World Bank accused of incentivizing investments in fossil fuels through $5B policy loans portfolio

Power stations in Serbia. Photo by: Dren Pozhegu / CC BY-NC

A new report by advocacy group the Bank Information Center has accused the World Bank of funding the creation of policies that promote the development of coal, gas and oil projects in four countries, but the World Bank says the report “grossly misrepresent” its activities.

In a study released today, BIC points to a contradiction between the World Bank’s pronouncements on climate change and its lending activities. President Jim Kim has talked frequently about the need to reduce subsidies for fossil fuels while incentivising investments in renewables in order to promote low-carbon growth, but BIC argues the World Bank has knowingly funded national policy and institutional reforms to subsidize the fossil fuel industries in four countries.

BIC — an NGO that does advocacy work predominantly on World Bank Group activities — also accuses the World Bank of providing “inadequate” support for renewable energy in the four listed countries and finds that in some instances the World Bank financing has had the effect of “undermining” environmental governance and “threatening” forests.

“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. However, the Bank’s policy lending does the opposite by introducing tax breaks for coal power plants and coal export infrastructure,” said Nezir Sinani, Europe and Central Asia manager at BIC.

However, the World Bank strongly denies the report’s findings and said they paint a false picture of the World Bank’s activities in the four countries.

In a statement emailed to Devex, a World Bank spokesperson said "We are deeply disappointed that after close cooperation with BIC on this report, their findings grossly misrepresent the World Bank's engagement in these countries.”

“The report does not capture the World Bank's broader energy work, which involves not only development policy loans, but a mix of interventions — policy reforms, investments, technical assistance — that work together to promote climate smart growth and increased energy access,” the statement said.

Furthermore, the bank denies that any of its development policy loans promote the use of coal, but said instead they “help support a shift towards a cleaner energy mix and low carbon growth,” according to the statement.

The BIC study looks specifically at the World Bank’s Development Policy Finance operations across the four countries between 2007 and 2016, worth $5 billion. DPF is one of the bank’s main lending instruments and accounts for approximately one-third of all funding, equal to more than $15 billion in 2016.

According to the World Bank website, “DPF is a lending instrument that provides general budget support to countries for policy and institutional reforms that help them achieve development results.” DPF emphasizes country ownership by being distributed as “non earmarked general budget financing that is subject to the borrower's own implementation processes and systems,” the website said.

The World Bank is committed to supporting low-carbon development, according to its 2016 climate change action plan.

In Indonesia, the BIC report claims that World Bank infrastructure DPF loans actually led to the establishment of “subsidies,” including tax exemptions and potential government finance and guarantees, for public private partnership projects, including four coal power plants, three coal transport railways, and one large hydropower plant. The report states no geothermal, solar or wind PPP projects are pending and “slated to benefit” from the DPF-backed subsidies.

Sinani questioned whether the bank had missed the “inextricable link” between the reforms it funded and the benefits accrued by the coal industry.

“When the Bank agreed to provide the DPF support to the Indonesian government, did the Bank analyze Indonesia's plans to develop the energy sector and were they aware that the coal industry was slated to benefit mostly from the reforms? If they knew, then were they deliberately helping the Indonesian government promote fossil fuel subsidies?” Sinani asked.

“In both cases, how do these reforms help Indonesia in any way move onto a low carbon path?” He added.

A World Bank employee speaking to Devex off the record explained that the Indonesia infrastructure policy loans were intended to improve the policy environment and investment climate in the country to help bridge its $600 billion infrastructure funding gap over the next 10 years.  

 “We help the government get the right structures and incentives in place, with appropriate environmental and social safeguards and fiduciary standards, we do not do the investments,” they said.

They also pointed to a "misunderstanding" in the BIC report where it suggests that DPL-backed reforms to make doing business easier - for example by cutting the time it takes for the government to issue land titles - are the equivalent to a subsidy for coal.  This is a “far stretch of logic,” the Bank staffer said.

The report raises the long running debate about whether development finance institutions should finance coal projects, as previously reported by Devex.  

For many energy poor countries, fossil fuels still represent the cheapest available energy option, and since electricity is widely seen as crucial for economic growth, arguably the World Bank should fund fossil fuel driven energy projects in certain circumstances. Furthermore, to insist poor countries pursue more expensive renewable energy options is seen by some as unfair considering developed countries were able to industrialize off the back of fossil fuels.

However, by supporting fossil fuel projects, the bank is open to the accusation it is failing in its leadership role in advancing the post-carbon global economy needed to manage climate change.

To date, the bank has taken a middle course. While its 2013 energy sector strategy states it would only provide finance for coal projects in “rare” circumstances and the institution has not backed a greenfield coal project since 2010, the World Bank has stopped short of declaring an all out ban on fossil fuel lending. In fact, the bank is currently considering a controversial $58 million partial risk guarantee for a coal plant in Kosovo — “Kosovo C” — on the basis that non-fossil energy sources are too limited and too expensive alternatives for the country.

The Intergovernmental Panel on Climate Change has said that in order to reach the goal of limiting global average temperature increase to two degrees celsius, the bulk of remaining fossil fuel reserves will need to be left in the ground.

World Bank DPF lending is not the only World Bank financing mechanism to be accused of indirectly supporting coal projects. A joint report by Inclusive Development International and BIC published last October claimed the International Finance Corporation — the bank’s private sector lending arm — was loaning money to national financial institutions that were then supporting the development of coal-based power projects in Asia. The report found that IFC-supported financial institutions funded at least 41 new coal projects.

Updated Jan. 26, 2017: This article was updated to include additional comments from the World Bank.

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About the author

  • Edwards sopie

    Sophie Edwards

    Sophie Edwards is a Reporter for Devex based in London covering global development news including global education, water and sanitation, innovative financing, the environment along with other topics. She has previously worked for NGOs, the World Bank and spent a number of years as a journalist for a regional newspaper in the U.K. She has an MA from the Institute of Development Studies and a BA from Cambridge University.