This update was co-written with Vijaya Ramachandran, senior fellow at the Center for Global Development and originally posted on the Center for Global Development's Commentary and Analysis page.
An independent external review of the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA)’s environmental and social accountability (E&S) mechanisms—commissioned in the wake of a ruling by the United States Supreme Court that limited IFC’s immunity from prosecution—was released by their boards last week. In late July, we had called for the immediate release of the report, and we are pleased that the report has now been disclosed.
The review is comprehensive and exposes serious problems in IFC/MIGA’s accountability system that have led to its dysfunction. The process for implementing reforms should be open and transparent and should address the following shortcomings:
IFC’s response to CAO investigations: The most disturbing finding was that IFC failed to address compliance failures when it disagreed with the Compliance Advisor Ombudsman (CAO), the independent accountability mechanism for IFC and MIGA which responds to complaints from project-affected communities. Disagreements between IFC and the CAO led to “polarized attitudes and unconstructive interactions.” IFC staff and management often did not have a good understanding of the role of the CAO and did not feel compelled to implement its recommendations.
CAO reporting structure: CAO’s organizational structure—which includes reporting to the president of the World Bank Group rather than the board—meant that complainants had little recourse when they were ignored or underserved. The review recommends that the CAO should report to the IFC/MIGA board rather than to the president of the World Bank Group in order to eliminate potential conflicts of interest and ensure that complaints are reviewed at the highest levels of governance. Reporting to the board might also ensure that appropriate action is taken in response to CAO findings.
IFC’s culture of compliance: In cases where complainants voiced their concerns directly to staff, the review found that IFC’s response varied according to the individual judgments of staff or managers. While staff said that compliance processes should result in institutional learning, the review found that IFC did not actually have the tools to learn systematically from complaints. The report highlights problems with the culture of compliance, rather than with the wording of the rules per se. The review team recommends that IFC develop a “more active response culture” and embrace direct engagement with affected people when problems arise.
Strength of the CAO: The review also correctly highlights the need for a well-functioning CAO. It recommends that IFC/MIGA management presents an action plan to the board in response to every CAO report, and that the board reviews the plan to decide if it is adequate. It also calls for greater resources for the CAO to handle its increasing caseload and to accelerate processing times in order to minimize the long delays experienced by some complainants in recent years.
Remedial action: The review recommends IFC develop a stronger framework for remedial action to address harms associated with noncompliance. Specifically, it recommends a contingency funding requirement, with associated legal covenants, that will be binding on the client during the period of IFC/MIGA involvement and for two years thereafter. For the fishing communities in the Tata Mundra case and others who have been waiting years for concrete actions from IFC and its clients, the implementation of this recommendation cannot come soon enough. This is one of the most urgent and important recommendations emerging from the review.
The release of the review is a very important moment for accountability in development finance. IFC’s new leadership must take the recommendations of the review team seriously and must engage with civil society to develop a robust culture of accountability. A strong system of accountability, adhered to by all parties, is essential for IFC and MIGA’s success, especially as they come under pressure to do more deals in poorer countries and in fragile states.