REDD Alert: Lessons from Peru's Camisea Pipeline Project

Can forest-rich countries learn from the mistakes of extractive projects and avoid unleashing their own resource curse?

For poor developing countries, exploiting natural wealth such as minerals and metals should prove a blessing, offering the potential to generate huge revenues and help lift them out of poverty. Instead many have been afflicted by the "natural resource curse," in which countries with an abundance of natural resources enjoy less economic growth and worse development outcomes than those endowed with less of Nature's bounty.

Despite efforts to improve governance and oversight related to extractive industries projects, the natural resource curse persists today. A recent WRI, Oxfam and Bank Information Center report shines the spotlight on the Camisea natural gas project in Peru and highlights the importance of investing in sub-national governance and capacity building before scaling up investments in natural resource projects.

$1 billion in gas revenue, but poverty remains

The findings of the report, People, Power and Pipelines, as described in this article, have implications not only for extractive industry projects, but also for forest management in developing countries. In particular, international financial institutions, national governments and other stakeholders involved in REDD -- that seek to reduce emissions from deforestation and forest degradation -- should learn from the mistakes of extractive projects and avoid unleashing their own resource curse.

The massive Camisea project's gas production infrastructure and pipeline physically impacted five of Peru's 24 regions, three of which are among the poorest in the country. Between 2004 and 2009, over $1 billion in gas revenues were distributed to sub-national governments. Yet the social benefits have arguably been slight. In 2008 close to 60% of Peru's rural population remained mired in poverty, including regions benefiting from pipeline revenues, and despite the fact that national poverty levels declined steadily from 2006 through 2008. In addition, the project took a heavy toll on local ecosystems with three major oil spills occurring within the first 15 months of construction.

Local governments unprepared for influx of funds

Peru embarked on a substantial decentralization process in 2002, handing more political and fiscal control to sub-national governments. This meant that provincial and district governments in the vicinity of the project were unprepared, only two years later, either to manage the significant social and environmental risks associated with a major gas pipeline or to effectively deploy the massive revenues generated.

Against this backdrop, People, Power and Pipelines analyzed the experience of sub-national government in the Cusco region in managing the natural gas project's impact and associated revenues between 2005 and 2007, researching public records and conducting interviews with key players. The report's findings highlight five challenges, stemming largely from weaknesses in sub-national planning and capacity, which may provide an instructive lesson for similar situations in other countries and sectors.

1. Significant surplus revenues were carried over from year to year by sub-national Governments, without applying an investment strategy. This resulted in missed opportunities to gain returns on these funds, address the risks of oil price volatility and to prepare for the eventual decrease in gas revenues.
2. While institutions, procedures and plans for fiscal management were in place, interviews with municipal officials suggested that these were rarely used in day to day administration.
3. A lack of strategic planning hindered municipal governments' ability to coordinate large land use projects, plan for the future, and manage the impacts of infrastructure expansion in environmentally and socially sensitive regions. For example, a road was built through the Megantoni National Sanctuary without assessments of impacts on the local environment or on indigenous populations.
4. Visible investments, such as roads and buildings, were favored over less visible investments that would enhance social capital such as health, education, and agriculture.
5. Public access to information on how gas revenues were being used was limited and insufficient for citizens to hold government accountable.

Lessons for REDD Revenues

Peru's experiences from the Camisea project could prove instructive for REDD as the international community ramps up efforts to provide a financial compensation mechanism for developing country actions to reduce emissions from forest loss. Although funding for REDD will likely take different forms, a frontrunner option is to link it to carbon markets in developed countries. Companies would then meet their emission reduction commitments by channeling funding to REDD projects in forest-rich countries.

Like Camisea, and extractive projects more broadly, carbon markets would generate funding for poor, but natural- resource- rich, nations, at a scale rarely seen before. There is a risk, though. If REDD does not work as intended, its failure could not only undermine climate reduction goals in developed countries but also inflict a new kind of resource curse on developing nations.

Drawing on Peru's Camisea experience, international financial institutions and others designing REDD should therefore:

• Withhold access to carbon markets until in-country governance and capacity is sufficient to manage the scale up of funds. Indicators developed by WRI's Governance of Forests Initiative (GFI), for example, can be used to assess the strengths and weaknesses of forest governance in a given country.
• Support sub-national capacity building for long-term strategic planning and programs that strengthen transparency and accountability mechanisms for tracking revenues and expenditures in areas where REDD funds are channeled.
• Draw on and adapt best practices from successful extractive industry projects to avoid known pitfalls.

Above all, careful sequencing of governance and capacity building should be employed before scaling up revenue flows. This will help ensure that urgently needed REDD and extractive industry payments are used in a way that generates long term development benefits, especially for the poor. It will create incentives for strengthening developing country governance and capacity. And it will help architects of REDD avoid inflicting a new "REDD resource curse" on nations whose wealth lies in forests.