Private Sector


IFC-financed private equity fund implicated in Honduras dam

IFC action plan on financial sector lending called unacceptable

3 December 2013

An early October complaint was registered with the Compliance Advisor Ombudsman (CAO), the World Bank’s accountability mechanism for private sector projects, regarding the Agua Zarca hydropower project in Honduras. The project has been beset by controversy given its rejection by the Lenca people, an indigenous group in southern Honduras who claim they have not given consent for the project (see Update 86). The complaint was filed in relation to investment in the project by the Central American Mezzanine Infrastructure Fund (CAMIF), a private equity fund which received $40 million in financing from the International Finance Corporation (IFC, the World Bank’s private sector arm) in 2007. CAMIF is managed out of Washington DC by a former staff member of the IFC who now works for EMP Global, a private equity management firm founded by former World Bank senior managers.

By early December the CAO had still failed to post the complaint on its website, despite having a 15 day window for doing so specified in their operational guidance. The CAO’s confirmation of eligibility, sent directly to the case complainants, confirms that the IFC is linked to the Agua Zarca dam, despite denials issued by the IFC earlier in the year (see Observer Autumn 2013). Those denials were directed at claims that IFC-client FICOSHA, a private Honduran bank, was financing the project; however, the IFC made no mention of CAMIF’s consideration of the project. Despite the complaints and the very public controversy over the dam – protestors were shot by security forces in July resulting in the death of unarmed indigenous protestor Tomás García, and staff of the Honduran indigenous support NGO COPINH have had charges filed against them in courts over the protests – the IFC is currently considering a second investment in CAMIF with a projected board approval date in early December.

IFC action plan panned

The IFC is under heavy criticism from civil society groups and the CAO over the lack of knowledge of the development, environmental and social impacts of lending to the financial sector, which now accounts for over half the of the IFC’s annual commitments (see Update 86, 85, 84). Responding to a CAO investigation, in August IFC staff sent an “action plan” to a committee of the World Bank’s board of directors to address the concerns about these so-called financial intermediaries (FIs).

the financial intermediary model was precisely designed to by-pass regulatory and accountability mechanismsLakshmi Premkumar

An end August civil society letter to the board committee, signed by 10 NGOs including Oxfam International, “recommend[ed] that IFC does less but does it better”, including “third-party verification” of the environmental and social impacts of financial sector investments and greater guarantees of do no harm in financial sector project by “creating systems to spot risk at the pre-approval stage; by increasing high-risk sub-project supervision; and by ensuring greater transparency around financial intermediary sub-project lending.”

However, when the action plan was finally made public in early October, civil society groups were disappointed. The plan’s three elements included on-going stakeholder outreach and dialogue; scaling up advisory services for environmental and social risk management at FIs; and a “continual improvement framework” for managing risk at FIs. The only changes proposed under the framework were an increase in the frequency of site visits to some medium-risk financial sector clients, an increase in desk based reviews for sub-clients of high and some medium risk financial sector clients, and a voluntary request for private equity funds with IFC investment to disclose all their sub-investments.

Strategy demanded as push for FIs grows

A mid November civil society letter to World Bank president Jim Yong Kim complained that the IFC’s response was “inadequate” and called the IFC staff position that “the IFC is not accountable for FI clients’ investments in sub-projects … not acceptable”. The 50 organisational signatories, such as Indian NGO Programme for Social Action and US NGO Center for International Environmental Law, “fundamentally reject a model in which, by design, the IFC cannot guarantee that its investments contribute to poverty reduction nor avo id harm.” They asked Kim to “make a commitment to develop a new strategy for investments in the financial sector, fundamentally rethinking the nature, purpose, modalities and limits of these investments. In the development of a new strategy for investment in the financial sector, the IFC should formulate a process for independent input, participatory consultation with affected communities, and broader stakeholder engagement.”

Lakshmi Premkumar of Indian NGO Programme for Social Action said: the action plan “now establishes beyond doubt that the financial intermediary model was precisely designed to by-pass regulatory and accountability mechanisms. The recent responses from IFC to CAO findings, including to the CAO audit of FI projects, has demonstrated that the IFC does not take the CAO seriously. Dr. Kim might as well order closure of the CAO.”

The debate on FIs is growing as they are increasingly seen by official bodies as desirable channels through which to push development finance. The Inter-American Development Bank is in the middle of a restructuring and is considering whether it should create a stand-alone private sector financing entity like the IFC, which some have proposed should focus more on financial markets lending.  Additionally, the financing mechanism being set up under the UN Framework Convention on Climate Change, the Green Climate Fund (GCF), is also considering whether to channel climate change funds through the private financial sector. This led to an early October letter to the GCF board from nearly 140 civil society groups from developing countries citing the IFC’s experience with FIs as a reason why “we are opposed to the use of international FIs by the GCF.”

Furthermore, in the last six months the IFC has proposed investment in nine more private equity funds, plus six commercial banks deemed to be of high risk (in Brazil, India, Mexico, El Salvador, Chile and Romania).