Why IFC resists directly compensating people harmed by its projects

The International Finance Corporation — the private sector arm of the World Bank Group — has been in the news a lot lately after being implicated in a child sexual abuse scandal in Kenya. But while the bank’s President Ajay Banga has admitted failings, apologized for the “trauma” experienced by the abused children, and called for an independent investigation into what went on, the institution has attracted controversy over its refusal to offer direct financial compensation to the alleged victims. Advocacy groups, some U.S. lawmakers, and even IFC’s own internal watchdog say IFC should pay for its mistakes, but the financier is refusing to budge. Why? Defenders of the institution say it's down to a mix of legal, reputational, and financial risks. These include the fear that providing remedy would admit liability and open IFC up to a host of claims and lawsuits, endangering its immunity and thus credit rating and competitiveness. These additional worries will make IFC staff more risk averse when it comes to doing deals in fragile and conflict-affected countries, something shareholders are pushing hard for, and where IFC’s business is needed most, they say. In addition, by picking up the tab when things go wrong, IFC will create perverse incentives for companies to drop their own environmental and social standards, while also encouraging communities to make spurious claims of harm, IFC has said. But advocates say those concerns are overblown and that there are cases where IFC needs to do right by the people harmed by its projects. And rarely has a case attracted as much attention, and controversy, as the Bridge project. Damning report A report by IFC’s internal watchdog, published last month, revealed serious compliance, due diligence, and monitoring failings by IFC in relation to its $13.5 million investment in Bridge International Academies, whose parent company was previously NewGlobe. Bridge operates for-profit, low-fee schools in Kenya, Uganda, Nigeria, and India. Reports of sexual abuse at the schools emerged in 2018 and included allegations from more than 20 pupils involving two Bridge teachers. In 2020, a compliance investigation by the Compliance Advisor Ombudsman, or CAO, the bank’s internal watchdog, was launched. The report was finally sent to the World Bank’s board of directors in 2023 and included a recommendation that IFC compensate the alleged victims. Further allegations of abuse have since been filed with CAO. IFC has responded to CAO’s findings with a management action plan, which was approved by the board last month after a series of delays. To the dismay of many, IFC is refusing to compensate the children allegedly abused by Bridge teachers, instead opting to fund a much larger community remediation program for survivors of child sexual abuse across the Kenyan counties where Bridge operates. The program will include education, community prevention measures, and rehabilitation services, and will be designed in consultation with survivors and safeguarding experts. Civil society groups are furious at the omission and point to examples of the commercial banking sector paying for remediation. IFC’s stance has far-reaching consequences, they say, because the investor is a trendsetter among other development finance institutions. Furthermore, compensating the Bridge victims wouldn’t cost much, advocates say, and will help IFC avoid facing the kind of expensive and reputationally damaging litigation seen in the landmark 2019 Jam v. IFC case. That case saw a group of Indian fishermen try to sue the investor over its support for the coal-fired Tata Mundra Power Plant which contaminated the local environment. IFC didn’t dispute the damage, but said it had legal immunity to prosecution. The case made it all the way to the U.S. Supreme Court, which ruled in the fishermen's favor, although a district court ultimately threw out their specific claims. The case sent shockwaves through the World Bank Group, prompting a number of reforms and reviews of IFC’s accountability policies and procedures. A broader push for remedy The Bridge compensation debate is not happening in a vacuum — IFC was already working on an Approach to Remedial Action to guide the institution’s actions when projects cause harm, triggered by the Jam v. IFC case. Consequently, the board commissioned an independent external review, published in 2020, to look into accountability at IFC and the Multilateral Investment Guarantee Agency, the bank’s other private sector operation, which principally offers guarantees to would-be investors. A draft of the IFC and MIGA remedial action plan came out last March and ignited the same debate over remedy, with the independent external review recommending that IFC and MIGA establish specific funding mechanisms to pay out when things go wrong. But IFC refused to go that far. IFC’s remedial action plan makes it clear that clients bear the “primary responsibility” for managing environmental and social impacts in line with their contractual agreements. This includes compensating communities when something goes wrong, the draft says. IFC is prepared to use its leverage to influence clients to offer remedial action, and will also provide technical assistance and other support to “facilitate remedial actions by clients and others.” However, the plan explicitly excludes “compensation or acknowledgements of culpability/causation to individuals or communities.” IFC’s position provoked an outcry at the time. A new version of the plan was meant to follow the consultation period — which ended April 2023 — but there has been “radio silence” about the next steps, World Bank insiders told Devex. Related to this, the bank has also been working on an Approach to Responsible Exit after a CAO investigation found that IFC had divested from a disastrous hydropower dam project in Guatemala, which ended in violence and the death of a community activist, without ensuring that the harms caused by the project had been dealt with and people compensated. According to the World Bank, both the Remedial Action Framework and the Approach to Responsible Exit are still being discussed with the board but should be finalized and piloted in the coming months. Why no remedy? An oft-cited reason behind IFC’s refusal to offer individual remedies is the fear that it will open the floodgates to other claims, creating a “cash for complaints” culture, and embroiling IFC in lengthy and costly lawsuits. This could “affect IFC/MIGA’s financial sustainability and IFC credit ratings,” according to a version of IFC’s draft remedy plan, seen by Devex. However, the situation is far more complex, experts told Devex. A key issue is a fear that paying out to individuals could make IFC staff more risk averse when it comes to supporting projects in countries affected by fragility, conflict, and violence, or FCV countries, where the needs are greatest but the risks facing investors and private companies are higher. Meeting the bank’s environmental and social standards in these countries is especially difficult because of weak institutions, which means that strong implementation partners, insurance, legal, and other services, alongside data and accurate registries, can be hard to come by. Despite these challenges, IFC has committed to delivering 40% of its business in FCV countries by 2030. This was a key condition imposed by shareholders during the 2018 capital increase negotiations, in which IFC received a $5.5 billion boost. However, increasing investments in fragile and low-income countries has proved challenging and the institution is falling far short of its target. In 2023, IFC investments in countries served by the International Development Association — the bank’s concessional lending arm for the lowest-income countries — fell to a record low of 8.8% of its total business. Given this backdrop, adding an increased threat of compliance complaints and remedial action will only further disincentivize IFC staffers from putting projects forward in those contexts, said Hans Peter Lankes, managing director at the ODI think tank and a former IFC senior executive. “These will contribute to increased pipeline droppage and risk avoidance – directly impacting IFC/MIGA ability to work in the most challenging markets,” IFC’s draft remedy plan, seen by Devex, warns. The solution is not to throw out E&S standards, but to be more realistic and flexible in their implementation in these countries, he said. “Strong environmental and social standards are an important part of development finance institutions’ value proposition and DFIs absolutely must have mechanisms for enforcing their own standards,” Lankes told Devex. “However, IFC also has to preserve an internal balance of incentives which make people willing to do their mission in these countries. You don’t want to take away the incentive for them but you can’t expect that nothing will ever go wrong, it’s not realistic. That’s a very complicated balance to strike,” Lankes added. Karen Mathiasen, project director at the Center for Global Development and a former U.S. representative to the World Bank board of directors, said she had some “sympathy” for IFC’s desire to avoid offering direct financial compensation for E&S harms. The institution needs to become more risk tolerant, not less, Mathiasen said. “If things go south because a company fails to meet its environmental or social safeguards, you read about it in The New York Times. So that does contribute to risk aversion, and understandably so, because it creates huge reputational risks for the IFC,” she told Devex. Perverse incentives Another worry is that if IFC starts handing out compensation for E&S breaches by its clients, those clients will drop their own E&S standards since they know that IFC will pick up the tab when things go wrong. Similarly, a remedy fund could also create a moral hazard risk, whereby communities know that funding is available and thus have a perverse incentive to claim the project has caused harm, Mathiasen said. ‘Question of principle’ There is also a “question of principle” at stake, Lankes said, about whether a minority stakeholder should be on the hook for offering compensation — IFC only held a 5% stake in Bridge. Its other financial backers include Bill Gates, the Omidyar Network, and the Chan Zuckerberg Initiative, none of whom are understood to be stepping up to the plate. IFC’s E&S standards already “typically go well beyond legal requirements of borrower countries,” which is why they are litigated by internal compliance mechanisms rather than local courts, Lankes explained. “So you could find the DFI in the dock with only an indirect and small investment in a company. That makes sense for internal compliance, but it doesn’t typically make sense to hold the DFI liable for infractions by a borrower,” he said. And the same logic is true for financial compensation schemes — such as the proposed IFC remedy fund — which give a DFI external liability for internal standards that fall outside of a country’s legal framework. Borrowing countries may feel that this carries a “whiff of global north paternalism,” Lankes explained. The net result is that by introducing additional E&S compliance risks, including potential liability for compensation, IFC and other DFIs create yet more obstacles to the delivery of their mission in the countries that need their financing and technical assistance the most, said Lankes. Borrowers are nervous too It is not just IFC resisting the push for a remedy fund; some IDA borrower governments are also against the move, which they worry could “scare off” IFC from doing business in their countries, a bank insider told Devex. Indeed, implementing IFC’s E&S standards can be a tall order for borrowers in countries with weak institutions, especially FCV countries. This was highlighted in a recent survey of borrower countries by ODI which revealed that client countries find MDB processes and procedures complex and cumbersome, including E&S standards. Bank staff should adopt a more risk-tolerant approach when investing in fragile markets, as was acknowledged in the bank’s 2018 FCV strategy which includes a “recognition that some risks may materialize during the life of a project that cannot be fully avoided or mitigated.” In practice, this means handling some E&S standards with a degree of flexibility and allowing some safeguards to be delivered during the course of the project, and not necessarily be in place from the beginning. It means having to take risks, Lankes explained. “IFC has to consider to what extent these E&S standards are structured for implementation which takes account of local conditions and capacity. E&S standards can be very hard to meet even for the best intentioned borrowers,” he said. Behind the times Not everyone agrees that playing it safe with regard to compensation is best for IFC or its client countries. Former IFC head Peter Woicke, who was chair of the independent external review panel into accountability at IFC and MIGA, is convinced that IFC should and could pay compensation to harmed individuals. “We proposed that whenever IFC invests, it should make sure that the client also provides a contingency for environmental and social harms so that money could be used to compensate people harmed. “Going further, if the mistake for the E&S mishap was clearly caused because the IFC gave wrong advice or failed to train the client inadequately, then IFC should pay for the damage,” he told Devex. The review panel’s argument was not just based on wishful thinking; it was drawn from examples in the private sector of companies planning for E&S contingencies and compensating harmed communities. For example, the Australia and New Zealand Banking Group Limited invested in a sugar plantation and refinery in Cambodia that displaced thousands of people. After a dispute was raised and the bank was found to have failed to do appropriate due diligence, it reached a compensation agreement with farmers. The Dutch banking sector has also put forward a way of paying compensation in cases in which banks were responsible for E&S harm. “IFC would fall behind what was already happening in the private sector if it would not adjust to these realities,” Woicke, who ran IFC from 1999 to 2005, explained. “I find it disappointing and frustrating that IFC as a development institution, instead of being on the forefront, is taking so much time in taking the lead on this issue,” he added. Floodgates Advocates also dispute the idea that offering remedy will trigger an influx of claims by communities. In fact, by refusing to offer remedy, IFC is inviting more lawsuits, not preventing them, they argue. “It makes sense that IFC is concerned about litigation risk but the institution learnt the wrong lesson from the IFC v. Jam litigation,” said Shannon Marcoux, a legal expert from the NGO EarthRights International, which represented the claimants in the IFC v. Jam case. “Communities harmed by projects are looking for some sort of remedy or compensation and right now IFC is telling them that litigation is the only option, they can’t achieve compensation in any other way.” Woicke agreed, saying: “I felt that if IFC would strictly make equity investments, lend money or provide advice within the confines of its established guidelines, the legal department should be able to protect IFC from unsavory requests,” he said in an email. But back to the Bridge case. Advocates argue that the harms were so egregious that surely IFC should make an exception in this case. "By refusing to plainly and simply list compensation as a potential remedy for survivors of sexual abuse, the IFC is signaling that this is not exceptional enough to convince them to contribute financially. If not this, what is?" said Margaux Day, executive director at Accountability Counsel, a group that advocates for people harmed by internationally financed projects. Update, April 18, 2024: This article has been updated to reflect that Bridge is no longer owned by NewGlobe.