- The Washington Times - Monday, November 8, 2010

In tough economic times, countries in Latin America and the Caribbean have turned to the U.S. taxpayer-supported Inter-American Development Bank (IDB) for loans that help boost national productivity while protecting the environment and vulnerable people.

Now the Washington-based lender, which last year suffered a billion-dollar loss after putting its money into mortgage-backed securities, wants Congress to help pay for a historic $70 billion capital increase to fund projects like development programs in Haiti and environmentally smart mining projects in the Dominican Republic.

But U.S. officials have begun to question the reasonableness of the IDB’s loans amid criticism that its bankers are more focused on securing new deals than making sure existing ones work as planned.

With the U.S. government — the bank’s largest shareholder — considering whether to approve the increase, a Washington Times examination of an IDB-backed natural-gas project in the Peruvian Amazon confirms those criticisms. It reveals that bank officials in 2007 manipulated a technical investigation of a rupture-prone pipeline, producing a fraudulent report that cleared the way for a controversial $400 million loan to a natural-gas export project headed by a Texas oil company.

Carved into Peru’s Lower Urubamba region, a sprawling and largely pristine swath of Amazonian rain forest, the Camisea Natural Gas Project came online in 2004. IDB officials had backed the Camisea consortium, a group of companies including Texas’ Hunt Oil, with a $73 million loan, praising the project as a best-practices example of how to surgically remove oil from a rain forest and fill development coffers.

Screen capture of the Inter-American Development Bank's Web site (Courtesy of iadb.org)
Screen capture of the Inter-American Development Bank’s Web site (Courtesy of iadb.org) more >

With chain saws and bulldozers ferried deep into the jungle along muddy rivers, crews built a processing station and two pipelines that extended over the Andes, one leading to the coastal town of Pisco and the other going south to feed Lima. Soon, the Peruvian government was making a natural-gas export deal — known unofficially as Camisea II — with Hunt Oil. To build a $3.9 billion processing plant on the coast, Hunt turned again to the IDB for a $400 million loan.

But problems emerged. Four months after coming online, the main Camisea pipeline that would feed Hunt Oil’s future processing plant ruptured, spilling contaminants into rivers and streams. Eight months later, it happened again; then again 18 days later. By March 2006, the rain-forest pipeline had produced five ruptures — spilling gas, sending three burn victims to the hospital and creating a dark cloud over Camisea II’s prospects.

Other complications emerged. In February 2006, as critics pressed the IDB to explain Camisea’s pipeline problems before backing Hunt’s export project, a California-based nonprofit engineering firm, E-Tech International, presented bank officials with a bombshell.

Bill Powers, E-Tech’s president and an engineer, came forward with a detailed report claiming that the company that built the leaky pipeline had cut corners to avoid some $90 million in costs. He said the company — known by its Spanish acronym as TgP — violated the bank’s loan agreement by using pipes that had deteriorated owing to inadequate storage before their use in the project.

Mr. Powers — who based his report largely on testimony, documents and photos provided by a Peruvian welding inspector who worked on the leaky pipeline — also claimed that TgP used unqualified welders and that it had changed the pipeline route without the bank’s approval.

Weeks later, according to internal IDB e-mails, Mr. Powers’ allegations were supported by Peruvian engineer Alfredo Arana, who offered to provide supporting photos and documentation for both men’s claims.

Interviews with former and current bank staffers, as well as dozens of pages of internal bank documents obtained by The Times, paint a picture of bank officials scrambling to deal with the E-Tech report and clear the way for Camisea II.

The bank’s Office of Institutional Integrity (OII) hired R.W. Beck Inc., a Denver-based engineering firm, to investigate Mr. Powers’ claims. On Aug. 16, 2006, the company turned in a draft report. The then-head of OII, Stephen Zimmerman, ordered a contracted investigator to review the report to determine whether it addressed the bank’s issues. In a Sept. 29 memo, that investigator, lawyer Maria Contreras, told Mr. Zimmerman “that Beck did not seem to give the issues raised by OII any great importance.”

Ms. Contreras wrote that Beck had not looked into the qualifications of the welders, whether the pipes were new at the time of installation or if the pipeline route was altered to defray costs. What’s more, she wrote, the appropriate experts hadn’t even gone into the field to inspect the leaky pipeline.

The pipeline report still raised several concerns that echoed those of E-Tech. About the welders, for example, it noted that the same inspector issued welding certificates at two different locations on the same day. About the purported changes in the pipeline route, Ms. Contreras stated that the Beck report “dismisses the allegations rather summarily.”

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