IFC’s role in Yemen mining

17 April 2009

Trends in the relationship between World Bank and IFC technical assistance policies and the IFC’s investment portfolio raise interesting questions over possible conflicts of interest. Disclosure at the IFC remains opaque making specific details of projects and policies hard to come by.

Over the last couple of years, the International Finance Corporation’s (IFC) regional advisory service agency, the Private Enterprise Partnership Middle East/North Africa (PEP-MENA) has provided assistance to the Yemeni government in the drafting of the country’s mining law, which is expected to pass through the Yemeni parliament within a few months. This policy is supposed to reflect best practices, yield increased transparency, efficiency, and regulatory accountability, as well as streamline administrative procedures faced by investors.1

Meanwhile, in March 2008, the IFC took the lead in Yemen’s tax reform programme, and pushed a reduction of corporate taxes to attract greater foreign investment. The Bank also pushed for this change through Yemen’s development policy loan, a direct budget support instrument that disburses funds based on policy and institutional reforms made by the government. The Bank maintained that, in order to make up for lost tax revenues, the government would have to double the sales tax to 10 per cent in 2009.

An increase in sales tax to make up for the corporate tax reduction, would seriously compound the already harsh conditions faced by the population, 42 per cent of whom live in poverty with 20 per cent of which is malnourished, according to the Bank.

While the IFC is encouraging the reduction of corporate taxes, and PEP-MENA is helping to draft the mining code. It is very likely that the IFC will expand their extractives investments in Yemen’s mining, oil and gas sectors. The legal and tax reforms make it cheaper and easier for the IFC to invest in the industry. This trend is clear in Egypt, where the IFC helped draft the country’s new mining laws, and also has substantial investments in the mining industry.

This conflict of interest is clearly no accident; in a MENA report for 2008, IFC advisory services stated that “by the end of [fiscal year] 2008, about 50 per cent of PEP-MENA’s advisory work, based on project value, was linked to the IFC’s current and potential investments.”2

Similar trends are seen beyond the MENA region. While the Bank has been supervising the DRC’s mining policy since 2001, the IFC maintains investments in DRC copper mines. Those trends are seen in other sectors, with the World Bank providing substantial technical assistance in India’s power sector reforms, while the IFC has invested in the country’s power industry, reflecting the overall strategic plan for each region established under the umbrella of the World Bank Group.

Coherence lacking

The mining industry is a particularly sensitive one, because of the vast damage to the environment and surrounding communities from poorly regulated mining projects around the world. A World Resources Institute report encourages greater community engagement in extractive projects, in order to “mitigate risks, to improve the lives of communities and strengthen a project’s viability.”3 Nonetheless, nobody representing potentially affected communities was invited to participate in the drafting of Yemen’s mining policy.

The mining industry is also vulnerable due to the high level of corruption that is often associated with it, not only in infamous cases such as the DRC or Guinea, but also in Yemen.

In September 2007, Yemen became the first MENA country to be accepted as an Extractives Industry Transparency Initiative (EITI) candidate country (see Update 62). This initiative aims to strengthen transparency and accountability in the extractives sector, by setting standards for companies to publish what they pay and for governments to disclose what they receive.4 Yemeni work has been slow even though they only have until March 2010 to implement the initiative. The same Yemeni ministry of oil and minerals that was designated to coordinate the implementation of EITI, has also worked with the IFC on the new mining code, yet there was no mention of EITI in the draft code.

Not surprisingly, the IFC’s record of transparency is mixed, at best, with weak disclosure policies and irregular adherence. Information on IFC advisory service projects approved during fiscal year 2007 can only be found, with difficulty, on the IFC’s website. However, details of the Yemen policy reform are limited to location, a brief description and total estimated funding. The limited information combined with the complexity of IFC’s investments in the mining sector, which could take place through several layers of subsidiary companies, make understanding the extent of these schemes almost impossible.

World Bank sabotaging benefit from mining in Africa?

A paper published by the Open Society Institute of South Africa and compiled by a group of African and international civil society organisations highlights the Bank’s role in reducing state involvement in mining and promoting the role of the private sector.

The report focuses on mining taxation and transparency in seven African countries, finding that generous tax rates as well as illicit tax avoidance strategies mean governments are failing to optimize mining tax revenues.

The role the Bank played in promoting lower ‘competitive’ taxes in order to open African mining to foreign investors is found to be a key factor. Mining reform was driven by the Bank’s overall strategy to reduce the state’s role in development, “in no African country, however, did these tax regimes form part of a broader industrial strategy,” according to the paper.

As well as exposing tax subsidies and avoidance strategies, the report presents some recommendations to African governments and international donors as to how they can increase the revenue collected from mining activities.

“African governments should be free to use this finance to purchase legal and other technical assistance from any service provider of their choice,” the report concludes.