Yesterday, the House Financial Services Committee announced that the World Bank Group agreed to adopt a sweeping set of reforms advocated for by Chairwoman Maxine Waters. The agreement paved the way for the U.S. to support a $5.5 billion capital increase for the International Finance Corporation (IFC), the Bank’s private sector arm, which the Committee authorized in the recently passed CARES Act. While the Committee has a long history of accomplishing major reforms at the World Bank Group, the package negotiated by Chairwoman Waters and her staff is unprecedented in scope — covering a host of issues that civil society has urged the Bank to address for years. The adoption of these reforms by the World Bank and IFC, which we believe will improve the performance and impact of the institution, should be applauded and sets a new standard for transparency, accountability, and respect for human rights that will undoubtedly have a ripple effect across the development finance landscape. Below, we break down some of the major commitments in the reform package and their potential impacts.
1. Enhancing transparency. The letter from President Malpass memorializing the reforms includes commitments that will finally shed light on some of the most opaque forms of IFC lending. Until now, billions of dollars channeled by IFC through commercial banks and other financial intermediary (FI) clients have been almost impossible for the public — or even IFC shareholders — to track. The commitment to greater transparency in IFC’s FI portfolio by disclosing basic project information for all of its high risk projects and many of its substantial risk projects will not only allow both shareholders and stakeholders to know where much of this money ends up, but will also promote stronger due diligence in riskier investments. Improving transparency in the FI portfolio also provides potentially impacted communities the ability to alert IFC when there are problems, and hold the institution accountable if their rights are violated.
President Malpass also agreed to greater oversight and transparency with respect to financing IFC’s clients receive from the International Development Association (IDA), the arm of the World Bank that is supposed to serve the world’s poorest countries. For nearly three years, IFC clients have had access to subsidized funding through the IDA Private Sector Window (PSW), with little public accountability for how the funds were used or the level of subsidy provided to each project. In response to concerns raised by the Committee last year, IFC began disclosing more information about each project and reporting back to IDA donors on the levels — and justifications — for subsidies provided. In this new agreement, IFC has also committed to taking further steps to enhance transparency and accountability for PSW-supported projects by capping the level of subsidy provided for each project and securing that subsidies are awarded on a more competitive basis.
2. Advancing human rights. The package also includes two measures that represent a significant improvement in IFC’s approach to human rights issues. The first is a commitment by IFC to enhance its approach to mitigating human rights risks in Myanmar — a country that has one of the worst human rights records on the planet. Going forward, IFC will require enhanced environmental and social due diligence, including human rights impact assessments for its riskiest projects in the country. It will also undertake an independent audit of its portfolio to confirm that none of its investments are directly benefitting the military, which controls much of the country’s economy — enabling it to continue perpetrating gross violations of human rights with impunity.
A second commitment increases the realization of the right to education by freezing direct and indirect investments made by IFC in private for-profit K-12 schools — which disproportionately exclude poor and marginalized students, including girls. This responds to years of calls from civil society and education experts to abandon these investments, and should serve to refocus the World Bank Group’s education investments on supporting free, public, and inclusive education.
3. Committing to public accountability. Perhaps most importantly, the President of the World Bank Group also committed to strong, public accountability in the letter — strengthening the impact of the reform package as a whole. Specifically, the commitment by President Malpass to promoting a transparent and participatory review of IFC’s accountability system, including the Compliance Advisor Ombudsman (CAO), will bring the institution back in line with international best practice after a terrible precedent set by the lack of transparency and participation in the Bank’s recent review of the Inspection Panel’s mandate. Providing opportunities for outside experts, civil society, and affected communities to participate in the process for strengthening these critical independent accountability mechanisms (IAMs) not only recognizes the importance of public engagement with the MDBs, it can also lead to more robust and informed reform proposals.
President Malpass also committed to follow the model used for the selection of past CAO Vice Presidents, which is widely recognized as a key source of CAO’s legitimacy that sets it apart from many other IAMs. The independence of these mechanisms is guaranteed by a complex web of policies and practices that help to confirm the individuals who lead them are not easily captured by the institutions they are charged with overseeing. The CAO selection process is an important trapping of independence that must be maintained and — hopefully — replicated at other IAMs, including the World Bank Inspection Panel.
4. Overall impact of reforms. The agreement negotiated by Chairwoman Waters and her staff will undoubtedly make a difference for people who are often overlooked in the development process, from ethnic minorities persecuted in Myanmar to communities that are harmed by projects financed through financial intermediaries. As the World Bank Group begins to implement its response to the COVID-19 pandemic — including the billions of dollars that will be channeled through FIs, into the world’s poorest countries — these reforms will significantly increase the likelihood that these investments are benefitting, rather than harming, the poorest and most marginalized communities.