In July 2000, China withdrew its request for World Bank financing for the Qinghai anti-poverty project, one of the most controversial projects in the 54-year history of the Bank. Mr. Bottelier expertly traces the events leading to the decision and raises important questions regarding the validity of the charges against the project and the appropriate role and responsibility of the World Bank.

Pieter Bottelier is a faculty member at the John F. Kennedy School of Government at Harvard. He worked in the World Bank from 1970-98. He served in many different functions, including as Chief of Mission in Beijing (1993-97) and as Senior Advisor in the East Asia Region (1997-98).

This article is based on a talk presented by Mr. Bottelier at the Harvard University Asia Center on October 20, 2000.

The Qinghai anti-poverty project is one of the most controversial projects in the 54-year history of the World Bank. In July 2000, after a detailed investigation by the Bank’s independent Inspection Panel and periods of serious tension between the Bank, its largest client, China, and its largest shareholder, the U.S., China withdrew its request for Bank financing in a stormy board meeting. The decision to withdraw was made by the Chinese Prime Minister Zhu Rongji personally. The episode has put additional strain on the relationship between China and the Bank. It has also left the impression that the Bank was incompetent, insensitive, or terribly naïve in undertaking this project. The purpose of this article is to correct misinformation about this project and to develop a more balanced perspective on the case.

As Chief of the World Bank’s mission in Beijing (1993-1997), I knew the poverty conditions in parts of Qinghai well and was involved in early project discussions in 1997. I was not involved in actual project preparation or appraisal work. The outcome of the fascinating but sad saga that is the subject of this article left me and many of my former colleagues in the World Bank very uncomfortable at different levels. It seems to me that a potentially good anti-poverty project was killed for the wrong reasons.

Although China and many senior staff members in the Bank were profoundly dissatisfied with the work of the Inspection Panel, China was, for the sake of maintaining harmonious relations with the Bank, willing to go along with recommendations by Management for further studies and consultations, as the Panel had deemed necessary. China was not prepared, however, to re-submit the Qinghai project for Board approval after completion of the extra work. China felt that a technical decision to unblock disbursements was all that was required.

The U.S. and Japan were in the end the only two member countries that opposed the project. All other shareholders supported it in principle, but some (including European shareholders, Canada and Australia) required that it be re-submitted for Board approval after completion of additional studies and assessments. China refused to accept this condition on the grounds that: (a) the Board had already approved the project in June 1999, before Panel investigation; and (b) Bank management had officially certified (after the protests by outside agencies, but before Panel investigation) that, contrary to allegations that had been made, Bank policies and procedures had been properly observed in the preparation of this project.

The project and the unusual circumstances surrounding it were discussed in national parliaments around the world. China is proceeding with the project, but all financing will now come from domestic resources and there will be no external supervision of project implementation.

Long-term implications of this unusual episode for the Bank and its Part II members are on balance likely to be negative. They go well beyond the project that triggered the crisis. The Bank’s capacity to help member countries reduce poverty—its main job and purpose—has been impaired. The Bank’s credibility as a non-political institution has suffered. Operational costs of the Bank are likely to increase further as a result of additional reviews and safeguards that may be required by Part I member countries. Bank operational staff has become more risk-averse and less inclined to exercise professional judgment without first consulting internal lawyers. Possible positive consequences are that the Bank may become more sensitive to political realities and that in future there will be less room for confusion over the interpretation of environmental and social safeguard policies.

The project and the crisis it provoked raise questions about the role and procedures of the Bank’s independent Inspection Panel, the Bank’s relations with outside agencies that have a political agenda, the use of resettlement in poverty alleviation, and the apparent unwillingness of the U.S. and some other shareholders to protect the Bank’s political neutrality more forcefully. This is also an interesting case study in how the Bank and its shareholders can inadvertently become entangled in an internal political conflict in a member country through the actions of influential NGOs.

In this case, the underlying conflict that led to the crisis is the political struggle between the Tibetan "government in exile" and the government in Beijing. More precisely, the conflict was over alleged efforts by Beijing to "dilute" Tibetan culture in Qinghai with Bank support through resettlement. The controversy over this project was not anticipated by the Bank or by China. The Bank walked into a political mine field without realizing it until the explosions went off. The international campaign against the project was led by the International Campaign for Tibet (ICT) in the U.S. and Tibetan support groups around the world. The opposition to the project was in my view essentially political in nature, but the conflict took the form of a proxy battle over compliance with Bank operational guidelines and safeguard policies.

The Project

The Qinghai project is a component of the Western Poverty Reduction Project (WPRP) aimed at poverty alleviation in Gansu, Inner Mongolia and Qinghai, three poor, semi-desertic provinces in West and Northwest China. Only the Qinghai component, on which international opposition exclusively focused, involves significant resettlement and Tibetan interests. Under that project, some 58,000 extremely poor farmers living in the largely barren and overcrowded mountains of Eastern Qinghai, without prospect of in-situ economic development, would be assisted, on a voluntary basis, to resettle on irrigated land about 500 km to the west within the same province.

The resettlement site is one of the last remaining undeveloped areas in Qinghai that is suitable for irrigated agriculture. Most other relatively flat areas with adequate water resources in this mountainous, arid, and thinly populated province have already been developed over the past half a century. The share of the Tibetan population in the three prefectures affected by this project (in move-out and move-in areas) ranges from four to eleven percent. They are the "least" Tibetan prefectures in Qinghai and the only three not designated solely as "Tibetan Autonomous"; the other five prefectures in the province are all designated as "Tibetan Autonomous". The project area narrowly defined, which includes land to be irrigated and villages to be established, occupies a little over 200 sq. km.

The project area broadly defined, which includes rural roads, irrigation canals, and open space between non-contiguous irrigation areas, occupies about 2,000 sq. km, or about four percent of Dulan County. At present, the area is poor quality grassland, and is primarily used by the Mongolian cattle herders for winter grazing. Only 63 families presently live (part of the year) in the actual project settlement areas. They are semi-nomadic and all are Mongolian. Others use the area merely for the transit of cattle between summer and winter grazing. Another 248 households farm nearby amidst an old dilapidated irrigation scheme. All affected local people would be entitled to full compensation under the project or have to option to participate in it as direct beneficiaries. Transit rights through the project area would be fully protected. A grievance mechanism would be introduced to deal with concerns and complaints of affected local people

A few Tibetan villages dot the project area broadly defined, but most local Tibetans live higher up in the mountains with their yak and their sheep, not in the project area. The inconvenience of the project on those mountain people would be minimal. Indirectly, they would benefit from a larger market for their products. Tibetans living near the project area, like other minorities, would have the option to participate in the project as direct beneficiaries or receive compensation if they were negatively affected and preferred not to participate. The Bank’s appraisal report indicates that Bank staff responsible for the project’s preparation and appraisal were aware of Tibetan dilution concerns and the perceived risk that Tibetan culture in the area might weaken through the replacement of a herding lifestyle with that of farming. However, since nobody would be forced to adopt a different lifestyle, while a large majority of the local people seemed to be in favor of the project, the Bank’s team found that these risks were manageable.

The ethnic composition of the 58,000 target population in the move-out area is about 42% Han, 36% Hui, 9% Tu, 7% Salar, and 6% Tibetan. The majority is therefore non-Han. All are chronically poor and many are illiterate. Paradoxically, the proportion of Tibetans living in the move-out areas would increase as a result of the project, because the proportion of Tibetans in the target group is much smaller than the proportion of Tibetans in the total population of the move-out areas. The relatively low (voluntary) participation rate of Tibetans in the target group was thought to be related to the fact that the move-out areas are located in the vicinity of the birth places of the Dalai Lama and the Panchen Lama. These are areas to which many Tibetans are for that reason deeply attached.

To protect the social fabric of villages in the move-out area, people would resettle on a village-by-village basis. The Qinghai provincial government originally proposed to move all 120,000 people who had applied for resettlement. However, the World Bank team persuaded the borrower to limit the number to a little under 58,000 so as not to overload the move-in area. The government also agreed to include in the project certain investments in the move-out area for the benefit of those left behind.

The amount of Bank and IDA financing for the Qinghai component of the WPRP would have been about $ 40 million. Typically, the Bank does not finance more than 50% of total project costs in China; the rest is financed by the borrower. In China, projects proposed for World Bank financing are usually prepared by the borrower before they are submitted for the Bank’s consideration. The Chinese typically have a high degree of project "ownership" and implementation is well supervised. The quality of the Bank’s project portfolio in China is rated as one of the best in the world.

The proposed resettlement area for the Qinghai project is mostly uninhabited, semi-desert country. The elevation is 3000 meters and the climate is harsh, as it is in the move-out areas. The growing season is only about 100 days per year. Natural vegetation and wildlife are limited. Most of the land is leased on a long-term basis to herders for seasonal grazing. A few irrigated plots in the area developed under some small, earlier projects are leased to sedentary families in small villages. The project provides for the rehabilitation of an old dam and the construction of a new one to capture seasonal snowmelt from the nearby Kunlun Mountains. The water currently flows off in small streams into marshes in the desert. The reservoir behind the dam will be very small, only about 1.3 sq. km (0.5 sq. mile). Nobody lives in the reservoir area. About 25% of the reliable water supply created under the project would be needed for human and animal needs and for the irrigation of 19,200 hectares (about 47,000 acres) of land. The rest of the water would continue to flow off into the desert.

The project would also provide for land and rural road improvement, simple housing, electricity, as well as health and education services in local languages as well as Mandarin for all settlers. Local people who wished to take advantage of the project, including Tibetans, would have full access to social services to be provided under the project. Local farmers and pastoralists would have the option to receive a piece of irrigated land under the project, like the settlers from Eastern Qinghai. The settlement area is located in Dulan County, which is part of the Haixi Mongol and Tibetan Autonomous Prefecture. Dulan County, with about 23% of its population Tibetan, has a higher concentration of Tibetans than most areas in Haixi Prefecture.

With a surface area of 52,000 sq. km, Dulan County is larger than New Hampshire and Vermont added together. Its current population is only about 60,000, many of whom are nomads. The project would just about double the population of Dulan County. The additional population would live in a relatively small section of the County and leave the vast majority of the current population undisturbed. The settlers would live in small villages and not in big towns as was later suggested by the Inspection Panel. The current ethnic composition of the County’s population is 53% Han, 23% Tibetan, 14% Mongolian, 7% Hui, and 3% other minorities. There are at present no Tibetans living in the project settlement area, narrowly defined. Ironically, among the move-in settlers would be about 3,500 Tibetans from Eastern Qinghai. Many of those do not speak Tibetan, however, and are regarded by some as non-Tibetans for that reason.

The project would reduce the share of Han Chinese in Dulan County from 53% to 48%, of Tibetans from 23% to 14%, and of Mongolians from 14% to 7%. Other minorities would increase their share as follows: Hui from 7% to 22%, Salar from 1.5% to 4%, and Tu from 1% to 5%. The"dilution" of the Tibetan population in Dulan County would be balanced by an increase of the share of Tibetans in the move-out areas. Moreover, 3500 Tibetans would settle in a part of Dulan Country where no Tibetans are living at present. Since all movement of people would take place within Qinghai, the project has zero impact on the ethnic composition of the population in the province as a whole.

The World Bank estimates that more than 60,000 people, including settlers and people who stay put in the move-out areas, would directly benefit from the project. Many more would benefit indirectly. Productivity of the irrigated land in the settlement area would increase by well over 1,000%. Settlers would be able to triple or quadruple their income in a few years, receive health care and send their children to nearby schools. The economic rate of return of the Qinghai project, not including benefits resulting from improved health and education, was estimated by the Bank at about 20%, which is not unusually high for this kind of project.

To reduce the risks associated with any large-scale resettlement, the World Bank proposed and the Chinese government agreed to begin the Qinghai project with the pilot settlement of only 200 families and to make design adjustments, if necessary, on the basis of lessons learned. Two hundred families represent about the scale of a similar resettlement project in a neighboring county that was supported by the World Food Programme twelve years ago and that remains successful today. About 1,000 settlers from Eastern Qinghai moved to Dulan County spontaneously about a decade ago and are doing well on irrigated land. No NGOs had ever protested against the WFP project or against two other large and successful World Bank-supported resettlement projects involving minority populations in nearby Gansu and Ningxia (see footnote 2).

Tibet and Qinghai

Qinghai Province is somewhat smaller in area than the Tibet Autonomous Region (TAR), but larger than the state of Texas. The history of Qinghai is relevant in light of Tibetan opposition to the Qinghai project. Tibetans currently account for 21%, and Han Chinese for 57%, of Qinghai’s total population of a little over 5 million, which is about double the TAR population. The concentration of Tibetans in Qinghai used to be much higher many years ago. Large-scale Han settlement in Qinghai started in the 1920s and accelerated in the 1950s under Mao. Han settlement in Qinghai is in many ways different from and much older than Han settlement in what is now Tibet Autonomous Region. Some members of the local Han population in Qinghai are former prisoners of the provincial Laogai prison system, or "left-over" exiles from China’s Cultural Revolution (1966-76). Dulan County, like most of Qinghai, is regarded part of the "Tibetan Plateau" or "Greater Tibet" by the Tibetan "government in exile". No foreign government recognizes Tibet as a separate state. The U.S. Congress, however, passed a non-binding resolution recognizing Qinghai as part of Tibet. The resolution is reflected in political maps of China used by some.

The last time Tibetan rulers had full control over the area that is now Qinghai Province was more than 1,000 years ago. The areas had been conquered by Tibet during the seventh and eighth centuries A.D. Prior to that there were kingdoms subordinate to China. The great Tibetan empire disintegrated towards the end of the first millennium, and was never fully restored. However, from time to time, Tibet exercised jurisdiction in certain parts of the old empire (outside TAR) until the twentieth century, and Tibetan culture in some of these areas remains strong. Though part of the "Tibetan Plateau", Qinghai is very different from Tibet, however, historically and in many other ways.

Campaign Against the Project and Request for Inspection

The start of the protest campaign against this project—shortly after project negotiations between the Bank and China had been completed in April 1999—was carefully timed. It enhanced political impact. The campaign was led by ICT, which also provides guidance to other Tibetan support groups in the U.S. and elsewhere. ICT shares offices in Washington D.C. with the Special Envoy of the Dalai Lama in the U.S. The campaign was supported by the Center for International Environmental Law (CIEL), the Inner Mongolian People’s Party (a Mongolian support group based in New Jersey), several other NGOs, and by many individuals. The President of the World Bank, James Wolfensohn, and Bank Directors were inundated by thousands of letters and emails from all over the world, protesting the Qinghai project and the proposed World Bank support for it. Mr. Wolfensohn was also urged to drop the project by 60 members of the U.S. Congress in a joint letter, and by the U.S. Secretary of the Treasury as the U.S. representative on the Bank’s Board of Governors.

The ICT-led campaign appears to have been triggered by a "News Update and Special Report" on the Qinghai project from the London-based Tibetan Information Network (TIN), dated April 27, 1999. The 7-page TIN report cited Gabriel Lafitte, Aid and Development Coordinator for the Australia Tibet Council, as its main source. Mr. Lafitte had observed World Bank missions in Qinghai. Unfortunately, the TIN report contained a number of errors and unsubstantiated allegations by Lafitte against the Chinese government and against Bank staff that may have contributed to the international furor over the project. The TIN report was objective and balanced in tone and appearance, but it nonetheless presented a misleading picture of the project and the Bank’s role in it. The large amount of detail in the TIN report about internal Bank procedures and policies suggest that the campaign against the project had been under preparation for some time.

Bank staff members and managers dealing with the Bank’s China program were tied up for months trying to respond to the numerous complaints, attending meetings with protest groups and later, when the Inspection Panel (IP) had started its work, responding to requests for information from the IP. The Chinese government set up a 24-hour hotline, both in Beijing and in Qinghai, to answer questions that were raised by different parties.

The protests focused mainly on the proposed resettlement of large number of non-Tibetans in Dulan County and on the alleged environmental damage that the project would cause. The arguments used in most correspondence received by the Bank were generally the same and the language often identical. Most letters received were form letters. This was clearly a centrally led campaign. Some letters were highly emotional in tone and reflected deep suspicions of the intentions of the Chinese government. Tibetan people and Tibetan culture were allegedly being ‘swamped by hordes of Chinese’. Many letter writers were evidently not well informed about the project, but nonetheless protested loudly.

ICT was strongly supported by CIEL. Both agencies claimed that the Bank had not followed its own operational procedures and guidelines in the design and appraisal of the Qinghai project. These policy violations were thought to represent a "serious threat to the lives and the livelihoods of affected peoples in the area and will result in irreparable damage to the environment, causing locally affected people material harm". ICT’s formal request for inspection was dated June 18, 1999. The request focused on compliance issues, because it was evidently well understood that the Bank’s independent Inspection Panel cannot express judgment on the merits of a project per se. It can only determine whether, in its judgment, the Bank has properly followed its own project policies and procedures. When the ICT request for inspection was first submitted to the Panel, China made it clear that it could not cooperate, because the request was, in China’s opinion, politically motivated and as such not eligible under Panel rules.

Many protesters also complained that the Bank was naively allowing itself to be used as a tool by the Chinese government to legitimize the dilution of Tibetan culture and identity. Protesters raised doubts about the Bank’s claim that migration from the move-out area would be voluntary. It was claimed that prison labor would be used during project construction (which is contrary to Bank rules) and that the project would benefit a nearby Laogai prison camp and/or government mining projects elsewhere in Qinghai.

The Board Decision of June 24, 1999 and the Management’s Response to the Request for Inspection

Protests and request for inspection notwithstanding, the Bank’s Board of Executive Directors approved WPRD project on June 24, six days after receipt of ICT’s request for inspection. The Board stipulated, however, that there would be no disbursements for the Qinghai component of the project pending review of the IP report that was formally authorized by the Board on September 9. Only the U.S. and Germany voted against the project at that Board meeting. Just prior to the meeting, Bank management had sent a special team of very experienced Bank staff who had not been directly involved in the Qinghai project, to the project areas to investigate the claims made by ICT, CIEL and others. The team reported that the allegations were not sufficiently robust to justify further delay in Board consideration. It was in part on the basis of this report that Bank management decided to go forward with the project, subject as always, to Board approval.

In its request for inspection ICT claimed to represent affected people in the project areas who could not openly speak for themselves, because of China’s repressive political climate. ICT had received letters from people in Qinghai who opposed the project mainly on the ground that it was perceived as a threat to Tibetan culture and interests. Resentment against China remains strong among Tibetan people and Tibetan support groups outside China. Unfortunately the Qinghai project, which was otherwise a promising anti-poverty project, became a lightning rod for those sentiments and was seized upon by agents such as ICT as an instrument to further perceived Tibetan as well as their own institutional and political interests.

ICT’s legal representation claim presented an awkward dilemma for the Bank. China was for many years the Bank’s largest customer and China’s reputation as a high quality borrower with a strong commitment to poverty reduction was not in doubt. Under Panel rules, the Board can only accept representation claims of the kind made by ICT if the representative produces satisfactory evidence that the affected people cannot openly speak for themselves. In an effort to diffuse the crisis, Management inquired if China would be willing to withdraw its request for Bank financing or use the concessionary funds for another anti-poverty project. Characteristically, China refused on grounds of principle. To avoid the awkward dilemma presented by ICT’s representation claim, the Board decided to ignore ICT’s request and to instruct the Panel on its own authority to conduct an investigation. The Board must have been sufficiently impressed by the protest campaign to feel that an investigation was warranted.

The Board’s terms of reference for the Panel fully reflected ICT’s request for inspection, even though the original request was not mentioned. On that basis, China was able to agree with the inspection and offered full cooperation with the inspection team. At the same time China invited foreign journalists to come to the project areas to see for themselves, before, during, or after the inspection. Many did.

After receipt of ICT’s inspection request, the Bank’s Management prepared a detailed report for the Board, responding to all allegations and concerns expressed in the request. The report, dated 19 July, 1999, essentially confirmed the conclusions of the special high-level staff mission to Qinghai just before the Board meeting of June 24. It conceded though, that Bank staff responsible for project appraisal could have done certain things better, that some refinements in project design could and would be made, and that the Bank should have provided more timely and more complete information on the project to the general public. Management firmly rejected the thrust of ICT’s claims, however. It confirmed that Bank policies and procedures had essentially been followed. It reaffirmed its belief that this was a sound anti-poverty project that would bring considerable benefits to the poor target population while adequately protecting the interests of people in the move-in area and that the project would not be harmful to the local environment.

The report also confirmed that resettlement was voluntary, that prison labor would definitely not be used in project construction, and that the project’s "B"rating for environmental assessment purposes was justified, although this was essentially thought to be a "question of judgment". It also disagreed with ICT’s view that a separate "Indigenous Peoples Development Plan" should have been prepared for each of the ethnic minorities affected by the project. Citing Bank guidelines, Bank Management argued that, since the majority of project beneficiaries belong to ethnic minorities, the project itself is the plan, making separate plans for each minority unnecessary. Management stood by its opinion that the Qinghai anti-poverty project had been reasonably well prepared, and that it would adequately protect the interests of affected people in the move-in area.

The Inspection Panel and Its Report

The World Bank’s independent Inspection Panel was established in 1994 following the upheaval surrounding the Narmada project in the early 1990s and lessons learned from the Wapenhans report. The World Bank is the first and so far the only multilateral organization to have such a Panel. In the original concept of the Panel it was meant to serve as a kind of "ombudsman" on the quality of Bank-supported projects and their implementation. This concept was later – but well before the Qinghai project - narrowed at the insistence on Part II member countries who did not want the Panel to express judgment on the quality of their projects or policies. The current Panel concept is focused exclusively on the inspection of compliance with Bank policies and guidelines.

The Qinghai project was the first occasion for the Panel to conduct a full-scale inspection. The Panel consists of three respected international figures appointed by the Board. The chairman of the panel is a well-known Canadian environmental expert. The other two members are a Ghanaian biologist and a Dutch parliamentarian/community development expert. Requests for inspection may be submitted by two or more people affected by a World Bank-supported project or their representative, by technical experts, or by members of the Board. The Panel is assisted by consultants.

Given the rather severe limitations imposed on the scope of Panel investigations, it is not surprising that in the case of the Qinghai project, the Panel only looked at compliance issues. The IP report does not confirm or deny the claim by ICT and other protesters that the project would risk disaster for the environment or Tibetan people in the move-in area. In some sense, the narrow "legal" role of the Panel defeats the broader objective for which it was originally created.

The panel’s 160-page report came out at the end of April 2000. Because of its technical nature, it diffused somewhat the sensitive Tibetan issue, but the report was nonetheless very critical of the Bank. It essentially agreed with the allegation that several important Bank procedures and policies had been violated. The panel’s main conclusions were that:

In the introductory chapter, the Panel notes that there is considerable uncertainty and disagreement within the Bank on the precise interpretation on key project policies and procedures. The Panel concluded, and many staff agreed, that differences in staff opinion are so significant that this "raises serious questions about the ability of the Bank Management to apply them with any reasonable degree of consistency." This is indeed a problem in the Bank. Efforts to reduce the scope for confusion and disagreements within the Bank on the interpretation of project policies and guidelines are needed. Given the infinite variety of project and country circumstances, this is a major challenge. Complete black-and-white certainty for all project situations cannot be achieved, but the Bank can do better on this score than it has in the past.

One of the consultants engaged by the IP for this particular investigation, an American political scientist, publicly disagreed with the main thrust of the IP’s conclusions and stated that the project should go forward with Bank support. Bank staff members who had worked on the project felt that the IP report reflected many errors in judgment and fact. Most disagreed strongly with the main implication of the IP report, namely that the project had been so poorly prepared and was so risky that major revisions (based on additional studies) would be needed before it could proceed. Many staff would have welcomed an opportunity to discuss a draft report with the Panel and complained about Panel procedures which they saw as less than transparent.

Management and Staff Responses to the IP Report

Most staff members conceded that a number of small improvements in project design should be made, as had already been suggested in the Management report of 19 July 1999. Some agreed that the environmental assessments that had been prepared for the project were indeed rather thin and that the project should have been rated "A". A large number of experienced Bank staff, however, felt negatively about the IP report. An unpublished internal staff report responding point-by-point to the IP report was intensely critical and identified many factual errors and misunderstandings by the Panel. Some errors and misunderstandings were thought to be so serious so as to invalidate several of the report’s main conclusions.

For example, the staff pointed out that, contrary to a statement in the IP report that Mongolian pastoralists periodically passing through the project area with their herds had not been consulted, they had in fact been consulted by Bank staff, and that these people had expressed strong interest in joining the project as beneficiaries. Another response concerns the alleged absence of studies on possible project alternatives. The Bank’s project team maintained that China had in fact conducted serious studies of possible project alternatives over a period of years. The information had not been included in project documents as there seemed to be no purposes in that.

Although staff generally agreed with the introductory chapter in which the Panel complains about the confusion within the Bank on the interpretation of policies and guidelines, they found the Panel’s interpretation of its own terms of reference excessively narrow and legalistic. It was felt that if Panel criteria used for the inspection of the Qinghai project were to be applied across-the-board, few if any Bank project would pass muster. Put it differently, if Panel requirements were to be met, Bank operational costs would go through the ceiling and preparation time would become so long as to make it essentially impossible for the Bank to support this kind of anti-poverty projects anywhere.

The Chinese government was extremely dissatisfied with the IP report and felt that the Panel had misjudged or misunderstood much of the information that it had provided at considerable cost of time and effort.

The unpublished internal staff report did not form the basis for the official Management response to the IP report submitted to the Board on June 19, 2000. According to Bank rules, the Panel has the last word. The Panel reports to the Board and its conclusions are final. They cannot be appealed or rejected by Management. In its final recommendations to the Board, Management stood by the project, but agreed to reclassify the project as "A". It recommended moreover that:

The Chinese government reluctantly agreed to accept these recommendations and the extra work and costs that acceptance by the Board would entail. Management did not propose to undertake additional studies of project alternatives on the ground that adequate studies had already been conducted. Management agreed with the Panel that information on these studies should have been included in the project documents. The Management report also pointed out that implementation of its recommendations to the Board would cost no less than $2,125,000 and would take 12 to 15 months. Acceptance and implementation of all Panel recommendations would have cost over $3 million and would have taken 15 to 18 months. For comparison, the Bank’s original operational budget for the Western Provinces Poverty Reduction Project, of which the Qinghai component accounted for about one third, was about $0.5 million. Including expenditures financed from supplementary Trust Funds, the total cost of preparing and appraising the Qinghai component prior to Panel inspection had been under $0.3 million, which, in the World Bank, is about normal for projects of this kind.

The Board Meeting of July 6, 2000

Management’s recommendations were broadly acceptable to the Board, except for the U.S. and Japan who voted against the project. The negative Japan vote was an unpleasant surprise for China and was seen as a political gesture. Germany had apparently modified its position and was willing to go along with other European members, who suggested that Management’s recommendations should be accepted, but that the project should be re-submitted for Board approval after the additional studies and assessments had been completed. This proposal was not acceptable to China on the ground that the project had already been approved by the Board a year earlier; only disbursements had been blocked pending an investigation by the IP. In China’s view, all that was required, upon completion of the additional studies and assessments, was a recommendation from Management to the Board to lift the disbursement restriction.

China and the Bank had already incurred substantial additional expenditures responding to the protests and requests for supplementary information from the IP. Because China did not want the Qinghai project to become a permanent target for international protests and felt that it had done more than enough to accommodate the concerns that had been expressed, it decided "enough is enough", and withdrew its request for Bank financing. China had come to the conclusion that the Bank could not be an effective partner in this project and simply gave up.

Formally, this was the end of the story. But the episode left many in the Bank and in China deeply frustrated. The protest campaign and the IP report had made it effectively impossible to support what was essentially good anti-poverty project or could have easily been turned into a good project. Some staff felt that the Bank had been naïve and should never even have contemplated supporting a project in such complex and controversial political circumstances. Others felt that the Bank deserved to be put down by the IP, because the environmental assessments had indeed been marginal at best. Almost everybody was shocked. A thing like this had never happened before.

Conclusions and Issues