Opinion: What development finance institutions don’t want you to know

Women pick tea leaves in India. Photo by: Pathumporn Thongking / UN Women Asia and the Pacific / CC BY-NC-ND

While development finance institutions like the World Bank, the International Finance Corporation and others continue to allocate massive sums to large-scale development projects – including mass transit infrastructure projects and utilities, wind and solar farms and protected conservation areas – they know that some of these are harming local communities.

The damage caused by hundreds of development projects has been independently verifiedincluding the displacement of communities, the exposure of women and girls to an increased risk of violence, and the infringement of indigenous sovereignty, to name but a few examples.

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Despite this evidence, DFIs largely refuse to provide reparations for damage caused by their own projects. A recent report of the United Nations confirms that the state of recourse in financing for development is lacking and that DFIs are not held accountable. It also lays out a roadmap for what DFIs need to do.

A fundamental step that DFIs must take is to repair any damage they cause. In reality, it means spending money on remedies. The UN report lists several known means of funding remedies, including a permanent fund drawn from a fixed percentage of DFIs’ revenues to be used when needed. Currently, DFIs do not routinely set aside funds for unintended damage.

Without a commitment to fund remedies, local communities pay the price for DFI’s mistakes.

For example, in 2013, community representatives in Assam, India, filed a complaint on behalf of thousands of tea plantation workers, alleging inhumane working conditions at three IFC-funded plantations. In 2016, IFC’s Accountability Mechanism investigated the allegations and confirmed non-compliance with the institution’s own social and environmental obligations. But when the accountability mechanism audited the project two years later, it found that IFC had not remedied the non-compliance. The community is still awaiting redress.

There have been isolated cases of DFIs funding reparations in response to particularly egregious cases of harm caused by development projects. The UN report highlights one example: the Uganda Transport Sector Development Project supported by the World Bank.

the project deployment leads to human rights violations, especially against women and girls. In response to an investigation by its Accountability Mechanism, the World Bank mobilized more than $1.5 million from its Rapid Social Response Trust Fund for remedial purposes. This example shows that development actors are able to set up a contingency fund to deal with harm when faced with enormous diplomatic and media pressure.

As a second critical step, DFIs must mandate their own accountability mechanisms to order corrective action.

DFI accountability mechanisms accept complaints regarding environmental and human rights concerns of affected communities, undertake compliance investigations and facilitate negotiation processes to resolve them.

Without a commitment to fund remedies, local communities pay the price for DFI’s mistakes.

However, with a few notable exceptions, including the African Development Bank, accountability mechanisms generally have limited power to even make recommendations on appropriate reparations for damages caused by internationally funded projects, let alone to order. Instead, they assess whether a particular project was up to their standards, and it’s up to the DFI itself to decide how to respond.

As many DFIs are governed by member governments, they also have a role to play. Member governments should monitor the DFIs they finance by ensuring that they are accountable to their own accountability mechanisms. They can use existing and agreed resources UN Framework to provide reparations, and they can expand the mandate of DFI accountability mechanisms to include the facilitation of reparations.

Development finance institutions, as the UN report points out, argue that establishing processes like these for recourse funding could make them targets of litigation and create a “moral hazard” that discourages project implementers to do their best – but the current state of remedies does not support these assertions. Litigation against these institutions is extremely rare, given that some DFIs say they are largely immune from prosecution, and there are numerous legal and practical obstacles to pursuing claims of an international nature.

If it is well structured, the use of financing reduces moral hazard instead of creating one. Proactive restorative approaches can reduce damage, and the real moral hazard is to maintain the status quo. Refusing to provide a remedy to tea workers in Assam does not reduce the risk; this only perpetuates the failure of the IFC to fulfill its development mandate.

As the UN report states, “The most pressing risk of moral hazard…lies in the current situation in which project clients and funders are too often insulated from responsibility for impacts on human rights, the costs of which are instead externalized to the people (and often the poorest and most marginalized) who cannot claim their rights.

In most contexts, if you don’t correct your mistakes, you are obligated to correct them under the rule of law. But, we are faced with the reality that powerful DFIs must hold themselves accountable, which means that the parallel complaints system allowed by DFIs is weak. Even after independent findings of wrongdoing, DFIs lack systems to simply right established wrongs. Especially given their mandates, they should.

Development institutions have the expertise and power to fund reparations when their projects cause unintended harm to the environment and human rights. They can set funds aside and give their own accountability mechanisms the mandate they need to adequately serve the local communities that bear the most risk from DFI projects. The hurdle, then, seems to be whether they have the will.

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