Page 3 - Project Finance and Conflict Responsibility

Corporate social responsibility information sharing, and the establishment of
Corporate social responsibility (CSR) has for greater commonalities in project assessment
several decades now become an integral and operational safeguards, will contribute to a
part of the planning and implementation higher degree of conflict avoidance in the project
of infrastructure projects. Project sponsors, finance process.
financiers and insurers have learned some tough
lessons about the dangers of not paying sufficient The path forward
attention to these issues. Private sector sponsors, financiers, and insurers
A classic example of the possible consequences of project finance-related infrastructure projects
of not paying enough attention to the social and should be given credit for having moved solidly in
environmental issues associated with owning and the direction of corporate social responsibility. It is
operating a mine is Bougainville in Papua New clearly in the interests of all parties involved in the
Guinea (PNG). In 1988, a small group of villagers development process that the maximum amount of
blew up some of the mine’s installations, coming attention be paid to promoting social responsibility,
in the wake of demands for compensation for loss and to minimising the potential for conflict.
of land and resources to the project, and alleged Much remains to be done. Greater information
pollution of the local river system. sharing is one important aspect to enhancing the
Refusal by the mine owner and the PNG risk assessment, which is key to being able to
government to address the demands prompted better predict where problems are likely to arise.
escalating guerrilla action against the mine and Generating accurate risk assessments is critical to
its employees. The company closed the mine increasing the flow of foreign direct investment to
down the following year and it has remained the most difficult conflict ridden areas of the globe.
closed. Thousands of people died in an ensuing The problem is that the utter unpredictability
civil war, and litigation against the mine and its of political events makes the creation of more
owners continues to this day. accurate risk analyses even more difficult
NGOs have also learned some lessons. One of to produce. Where and when will the next
the best examples is the Freeport mine in West terrorist attack occur? What will its impact be
Papua, formerly Irian Jaya, Indonesia. In the on the foreign investment climate? Will a host
mid-1990s, an NGO sought to have Freeport’s government’s response to terrorist attacks create
PRI cancelled for alleged violations of the an investment climate that is less conducive to
environmental conditions set out in the insurance attracting foreign investment? These are the
provided by the Overseas Private Investment types of questions political risk analysts now face.
Corporation (OPIC) and the Multilateral MDBs can play a better, more effective role
Investment Guarantee Agency (MIGA). in supporting access to project finance during
Because covenants of the insurance appeared periods of crisis by improving the finance
to have been breached by the company, OPIC methodologies they use so that they can be
cancelled the coverage. Freeport took OPIC to quickly and economically introduced into new
court, had the insurance reinstated, and then itself markets, even before a crisis starts. They can
cancelled OPIC’s and MIGA’s insurance. The NGO’s focus on filling market gaps that might appear, so
objective of stricter environmental compliance that capital flows from private banks may remain
backfired. When the insurance was cancelled, open longer. MDB’s can also consider using the
Freeport was no longer obligated to adhere to strict, least amount of intervention possible in times of
internationally accepted environmental regulations. crisis, giving priority to financing tools that help
private-to-private flows first, leaving the public-to-
Information sharing public foreign exchange loans as a last resort.
Despite the great progress made in the MDB intervention can and should occur in
convergence of public and private PRI providers’ times of crisis, but only when the ordinary
interests, there remains a need for even greater functioning of capital markets fails, so as to avoid
collaboration with respect to information creating a future financial burden in crisis-ridden
gathering and sharing. MDBs and export credit countries. The loans provided by MDBs must
agencies (ECAs) have a distinct advantage in eventually be repaid. Finally, increased adherence
collecting project-related information because to principles of corporate social responsibility
they have access to sources private sector entities among all stakeholders in the project finance
do not have. business will certainly minimise the extent to
For example, MIGA has access to IMF and which such business aggravates conflict-prone
World Bank Group data, and OPIC can access any locations.
number of information sources from within the Increasingly, project financiers are insisting
US Government. Similarly, information gathered that adherence to such guidelines be a condition
from local sources by private sector institutions precedent to issuing loans to projects. Future
could prove to be extremely valuable to MDBs. conflict between project and local stakeholders can
All such institutions could benefit from greater be anticipated and even neutralised by thoughtful
adherence to widely acknowledged guiding planning. Those projects that are managed by
principles, such as the OECD’s Guidelines for socially responsible sponsors, financiers and
Multinational Enterprises, or those of the UN’s insurers are sure to prove to be the most profitable
Global Compact Conflict Dialogue. Enhanced and stand the best chance of being conflict-free. n

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