A new road is built near Victoria Falls on the Zimbabwe-Zambia border. Credit: David Brossard/cc by 2.0

By Carey L. Biron
WASHINGTON, Oct 9 2014 (IPS)

The World Bank has initiated a major call to action for private sector investors around infrastructure projects in developing countries.

World Bank Group President Jim Yong Kim on Thursday launched a new initiative, worth some 15 billion dollars, aimed at motivating banks, pension funds and other institutional investors to turn their focus to the pressing, and growing, infrastructure needs in developing countries.“Institutional investors have deep pockets – insurance and pension funds have some 80 trillion dollars in assets.” -- World Bank President Jim Yong Kim

In announcing the new Global Infrastructure Facility (GIF), Kim estimated these needs would require up to a trillion dollars of additional investment each year through the end of this decade. That’s twice as much as these countries are currently spending.

The private sector has turned away from infrastructure in developing countries and emerging economies in recent years, the bank reports. Between 2012 and last year alone, such investments declined by nearly 20 percent, to 150 billion dollars.

“Given the scale of infrastructure financing needs in developing countries, we definitely welcome an initiative like this,” Marilou Uy, the incoming director of the Group of 24 (G24) developing countries and a former bank official, told IPS.

“The private sector’s role here is especially important: to find good models to work with, so that private investment in developing countries can start to rise again and grow to levels even higher than before.”

In a surprise to many, the bank’s sister organisation, the International Monetary Fund (IMF), this week came out forcefully in favour of public spending, particularly on infrastructure. The IMF and World Bank are currently holding semi-annual meetings here in Washington.

The GIF will start a number of pilot ventures later this year, reportedly with a focus on climate-friendly projects and those that can promote trade. But it will not be financing these initiatives directly.

Rather, it will aim to turn the private sector’s attention back towards the road, bridges, energy production and other large-scale physical projects that make up the foundation of any country’s economic and social development.

“Institutional investors have deep pockets – insurance and pension funds have some 80 trillion dollars in assets,” Kim said Thursday, speaking with reporters.

“But less than 1 percent of pension funds are allocated directly to infrastructure projects, and the bulk of that is in advanced countries. The real challenge is not a matter of money but a lack of bankable projects – a sufficient supply of commercially viable and sustainable infrastructure investments.”

Fundamental bottleneck

The World Bank is hoping the GIF will function as a conduit through which major investors, together with the development institution’s own experts, can advise governments how to structure infrastructure projects in order to entice investors looking for long-term opportunities. Kim said a “massive infrastructure deficit” in developing countries today constitutes a “fundamental bottleneck” in addressing poverty, the bank’s key mandate.

Perhaps in response to past criticisms, the bank also notes that the GIF will not simply try to move as much money into these projects as possible.

“We know that simply increasing the amount invested in infrastructure may not deliver on the potential to foster strong, sustainable and balanced growth,” Bertrand Badre, the institution’s managing director, said in a statement. “A focus on the quality of infrastructure is vital.”

The GIF will focus on fostering particularly complex partnerships between the public and private sectors, known as PPPs. In anticipation of Thursday’s announcement, the World Bank Group’s private-sector arm, the International Finance Corporation (IFC), has reportedly been ramping up its PPP units around the world.

Yet the growing dependence on the private sector in development aims continues to spark concern among many development advocates and anti-poverty campaigners, who worry that the goals of for-profit entities are often at odds with the public good.

“While the bank’s new infrastructure facility is welcome, we are concerned that any sudden push into new big-ticket infrastructure deals must improve the lives of ordinary people,” Nicolas Mombrial, the head of the Washington office of Oxfam International, a humanitarian and advocacy group, said Thursday.

“Therefore, the World Bank must ensure that new infrastructure lending comes fitted with proper safeguards in place to protect the poorest and most vulnerable communities from clients that might be more interested in profit over development. We need safeguards for people and not just for investors.”

The head of the GIF, meanwhile, cautions that the initiative is still in its very early days.

“I have been meeting with civil society organisations who were really interested in engaging with us on the GIF,” Jordan Schwartz, the official in charge of the new programme, told IPS.

“Like them, we want to ensure that decisions around infrastructure investment are sensitive to a wide range of environmental, social and economic considerations, so that not only is there benefit for the poor and for economic activity generally but so the investments are sustainable. We look forward to continuing that dialogue.”

PPP worries

Concerns around public-private partnerships are particularly notable around public water systems. In recent years, private companies around the world have shown growing interest in stepping into partnerships to resuscitate public water infrastructure that has often been underfunded for decades.

The World Bank’s IFC has been a major proponent of such deals. Yet some of these have sparked powerful backlash from critics who note that water privatisation has often resulted in higher costs and inequitable service.

This week, for instance, activists in Nigeria stepped up a campaign to urge the government to pull out of discussions with the IFC around a potential water project in Lagos. They say the scheme’s details are being kept from the public.

“Around the world, the IFC advises governments, conducts corporate bidding processes, designs complex and lopsided water privatisation contracts, dictates arbitration terms, and is part-owner of water corporations that win the contracts it designs and recommends, all while aggressively marketing the model to be replicated around the world,” Akinbode Oluwafemi, with Environmental Rights Action, a Nigerian advocacy group, told reporters Wednesday in Lagos, according to prepared remarks.

“Not only do these activities undermine democratic water governance, but they constitute an inherent conflict of interest within the IFC’s activities in the water sector, an alarming pattern seen from Eastern Europe to India to Southeast Asia.”

According to World Bank estimates, public money makes up some two-thirds of PPP financing around the world today. Watchdog groups say this underscores the heavy government subsidies that these projects have typically required, especially for important improvements.

“The GIF is part of a larger, renewed push for big infrastructure, which is troubling in part because of the history of human rights and environmental abuses associated with these projects,” Shayda Naficy, director of the International Water Campaign at  Corporate Accountability International, an advocacy group, told IPS.

“But it is also troubling because even where infrastructure is a dire need, as it is in the water sector, the emphasis being placed on the private sector is leading us in pursuit of illusory solutions. At least in the case of water, the private sector is not interested in making these investments in infrastructure.”

Edited by Kitty Stapp

The writer can be reached at cbiron@ips.org

For the second time this year, an internal auditor has criticised the World Bank’s private sector investment agency over dealings in Honduras, and is warning that similar problems are likely being experienced elsewhere.

The investigation found that the bank’s private sector investment agency, the International Finance Corporation (IFC), took on a significant stake in a Honduran bank but undertook “insufficient measures” to assess that institution’s own investments. These included at least one company involved in a deadly land dispute.“The philosophy of the World Bank is to ‘end poverty’, but what has happened in this process has been the opposite.” -- La Plataforma Agraria de Honduras

The auditor, known as the Compliance Advisor/Ombudsman (CAO), also levels a broader critique of the IFC’s investments in third-party groups such as the Honduran bank. When dealing with these “financial intermediaries”, the CAO warns, financial considerations appear to be receiving far more attention from officials than the environmental and social policies meant to safeguard local communities.

“IFC acquired an equity stake in a commercial bank with significant exposure to high risk sectors and clients, but which lacked capacity to implement IFC’s environmental and social requirements,” the CAO states in a report released Monday.

“The absence of an environmental and social review process that was commensurate to risk meant that key decision makers … were not presented with an adequate assessment of the risks that were attached to this investment.”

The report focuses on a 2011 IFC investment, worth 70 million dollars, in Banco Ficohsa, Honduras’s third-largest bank. CAO found that important information was withheld between IFC offices over the extent of business between Banco Ficohsa and Corporacion Dinant, an agribusiness company that for years has been accused of waging a violent campaign to expand its palm oil plantations in the country’s Aguan Valley.

In January, CAO issued critical findings on a separate IFC investment in Dinant, from 2009, worth 30 million dollars. Dinant is owned by Miguel Facusse Barjum, one of the wealthiest businessmen in the country and reportedly a backer of the 2009 military coup that ousted a pro-reform president.

Over the past half-decade, more than 100 people have reportedly been killed in the Aguan Valley in clashes between Dinant security personnel and local cooperatives.

IFC has put on hold the Dinant deal and enacted a plan aimed at ameliorating the situation. The new report does not find evidence that the Banco Ficohsa deal was aimed at funnelling additional funds to Dinant, but CAO researchers suggest that the effect was the same.

“[W]aiving a key financial covenant and then taking an equity position in Ficohsa … facilitated a significant ongoing flow of capital to Dinant, outside the framework of its environmental and social standards,” the report states.

Local civil society groups say the effect has been devastating.

“The philosophy of the World Bank is to ‘end poverty’, but what has happened in this process has been the opposite,” La Plataforma Agraria de Honduras, a Honduran network, told IPS in Spanish.

“Instead, we’ve seen greater wealth for corporations and transnational landowners and greater poverty for the poor, who have been driven from their lands. And although the previous CAO report was very critical, the World Bank has continued to finance Dinant through Ficohsa.”

Beneath the intermediaries

In a formal response also released Monday, the IFC does not dispute the CAO findings. But it does suggest that they are no longer relevant, following changes put in place in part in response to the January CAO report on Dinant.

New procedures, for instance, will now allow for additional oversight visits to “medium risk clients”. Multiple new processes will also aim to close information gaps of the type that led to the Ficohsa revelations, including the creation of a new vice-president-level position to focus on “risk and sustainability”.

“Under this new structure, [environmental and social] risk will receive the same weight and attention as financial and reputation risk,” two IFC vice-presidents wrote in a letter to CAO.

Yet the remarkably critical CAO report has already added momentum to an ongoing campaign to convince the World Bank Group to reform the IFC’s dealings with financial intermediaries such as Banco Ficohsa. Such deals have become increasingly important to the IFC’s portfolio over the past decade, but they have traditionally offered far less oversight for the agency.

In such projects, the IFC requires the intermediary to set up a system aimed at ensuring that stringent environmental and social safeguards are met. But analysis of the effects of this system on the ground is left to the intermediary.

“This issue has been questioned in many cases – where a financial intermediary is the one doing the disbursements and the IFC is completely separate and doesn’t know what’s going on,” Carla Garcia Zendejas, a programme director at the Center for International Environmental Law (CIEL), a Washington-based watchdog group, told IPS.

“That’s the case here. Even if you have a system in place to assess these risks, if you’re not doing that properly the whole system is worthless.”

Systemic reassessment

The CAO has repeatedly questioned the IFC’s policies on investments in financial intermediaries (a broad investigation can be found here). This time, the investigators are clear that the Honduras situation is likely not an isolated incident.

“[T]he shortcomings identified in this investigation … are indicative of a system of support to [financial intermediaries] which does not support IFC’s higher level environmental and social commitments,” CAO states.

“CAO’s findings raise concerns that IFC has, through its banking investments, an unanalyzed and unquantified exposure to projects with potential significant adverse environmental and social impacts.”

The auditor warns that, under current disclosure mechanisms, “this exposure is also effectively secret”, and calls for a “reassessment” of the agency’s management of social and environmental risk in its dealings with financial institutions.

Rights advocates note that similar concerns are cropping up in IFC investments in financial intermediaries elsewhere.

“One of this report’s main findings is that there is a breakdown in the IFC’s systems approach to [financial intermediaries], especially in risk categorization,” Jelson Garcia, of the Bank Information Center (BIC), a watchdog group here, told IPS in an e-mailed statement. “This … links to recent cases in Myanmar and India as yet another example of the IFC needing to take stringent and urgent reforms of its financial markets lending approach.”

Advocacy groups say a primary concern is the IFC’s institutional culture, which they say prioritises the volume of loans disbursed over their quality. BIC, CIEL and others are now calling on World Bank Group President Jim Yong Kim to order the preparation of a reform plan in time for the next big World Bank Group meetings, in October.

Edited by: Kitty Stapp

The writer can be reached at cbiron@ips.org

The world’s first hospital to be built and run in a developing country under a public-private partnership is taking up more than half of the health budget in Lesotho, according to new estimates, diverting resources from populations outside of the capital.

The unique funding arrangement for the Queen ‘Mamohato Memorial Hospital, which opened in 2011 in the capital city of Maseru, came about under a deal brokered by the International Finance Corporation (IFC), the World Bank’s private sector arm.“It’s very concerning that the deal was structured to give a 25 percent return to a private company – that’s a phenomenally high rate." -- Anna Marriott of Oxfam

Yet while the Washington-based IFC was negotiating on behalf of the Lesotho government, the final agreement will see returns of around 25 percent for the private company running the hospital.

Now, critics from civil society and within the Lesotho government are warning that the contract, which lasts for 18 years, is already forcing officials to cut back on health and other services, particularly for the country’s rural areas – where 75 percent of the Lesotho population lives.

“The big promise was that the new hospital would cost exactly the same as the old hospital and bring better results, but that’s clearly not the case. Even at the point the contract was signed [in 2009], costs had already escalated beyond what was agreed to be affordable,” Anna Marriott, a health policy advisor with Oxfam Great Britain, a humanitarian and advocacy group, told IPS.

“It’s very concerning that the deal was structured to give a 25 percent return to a private company – that’s a phenomenally high rate – and the idea that the World Bank would advise on a deal of that type is truly surprising. It feels as though the IFC was negotiating on behalf of the company rather than the government.”

In a report released Monday, Marriott writes that the new hospital is costing around 67 million dollars a year, three times more than the old hospital. Further, it’s currently accounting for some 51 percent of the country’s health budget, even while rural services are being cut, including for agriculture and education.

“The [new] hospital has had a bad impact on how we’ve allocated resources over the last two years,” the report quotes an anonymous senior Ministry of Health official as stating. “There are less and less resources for primary health care and district services.”

Non-competitive bidding

While the Lesotho government has proposed a significant increase in its health budget for coming years, a large majority – some 84 percent – of this will be earmarked for the new hospital. Yet most people in Lesotho can’t easily make use of these facilities.

“For many people, travelling to urban areas or the capital can take two days or more,” Lehlohonolo Chefa, director of the Lesotho Consumers Protection Association (CPA), which co-authored the new report, told IPS.

“For a long time, the government has been relying on the Christian Health Association of Lesotho to provide most of the primary health-care services in rural areas. But with the advent of this project, the majority of funding goes to financing the federal hospital while sacrificing that primary health care.”

Chefa is in Washington ahead of semi-annual meetings between the World Bank and International Monetary Fund (IMF), which are taking place later this week.

Lesotho is one of the poorest and most unequal countries in the world. The new Queen ‘Mamohato Hospital replaces the country’s previous central health service provider, a century-old institution that nearly everyone agreed needed to be renovated or overhauled entirely.

Yet when the government of Lesotho went to the World Bank to request funding to do so, Oxfam’s Marriot says the bank’s window had already closed for the concessional assistance that would typically be used in such a situation. Instead, officials were pointed towards the IFC, which took over the main technical advisory role for the deal.

That process resulted in a contract between the government of Lesotho and Tsepong, a consortium headed by Netcare, a South African company that has long experience in the private health-care business.

Critics point to a host of problems with the negotiating process and structure of the eventual contract, however, including that only two companies engaged in the bidding process. In addition, the contract significantly underestimated the number of patients the hospital would see, while requiring the government to pay Tsepong for visits over that number.

Further, Tsepong’s priorities are at times at odds with those of the government. Lesotho, for instance, has the world’s third-highest rate of HIV/AIDS, yet CPA’s Chefa says the new hospital has scaled back these services.

“Most of the HIV/AIDS treatments are not provided in the new federal hospital, so people have to look elsewhere,” he says. “For the private sector, HIV/AIDS is not profitable – we’re seeing the same problem with mental health services.”

Landmark model

The deal was quickly lauded by the IFC, which continues to embrace the project’s broader aims.

“The World Bank Group shares Oxfam’s concern that the health network in Lesotho is being overburdened as it attempts to fulfil greater than anticipated public demand for basic health services,” Geoffrey Keele, an IFC spokesperson, told IPS in a statement.

“The World Bank Group is supporting the Government of Lesotho in strengthening the country’s health system so that everyone in Lesotho, especially the poorest, can access the essential health services they need.”

Keele notes that the project has improved the quality of care for around a quarter of the country’s population, while the overall mortality rate at the new hospital has fallen by 41 percent.

Indeed, the IFC started making plans to replicate the project in other countries almost immediately.

“The landmark deal might serve as a model for aging and overburdened health care systems across Africa,” the IFC said in a statement at the time. “The real potential of the Lesotho project becomes apparent if it could be scaled up across populous countries such as Nigeria, where there could conceivably be scope for 20 or more such hospitals.”

Currently, the IFC is advising on similar projects in Nigeria and Benin.

Oxfam is now urging the World Bank to investigate the IFC’s role in the project. Meanwhile, CPA’s Chefa says the Lesotho government will need to renegotiate the contract, but warns that the contract details remain under wraps.

“Renegotiating the contract is the only way out of this mess, and whether that’s possible is based on the government’s and the IFC’s willingness to change,” he says.

“For the moment, there is incredible secrecy around the project. But if this is a flagship project, how can they not be open about what’s in the contract?”

The Inga III dam would be the first in a series of hydroelectric installations along the Congo River, collectively referred to as the Grand Inga project. Credit: alaindg/GNU license

By Carey L. Biron
WASHINGTON, Feb 11 2014 (IPS)

Watchdog groups here are warning that a deal has been struck that would see Chinese investors fund a massive, contentious dam on the Congo River, the first phase of a project that could eventually be the largest hydroelectric project in the world.

Discussions around the Inga III dam proposal, in the Democratic Republic of Congo (DRC), have been taking place in some form for decades. They have picked up speed over the past year, however, under the auspices of the World Bank, the Washington-based development funder.“Handing the project over to a private investor will make it even less likely the country’s poor people would benefit from the project.” -- Peter Bosshard

On Tuesday, the bank’s board of directors were to have voted on an initial 73-million-dollar loan for the project, to be offered through the International Development Association (IDA), the institution’s programme for the world’s poorest countries. Last week, however, that vote was abruptly postponed.

Now, civil society groups are reporting that the project may be going forward instead under the World Bank’s private-sector arm, the International Finance Corporation (IFC), with the backing of Chinese investors. Yet critics, who have long worried about the local social and environmental impact of the Inga project, worry that greater involvement by the private sector will result in skewed prioritisation of beneficiaries.

“Handing the project over to a private investor will make it even less likely the country’s poor people would benefit from the project,” Peter Bosshard, policy director for International Rivers, an advocacy group, said Monday.

“The IFC deal was arranged behind closed doors without any accountability to the DRC parliament, the World Bank’s board of directors, or civil society … Non-transparent deals such as the Inga 3 Dam are the best recipe for deepening corruption in the DRC. They will not strengthen the public accountability that is necessary for social and economic development.”

Citing multiple sources within the bank, Bosshard says the decision to change the Inga III funding modality appears to have been made between high-level officials from the World Bank, the IFC and USAID, the U.S. government’s main foreign-aid arm, reportedly bypassing the bank’s board of directors. Thus far, none of these institutions have publicly confirmed any deal.

“The World Bank Group is fully committed to supporting the Inga III hydropower project, which has the potential to improve the lives of millions of Africans,” a bank spokesperson told IPS in a statement. “We postponed presenting to our Board a Technical Assistance package related to the design of the project’s operation, but the project has not been cancelled, and our commitment to Inga III is unchanged.”

Primary beneficiaries

As currently envisioned, the Inga III dam would be the first in a series of hydroelectric installations along the Congo River, collectively referred to as the Grand Inga project. This would include a single 145 metre dam, which would flood an area known as the Bundi Valley, home to around 30,000 people.

The full project could provide up to 40,000 megawatts of electricity, a power potential that has been eyed hungrily by the rest of the continent for decades. While DRC’s chaotic governance has stymied forward progress on the project for years, the Grand Inga vision received an important boost last year when the South African government agreed to purchase a substantial amount of power produced by Inga III.

The 12-billion-dollar dam is now supposed to be built by 2020 and, according to Congolese government estimates from November, would produce around 4,800 MW of electricity. Of this, 2,500 MW would go to South Africa while another 1,300 MW would be earmarked for use by mines and related industry in the province of Katanga.

“There is little indication that the dam development schemes underway would address the issue of access to electricity for the population at-large; industrial users stand to be the primary beneficiaries,” Maurice Carney, executive director of Friends of the Congo, an advocacy group here, told IPS.

“Only 10 percent of Congo’s population has access to electricity and the situation is even worse for rural population, where only 1 percent has access to electricity. For a country like the DRC that is endowed with a plethora of alternative energy options, smaller-scale renewable energy technologies would be the best way forward.”

Carney and others are calling for a cumulative assessment of the Grand Inga scheme, to include study of all social and environmental impacts. Indeed, these have been longstanding concerns, but now some development advocates worry that greater private sector involvement in the Inga III project will further exacerbate such issues.

“We have questions about whether the scheme can deliver any development at all in the hands of the private sector,” Joshua Klemm, manager of the Africa programme at the Bank Information Center, a watchdog group here that focuses on the World Bank, told IPS.

“For good or bad, if this project belongs to the Congolese government, there’s at least some hope to expand electricity access in the country. That would go out the window if we’re talking about a purely private sector project.”

Duelling U.S. stances

As the Inga III project picked up momentum in recent months, USAID too expressed its interest in the proposal. The agency’s administrator, Rajiv Shah, visited the Inga III dam site in mid-December, and stated that the proposal could be added to a new, large-scale initiative by the United States to significantly increase electrification across Africa.

Although USAID was unable to comment for this story by deadline, any involvement by the agency in brokering a deal with the IFC would be interesting. Just last month, the U.S. Congress passed a landmark new law requiring the U.S. Treasury to formally vote against multilateral funding for large-scale hydroelectric projects in developing countries.

The new provisions, contained in a huge appropriations bill funding the federal government, impact both on bilateral U.S. funding through agencies such as USAID, as well as on the significant contributions that the United States provides to multilateral development institutions, particularly the World Bank. (The U.S. Treasury was unable to comment by deadline.)

“Under the [appropriations] language, the United States will have to oppose the Inga III dam at the IFC as much as it would have had to do this if it were an IDA project,” International Rivers’ Bosshard told IPS. “There’s no difference there, but it is ironic that the USAID administrator would have pushed the deal.”

In an unusual statement, the World Bank’s private-sector arm has threatened to cancel a controversial investment in a Honduran palm oil company that has been implicated in serious human rights abuses, including numerous killings, over the past five years.

A member of the Aguan Valley Palm Producers Association holds the fruit from which palm oil is extracted. Credit: USDA/cc by 2.0

The statement came two weeks after the release of a damning report by the Office of the Compliance Advisor/Ombudsman (CAO) of the International Finance Corporation (IFC) that concluded, among other things, that Bank officials should have raised serious questions about the alleged complicity in those abuses by Corporacion Dinant before approving a 30- million-dollar loan to the company in 2008.

The company, which is owned by Miguel Facusse Barjum, “the wealthiest, most powerful businessman in the country,” according to a State Department cable obtained by Wikileaks, is based in the lower AguanValley, a region populated by hundreds of campesino cooperatives established there as a result of a far-reaching land-reform programme initiated in the 1960s.

Conflicts over Dinant’s efforts to buy up these communities’ lands under a 1992 law designed to favour the country’s burgeoning privately-owned agro-export industry, account for many of the abuses.

Since the 2009 military coup, which ousted a pro-reform president and which was reportedly backed by Facusse, nearly 100 people – mostly campesinos, as well as some Dinant employees – have been killed in the valley, according to press reports, although Rights Action, a Washington-based group that has closely monitored the conflict, estimates the campesino death toll at “well over one hundred.”

“IFC has not disbursed funds to Dinant since 2009, and will not disburse further funding until Dinant fulfills its commitments in the Action Plan (worked out between the IFC and Dinant in light of the ombudsman’s report), including strengthening its community engagement and environmental and social standards, and reviewing its security practices,” the IFC said.

“Should Dinant fail to meet these commitments, IFC stands prepared to exercise all remedies available, including cancelling the loan,” according to the statement, which also promised to “refine” its action plan to take account of recent criticism by international and Honduran civil-society organisations (CSOs) and “reflect on” internal problems that led to mistakes.

While many CSOs welcomed the IFC’s latest statement, comparing it favourably to the agency’s initial, more ambiguous reaction to the CAO report, they said it still fell short of what is required to redress the situation.

“The only real difference from its previous statement is that they explicitly said the possibility of cutting off the loan remains open if the action plan is not complied with,” Annie Bird, who directs Rights Action, told IPS.

“The action plan that the IFC is proposing is completely inadequate. People are going into hiding, afraid of being killed, and entire communities remain in constant fear of being evicted from their land. And the IFC really isn’t doing anything to do about it. It’s just calling on the Dinant Corp to work with the government.”

Her disappointment was echoed by Berta Caceres, co-ordinator of the Honduras-based Indigenous Lenca organisation (COPINH). “There is a risk that the situation of violence and impunity which exists in the Bajo Aguan will repeat itself in the future, if the World Bank does not investigate this company’s activities nor consult indigenous communities, farmers, and Garifunas,” she said.

The original 30-million-dollar loan – part of a 100 million dollar package that included Germany’s development bank, the Inter-American Development Bank (IDB), and the Central American Bank for Economic Integration — was signed in April 2009 to fund expansion of Dinant’s snacks and edible-oils processing facilities.

In November 2009 – four months after the military coup that ousted elected President Manuel Zelaya – the IFC disbursed 15 million dollars in support of the project.

One year later, a coalition of CSOs asked the CAO to audit the project and its implementation in light of the human-rights situation in the valley.

The German development bank cancelled its 20 million dollar loan in 2011 after one rights group, Food First Information and Action Network (FIAN), submitted “evidence of the involvement of private security forces hired by Dinant and other companies owned by Miguel Facusse in human rights abuses and, in particular, in the murder of peasants in Bajo Aguan.”

In its 72-page report, the CAO concluded that IFC staff had violated the agency’s own rules by failing to undertake due diligence in assessing and responding to risks of violence and forced evictions and to consult adequately with the agency’s environmental and social specialists on the project.

These deficiencies, it found, were in part due to its culture and incentive system that effectively encouraged staff to “overlook, fail to articulate, or even conceal potential environmental, social, and conflict related risks.”

“IFC has important policies to protect human rights and the environment,” noted Jessica Evans, senior international financial institutions researcher at Human Rights Watch (HRW). “But the Dinant case shows that staff treat them as optional. That needs to avoid more tragic outcomes.”

In response, the IFC took issue with some findings but agreed with others and set forth an “Action Plan” which was immediately denounced by most of the CSOs, including HRW, as inadequate. Their reaction, as well as negative international media coverage, reportedly triggered the Bank board’s demand that the agency revise its plan – details of which have not been disclosed — and issue a new statement.

The statement differs mainly from the IFC’s initial reaction in the apologetic tone it assumes, stressing, for example, that it “acknowledges that there were shortcomings in how we implemented our environmental and social policies and procedures…

“As noted in the audit, IFC must take a broad view of the country and sector risks when considering projects. Additionally, we need to pay more attention to a client’s security practices and preparedness in fragile country situations,” it said.

But its contrite tone failed to appease the CSOs or some Honduras experts.

The IFC’s reliance on the Honduran government in resolving the land conflicts and addressing the human-rights situation made little sense, according to Dana Frank, a Honduras specialist at the University of California at Santa Cruz.

“There’s a reason why the national government is not intervening in the Aguan valley to stop these killings of campesinos and why there’s complete impunity for the security forces and private security guards who have been killing them,” she told IPS. “It’s because Facusse is a formidable power in the national state.”

Indeed, the Facusse family, of which he, at age 90, is considered the partriarch, is widely seen as the most important and influential in what is essentially an oligarchic system.

Rights Action’s Bird also complained about the inadequacy of the response, insisting that the IFC should not only cancel the loan but also work with the affected communities to redress the abuses they have suffered.

She also complained that the IDB, whose own private-sector facility, the Inter-American Investment Corporation (IIC), had participated in the loans to Dinant, has never audited its own performance. “Instead, the IDB is initiating a 60 million dollar loan to create a police intelligence unit that human rights organisations in Honduras are screaming about because the security forces there are out of control,” she said.

Campaigners are seizing on a new internal audit of financial-market lending by the International Finance Corporation (IFC), the World Bank arm that engages in private sector investment, pointing to unusually stark criticism of the institution’s commitment to due diligence.

The report warns that the institution’s oversight mechanisms include no capability to assess whether that lending – which comprises at least 40 percent of IFC portfolios, valued at some 20 billion dollars – is helping or harming local communities and overall development indicators.

In response, on Friday five international watchdog organisations, including Oxfam International and the Center for International Environmental Law, collectively called for “a fundamental overhaul of World Bank lending to financial markets actors”.

“For the first time, we’ve had an official body say this is a fundamentally problematic way of operation, that the IFC is missing the entire point of what these policies are for,” Peter Chowla, coordinator of the U.K.-based Bretton Woods Project (BWP), a watchdog and one of the organisations calling for an overhaul, told IPS. “That puts a far larger onus on the IFC to respond effectively.”

Made public this week, the audit is the result of a year of research by the Compliance Advisor/Ombudsman (CAO), an independent body charged with response to complaints from communities affected by IFC and other World Bank Group projects. The document focuses on the institution’s use of “financial intermediaries” – third-party entities such as banks or microfinance groups that use IFC money to engage in development projects.

According to the CAO, “A large portion of IFC financing is currently channeled to private sector projects in developing countries and emerging markets through third party entities.”

The CAO and other analyses suggest this practice has risen in recent years for the IFC and for other multilateral institutions, public and private.

“The use of financial intermediaries was fairly well hidden over the past decade, but they’ve been used increasingly in recent years as both civil society and governments have become more focused on project transparency,” Stephanie Fried, executive director of the Ulu Foundation, which focuses on international financial flows, told IPS.

“Yet as we see a rise in the use of these opaque bodies, we also see the IFC moving away from due diligence requirements. It’s simpler, after all, and they don’t need to be so accountable.”

Fried calls the new report “shockingly candid”, and notes that its findings will have “tremendous implications for the way that global finance is done.”

Do no harm

The crux of the CAO’s findings is twofold. First, in important commitments further strengthened last year, the IFC’s current stated policy is that its investments will not only “do no harm” but that they will actively “do good”, meaning improve development outcomes.

Second, in projects in which the institution is working through a financial intermediary, the IFC requires that entity to set up a system, known as an ESMS, aimed at ensuring that stringent environmental and social safeguards (“do no harm”) are met. However, while the IFC does make certain that the ESMS is in place, it does not engage in further analysis of the effects of this system on the ground – leaving that responsibility to the intermediary.

The CAO characterises this set-up as a “box-ticking exercise”, and warns that the mere creation of the system could become the end result, rather than enhancing environmental and social safeguards on the ground.

In a formal response, the IFC management does not deny that this is the way the system is currently constituted.

“IFC does not evaluate all information at the sub-client” level, the response reads, referring to project implementers below the financial intermediaries. “We do not consider this necessary or efficient,” as the intent is to have the intermediaries “manage this” through the ESMS.

The response also notes that IFC does “expect our (financial intermediary) partners to maintain all the requisite information about all their sub-clients … and this is evaluated by IFC as part of our on-going supervision process.”

Yet according to the CAO findings, BWP’s Chowla points out, even this system appears to break down fairly often, as in 35 percent of cases the IFC reportedly is unable to verify that its direct partners have implemented these safeguards.

Perhaps most damning in this regard, some 60 percent of “sub-clients” were found to have failed to improve their environment and social practices following IFC investment – which, CAO notes, “is where IFC seeks to really have an impact”.

Other models

According to a statement sent to IPS from the IFC’s Washington headquarters, the institution’s use of financial intermediaries allows it to provide access to finance for millions of individuals and micro, small and medium enterprises that the IFC would otherwise not be able to reach directly.

“IFC focuses on helping our (financial intermediary) clients improve their capacity to assess and manage the environmental and social risks inherent in their own financing activities – in line with IFC’s Sustainability Framework,” the statement says. “As the CAO report noted, nearly all of our clients comply with these standards.”

Armed with the new audit findings, however, campaigners are stepping up criticism of the Sustainability Framework itself. This is particularly important given that the World Bank recently began a widely watched reassessment of its environment and social safeguards, for which some worry that the IFC Sustainably Framework could act as a model.

“The World Bank has made it quite clear that it wants to streamline the safeguards process, to use more country systems to measure compliance,” BWP’s Chowla says.

“But we need to see whether they will take on board the message that using country systems does not mean being ignorant of results – that they still need to be accountable for results.”

Indeed, other due diligence models do exist. Stephanie Fried points particularly to those used by the Asian Development Bank (ADB) and the U.S. Overseas Private Investment Corporation (OPIC).

“Unlike IFC, the ADB and OPIC have insisted on maintaining responsibility for ensuring that things are being done responsibly under their investments, looking not only at the clients to whom they’re giving cash but also at the projects on the ground,” Fried says.

“That’s night and day compared to the IFC. We need to see compliance with the ‘do no harm’ mandate, and it appears that would be a complete redoing of the way in which the IFC is operating at the moment.”

The International Finance Corporation (IFC), the World Bank Group arm that focuses on the private sector, announced Wednesday that it would be backing a new microfinance institution in Myanmar aimed at reaching 200,000 people by 2020.

The move marks the first investment the IFC has ever made in Myanmar, also known as Burma. Although the country joined the IFC in the mid-1950s, it had never received a loan by the time that most international financial institutions pulled out of Myanmar in the late 1980s, citing an increasingly dictatorial government.

Last August, however, following two years of contested pro-democracy reforms in Myanmar, the World Bank re-established an office in Yangon. Now, the Washington-based IFC has struck an agreement, along with several European financial institutions, to back a Cambodian bank’s proposal to create a major new programme to begin providing loans to micro and small businesses in Myanmar.

On the back of the IFC’s two-million-dollar investment, ACLEDA MFI Myanmar (named after its parent, the largest bank in Cambodia) is expected to begin operations by the end of this year. The IFC, which has also helped ACLEDA expand to Laos, says that the programme will be reaching out mostly to small businesses owned by women.

“Our investment in a microfinance institution is a good start to our support for Myanmar’s economic reforms in order to improve access to finance, create more jobs and reduce poverty for its people,” Sergio Pimenta, the IFC’s director for East Asia and the Pacific, said Wednesday in a statement.

According to a 2011 estimate by the United Nations Development Programme, which has been offering microcredit in Myanmar for a decade and a half, demand for loans by rural Myanmarese could be as high as 470 million dollars a year.

A microfinance initiative backed by major Western donors, including the United States, was set up in Myanmar in 2009, and began officially operating in 2011 after the passage of new national legislation formalising the domestic microfinance industry. Called the Livelihoods and Food Security Trust Fund (LIFT), the programme’s latest annual report says that it has already assisted 1.1 million people, around two percent of the population.

While the LIFT programme is overseen by the United Nations and exists largely to funnel donor monies in particular directions, the IFC sees the aim of the new ACLEDA initiative as being to pave the way for other international private-sector microfinance organisations.

“Through ACLEDA MFI Myanmar, IFC will help scale up the country’s microfinance industry and increase access to financial services for both the urban and rural poor,” Pimenta says. “This will help convince other players that affordable microfinance services can be delivered effectively in Myanmar.”

Responsible delivery

Microfinance remains a relatively young industry, having been created around two decades ago and having seen significant expansion only over more recent years. During that period, many of the world’s largest financial institutions have become involved in microfinance, offering banking services and small loans to impoverished individuals, communities and business owners.

According to many estimates, there are currently around 200 million users of microfinance programmes around the world – and upwards of another two billion that continue to lack access to financial services.

Proponents say such programmes allow applicants otherwise deemed uncreditworthy by most banks to participate more freely in the market economy, particularly helping women to set up or expand small businesses and, more generally, increasing financial inclusion.

But critics maintain that despite its successes, microfinance is little more than a way for multinational financial institutions to gain access to communities otherwise generally out of reach. They warn that for-profit programmes have a spotty record in furthering development or tamping down poverty levels, and at times have done more harm than good.

Given a notably rickety financial regulatory system, such dangers seem particularly apparent in Myanmar.

Microfinance leaders are clearly aware of this record. In a taped conversation posted by the IFC this month on microfinance and “responsible delivery”, Doris Kohn, a top official with the German banking group KfW (together with the IFC, the world’s largest microfinance partner), stated that microfinance is no “silver bullet” for development.

“There have been some bad experiences, but any industry experiences those, and there are some not-so-responsible players, but all in all this should not cloud the fact that there have been enormous achievements,” Kohn said. “We have seen some overheated markets and some … competition leading to over-indebted clients, so I do believe that regulation is needed to prevent that from happening.”

In Myanmar, however, financial regulation remains weak, although, pushed by the international community, the government has come out with a series of reforms and new laws aimed at strengthening long-maligned (or non-existent) regulatory authorities. Yet according to a new ranking by Maplecroft, a British risk assessor, the country remains one of the riskiest places to do business, ranked fifth from the bottom in the “extreme risk” category.

The worry for some scholars and activists, then, is that as Myanmar’s microfinance sector opens up, it will attract some of the industry’s more predatory or unscrupulous companies – the type against which KfW’s Kohn was warning.

Still others say that microfinance itself receives more emphasis from development institutions than it deserves.

“Far more important than microfinance is getting proper development banks – or central bank policies that provide similar functions – for medium and large domestic enterprises on a long-term, low-interest subsidised basis, as has been a cornerstone of all countries that have industrialised,” Rick Rowden, a development consultant who has worked in Myanmar, told IPS.

“Microfinance is nice and all, but it has little to do with the fundamentals of industrialisation or long-term development strategy.”