An accountability mechanism without teeth?

Two Albanian projects under CAO review

26 June 2013 | Guest comment

The International Finance Corporation (IFC), the private sector arm of the World Bank, is under internal scrutiny for two projects in Albania. The complaints, brought by two local NGOs in January and March, raise important issues of IFC compliance with its own mandate and safeguards as a global international development player. They also provide a rare glimpse of the effectiveness of the Compliance Advisor/Ombudsman (CAO), the IFC’s accountability mechanism. The first complaint focuses on an IFC advisory services project which guided the Albanian government for the privatisation of four small, profitable hydropower plants (HPP) built during 1950s and 1960s. The second brings to the CAO’s attention some disturbing allegations of harm to local communities in Mallakastër, central Albania related to Bankers Petroleum, a Canadian oil company.

Interfering in political affairs

The prohibition of use of development projects for the borrowers’ domestic political benefit is a sacrosanct principle for every international development institution. However, this is precisely what happened in the privatisation case. The matter has caused considerable debate in Albania, including criminal complaints and constitutional challenges.

Short on cash during a crucial election year, the Albanian government obviously intended to pump a few million euros into the economy right before the June election. In fact, the sale was reportedly completed in May, during the election campaign. The political implications of such a seemingly innocent free-market operation could not have been ignored. However, they were clearly overlooked by the IFC advisory team, which was hired by the Albanian government to prepare and lead the sale. To our knowledge, this is the first time CAO has ever been faced with this type of complaint.

The HPP complaint further alleges that the sale violates the IFC’s sustainability framework, one of the key elements of which is IFC’s commitment to “fight poverty with passion and professionalism for lasting results”. However, complainants argue “the only lasting result of this privatisation is a bigger hole in the public debt and more poverty”. The buyer – Kurum, a Turkish steel plant operator – is basically taking four profitable dams out of the national grid and using them for the Elbasan steel plant, built during the communist regime in Albania and presently one of the largest polluters in the Balkans. “What economic rationale for fighting poverty has the process of selling for a quick buck the cow that produces milk for the family”, rightly ask the complainants. To top it off, the IFC stands to make a profit of approximately $1 million out of this sale, according to the IFC’s non-public contract. Clearly, all this makes a mockery of IFC’s goal of “fighting poverty with a passion”.

More importantly, the case points to a major weakness in the CAO’s mandate, that it has no teeth. The case was filed in January, approximately four months before the sale was actually completed. The complainant requested that the CAO stop the project until it had fully investigated and reviewed it. The CAO declined to take such a course of action, responding that it did not have such powers. However, under the Bank’s fundamental principle of “do no harm”, the CAO should have recommended to the Bank’s president to order a suspension of the project under the circumstances. Instead the complaint was moved to the compliance stage, but the damage is irreversible.

The role of trust funds

Another issue raised by another CSO in relation to the HPP case is the use of trust funds within the World Bank Group. Trust funds are obscure financial instruments administered by the World Bank made up of contributions of various governments and the World Bank, targeting a general or specific development goal. Despite their seemingly benign approach, they appear to bypass arguably strict safeguards applicable to regular World Bank loans. One of such trust funds was used by the IFC to “fund” the HPP project and the Albanian American Women of Arizona wrote to Bank president Jim Yong Kim asking the Bank to investigate whether the many trust funds it administers should undergo stricter scrutiny or be brought within the scope of its social and environmental safeguards.

CAO at crossroads

The Bankers Petroleum case raises further questions about the role and effectiveness of the CAO. The allegations against Bankers Petroleum were serious, public and persistent in the local press in 2011 and 2012, including the dumping of oil residue in irrigation networks, lack of attention to occupational health and safety and the creation of tremors and induced earthquakes because of “questionable oil extraction techniques”. Allegations have been made in the press that the tremors caused the loss of a pregnancy of a woman in a nearby village. The complaint was raised with the CAO in March 2013, but is still at the ombudsman stage.

The large and overly decentralised structure of the IFC obviously conflicts with CAO’s small and centralised operations in Washington. The CAO seems overwhelmed and under-resourced. With its current structure it cannot effectively and in a timely manner handle the various problems with IFC projects all over the world. It should have its powers strengthened, be given more resources, and be empowered to launch more pre-emptive investigations and to recommend the suspension of IFC projects.

Lavdosh Ferruni, Organic Agriculture Association, Tirana, Albania,