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

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

Harm from hundreds of development projects has been independently verified, including displacing communities, putting women and girls at increased risk of violence, and undermining Indigenous sovereignty, to name only a few examples.

In spite of this evidence, DFIs largely refuse to provide remedy for harm caused by their own projects. A recent report from the United Nations confirms that the state of remedy in development finance is lacking and that DFIs are not being held to account. It also sets out a road map for what DFIs need to do.

One fundamental step that DFIs need to take is fixing any harm they cause. In reality, this means spending money on remedies. The U.N. report lists multiple known ways to finance remedy, including a standing fund drawn from a fixed percentage of the revenues of DFIs to use when needed. At present, DFIs do not systematically set aside funds for when unintended harm occurs.

Without a commitment to funding remedy, local communities pay the price for DFI 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 on three plantations financed by IFC. In 2016, IFC’s accountability mechanism investigated the allegations and confirmed noncompliance with the institution’s own social and environmental obligations. But when the accountability mechanism checked on the project two years later, it found that IFC had not addressed the noncompliance. The community is still awaiting redress.

There have been isolated instances of DFIs financing remedy in response to particularly egregious cases of harm caused by development projects. The U.N. report highlights one example: the World Bank-backed Uganda Transport Sector Development Project.

The project’s rollout led to human rights abuses, particularly against women and girls. In response to an investigation by its accountability mechanism, the World Bank mobilized over $1.5 million from its rapid social response trust fund for remedial purposes. This example shows that those in the development sector are capable of implementing a contingency fund to address harm when they are facing enormous diplomatic and media pressure.

As a second crucial step, DFIs must empower their own accountability mechanisms with a mandate to order remedial actions.

DFIs’ accountability mechanisms accept complaints about environmental and human rights concerns from impacted communities, undertake compliance investigations, and facilitate negotiation processes to resolve them.

However, with a few notable exceptions — the African Development Bank among them — accountability mechanisms generally have limited power to even make recommendations on appropriate remedy for harm caused by internationally financed projects, let alone order it. Instead, they evaluate whether a particular project was in compliance with their standards, and it is up to the DFI itself to decide how to respond.

As many DFIs are governed by member governments, there is a role for them as well. Member governments need to rein in the DFIs they fund by ensuring they are answerable to their own accountability mechanisms. They can use the existing and agreed-upon U.N. framework to deliver remedy, and they can expand the mandate of the DFIs’ accountability mechanisms to include facilitating remedy.

Development finance institutions, as the U.N. report points out, argue that establishing processes like these for financing remedy could make them targets for litigation and create a “moral hazard” that disincentivizes project implementers from doing their best work — but the current state of remedy does not support these claims. Litigation against these institutions is exceedingly rare, given that some DFIs say they are largely immune from suit, and there are many legal and practical barriers to litigating claims of an international nature.

If structured well, financing remedy reduces a moral hazard as opposed to creating one. Proactive approaches to remedy can reduce harm, and the true moral hazard is maintaining the status quo. Refusing to provide remedy to tea workers in Assam doesn’t reduce risk; it only perpetuates IFC’s failure to meet its development mandate.

As the U.N. report states, “The more pressing risk of moral hazard ... lies in the present situation wherein clients and financers of projects are all too often insulated from responsibility for human rights impacts, the costs of which are instead externalized to people (and, often, the poorest and most marginalized), who are unable to assert their rights.”

In most contexts, if you don’t fix your mistakes, you are made to fix them through the rule of law. But, we are faced with the reality that powerful DFIs are left to hold themselves accountable, which means that the parallel system of complaints allowed by DFIs is weak. Even after independent findings of wrongdoing, DFIs do not have systems to simply right the established wrongs. Particularly given their mandates, they should.

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