World Bank–IMF Development Committee Stresses Institutional Accountability at Spring Meetings, Amid Planned IFC Reforms

The recent Spring Meetings of the World Bank Group (WBG) and International Monetary Fund (IMF) saw a series of notable developments.

Along with the arrival of new bank President David Malpass, there were intensified discussions among organizational leaders and country ministers on how to improve institutional accountability in the wake of a landmark U.S. Supreme Court decision issued earlier this year.

The Supreme Court ruling, issued in late February, states the International Finance Corporation (IFC), the World Bank’s private sector arm, is not immune from prosecution by domestic courts and could be sued in limited circumstances.[1] This decision could help ensure communities have effective legal avenues for defending their livelihoods and well-being, while also spurring leaders at these institutions to reconsider how their organizations engage with private sector actors and affected communities.

Philippe Le Houérou, who has served at the helm of the IFC since 2016, pledged in an opinion piece published by Devex on April 9 he would take several steps to improve institutional accountability and ensure the organization becomes “more proactive in solving issues when we become aware of them and quicker at identifying mistakes and course correcting.”[2]

“We work at IFC because we believe the private sector can create markets, opportunities, and jobs for people in developing countries who urgently need them,” he said, crediting the Supreme Court ruling, as well as the IFC’s own interest in developing new projects and partnerships, as a significant motivation for the organization to rethink its accountability efforts.[3]

The 25-member World Bank–IMF Development Committee, which is convened during both the Spring and Annual Meetings and serves as a steering body for the development-related work of both institutions, also referred directly to the importance of strong institutional accountability in their closing communiqué on April 13, without referring specifically to the Supreme Court ruling. “As the WBG scales up work in high-risk scenarios, where institutional capacity is often weak, strong environmental and social protections and accountability processes are critical, and we support the WBG’s continued commitment in these areas.”[4]

They also referred to the “important role that the World Bank’s Inspection Panel and the IFC and MIGA Compliance Advisor Ombudsman play in accountability, lessons learned, and mitigating risks in an efficient and effective way.”[5]

Immunity of Intergovernmental Organizations

The Supreme Court decision has implications that extend beyond the IFC to the wider sphere of intergovernmental organizations. The IFC has long held that the 1945 International Organizations Immunities Act grants it total immunity from prosecution by a national court. Now, in a notable first, the Supreme Court ruling has confirmed that a U.S.-headquartered international organization faces a more restricted type of immunity, on par with foreign governments, which are subject to the Foreign Sovereign Immunities Act. This means that the IFC and similar organizations can be subject to certain types of lawsuits in domestic U.S. courts, including when they are exercising commercial activities.

The case against the IFC was brought by members of a fishing and agricultural community in Mundra, India, who were represented by EarthRights International and the Stanford Law School. The group sued the IFC for environmental damage caused by the Tata Mundra coal power plant project.[6] The IFC had provided financing of USD 450 million to Coastal Gujarat Power Limited, the Tata subsidiary responsible for developing the project. The plaintiffs claimed the project had damaging implications for their livelihoods and that both the IFC and Coastal Gujarat, despite being aware of the risks, chose to proceed without enacting appropriate safeguards. The case was first heard by the DC District Court, which ruled in favour of the IFC—a decision the Supreme Court overturned.

Improving Due Diligence

International financial institutions play a critical role in financing and supporting development projects. Their activities can have significant impacts on local and national development, the environment and local communities, in both positive and negative ways. These institutions can be held legally responsible by their constituent member states, as well as under the contracts they conclude with borrowers. However, there is no contractual relationship between the IFC and communities affected by the projects that receive IFC financing. This situation has historically prevented communities from seeking reparations if a project causes them harm.

The IFC has a Sustainability Framework in place, which includes components devoted to transparency, “performance standards” that the institution has designed to outline “clients’ responsibilities for managing their environmental and social risks,” and a specific policy involving the IFC’s own environmental and social “commitments.”[7] Despite this effort, the IFC has faced scrutiny over whether its due diligence processes and evaluation mechanisms are sufficiently rigorous, as the NYU Law School Clinic of International Organizations noted in a recent report.[8] For example, certain corporations involved in IFC-funded projects have allegedly been responsible for severe human rights violations or environmental damage that has devastated communities, as seen in Honduras[9] and in the Tata/Coastal Gujarat case,[10] respectively.

An Oxfam report from April 2015 similarly cautioned that the IFC “has limited knowledge about the underlying results on its end-beneficiaries,” because the evaluation of the projects it finances is based only on figures provided by the IFC’s client and the intermediary financial institution.[11]

Accountability Mechanisms: A promising start, with room for improvement

The IFC’s  own independent accountability mechanism, the Compliance Advisor Ombudsman (CAO), found that the institution failed to ensure that the Coastal Gujarat project met the environmental and social conditions placed on the IFC loan at all stages of the transaction. The CAO first raised the problem in a 2013 report and found little improvement when assessing the situation four years later.[12]

The CAO is not able to enforce its recommendations directly: in cases of continued non-compliance, it keeps the case open for monitoring and continues reporting on its progress. The Mundra fishing and agricultural community ultimately had to turn to the U.S. court system for redress.

The Coastal Gujarat case shows that, while the CAO can provide valuable feedback, it has limitations when it comes to enforcement. Mechanisms like the CAO lack the authority to terminate projects or decide on appropriate remedies, nor do they have in place procedures to enforce the implementation of their advice. International financial institutions must improve their accountability mechanisms, such as the CAO, so that communities affected by loans and grants can make their complaints heard and have them addressed.

In the wake of the Supreme Court ruling, Le Houérou has announced that the IFC board will conduct a review of both the CAO and the organization’s other mechanisms for fostering improved accountability on environmental and social issues.

In the more immediate future, he pledged that the IFC will become more proactive in hearing complaints and evaluating where there are problems, well before the CAO gets involved. If efforts to address those issues with private sector partners fail, he said that the IFC is ready to “take the tough decision to enforce the terms of our agreements” with those partners and walk away from those projects altogether.[13]

What these pledges will mean in practice remains to be seen, and the IFC head has noted that there are still several challenges to address, including the need to marshal further resources to enact these changes.

Going forward, it is also important to consider other possible solutions to the enforcement-related limitations of accountability mechanisms, some of which have been raised in other forums.[14] These include, for example, the use of sanctions to ensure compliance, along with the option of bringing in civil society organizations to help monitor implementation.

Communities must also be made aware of these accountability mechanisms and have the funds and support to use them effectively. While accountability mechanisms have their virtues, there is clearly much room for improvement.

An Important Precedent

Another option that communities have for defending their interests involves bringing claims against project companies through domestic court systems in home or host states. The success of these claims depends largely on how effective and capable these systems are in the countries involved. Often the companies undertaking these projects have either ceased to exist or are no longer present in the host state once victims are ready to seek justice.

The Supreme Court’s decision therefore offers affected communities another path for legal redress, at least when dealing with projects financed by U.S.-headquartered international organizations. If the IFC is ultimately compelled to pay damages to the community in Mundra, there will be a clear precedent for other lawsuits to follow.