Opinion: What a new US development finance institution needs to succeed

Photo by: Raúl Nájera on Unsplash

Last week, a bipartisan group of senators and representatives introduced the Better Utilization of Investment Leading to Development (BUILD) Act, which, if enacted, would create a new agency called the United States International Development Finance Corporation. The IDFC would absorb the Overseas Private Investment Corporation — the U.S. development finance institution that encourages American businesses to invest in developing countries by providing businesses with loans or insurance — as well as several functions currently performed by the U.S. Agency for International Development. The bill could likely receive White House support as the administration similarly called for a new DFI in its 2019 budget proposal.

With this bill, its sponsors are seeking to modernize the U.S. approach to development finance by authorizing additional financial services that are already utilized by many other DFIs. For example, in addition to OPIC’s existing ability to make loans, the new IDFC would be authorized to make direct equity investments, taking an ownership share in overseas development projects.

A key part of any such modernization should be policies that will protect the environments and communities that host development projects. Environmental and social policies, a common feature at DFIs, are crucial to ensuring that the proposed IDFC does not finance projects that cause environmental degradation, engage in illegal labor practices, or otherwise harm the local communities where the projects are located. Without effective policies and practices in place, U.S. taxpayer money could facilitate abuse of the very communities that the projects are intended to benefit. For instance, between 2008 and 2011, OPIC approved over $200 million in loans for a biomass company in Liberia, which was supposed to rejuvenate family farms and create sustainable energy for Liberia. Instead, the company caused serious human rights, labor, and environmental abuses, including sexual abuse by company employees of local woman, leaving hundreds of Liberians worse off than they were prior to OPIC’s investment.

In addition to mandating strong environmental and social policies, Congress must include an independent accountability office that is readily accessible to those who feel they have been harmed by IDFC projects. Most DFIs have these offices, including the International Finance Corporation. Even the Asian Infrastructure Investment Bank, led by China, is in discussions with civil society about the development of such an office. Furthermore, OPIC already has an accountability office.

The BUILD legislation should either explicitly state whether OPIC’s Office of Accountability will be incorporated into the IDFC or create a new accountability office according to international best practice. To be truly effective, this accountability office must be structured to promote transparency and independence from IDFC’s management and staff and have the ability to remediate harm that has occurred. The most effective accountability offices offer impacted communities multiple means of having their complaint addressed. For example, impacted communities should have the option to initiate a formal investigation into compliance with environmental and social policies, engage in dispute resolution with the IDFC and/or its clients, or both, while also feeding lessons back into the institution to prevent harm from occurring in the future.

A recent case in Mongolia demonstrates the power of these accountability offices: as a result of community complaints filed to one such office, nomadic herders, a major mining company, and the local government entered into voluntary negotiations, culminating in two complex agreements that address issues related to water, pasture, environmental monitoring, compensation, and livelihood support.

In the Liberia case, OPIC’s Office of Accountability found that OPIC had failed to identify and protect vulnerable communities and called for numerous improvements to OPIC’s environmental and social policies. In response, OPIC recently strengthened its Environmental and Social Policy Statement, which should lead to more sustainable projects and prevent harm to people and the environment. This highlights the invaluable role accountability offices play in institutional learning and improvement.

If Congress and the White House want a strong DFI that finances sustainable projects, protects the U.S. reputation abroad, and actually benefits vulnerable communities around the world, strong environmental and social policies and accountability must be the cornerstones. Any legislation for the IDFC that does not contain these measures is risking its failure even before it opens its doors.

About the authors

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    Kindra Mohr

    Kindra Mohr, Esq. is the policy director at Accountability Counsel, an organization that works with communities around the world to defend their environmental and human rights through advocacy, research, and direct case support. Mohr has extensive advocacy and accountability experience from working with nonprofit organizations, the private sector, and on Capitol Hill.
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    Brian McWalters

    Brian McWalters is a policy fellow at Accountability Counsel. He attends Georgetown Law and will earn his J.D. in May 2018. Brian previously served at the Environmental Protection Bureau of the New York Attorney General’s Office.