ARSHIYA
URVEEJA BOSE
Resources,
Energy and Environmental Policy
April
12, 2005
The World Bank and its Energy Outlook
Abstract: The paper begins
with an introduction to the World Bank and focuses on its goals, operation and
strategic direction. There is a discussion on the World Bank's Energy Program
which examines the World Bank's financing of energy projects. Lastly, there are case studies that provide an
in depth analysis of energy projects that the World Bank has funded in
I.
INTRODUCTION: What is the World Bank?
We live in a world so rich that global
income is more than $31 trillion a year. In this world, the average person in some countries earns
more than $40,000 a year and 2.8 billion people live on less than $700 a year.
Of these, 1.2 billion earn less than $1 a day (McClure 2003). The World Bank
works to bridge this divide and turn rich country resources into poor country
growth. The Bank is one of the world's largest sources of developmental
assistance and supports developing country governments to build schools, health
centers, provide water and electricity, and protect the environment (Mallaby
2004).
The World Bank came into existence on
December 27, 1945 with the original mission to finance the reconstruction of
nations devastated by World War II (McLellen 2003). Today its mission has
expanded to fighting poverty by means of financing states. The Bank's
activities are focused on less developed countries in fields such as education,
agriculture and industry (McClure 2003). The World Bank’s goals for the
millennium as decided in 2000 at the United Nations Millennium Summit were:
(EMSB 2002)
1. Eradicate extreme poverty and
hunger
2. Achieve universal primary
education
3. Promote gender equality and
empower women
4. Reduce child mortality
5. Combat HIV/AIDS, malaria and
other diseases
6. Ensure environmental
sustainability
·
Integrate
the principles of sustainable development into country policies and programs and reverse the losses of
environmental resources
·
Halve
by 2015 the proportion of people without sustainable access to safe drinking
water.
·
Halve by 2015 the proportion of people
without sustainable access to electricity.
7. Develop a global partnership for
development
The World Bank is not a "bank"
in the common sense. It is one of the United Nations' specialized agencies,
made up of 184 member countries. These countries are responsible for how the
institution is financed and how its money is spent. (Mallaby 2004).
II.
OPERATIONS: Financing Development
The "World Bank" is the name
used for the International Bank for Reconstruction and Development (IBRD) and
the International Development Association (IDA). Together these organizations finance
projects designed to reduce poverty and achieve the Millennium Development
Goals (McLellen 2003). The type of financing available to a developing country
is determined by the level of need but usually funds include loans from the
IBRD and credits and grants through the IDA (McClure 2003).
i.
International Bank of Reconstruction and Development (IBRD) Borrowers
IBRD offers loans to middle income
countries with a per capita income of less than $5115. This bank facilitates
access to capital of larger volumes, on better terms, with longer maturities,
and in a more sustainable manner than the market provides. For example,
countries that borrow from the IBRD have more time to repay than if borrowed
from a commercial bank – 15 to 20 years before repayment of principal begins
(McClure 2003). .
The money that is borrowed by the
governments has to be used for specific programming – for poverty reduction,
delivery of social services, environmental protection, or economic growth. In
the fiscal year 2004, IBRD provided loans totaling $11 billion to support 87 projects
in 33 countries (Mallaby 2004).
ii.
International Development Association's (IDA) Interest-Free Loans
The IDA's interest-free loans have a 35 -
40 year repayment period. While the IDA traditionally has provided
interest-free loans, it is increasingly providing grants as well. To be
eligible for IDA assistance, a country must have a per capita income of $865 or
less (McLellen 2003).
IDA is financed by a partnership of some
40 rich countries that make contributions every four years. The most recent
replenishment of the IDA trust fund distributes $23 billion to poor countries
over the three-year period which began July 1, 2002. At that time, donors
agreed on increased use of IDA grants - up to 21 percent of resources - to help
address the HIV/AIDS epidemic, faced by the most vulnerable countries. In the
fiscal year 2004, IDA provided $9 billion in financing for 158 projects in 62
low-income countries (Mallaby 2004).
iii.
Where does the Money Go
Over the past few years, the World Bank
has put significant IBRD and IDA resources into activities meant to have a
global impact. The World Bank is currently involved in more than 1,800 projects
in virtually every sector and developing country. These are as diverse as
providing micro credit in Bosnia and Herzegovina, raising AIDS awareness in
communities in Guinea, supporting education of girls in Bangladesh, improving
health care delivery in Mexico, helping East Timor rebuild upon independence or
India to rebuild Gujarat after a devastating earthquake (Lovei
& McKechnie 2000).
In 2004, the IBRD and IDA provided
financing of $20 billion in support of 245 projects in 95 countries. Latin
American and the Caribbean received the highest level of IBRD lending, with $5
billion or 45 percent of total IBRD commitments (Fig. 1). The largest share of
IDA resources was committed to Africa, with $4.1 billion, making up 45 percent
of total IDA commitments (Mallaby 2004) (See Fig. 2).
Public administration, including law and
justice received the highest volume of IBRD and IDA funding. The significant
lending in the public administration sector reflects the Bank’s focus on
assisting its clients to improve development strategies, implement reform
policies and build institutional capacities. Significant support was also
provided to the health, social services and transportation sector (Mallaby
2004) (See Fig. 3 & Fig. 4).
III. THE
ENERGY PROGRAM: Poverty Reduction, Sustainability and Selectivity
Energy is vital for social and economic
development. The World Bank recognized the importance of energy early on and
its first lending operation including support for restoring energy supply (EMSB
2002). The mission of the Energy Board is to support the Word Bank’s objective
of reducing poverty and increasing sustainable economic growth in developing
and transition economies. The Board believes that achieving these objectives
requires sustainable and affordable energy services for all, including the
poor, and these services can best be achieved by creating efficient markets in
energy – markets that are open to investors and enterprises large and small,
private and public, centralized and decentralized (Le Prestre
1998). The Bank believes
that the expansion of energy access to the poor needs to be based on markets
that function on sound commercial principles and on the preservation of the
environment (EMSB 2002).
The links between energy and poverty take
many forms. The World Bank envisions a transition from traditional to modern
energy use for poor households (EMSB 2002). In the Banks’ vision this
transition contributes directly to poverty reduction by generating productivity
gains that expand economic opportunities for the poor – through better access
to communications, education, services, employment and income-generating
activities (EMSB 2002). For energy exporters, particularly oil producers, they
provide revenues that can bring about sustainable poverty reduction. They
improve living conditions by providing better lighting of homes, cleaner fuels
for cooking and heating, and cleaner emissions from energy-consuming industrial
plants (Le Prestre 1998).
The World Bank has been active in the
energy field for five decades. For a long time about 25 percent of the Bank’s
lending supported the supply of energy services. Recently however, this share
has fallen to less than ten percent, despite the clear need for World Bank
support. This change reflects a process that started in the 1990s to bring the
World Bank’s policies for its energy practices in line with two major trends. First,
recognizing the failure of the public sector to deliver sustainable energy
services, the World Bank oriented its activities towards liberalizing and
privatizing energy markets, shifting support away from traditional integrated
state-owned monopolies. Second, as the World Bank strengthened its focus on
poverty reduction and sustainable development in the late 1990s, it updated its
programs for using its comparative advantages to help developing and transition
countries exploit energy’s many links with poverty reduction and sustainable development
(EMSB 2002).
Today,
the World Bank’s priority is to help governments design and implement policies
for reducing poverty. This requires a comprehensive approach to economic
development, an approach reflected in the World Bank’s four priorities for
energy supply:
- Helping
the poor directly
- Improving
macroeconomic and fiscal balances, including protecting budgets for social
programs that help the poor
- Promoting
good governance and private sector development
- Protecting
the environment
The World Bank will not provide financing
for investments in energy supply that do not contribute toward meeting at least
one of these priorities (EMSB 2002).
To realize its energy vision for poverty
reduction, the World Bank has set quantitative objectives for developing and
transition economies to be reached by 2010 (EMSB 2002).
- Increasing
the share of households with access to electricity from 65 percent to 75
percent
- Increasing
the share of economies where the power industry is no longer a burden on
the government’s budget from 34 percent to 50 percent
- Reducing
the average energy consumption per unit of GDP from 0.27 ton of oil
equivalent per thousands of dollars of output to 0.24
- Increasing
the share of economies where private ownership and financing play a dominant
role in energy supply from 25 percent to 40 percent
- Increasing
the share of economies where regulators are required to oversee natural
monopolies in an objective, transparent and nondiscriminatory manner from
35 percent to 50 percent
The World Bank has invested in a number
of energy projects that aim to achieve its overarching objective of poverty
reduction and economic growth.
IV. THE
WORLD BANK’S ENERGY PROJECTS
i.
Region:
Sectors:
Power, Industry
Borrower:
Implementing
Agency: Ministry of Water Resources
Implementation
Period: 6 years
Financing
(US$ million): $133.40
Bank
Approval Date: May 22, 2003
The objectives of the Nepal Power
Development Project are to (a) develop Nepal’s hydropower potential in an
environmentally and socially sustainable manner so as to help meet electricity
demand, (b) improve access of rural areas to electricity services, and (c)
promote private participation in the power sector as a way to sector efficiency
and to mobilize financing for the sector’s investment requirements (Imran
2003).
Specifically, the project aims at
establishing a Power Development Fund to finance private development of small
and medium-sized hydro projects. The Fund encourages the scaling-up of community-based
village electrification by developing about 25 to 30 MW of new micro hydropower
projects to serve some 30,000 new consumers. The Bank’s financing also supports
the construction of a 220 kV double circuit transmission line from Khimti Power
station to the existing 132 kV Dhalkebar station. The transmission lines will
enhance reliability, reduce energy losses, improve access, quality and
operational efficiency of power supply to consumers (Imran 2003).
Overall, the World Bank financed Nepal
Power Development Project will support development of Nepal’s hydropower
potential which in turn can lead to equitable access of energy between urban
and rural regions and increased energy sustainability (Imran 2003).
ii.
Region:
Europe and
Sectors:
Energy Efficiency Services
Borrower:
Bank Gospodarstwa Krajowego (BGK)
Implementing
Agency: Bank Gospodarstwa Krajowego
Implementation
Period: 4 years
Financing
(US$ million): $ 26
Bank
Approval Date: February 3, 2004
An enormous potential for cost-effective
improvements in energy efficiency in the building sector with associated
environmental benefits remains relatively untapped in the Krakow region in
The objective of the Poland Energy
Efficiency Project is to increase public and private sector investments in
energy efficiency. The project aims to achieve this by (a). overcoming the risk
barriers in the financial markets inhibiting commercial bank participation in
energy efficiency project financing (b) stimulating the demand of energy
efficiency services in the industrial sector and increasing awareness of
commercial banks to originate and implement loan transactions for potential
investors (Johansen 2003).
The Partial Guarantee facility with US$39
million in reserves will provide commercial banks partial coverage of risk
exposure against loans made for energy efficiency projects throughout
Technical assistance will be provided for
several activities, including how to attract potential investors, training to
local commercial banks, activities to increase awareness and demand for
efficiency investments and collection of project data and broad dissemination
of results (Johansen 2003).
The existence of a successful guarantee
program and the technical assistance that the World Bank can provide will
improve the chances of a sustainable and energy efficient market for energy in
Poland (Johansen 2003).
iii. Energy
Sector Recovery Project –
Region:
Sectors:
Power, Oil and Gas
Borrower:
Government of
Implementing
Agency: Ministry of Energy
Implementation
Period: Unknown
Financing
(US$ million): $ 208.7
Bank
Approval Date: July 6, 1999
In Kenya, in the past two decades the quality of delivery of energy and other infrastructure services has declined dramatically. Only about 9.5 percent of the population has access to electricity supply. The use of household commercial fuels to substitute for fuel wood and biomass use, which is causing acute depletion of country’s forest resource, is among the lowest in Sub-Saharan Africa on per capita consumption basis. The combined effect of poor economic governance, weak enforcement of policies and uncertain political environment has led to a significant decline in private investment and capital flows and high perception risk perception of risk by private investors (Maweni 2004).
The objectives of the project are (i) to enhance the policy, institutional and regulatory environment for private sector participation (ii) support efficient expansion of power generation to meet the economy’s projected supply deficits by 2006/7 (iii) increase access to electricity in urban and rural areas (Maweni 2004).
In parallel with policy reforms, the Project supports investments in power generation. Five power plants are to be completed under the Project, including a 64MW geothermal power plant. The Project also assisted in the execution of the Emergency Power Supply fast track project that attracted the private sector to supply 99MW of diesel fired generating capacity to help cover hydropower shortfall during the drought period of 2000/2001 (Maweni 2004).
Successful implementation of the World Bank’s comprehensive Energy Sector Recovery Project is the key to energy sustainability in Kenya (Maweni 2004).
v.
CONCLUSION
The cases of
Nepal, Poland and Kenya demonstrate that impoverished governments around the
world rely on the World Bank as a contributor of development finance. However,
the the World Bank is often
criticised by opponents of corporate globalization. These advocates of globalization
fault the bank for undermining the national sovereignty of recipient countries
through various structural adjustment programs that pursue economic
liberalisation and de-emphasize the role of the state (Powell & Starks
2000).
Another critique is that the Bank operates
under the belief that the market can solely, and by its own nature, bring
prosperity to nations that practice free competition. In this perspective,
reforms are not always suitable for nations experiencing conflicts (ethnic
wars, border conflicts, etc.), or that are long-oppressed (dictatorship or
colonization) and do not have stable, democratic political systems. In this
point of view, the World Bank would favor the installation of foreign
enterprises to the detriment of the development of a local economy (Izaguerrie
2000).
The World Bank is a closed system; that
is, the decision-making processes are shielded from those who, in fact, fund
the projects: primarily the taxpayers in the member nations. The number of
votes allocated to member countries are linked to the size of its shareholding.
Membership in itself gives certain voting rights that are the same for all
countries but there are also additional votes. The additional votes depend on
financial contributions to the organisation implying undemocratic
decisionmaking. As of November 1, 2004 USA held 16.4% of total votes, Japan
7.9%, Germany 4.5% and UK and France each held 4.3% (Mallaby 2004).
Consequently, the main objection expressed by citizens of less developed
countries where projects are being financed is that the Bank is under the
marked political influence of certain countries (notably, the United States),
that would profit from advancing their interests. It has been accused of being
a US or western tool for imposing economic policies that support western
interests, despite evidence that free market reform policies in practice are
often harmful to development if implemented badly, too quickly, in the wrong
sequence, or in an inappropriate environment (McLellen 2003).
However, despite opposition from NGOs and
activists,World Bank involvement in developmental projects, particularly energy
related is predicted to increase even further. The Bank is heading towards a
concrete set of energy objectives titled “Delivering the energy business lines
– the policy measures supported –” The goals and priorities of this evolving
project are as follows: (EMSB 2002)
Helping
the Poor Directly
· Facilitating access to modern fuels and
electricity
· Reducing the cost and improving the quality of
energy supplied to low-income households
· Ensuring that energy subsidies are targeted to
and reach the poor
· Promoting energy-efficient and less polluting
end-use technologies for traditional fuels
· Creating energy service enterprises run by the
poor
· Supporting energy needed for social services
(health, education, communication)
Improving
Macroeconomic and Fiscal Balances
· Rationalizing energy taxes
· Replacing public investments with private ones
· Managing risks associated with contingent public
liabilities
· Closing loss-making coal mines and oil
refineries and financing restructuring costs that fall on government budgets
· Enhancing effective payment by all energy users
to eliminate operating subsidies to state-owned enterprises
· Improving procurement and marketing of imported
and exported energy products
Promoting
Good Governance and Private Sector Development
· Creating objective, transparent, and
nondiscriminatory regulatory mechanisms
· Introducing and expanding competition and
cross-border trade
· Divesting assets to strategic investors and
regulating markets in ways that are socially responsible and corruption free
· Catalyzing private investment by liberalizing
entry to energy markets
· Strengthening the voice of consumers and
communities
· Strengthening local financial institutions to
provide long-term financing for rural energy business
Protecting
the Environment
· Promoting clean transport fuels and switching
from coal to gas
· Facilitating environmentally sustainable
extraction, production, processing, transport, and distribution of oil, gas,
and coal
· Strengthening environmental management capacity
in energy supply
· Removing market and regulatory barriers to
renewable energy and energy efficiency investments for power and biomass (such
as improved cooking stoves for the poor)
· Reducing gas flaring and facilitating carbon
trading and joint investments to reduce greenhouse gas emissions
This energy business line, developed and
ready to be implemented by the World Bank will only further emphasize the
Bank’s power and monopoly over financial assistance to energy projects in developing
countries. However, from past and present energy projects and also from the analyzing
the business line it is clear that the main focus of World Bank funded projects
will continue to center on poverty reduction and human enrichment. Energy
projects will merely be a tool for achieving this dream of “…a world free of
poverty (EMSB 2002.”
Figure 1: IBRD lending by region during fiscal year 2004
Source:
EMSB 2002
Figure 2: IDA commitments by region during fiscal year 2004
Source: EMSB 2002
Figure
3: IBRD lending by sector during fiscal year 2004
Source: EMSB 2002
Figure
4: IDA commitments by sector during fiscal 2004
Source: EMSB 2002
VI.
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M (2003). Project Information Document: Nepal Power Development Project. The
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A (2000). Private Participation in Energy. The World Bank Public Policy
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