BRIEF

World Bank’s Response to BIC’s case studies on Development Policy Operations in Peru, Egypt, Mozambique, and Indonesia

February 22, 2017

 

  • The BIC report is factually incorrect and does not capture the extent of our energy portfolio in these countries, which includes a mix of interventions – from policy reforms, to investments and technical assistance – that work together to promote climate-smart growth and increase energy access.
  • The World Bank's development policy loans help shift countries towards a cleaner energy mix and low carbon growth by reforming the energy sector, introducing efficiencies, and reducing waste in resources.
  • The BIC report looks narrowly at just one type of financing without the context of the broader program. This paints a limited and distorted picture.
  • In response to demand from our clients, the World Bank Group is committed to increasing the climate-related share of its overall portfolio to 28 percent by 2020. We are helping the private sector to invest in developing countries by reducing risks for commercial financiers, private investors, and public entities to implement renewable energy projects.
  • The goal is to add 20 gigawatts of renewable energy generation over five years and to mobilize $25 billion in commercial funds for clean energy. Through a combination of policies and investments in power systems, the World Bank will enable a further 10 GW of renewables to become integrated into grids.
  • Helping countries make the transition to clean energy is core to our work, in addition to securing affordable, sustainable and reliable energy services to the more than 1 billion people who currently lack access. For example, a recent auction in Zambia under our Scaling Solar Program, set record low prices per kilowatt hour for solar generation.
  • An important part of our work is getting the policy environment right to increase the flow of private investment. This means supporting countries to develop clear and transparent regulations, build strong institutions, remove fossil fuel subsidies, and grow industries that generate green jobs.

EGYPT

The World Bank’s Support to Egypt’s Energy Sector

  • The World Bank’s engagement in Egypt is focused on eliminating extreme poverty and boosting shared prosperity in a sustainable manner by improving governance, including in the energy sector, creating private sector jobs, and improving social inclusion.
  • As more than 70% of Egypt’s greenhouse gas emissions come from energy use, the World Bank Group’s engagement in Egypt’s energy sector is focused on moving toward cleaner energy and reducing the energy intensity of Egypt’s GDP.
  • The World Bank has a large program of renewable energy reform, including policy support, and technical assistance.
  • Our work ranges from promoting integration of renewables in the grid through transmission investments, technical assistance for reducing barriers for clean energy, reducing traffic pollution through more efficient railway and urban transport systems, to financing projects to find cost-effective solutions in environmental hot spots, to managing and disposing of stockpiles of obsolete pesticides and other long-lasting pollutants.

Role of Development Policy Operations

  • The Bank’s development policy operations (DPOs) in Egypt back energy reforms and modernization of the energy sector, which set out to increase the use of renewable energy, improve sector governance and encourage more efficient use of energy. The Development Policy Financing (DPF) reform program supports the use of economically priced gas, which is the cheapest way Egypt can meet demand for electricity and has potential to substantially reduce GHG emissions. It does not promote the use of coal.
  • Addressing sustainable energy supply issues in Egypt has the potential to dramatically improve Egypt’s fiscal situation and reduce GHGs (reduction of 11% to 21% by FY19 compared to baseline trajectory); enhance private sector investments; bring energy demand in line with supply; encourage sustainable growth; and increase funding for social programs.

MOZAMBIQUE

Development Challenges

The 2015 Human Development Index puts Mozambique at the bottom of the ranking (180 out of 188 countries). The adult literacy rate is 56%, and average life expectancy at birth is 50.3 years. Mozambique faces other challenges such as high malnutrition, and stunting. Only 25% of Mozambicans have access to electricity. The Bank is supporting expanded energy access for the poor through direct investments and policy reforms.

The World Bank’s Support to Mozambique’s Energy Sector

  • A well-managed energy sector could help improve the country’s fiscal position, which would allow for investments in critical improvements in human development.
  • World Bank projects are currently supporting investments and technical assistance to extend electricity services to the population, community centers (including schools and hospitals) in urban and isolated areas. For example, under the Energy Development and Access Project, over 1200 solar photovoltaic systems will be installed in schools, hospitals and towns where grid access is presently impractical.

Role of Development Policy Operations

  • The objective of the Poverty Reduction and Support Credit (PRSC) series was to assist the Republic of Mozambique to improve the business climate; increase transparency in the management of extractive industries; strengthen social protection; and enhance public finance management.
  • The PRSC support was aimed at the development of an improved regulatory regime for the extractive sector to encourage appropriate investments along with a fiscal regime that ensures that the Government is able to capture a fair share of the rents generated. This support is also fully consistent with the Bank’s policy in the energy sector, particularly regarding support for natural gas, which is the fossil fuel with the lowest carbon intensity. The PRSCs also supported reforms to strengthen the business environment in order to facilitate upstream and downstream linkages between local firms and international investors that could bolster employment, support diversification, and broaden the distribution of the benefits of Mozambique’s natural resource wealth.
  • The Bank’s support for Mozambique under the PRSC series also recognized that while resource revenues have tremendous potential to aid in poverty reduction, realizing this potential requires complementary reforms and investment. These include stronger systems for the management of public resources, increased social spending to build human capital, and improved institutional quality, which is often the decisive factor in how effectively the extractive industries contribute to positive development outcomes. PRSC support for improved public investment management, strengthened social protection programs, and greater transparency in the extractives sector were designed to address these challenges.
  • The Bank’s activities in Mozambique – using a full range of instruments, including DPF but also investment and technical assistance projects – have also sought to addresses climate-related challenges to inclusive growth and poverty reduction by strengthening the institutional and policy framework for integrating climate change considerations into development policies. With Bank and other donor support, the Government has made significant progress in laying the foundation for greater climate resilience.
  • The Bank fully supports transparency. The Bank already publishes all program documents – some of them prior to their presentation to the Board – and these documents contain descriptions of all actions by the relevant government that the Bank supports under DPFs.

PERU

Country Context

  • Over the past decade, the Government of Peru has been making significant efforts to improve its policies and institutions for environment and climate change management. A recent Environmental Performance Review of Peru prepared by the OECD-ECLAC (the UN Economic Commission for Latin America and the Caribbean) recognizes the government’s efforts.

The World Bank’s Support

  • The Bank’s support to Peru in climate change and environmental sustainability covers a broad set of activities, ranging from helping finance the Lima Metro project, that will contribute to improving air quality and reduce greenhouse gas emissions, to a grant mechanism implemented by indigenous peoples groups in the Amazon region and the World Wildlife Fund, that supports sustainable management of forest resources and reduction of GHGs. Other Development Policy Financing helped Peru to introduce the institutional and regulatory framework for improved environmental management and outcomes, and also contributed towards the creation of the Ministry of Environment and Natural Resource Management and the OEFA (environmental evaluation and supervision agency).

Role of Development Policy Operations

  • Development Policy Financing is just one aspect of the Bank’s support to Peru. The Government specifically requested support for policy and institutional reforms to improve competitiveness, productivity, and public financial management. The goal of these operations is to boost human capital and productivity, and improve the management of public expenditures in subnational governments, as well as the framework for public-private partnerships (PPPs).
  • Although these operations do not focus specifically on environmental issues, the two development policy operations assessed the impact of the supported policy actions on the environment, forests and natural resources. That assessment concludes that policy actions included in the development policy operations have a positive or neutral impact, and that the risk of un-anticipated effects is very low. Furthermore, the regulations supported by the operations do not override environmental or other types of legislation already valid and enforceable in Peru. They are also not directed to land acquisition issues and, in this respect, did not support the preparation of law 30230 on investment promotion (enacted long before the DPF) and did not have a part in the preparation of the recently enacted legislative decree 1333 to simplify access to land.
  • The new PPP framework adopted by the Government of Peru strengthens governance by ensuring that the stronger regulatory framework applicable to all public investments also apply to investments to PPPs. This is likely to help reduce potential negative impact on environment, forests and natural resources, and enable better scrutiny of investment projects financed by the PPPs.
  • The public-private partnerships referenced as examples of the DPO’s potential environmental impact were completed before the reforms supported by these two development policy operations were enacted. More broadly, the Government conducted detailed environmental impact assessments for each of the PPP projects referenced in the report, and these are available from the authorities.
  • The new PPP framework and fuel or gas subsidies: The WBG has not been part of the hydropower plants and the southern gas pipeline quoted in the report. These were not covered by the PPP reforms as they were structured before the reforms supported by the development policy operations were put in place.

INDONESIA

Development Challenges

  • To eliminate poverty and enhance shared prosperity, Indonesia needs productivity-based growth, more and better jobs, and improved access to health, education and social safety nets for all Indonesians. The WBG is committed to support the Government of Indonesia’s efforts to reach these goals in a sustainable manner.

The World Bank’s Support to Indonesia’s Energy Sector

  • The Bank Group’s program in Indonesia’s energy sector includes lending and knowledge services supporting reforms aimed at improving the investment climate in the energy sector; increasing sustainability through the use of renewables, low carbon and energy efficient investments; and expanding access to modern energy.

Role of Development Policy Operations

  • The Indonesia First Sustainable and Inclusive Energy DPO focuses on the government’s efforts to scale up renewable energy, especially geothermal energy, the second largest renewable resource in Indonesia after hydropower, and an important clean substitute for coal power. For example, the new geothermal law and its accompanying regulations, which the DPO supports, are expected to boost investor interest.
  • The World Bank’s strategy has been to engage the government in reforms of the sector and in its effort to shift more of its energy production to renewables. In other concrete examples of the Bank’s support for renewable energy initiatives, the Bank has made several other investments in geothermal power generation, including financing 75 megawatts as of end December with another 75 mw under way.
  • Since the DPO, the government has also increased its target for investment in geothermal energy by 30 percent, to 6.2 gigawatts.
  • The World Bank also helped Indonesia ease the process for power producers to invest in renewables. The Bank’s support is aimed at helping the government streamline cumbersome administrative procedures, which have impeded investment in clean energy.
  • The World Bank Group is not investing in coal fired power generation projects in Indonesia.
  • Through it energy engagement, including the Sustainable and Inclusive Energy DPO, the Bank is also supporting the government’s efforts to reduce wasteful energy subsidies – creating space to reallocate resources towards infrastructure, health-care, and social assistance programs.
  • In addition to the support to sustainable energy sector development, the Bank program also focuses on a broad, multi-sectoral Sustainable Landscapes Program given the unique GHG emissions profile of Indonesia (i.e. approximately 62% of all GHG emissions come from land use conversion and deforestation). The Sustainable Landscapes Program supports: (i) One Map Program (to improve clarity on land use and management in and around the Forest Estate); (ii) improved management of priority landscapes, including efforts to conserve, restore and sustainable manage peatlands; (iii) strengthening forest and land fire prevention and management; and (iv) jurisdictional pilots to improve land and forest management, including in East Kalimantan.
  • Some of the questions raised have been around the role of financial intermediaries.
    • The Indonesia Infrastructure Guarantee Fund, or IIGF, which is supported by a US$29.6 million IBRD loan, is part of the Government of Indonesia’s strategy to boost infrastructure investment by providing a well-governed, one-stop shop for guarantees for infrastructure projects. Under the terms of the World Bank loan to IIGF, all guarantees provided by IIGF must comply with its Operations Manual, which is compliant with the World Bank’s social and environmental safeguards. Any guarantees directly backed by World-Bank financed guarantees must be fully compliant with all World Bank policies, including our policy to not invest in coal.
    • Indonesia Infrastructure Finance Facility (IIFF) project, which was financed by an IBRD loan of US$100 million and approved in 2009, helped the Government of Indonesia create IIF as a non-bank financial institution to facilitate the financing of commercially viable infrastructure projects, and ultimately increase privately financed infrastructure to help fill the country’s infrastructure gap. The World Bank loan supported IIF to develop its Operations Manual (OM) in line with World Bank environmental and social safeguards and fiduciary requirements. Under the loan, IIF is required to comply with all WB project requirements, including those related to environmental and social safeguards, technical and fiduciary aspects.