These days, there’s a lot of talk at
the World Bank
about taking “smart risks,” ramping up investment with the private sector and
boosting support for fragile states — but a controversy over the bank’s
investments in Honduras has provided fodder for those who fear that the
Washington, D.C.-based institution won’t be able to manage the complex risks
that come with working in such nations.
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A view of Tegucigalpa, capital of
Honduras. Is the controversy over the
World Bank's investments in the
country a sign that the financial
instution isn't ready to manage
complex risks in fragile states?
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Dinant — a company in which the International Finance Corporation
(the bank’s private sector lending arm) had invested millions to operate
palm-oil plantations in the country — has been accused by civil society groups
of contributing to or participating in forced evictions and even killings of
local farmers in northern Honduras.
According to an internal audit carried
out by the World Bank’s Office of the Compliance Advisor/Ombudsman, the IFC
failed to meet it’s own ethical standards, and placed the blame squarely on the
bank’s misperception of risks.
“In [our] view these deficiencies in
performance may be seen as a by-product of what has described as a culture of
risk aversion at the bank. In a risk averse setting, accountability for results
defined primarily in financial terms may incentivize staff to overlook, fail to
articulate or even conceal potential E&S (environmental and social) and
reputational risks,” CAO said in its report.
Civil society groups and NGOs, both
international and local, have voiced concerns that the World Bank’s new
strategies could lead to a diluting of the bank’s social and environmental
safeguards.
World Bank President Jim Kim himself
recently responded those concerns, saying in a speech last month: “Taking smart
risks includes managing non-financial risks in order to help us achieve good
outcomes for the poor and not compromise the core values of our institution. I
believe that the interests of the poor and those of our shareholders are, in
fact, aligned and that social progress and environmental protection can be
strongly correlated to economic growth and financial profitability. This is why
the World Bank’s safeguards policies and IFC’s performance standards will
remain a cornerstone of our business.”
The IFC, for its part, has disputed
some of the findings of the CAO’s report, and it points out that it addressed
some of the shortfalls identified by the CAO in it’s 2012
Sustainability Framework. The private sector lender’s leadership did
however promise a thorough review of its own approach to managing environmental
and social risks in fragile and conflict-affected regions, and issued a laundry
list of requirements so Dinant will improve its operations in Honduras.
“If the client does not meet its
obligations under these plans, we reserve the right to exercise all remedies
available, including cancellation of the investment,” an IFC spokesperson told
Devex.
The case shows taking “smart risks” is
easier said than done — especially in the rapidly changing contexts of fragile
and conflict-affected states. As the bank’s makes such risky endeavors a larger
part of its portfolio, it will need safeguards that are as robust as ever.
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