Risk mismanagement? IFC runs into trouble in Honduras

A view of Tegucigalpa, capital of Honduras. Is the controversy over the World Bank's investments in the country a sign that the financial instution isn't ready to manage complex risks in fragile states? Photo by: Jose Luis Duron / CC BY-NC-SA

These days, there’s a lot of talk at the World Bank about taking “smart risks,” ramping up investment with the private sector and boosting support for fragile states — but a controversy over the bank’s investments in Honduras has provided fodder for those who fear that the Washington, D.C.-based institution won’t be able to manage the complex risks that come with working in such nations.

Dinant — a company in which the International Finance Corporation (the bank’s private sector lending arm) had invested millions to operate palm-oil plantations in the country — has been accused by civil society groups of contributing to or participating in forced evictions and even killings of local farmers in northern Honduras.

According to an internal audit carried out by the World Bank’s Office of the Compliance Advisor/Ombudsman, the IFC failed to meet its own ethical standards, and placed the blame squarely on the bank’s misperception of risks.

“In [our] view these deficiencies in performance may be seen as a by-product of what has described as a culture of risk aversion at the bank. In a risk averse setting, accountability for results defined primarily in financial terms may incentivize staff to overlook, fail to articulate or even conceal potential E&S (environmental and social) and reputational risks,” CAO said in its report.

Civil society groups and NGOs, both international and local, have voiced concerns that the World Bank’s new strategies could lead to a diluting of the bank’s social and environmental safeguards.

World Bank President Jim Kim himself recently responded those concerns, saying in a speech last month: “Taking smart risks includes managing non-financial risks in order to help us achieve good outcomes for the poor and not compromise the core values of our institution. I believe that the interests of the poor and those of our shareholders are, in fact, aligned and that social progress and environmental protection can be strongly correlated to economic growth and financial profitability. This is why the World Bank’s safeguards policies and IFC’s performance standards will remain a cornerstone of our business.”

The IFC, for its part, has disputed some of the findings of the CAO’s report, and it points out that it addressed some of the shortfalls identified by the CAO in its 2012 Sustainability Framework. The private sector lender’s leadership did however promise a thorough review of its own approach to managing environmental and social risks in fragile and conflict-affected regions, and issued a laundry list of requirements so Dinant will improve its operations in Honduras.

“If the client does not meet its obligations under these plans, we reserve the right to exercise all remedies available, including cancellation of the investment,” an IFC spokesperson told Devex.

The case shows taking “smart risks” is easier said than done — especially in the rapidly changing contexts of fragile and conflict-affected states. As the bank’s makes such risky endeavors a larger part of its portfolio, it will need safeguards that are as robust as ever.

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About the author

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    Paul Stephens

    Paul Stephens is a Devex staff writer based in Washington, D.C. His coverage focuses on Latin America and World Bank affairs, as well as Washington's global development scene. As a multimedia journalist, editor and producer, Paul has contributed to the Los Angeles Times, Washington Monthly, CBS Evening News, GlobalPost and the United Nations magazine, among other outlets. He's won a grant from the Pulitzer Center on Crisis Reporting for a 5-month, in-depth reporting project in Yemen after two stints in Georgia - one as a Peace Corps volunteer and another as a communications coordinator for the U.S. Agency for International Development.