Analysis of the World Bank Eskom loan to fund a large energy project in South Africa and how the World Bank’s Energy Strategy Review and approach to analyzing coal projects does not factor all costs associated with coal-based power projects.
In early 2010, the World Bank Group (Bank) approved a loan of 3.75 billion dollars to Eskom Holding Limited (Eskom). The purpose of the loan was to finance the Eskom Investment Support Project (Eskom Project) in South Africa, which included support for a 4,800 MW coal-fired power plant, investments in renewable energies (wind and solar), and support for a low carbon rail project.
Shortly following the approval of the loan, local South African community members submitted a claim to the Inspection Panel, the accountability mechanism at the Bank, asserting, among other things, that the Bank did not comply with its own environmental policies and failed to adequately address important negative environmental effects associated with the project during the approval process. The Eskom Project has been challenged on a number of grounds. To avoid duplication, we do not offer a comprehensive review of all Bank policies triggered by the Eskom Project. Rather, we focus specifically on the Bank’s failure to comply with requirements of Bank Operational Policy 10.04 (OP 10.04), by not fully considering environmental externalities in the Economic Evaluation for the Eskom project.
The failure to fully evaluate environmental and social costs renders the Bank’s Economic Evaluation incomplete and inaccurate, thereby distorting the approval process. Moreover, the analysis raises the concern that the failure to sufficiently account for and quantify the environmental and social costs associated with coal-based power projects has led to a tendency to favor such projects. This report also supports the conclusion that the benefits of large-scale centralized power projects may be overstated because of a failure to rigorously account for the very real negative costs associated with such projects. Large-scale energy projects – such as nuclear, coal, oil and gas, and large hydro – all carry significant negative social and environmental costs analogous to those associated with the Eskom loan. Thus the analysis conducted here reveals what may be a pattern in which the failure to fully value the negative aspects of such lending leads to over-investment in those sectors.