(Recasts lead, adds Oxfam comment in paragraphs 16 and 17)
By Lesley Wroughton
WASHINGTON, Sept 9 The World Bank on Tuesday pulled the plug on an oil pipeline agreement with Chad after long-standing tensions with the government over failed promises to spend the oil profits on programs for the poor.
In a statement, the World Bank said Chad prepaid the outstanding balance of $65.7 million under the $140 million loan deal on Sept. 5 following talks with the government of President Idriss Deby.
The impoverished central African country is expected to earn about $1.4 billion in oil revenues this year.
The pipeline was one of the World Bank's biggest investments in Africa and billed as a test case for how Africa's oil wealth could benefit the poor if spent properly.
The bank said Chad had failed to comply with agreements, in which the government agreed to set aside a chunk of its oil revenues for local communities, health and education.
After two agreements since 2001 with Chad over the pipeline and no progress, World Bank President Robert Zoellick wrote to Deby in August saying the bank could no longer support the project and urged him to prepay the balance of the loan and end the arrangement.
"Regrettably, it became evident that the arrangements that had underpinned the bank's involvement in the Chad/Cameroon pipeline project were not working," the bank statement said.
"The bank therefore concluded that it could not continue to support this project under these circumstances."
A government official in N'Djamena told Reuters the bank's decision would not affect the country's oil output.
The World Bank backed the $4 billion, 170,000-barrels per day Chad-Cameroon pipeline, operated by U.S. major Exxon Mobil, by financing a portion of it in 2001 on condition profits were spent on programs to reduce poverty.
The 620-mile (1,000 km) pipeline, which carries oil from Chad through Cameroon to international markets, was heavily criticized by aid agencies which warned that Chad was marred by corruption, political instability and human rights abuses.
GRAB FOR PROFITS
Former World Bank President Paul Wolfowitz halted lending to Chad in January 2006 and froze a dollar account at Citibank in London after the government made a grab for the oil revenues by altering an oil law to access more of the profits.
Relations were restored in April 2006 when the agreement was renegotiated and the government promised to allocate 70 percent of budget spending in 2007 for programs for the poor.
Over the past year, however, Deby has signed several decrees handing him personal control over the landlocked oil producer's finances and circumventing World Bank attempts to ensure a large share of oil profits go to social spending.
Relations with the bank have worsened as the government has tapped more of the oil profits for military spending amid growing threats by rebels and increased costs related to refugees fleeing the Darfur conflict in neighboring Sudan.
The bank had been warned by local and international development groups that the pipeline project had little chance of reducing poverty, said Ian Gary, senior policy advisor for extractive industries at Oxfam America.
"The project's record of failure proves these warnings correct," Gary said. "Looking forward, the World Bank must absorb the lessons of failure from this and other oil and mining projects around the world and avoid financing such efforts in places not yet ready to manage the risks."
The World Bank's decision on the pipeline does not affect its existing seven development projects in Chad and a bank mission is expected to review the projects shortly.
Nor does it affect an agreement between the World Bank's private-sector lender, the International Financial Corp, and the pipeline's operator Exxon Mobil, including environmental and other monitoring of the pipeline.
The World Bank said it recognized Chad's problems and was willing to help, despite the parting of ways over the pipeline.
"If the government of Chad wishes to focus its energies on a program to support inclusive development to overcome poverty, assist displaced people, and improve governance and effectiveness to achieve results, the World Bank is willing to work with Chad to assist," the bank said.
The bank said it looked forward to talks with senior Chad officials in Washington at the end of September on future relations and a development program that reduced poverty. (Reporting by Lesley Wroughton, Editing by Diane Craft and Neil Fullick)