‘Responsible Exit?’ Why the IFC cannot just walk away from harms its investment caused in Guatemala

10 June 2020: The independent watchdog for the World Bank’s private sector lending arm, the International Finance Corporation (IFC), today published an investigation into a dam project in Guatemala, cataloguing IFC’s dereliction of its duties and obligations to prevent harm to the local indigenous communities.

The investigation, by the Compliance Advisor Ombudsman (CAO), was prompted by affected communities filing a case in 2015, alleging significant social and human rights impacts, including project-related conflict, resulting in the death, serious injury and imprisonment of community members linked to an IFC investment.

CAO concludes, “Though aware of project impacts during the period of financing, IFC did not engage with its client to ensure that residual impacts of the project were assessed, reduced, mitigated, or compensated for, as appropriate, including at project closure, as required by the Performance Standards and the Sustainability Policy.”[1]

“In these circumstances, contrary to the intent of IFC’s Sustainability Policy, adverse impacts have been left to fall on the community.”[2]

IFC has protections in place to ensure its investments “do no harm” and ensure “that the costs of economic development do not fall disproportionately on those who are poor and vulnerable.”[3] However, IFC has struggled to ensure its financial intermediary (FI) clients, who now make up around 62% of IFC’s total lending portfolio (as opposed to direct project finance) apply its environmental and social standards.[4]

IFC invested in the USA-based Corporación Interamericana para el Financiamiento de Infraestructura (CIFI) in 2008[5], which in turn funded the Canbalam dam in Huehuetenango, Guatemala, in 2011.[6] The local population there is predominately indigenous, many living in poverty or extreme poverty. Huehuetenango experienced significant violence during the Guatemalan civil war from 1960 to 1996, with more than 10,000 people killed, a majority of them indigenous.

 The 52-page CAO investigation catalogues a series of failures by the IFC to uphold its own policies and to ensure no harm befell the communities of Santa Cruz Barillas, Huehuetenango, despite the high-risk post-conflict context and the presence of vulnerable indigenous communities. While accepting some of the CAO’s findings, the IFC’s response to the investigation denies the project’s link to the violence and repression suffered by local communities. IFC therefore takes no responsibility and offers no remedy in its response.

CAO findings

CAO finds that IFC failed to uphold its own policies and procedures in relation to due diligence, monitoring and supervision, breaching its Sustainability Policy and its Performance Standards, especially as regards indigenous peoples, consultation, and use of security guards:

1. When CIFI filed a serious incident report to IFC, following the fatal shooting of local peasant farmer Andrés Pedro Miguel, IFC failed to respond or follow through. The first time CIFI communicated with the IFC about the impacts of the Canbalam project was in its serious incident report of June 2012. CAO notes, “There is no record of IFC following up with the client in relation to the incident report,”[7] despite the fact that, “Once the client informed IFC in June 2012 of the violent incidents of May 2012, IFC had a duty to respond.”Specifically, IFC’s obligations included ensuring an analysis of the root causes of the problem and plans to prevent it happening again.[8] [9]
2. CAO concludes: “IFC did not take measures … to ensure that the client was properly applying the Performance Standards to the project, following the violent incidents of May 2012.” CAO notes, “Specifically, IFC did not: (a) schedule a site visit to the client or the project; (b) document a review of the client-commissioned Social Monitoring Report; (c) review the client’s ESMS [Environmental and Social Monitoring System] implementation in relation to the project; (d) ensure the client had in place an adequate remedial action plan for the project; and (e) remain informed of ongoing implementation of project-level remedial actions.”[10]
3. Because IFC did not engage with CIFI at this stage, IFC failed to ensure the project could meet its Performance Standards, specifically regarding the use of security forces (PS4), and assessment on impacts on indigenous peoples (PS1 and PS7). In particular, CAO notes that IFC failed to “address project impacts throughout the project cycle including at project closure (PS1 para. 6)”.
4. Despite being informed about significant violence and problems at the project site, IFC only engaged with CIFI once about social and environmental issues. IFC’s only recorded engagement with CIFI about the Canbalam project was in March 2013, in relation to concerns around the quality of the project’s environmental and social review.[11] [12]
5. Despite being aware that CIFI repeatedly failed to meet IFC’s standards and lacked the capacity to ensure social and environmental protections were applied at project level, IFC did not take effective action to address these shortcomings. As a result, the CAO concludes, “Nine years after making its investment, IFC has yet to assure itself that the client is operating the ESMS as envisaged at the time of appraisal or that its client has applied the applicable performance requirements to their sub-projects.”

The IFC’s response

The management of the World Bank and IFC have taken a long time to respond officially to this report. Completed in December 2018, the CAO’s investigation was initially replied to by the IFC in early 2019. This response then got delayed by passing through the offices of 2019’s three World Bank Presidents, before a Board meeting in October 2019 and another in February 2020 requested the IFC to revise its response.[13]

Affected communities, who initially filed the complaint in July 2015, have had to wait five years to hear the result.

Was it worth it?

On the one hand, the CAO vindicates the communities’ concerns: that they suffered violence, intimidation and repression after this project began, and that significant social impacts remain to this day; and also that the IFC failed in its duties and obligations to ensure that its investments did no harm, especially in the context of poor and vulnerable communities in a high risk, post-conflict context. On the other hand, however, the IFC takes a different view. Its response rests on four arguments:

• The first, that many of the issues raised by the CAO – for example, risk management and contextual risk analysis – have been addressed by IFC in its reforms over the last 12 years since project construction started. This is to some degree true – the IFC has indeed made significant and much-needed reforms to its financial intermediary lending. But these reforms come too late to address the harms suffered by the communities of Santa Cruz Barillas.
• The second, that this was an indirect investment, so IFC cannot be expected to respond in the same way it would to a direct investment. CAO claims that when CIFI filed a serious incident report to IFC, following the fatal shooting of local peasant Andrés Pedro Miguel, IFC failed to respond or follow through, though it had a duty to do so. In response, IFC argues that this duty to respond only applied to its direct investments, and in this case, it believes its client responded effectively. This is cold comfort to community members whose partners were injured and imprisoned or who suffer ongoing health issues.
• The third argument is that in future, IFC will learn lessons in terms of responding to serious incidents, and how to exit investments responsibly. This is welcome and will perhaps help in addressing problems encountered in future projects. Systemic reforms based on lessons learned are fundamentally important in avoiding repeating the same mistakes over and over. But future learning of lessons does not address the impacts suffered and still being suffered by communities affected by the Canbalam project today.
• Which brings us to the IFC’s final argument: that the Canbalam project is not responsible for the terror, violence and repression that convulsed communities around the project site from 2012. [14] The IFC argues that there is nothing to link the project and the company building the dam (Hidro Santa Cruz or HSC) with the upsurge in repression and the state of siege declared by the Guatemalan government in May 2012. This last argument is insulting to the affected communities and frankly absurd. By denying this link, IFC can wash its hands of any responsibility for the suffering of local communities then and now – and therefore refuse to do anything about it in its response.

In denying that the project is associated with the violence and repression that was visited on local communities, the IFC relies on a 2013 report on Guatemala by the United Nations (UN) High Commissioner for Human Rights.[15] IFC quotes the UN several times in its defence: “The United Nations investigations did not identify HSC as responsible for any abuses” and “The United Nations review did not identify HSC as a responsible party.” Presumably, the United Nations report to which the IFC refers comprised an in-depth investigation by the UN of the causes of the violence in Barillas? On the contrary: the UN report in fact highlights instances of human rights abuses in Guatemala, including in Barillas; expresses concern over the impacts on indigenous peoples; calls for the actions of non-state actors including companies to be investigated; and appeals to companies to respect the rights of indigenous peoples.[16] The UN report never set out to investigate the role of HSC in the abuses suffered by local people, but does draw attention to their plight. By using that report as a means of exculpating HSC and by extension itself, the IFC is stooping to a new low.

In its response to the CAO audit, the IFC argues that there is nothing to connect the project and the company building the dam (HSC) with the upsurge in repression and the state of siege declared by the Guatemalan government in May 2012. By denying this link, IFC can wash its hands of any responsibility for the suffering of local communities then and now – and therefore refuse to do anything about it in its Action Plan.

For IFC to exit responsibly from this project, it must revise its Action Plan and offer remedy to affected communities for the harms they have suffered. The IFC must do this in consultation with the affected communities, so that their needs and wishes can be heard and addressed appropriately.

Recourse is calling on the Board of the World Bank to ensure that IFC revises its position.

Read our full briefing attached

[1] See P 40.

[2] See P 52

[3] IFC Sustainability Policy (2006) and Performance Standards.

[4] https://www.inclusivedevelopment.net/campaign/campaign-to-reform-development-lending-through-financial-intermediaries/

[5] The 2008 IFC investment comprised a $10 million equity investment in CIFI for a 15% stake, a $20 million loan and in addition IFC helped arrange a $48.5 million syndicated loan to CIFI. See P 10.

[6] CIFI and Norfund together made debt and mezzanine finance investments of up to US$10.6 million to support the development of the Canbalam project. The lenders made an initial disbursement of US$3.5 million in 2011. The remaining US$7.1 million were never disbursed due to unresolved social conflicts around the project. See P 10.

[7] See P 38.

[8] See P 39.

[9] In its response the IFC claims that it set up a phone call with its client, but there is no record of that conversation. In addition, the IFC says the obligation to respond to serious incidents only applies to its direct not indirect investments, so it was only obliged to supervise its client’s response.

[10] See P 42.

[11] See P 38.

[12] Again the IFC claims in its response to have had several interactions with its client, but that its error lay in not recording those interactions.

[13] https://www.devex.com/news/first-test-for-world-bank-board-s-new-accountability-powers-96501

[14] The IFC’s response claims: “Management is deeply troubled by the impacts that stemmed from the civil unrest and subsequent state of siege in Santa Cruz Barillas, while noting that these impacts have not been attributed to HSC.”

[15] Annual report of the United Nations High Commissioner for Human Rights, Addendum Report of the United Nations High Commissioner for Human Rights on the activities of her office in Guatemala (January 7, 2013).

[16] See paras 27, 28 and 50 of the Annual report of the United Nations High Commissioner for Human Rights, Addendum Report of the United Nations High Commissioner for Human Rights on the activities of her office in Guatemala (January 7, 2013).