Dr. Jane H. Hill
President
American Anthropological Association
4350 North Fairfax Drive
Suite 640
Arlington, Virginia 22203-1620

Dear Dr. Hill:

Thank you for your letter of September 30, 1998, relating to IFC's handling of the Pangue hydroelectric project in Chile. I share your concerns about this project. I have said on a number of occasions publicly, both in Chile and elsewhere, that there were serious shortcomings in the way that IFC handled the Pangue project.

As a result of close scrutiny and review of Pangue and other projects, IFC learned important lessons and resolved to improve its environmental and social performance. The direct result of that process is a new and more stringent environmental and social review procedure, which has now come into effect, and IFC safeguard policies which follow closely those of the World Bank. IFC has also substantially expanded its environmental and social science review staff and further expanded its social science capacity by working with other social scientists in many countries. Moreover, IFC is working closely with the specialists in the Bank to augment its resources. With these changes, IFC will be able to focus on assuring first-rate environmental and social performance on its projects, both at the design stage and during implementation.

I note your concern regarding the lack of progress made in responding to the March 1998 report by the American Anthropological Association's Committee for Human Rights. This has been a difficult issue for IFC and I share the frustration you expressed in your letter. However, it is important to recognize that IFC's capacity to influence outcomes of the projects it helps finance varies, depending on when in the project cycle intervention is needed. In addition, it remains an ongoing challenge in the private sector projects to accurately define the issues to be addressed by the client company and those that must, by their scope and nature, be in the domain of the national government. Understanding and recognizing these challenges and constraints is central to accurately assessing IFC's present capacity to address the issues the Committee has raised in its report.

In the case of the Pangue project today, years after Board approval and a year and a half following prepayment of the IFC loan by Pangue S.A., the simple fact is that IFC's leverage to address existing deficiencies in the social area is extremely limited. IFC cannot take unilateral action in connection with the Pangue project. I believe IFC management and staff had conveyed the constraints they faced during the extensive discussion with the members of AAA's Committee on Human Rights both in open and closed session in November of last year. Many of the recommendations of the Committee's report were raised and addressed at that time. IFC management are under my direction to continue to work with Pangue S.A. and other directly impacted parties to reach as positive an outcome as possible as long as it remains a 2.5% shareholder in the company. However, given the reality of present circumstances, I cannot promise success in achieving some or all of our objectives, or the objectives of the Committee.

While the lack of progress in this matter is frustrating for all of us, I hope that the valuable lessons learned from the Pangue project and the frank exchange on issues such as human rights and development, and indigenous peoples, with your organization and many other interested parties will continue, as will the evolution of the Bank Group policies and operations to better reflect the interests of those impacted by the projects we help finance.

[written in by hand:] I will continue to press in every way I can.

Sincerely yours,

James D. Wolfensohn

Enclosed is the full exchange.