Karen Mathiasen is a strategic advisor to Publish What You Fund’s DFI Transparency Initiative. Here she draws on her decades of experience at the World Bank and the US Treasury to illustrate the challenges and opportunities for the IFC in light of the recent publication of their CAO review.
In mid-August, the World Bank’s Executive Board released an external review of the IFC’s accountability arm, the Office of the Compliance Advisor Ombudsman (CAO). The CAO is an independent entity responsible for addressing complaints of communities affected by IFC projects and, when deemed appropriate, proposing actions to bring IFC clients into compliance with IFC environmental and social guidelines. Unfortunately, the CAO has no enforcement authority and has been beset by governance and operational challenges that have hampered its effectiveness. Indeed, a key review finding is that the IFC and the CAO often disagree on when and how extensively the IFC is required to apply and enforce its social and environmental guidelines, leading to repeated and protracted conflicts.
Releasing the report and soliciting feedback are welcome and important steps in improving transparency. The report pulls no punches. The headline finding is that the IFC successfully brought clients into compliance with its performance standards (as the environmental and social guidelines are called), in only 13 percent of cases. Another 35 percent were partly resolved. For half of all cases, the responses were unsatisfactory.
As a former U.S. government representative at the IFC, these figures are not surprising. In several instances I was astonished to see CAO reports with extensive documentation and analysis on a complainant dismissed by the IFC in a few pages.
A key problem is that the CAO reports to the Office of the President — not the Executive Board – making it difficult for the Board to hold the IFC to account. The Office of the President has neither the bandwidth nor the inclination to broker greater cooperation between the CAO and the IFC when they disagree on findings and recommendations, which during my 3 and ½ year tenure happened more often than not. Having the Board assume oversight over CAO is one of many critical recommendations the report puts forward.
The report is thorough – it does a deep dive into every aspect of the CAO’s mandate and ability to carry it out and offers a long list of thoughtful and detailed recommendations to address the weaknesses and challenges that it has identified. I want to emphasize two key areas from my current perspective as an external stakeholder.
First is the recommendation that the IFC’s access to information and disclosure standards be revisited. In this context, a key priority should be to clarify the issue of client confidentiality. The presumption of client confidentiality is a major barrier to information disclosure at DFIs, stemming from concerns that public information could give a competitor a market advantage or affect a client’s creditworthiness. This comes into play in the event that the CAO relies on confidential information as a basis for its findings and is thus precluded from including it in their final report, denying affected communities their right to see the CAO’s evidence.
The review encourages the IFC General Counsel and the CAO to clarify the circumstances around client confidentiality. This exercise (if successfully pursued) could have broader implications for IFC disclosure. The presumption of client confidentiality is embedded in IFC contracts and, as a result, stakeholders have limited access to IFC project information, especially compared to public sector operations. Long overdue is an exercise to better ringfence when confidentiality must be applied.
Second, the review urges the IFC to enhance the transparency of IFC-funded portfolios and sub-projects. Nearly half of all IFC lending is invested in financial intermediaries (FIs), a factor which has provoked conflict between IFC and many of its stakeholders over the level of accountability that can be expected from these arms-length investments.
The review noted that the CAO and IFC often disagree over when communities are eligible to have FI-related complaints reviewed by the CAO and raises concerns about the adequacy of IFC sub-project client assessments, monitoring and supervision. It proposes a menu of reforms for both parties to consider, including that the IFC clarify the criteria for identifying high-risk sub- projects and that the CAO clarify the eligibility criteria for complaints involving FIs, ideally reducing the scope for conflict. It also recommends that the IFC do more to assess whether FI clients understand and have the capacity to implement its guidelines, and advocates for a new advisory product to assist with compliance. And, the review calls on the IFC to build on the Equator Principles to expand disclosure requirements for FI clients.
The World Bank Group prides itself as a first mover and a leader when it comes to best practices in development. The review notes that the IFC’s Performance Standards have had a positive impact on many lenders, which have been voluntarily adopted by more than 100 banks, DFIs and export credit agencies, together accounting for the majority of international private projects and corporate finance in development countries. It goes on to stress that the IFC should lead with “the most ambitious E&S principles and commitments; experimenting with innovative practices and instruments; and delivering world-class economic, environmental, and social results.” Meeting this goal requires that the IFC address its own compliance shortfalls.
The next step is for the IFC Board to consider the report and the feedback offered by stakeholders. This will not be easy, and many recommendations will be contentious. Ideally, they will deliver by offering a way forward that will strengthen internal oversight, reduce the internecine conflicts, improve compliance outcomes and restore the IFC’s role as a leading example of best practice.