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World Bank loans support high-carbon development in Indonesia: report

  • A report by the nonprofit Bank Information Center analyzed the World Bank’s Development Policy Finance (DPF) operations in four countries: Indonesia, Peru, Egypt and Mozambique
  • The Bank’s climate policies state that DPFs should be used to support countries in meeting their global climate change commitments.
  • In Indonesia, DPF-backed programs were found to support the development of coal-fired power plants and roads in sensitive forest areas. Similar patterns were found in the other countries studied.
  • The study addresses policy financing, not direct World Bank funding of individual projects.

Despite their stated aim of boosting low-carbon growth, World Bank policy loans to countries like Indonesia are creating subsidies for coal, gas and oil projects, according to a report released today by the nonprofit Bank Information Center. At the same time, these policy programs undercut efforts to conserve forests, protect land rights and develop renewable energy, the report argues.

The report examined Development Policy Finance (DPF) operations in four countries: Indonesia, Peru, Egypt and Mozambique, which received a combined total of US$5 billion in funds from 2007 to 2016. Governments applying for these loans must agree with the World Bank on a policy reform agenda, which the funds are then used to support – money goes into the country’s general budget rather than to individual projects.

According to the World Bank’s current Climate Change Action Plan, DPF funds should be used to support countries to transition to low-carbon economies and meet their global climate change commitments.

Aerial view of a coal mining operation in Palangka Raya, Central Kalimantan, Indonesia. Photo by Daniel Beltrá/Greenpeace.

To gauge the effectiveness of this policy, the BIC, along with partner organizations in recipient countries, examined DPF-funded reforms aimed at boosting investment in large-scale infrastructure projects.

“The World Bank has pledged to help countries adopt a low-carbon development path specifically by phasing out fossil fuel subsidies and promoting a carbon tax,” said Nezir Sinani, Europe and Central Asia Manager at BIC, in a press statement. “However, the Bank’s policy lending does the opposite by introducing tax breaks for coal power plants and coal export infrastructure.”

In Indonesia, the BIC and local collaborator Greenpeace reviewed $1.4 billion worth of World Bank funds aimed at infrastructure and energy projects. As is typical of World Bank financing, the government reforms agreed on by Indonesia and the Bank emphasize policies aimed at increasing private sector investments. For example, the stated goals of the $500 million “First Indonesia Sustainable and Inclusive Energy Development Policy Loan” signed in 2015 included “improving the investment climate in the energy sector” as well as “removing constraints to renewable energy expansion.”

The study looks at Development Policy Loan (DPL)-supported Public Private Partnerships (PPPs), which are agreements between the government and private companies to build public infrastructure like roads and power plants. This included projects that benefited from the Indonesia Infrastructure Guarantee Fund, which was set up with technical and financial support from the World Bank.

A lone house in Indonesia’s East Kalimantan is left standing at an abandoned village after a nearby mining concession degraded the surrounding environment. Photo by Kemal Jufri/Greenpeace.

These projects include four coal-fired power plants and three coal transport railways,  as well as a large hydropower plant and several road construction projects. “There are currently no upcoming PPP projects for solar, wind, geothermal, small hydropower or distributive energy,” the study concluded.

Instead, the report says World Bank DPFs “supported many incentives for fossil fuel development” including  exploration for natural gas as well as coal power.

“In order for the World Bank to understand its potential social and environmental impacts of its policy lending operation, it needs to start by assessing the government planned infrastructure projects,” the study advises. “With regards to electricity, over 60 percent of the [Indonesian Government’s] priority electricity projects of its infrastructure master plan are coal power plants. Thus, higher government expenditure on electricity infrastructure, which was specifically mandated and enabled by the World Bank I-DPL funds, contributed to the development of coal projects.”

The study also raises concerns about the emphasis placed on road building projects by the World Bank’s Infrastructure Development Policy Loans. “Large-scale road projects often open up previously less accessible forests to expanded deforestation,” it notes. Among the highlighted projects are highways planned for sensitive forest areas in Kalimantan (Indonesian Borneo) and South Sumatra.

The report also argues that the World Bank supported legal reforms that made it easier for developers to acquire land. It points in particular to Indonesia’s 2012 Land Procurement Law. One high-profile use of this law has been to obtain land for a coal-fired power plant in Batang, Central Java, despite protesting landowners refusing to sell their property.

During a May 2016 march, protesters in Jakarta, Indonesia, carry banners calling on the government to reject coal-fired power plants in favor of renewable energy. Photo by Afriadi Hikmal/Greenpeace.

“Rather than using its development policy lending muscle to protect forests and combat climate change, the Bank is helping to weaken vital environmental laws and governance and undermine local communities’ rights to the resources they rely on for their livelihoods,” Kate Geary, BIC’s forest campaign manager and a report contributor said in a press statement.

When it comes to low-carbon development, DPF support was judged to be “inadequate.” Just 1.3 gigawatts of Indonesia’s estimated 29 gigawatts of geothermal capacity have so far been developed. Despite the World Bank’s stated aim of “removing constraints to renewable energy expansion,” the report also found a lack of tangible support for other alternative energy sources like wind and solar power.

The BIC noted similar patterns in the other countries studied. In Peru, it points to DPF measures that support gas pipeline networks and oil and gas concessions in the Amazon. In Egypt, it found support for more than a dozen oil and gas projects and 12.5 gigawatts of new coal power plants. In Mozambique, it noted DPF-supported subsidies for four coal power plants, three coal port terminals and two coal transport railways. Far less support was found for renewable energy projects, particularly those relying on wind, geothermal or solar power.

Overall, the BIC’s Sinani said, DPFs do not meet the social and environmental guidelines the Bank sets for projects it funds directly.

“The climate crisis and staying under 2 degrees Celsius warming not only requires increasing investments in renewable energy but also drastically decreasing fossil fuel investments,” Sinani said in a press statement. “We also want a more rigorous climate- and forest-related assessment of DPFs before they are approved.”

Editor’s note: the World Bank sent this letter in response to this article. While the bank disputed the findings of the Bank Information Center report and asserted the article contained “inaccuracies,” it failed to identify any specific “inaccuracies.”

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