Politics of Poverty

Achieving development impact requires the International Finance Corporation to learn from its failures

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An action plan is needed to ensure environmental, social, governance and political risks are given equal weight with financial and credit risks in IFC decision-making.

This post originally appeared on The Huffington Post

Jin Yong Cai, executive vice president of the International Finance Corporation (IFC) — the private sector arm of the World Bank Group — recently wrote an engaging blog post, “Achieving impact in development requires us to venture into tough places,” stressing that ending poverty requires the IFC to do more in “the most difficult corners of the world,” rather than walk away from risks inherent in these countries.

Few would disagree that the private sector — and therefore the IFC — has a role to play in fragile states. But there are many caveats.

First, private sector investments must be preceded by strong investments from the Bank that strengthen governments and civil society to ensure the right environment for IFC investment and protections for the population.

And while the IFC most certainly needs to take more financial risks, this should not mean taking more unnecessary environmental and social risks. When these risks are not well identified or managed, it’s poor people who will pay the price. This is precisely what happened with Dinant, a company the IFC invested with in Honduras that was linked to human rights abuses and alleged killings. The IFC should do all it can to limit such risks; today it fails to spot and manage them properly.

It is essential to have strong standards in place and implemented to ensure World Bank Group investments in tougher places keep environmental and social risks to the minimum. And while they can always be improved, the IFC performance standards are considered to be international best practice. But recent investigations by the World Bank’s own internal watchdog on the dealings of companies like Dinant and Ficohsa in Honduras, Tata Mundra and GKEL in India, and Dragon in Cambodia — to name just a few — show that the IFC is failing to implement these standards. And it’s not because of a lack of oversight, but rather because of systemic and cultural issues, such as incentivizing the wrong priorities. On Dinant, the investigation highlighted staff incentives, “to overlook, fail to articulate, or even conceal potential environmental, social and conflict risk,” and to “get money out the door” “without “making waves.” These systematic problems have not been addressed by the 2012 update of the IFC standards, as a number of upcoming post-2012 cases will show.

Mr. Cai’s admits that implementation can indeed be a problem and proposes giving environmental, social, governance and political risks equal weight with financial and credit risks in IFC decision-making. But as a development institution, these risks should be given more weight. He commits to work towards changing an institutional culture that prioritizes volume of investment over development impact, which is positive given that only 30 percent of IFC staff currently consider development as their main objective. As long as the message from the top is that volume of lending is what is rewarded, staff will focus on project profitability and will be tempted to hide risks to ensure the money gets out.

While Cai’s blog begins a one-sided conversation, it does not allow for debate and discussion. And Cai has yet to reply directly to a detailed letter from 30 civil society groups on IFC’s lessons learned. Worse yet, Cai’s blog is silent on the necessary budget for environmental and social requirements and is rather vague on details on how and when these changes will be implemented. It leaves us with nothing concrete to hold the IFC accountable.

The World Bank’s shareholders meeting this week should not be satisfied with vagaries. They can look back to President Zoellick’s response to the Indonesia Wilmar audit as an example of what is needed. In that case, President Zoellick announced a moratorium on all lending to palm oil for 18 months to allow for root and branch reforms. If the shareholders want IFC investments to truly deliver for development without human rights abuses, they need to ensure that the IFC learns the lessons of recent scandals and addresses cultural and systemic institutional issues. They should request that Vice President Cai propose an action plan, including concrete actions or reforms, that could be discussed with stakeholders and be assessed by the Board in a year or two.

If the IFC takes this step, we can all feel more reassured that it’s serious about reform. If it does not, cases like Dinant might happen again and again in the future.

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