Statement by the Vice President and General Counsel of the Multilateral Investment Guarantee Agency (MIGA), December 15, 1995, to the MIGA Directors.

I. Introduction

Due to the recent attention that some members of the media and nongovernmental organizations (NGOs) have directed toward the Freeport McMoRan project in Indonesia, Management would like to inform the Board about recent actions taken by the Agency with respect to this project. First, however, allow me to give you some background on the project and MIGA's involvement with it.

II. Background

In January 1990, MIGA signed its first guarantee contract covering a portion of the expansion of Freeport's investment in a copper and gold mine which has been in production since 1971. The risks covered in MIGA's contract are war and breach of contract, and the maximum amount of guarantee was US $50 million. This contract is still in force. The Overseas Private Investment Corporation (OPIC), the U.S. official investment insurance agency, had provided coverage for this project since 1974 and issued coverage for another portion of the expansion in the amount of US $100 million in 1990. At that time, OPIC and MIGA concluded, as is usual in this type of business, a co-insurance agreement.

Before issuing the MIGA guarantee, the World Bank environmental experts reviewed the project; subsequently, MIGA also benefited from a major environmental impact study of the project by several independent, specialized consultants coordinated by Dames and Moore, who had also been hired by OPIC as part of its environmental review.

In the summer of 1995, OPIC informed MIGA that they were concerned about some allegations that the project was causing environmental damage. In August, MIGA sent a guarantee officer to Indonesia to make an initial on-site assessment of the situation. In order to have a more extensive assessment of the impact of the project, MIGA sent an environmental expert from IFC to the mine site in September. (MIGA's environmental reviews are undertaken by IFC experts pursuant to an agreement between the two institutions.) The expert found that Freeport was not acting in an irresponsible manner with respect to the environmental aspects of its mining operation, and noted that key Indonesian officials had concluded that Freeport was operating in compliance with Indonesian laws and regulations. MIGA's contract to guarantee may be terminated by the Agency, inter alia, if the guarantee holder does not comply with the legislation of the host country.

On October 31, 1995, OPIC canceled its insurance contract with Freeport alleging, among other things, that Freeport had not informed OPIC of a subsequent increase in production at the mine. This expansion, OPIC alleges, created an environmental impact that, had OPIC been aware of it at the time of the issuance of their insurance contract, would have caused OPIC to deny coverage for this project. Freeport immediately instituted arbitration proceedings which are underway against OPIC, alleging that OPIC had unilaterally breached their insurance contract without sufficient cause.

III. Present Situation

MIGA has received a number of letters from NGOs pressing the Agency to cease "supporting" this project as did OPIC. In view of the termination by OPIC of its insurance contract and the resulting arbitration, as well as the complaints which have been made about the project, MIGA Management has taken the following steps:

• First, a team of environmental and social experts from the Bank and the IFC are well underway in their review of the environmental and social impacts of this project - in terms of the original 1989/1990 time frame when the MIGA guarantee was being considered, the consequences of the expansion, and the present situation. This effort is expected to be completed before the end of the month.
• Second, if any adverse environmental impacts are identified in the Bank/IFC review, Management intends to take appropriate action. This may include recommending mitigative measures to Freeport.
• Third, MIGA has hired outside counsel, Wilmer, Cutler & Pickering, to advise the Agency on, among other things, appropriate steps to be taken, if any, should MIGA or its staff be drawn into the arbitration between Freeport and OPIC, especially in situations in which District of Columbia law may be applicable.

Freeport has recently voluntarily submitted itself to two audits (which are currently underway). One on environmental issues is being carried out by Dames and Moore under the direction of Hon. Ros Kelly, former Australian Minister for the Environment; and the other, on the social impact of the project, is being performed by a consulting firm, Labat-Anderson. It is expected that the results of both of these audits will be made public during the first quarter of 1996.

Management intends to review the entire situation in the very near future and decide what additional steps should be taken, including sending to the site a team of environmental and social experts from the World Bank Group. As the cost of these steps may be considerable, Management may ask for a supplementary budget for this purpose at a later stage.

Finally, let me make two points:

1. The problems we are encountering in this project may be due to the fact that, in accordance with MIGA's present policy (which is by the way more rigorous than that of other insurers), we did not perform an environmental review when we learned that the project was going to expand.
2. Management is studying MIGA's policy on environment to see if we can close this gap.

The foregoing was typed by Robert S. Boyer (rsb) from a copy received from Lori Udall.