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Bank stumped on Uruguayan paper mills

19 June 2006

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The IFC and MIGA have been unable to manage the international dispute created by their proposed investment in two pulp and paper mills in Uruguay, and have been forced to back track on their earlier assumptions that the mills should be built. They show no signs of setting a board date for considering Bank support (see Update 48, 49). Environmental campaigners and community activists in Argentina and Uruguay have been leading angry protests against both projects on the Rio Uruguay, just outside the town of Fray Bentos, which they say will pollute the river, damage local industry and the surrounding environment. In April Dutch bank ING, a leading advocate of the Equator Principles for environmentally and socially responsible financing, withdrew its consideration of funding for the Botnia plant. Construction of both plants by Swedish company ENCE and Spanish firm Botnia has since been stalled for 90 days.

The projects have become the source of acute high-profile diplomatic tension between the governments and citizens of both countries. According to national media they have polarised the communities on opposite sides of the river- Fray Bentos in Uruguay, and Gualeguaychu in Argentina. The Uruguayan government claims that the pulp and paper mills will create jobs where they are needed most, and bring investment into the country, whilst Argentina opposes the projects on environmental grounds, citing potential water, air and ground pollution, and damage to local industry such as agriculture and tourism. In May Argentina filed a complaint to the International Court of Justice in The Hague, claiming Uruguay had violated the Uruguay River Treaty. In September, Argentine NGO the Center for Human Rights and Environment (CEDHA) filed a complaint to the Inter-American Commission on Human Rights.

A recent request by Uruguayan president Tabaré Vázquez for Bank approval for the projects was rejected on the basis that credits could only be disbursed on compliance with the Bank’s safeguard policies. Both companies are dependent on World Bank financing for further private sector investment of other groups, including BBVA of Spain, Nordea of Sweden, and the Finnish and Spanish export credit agencies.

In February the World Bank’s Compliance Advisor Ombudsman published a compliance audit which identified clear violations of the World Bank’s environmental and social safeguard policies particularly in relation to transparency, consultation, and access to information. In April, the IFC released an additional cumulative impact study, carried out by independent consultants, to address social, economic and environmental issues in greater depth. The study found the initial environmental impact assessments carried out by the companies to be inadequate. The Bank has since withheld approval of the $400 million requested for the mills until the companies complete further studies on the project’s social and environmental impacts.

In an agreement struck with the IFC, the two companies must carry out additional studies on air, water and soil contamination, re-examine the impact that the mass plantation of eucalyptus will have on the water table and consider using less polluting technologies.