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Achieving Impact in Development Requires Us to Venture into Tough Places

Jin-Yong Cai's picture
Also available in: 中文

For two decades, the world has made extraordinary progress in development — lifting nearly 700 million people out of extreme poverty and halving the percentage of people living on less than $1.25 a day. Now the work gets even harder: extending that progress will require us to focus on improving lives in some of the world’s most difficult corners.
 
Conflict and poverty are mutually reinforcing. Large numbers of the world’s poorest live in areas torn by conflict, instability, and violence — and the numbers are growing. Quite simply, we cannot end poverty and boost shared prosperity by 2030 unless we ramp up our work in these areas.

This work puts us in some of the world’s toughest and most dangerous places. There’s a good reason poverty rates in such countries have declined much more slowly than in other parts of the world — public institutions tend to be unequipped for the challenge, and the prospect of conflict or instability leaves little opportunity for private enterprise to flourish. Many projects are likely to involve untested partnerships. Controversy can arise at any time.
 
The key isn’t to walk away from such risks, but to find ways to achieve our goals. Those of us in the World Bank Group and elsewhere in the international community need to think big about fighting poverty, take a comprehensive approach to problem-solving, and manage the inherent risks of doing difficult things in difficult places.
 
Since I became IFC’s chief executive nearly two years ago, I have made it my priority to refocus the institution — to enable us to take on more projects with the potential to make a difference in the lives of the poor, and to assess all risks in a comprehensive and coordinated way. This includes environmental, social, governance, and political risks — which I believe are equal to financial or credit risks in their potential to impede our development mission.
 
We have the right tools for assessing many of these risks. Through our environmental, social, and governance standards, we are helping our clients continue to improve in these areas. We are helping them identify solutions that are good for the environment, good for communities, and good for business.
 
But safeguards alone can never be enough. Whenever we discover gaps in implementing our policies, we move promptly to close them. When our initiatives don’t live up to our expectations, we take every step to learn from our experience.
 
We have done exactly that with regard to our 2009 investment in Corporacion Dinant in Honduras — a country where the rate of violence is so high that it continues to make international headlines. We invested to help the company expand production at an existing factory. We followed our guidelines for investments of this type.
 
In such a highly charged environment, however, it was not sufficient to confine our risk assessment to the immediate scope of the project. We now know that it is imperative for us to consider and prepare for a broad variety of risks — in this case, political instability and the prospect of conflict and violence over land rights.
 
IFC has since taken action that goes well beyond the Dinant project. We have made our risk-assessment procedures more comprehensive, putting in place protocols to ensure that information flows to IFC’s top management for prompt intervention. Going forward, we will be much more vigilant.
 
We will measure our success by the development impact of our projects — not by the dollar volume of our investments. Toward that end, we are changing our institutional culture.
 
These steps put IFC on a strong footing to venture into areas where we are needed most. To meet the goals of ending poverty and boosting shared prosperity, we must safeguard the environmental and social interests of all people who could be affected by our projects. We cannot afford to be timid in fighting poverty — and we cannot do it alone.

Comments

Submitted by Roderick Aspinwall on

I applaud IFC's commitment to engaging more in frontier markets and I firmly believe that is where IFC can make the biggest impact. At the same time IFC's innate conservatism and ever shifting investment priorities can send conflicting messages on IFC's role.

For example Belarus which is arguably one of the most 'frontier' markets in Europe, where three quarters of the economy (and employment) is in completely ineffective government hands, there are good private sector companies who have, despite all adversity, developed and provide a counterweight to the dead hand of the state, and who are worthy of IFC support in their development and expansion. Especially so given the lack of private sector financing available.

Given this one would imagine that supporting private sector development in the country would be a priority for IFC, and especially given that key IFC shareholders would applaud such moves (at the very least the US, UK, and the EU). However instead management simply refuses to countenance any projects in Belarus citing reputational risks for the corporation; the country's small size; hostile business environment; which all are frankly not worth management attention or resources. Belarus does not even merit an investment officer in-country. Even IFC's excellent advisory services initiatives (which have made IFC the most respected development institution in the country) are at risk.

I would urge IFC to be true to its mission and to think creatively about how to profitably provide investment capital in challenging environments and improve private sector development advisory services where IFC could maximise its macro impact on entire countries.

Submitted by Angel Gunther Vega on

Encouraging article. It reminds the vision and expectations towards sustainability, a subject that still requires endorsement by the different actors and stakeholders.

Submitted by Ray Offenheiser, President, Oxfam America, on behalf of Oxam on

I am glad to see this blog from Executive Vice President Cai, addressing some of the concerns Oxfam and others have been raising on the IFC's policies and practices in recent years. These issues go to the heart of the World Bank Group (WBG) mission and to the lives and livelihoods of the many hundreds of thousands of people affected by IFC investments.

It is good to see Mr. Cai acknowledge that the IFC has had problems, particularly in assessing and managing risk, and committing publicly to the IFC taking action. Though the issue was much more complex than that, it is true that the failure of the IFC to look at broader risks –not just risks to the project- was one of the problems with its investment in Corporacion Dinant in Honduras.

The recognition that environmental, social, governance and political risks should be given equal, and in our view more so, weight with financial and credit risks in IFC decision-making is also something we have been asking for. This should include the IFC having more staff on environmental, social and political risks; giving staff incentives to raise risks and concerns; and increasing the budget for environmental and social risks assessment, monitoring and supervision.

The biggest commitment to reform I see in this blog is the willingness to change an institutional culture that prioritizes volume of investment over development impact. For IFC's senior leadership to send strong signals to staff about that is a welcome step. As long as IFC staff feel incentivized to get the money out the door, with the message from the top being that volume of lending will be rewarded, they will tend to focus on project profitability at the expense of development outcomes. However, what is not clear is how far this change is going. If it is only at the margins, reducing only slightly the weight of lending targets in staff performance appraisals, it will not have the impact needed. My hope also is that when Mr. Cai mentions “projects that have better development impact”, such as transformational projects, he does not only mean large-scale projects.

It is disturbing to see that Mr. Cai continues to misrepresent the Dinant case - which was the important trigger for these discussions about reform. He does this in two ways: claiming that the investment was only to support a factory rather than Dinant's plantations (“we invested to help the company expand production at an existing factory”) and that the IFC abided by its standards for this investment (“we followed our guidelines for investment of this type”). The CAO has proven both of these claims to be false. IFC's investment did support Dinant's plantations and the IFC systematically broke every one of its standards on assessment, supervision, monitoring, consultation with affected communities and information disclosure. How can the IFC learn lessons if its starting point is to deny the truth?

Also, posting a blog has several shortcomings by its very nature. It does not allow for debate and discussion. While there are good changes as mentioned, how they are to be implemented remains vague. A blog does not give firm time bound commitments to which civil society or the WBG board can hold the IFC accountable. Overall, while a good step it is not yet what we are hoping to see to guarantee real changes in what, to many, seems a broken institution. Let's not forget the IFC is currently embroiled in many controversial cases - from Dinant to Ficohsa, Tata Mundra to GKEL, Dragon to Wilmar - that reveal deep systemic problems. These are not isolated cases, nor are they easily fixable. On the contrary, they have in common the undeniable conclusion that staff at IFC are routinely breaching the IFC's own Performance Standards, which are meant to protect communities from harm. They do so because they do not feel as though they can raise problems with senior management, and feel that getting money out the door is more important than development impact.

Mr. Cai acknowledges that there are problems at the IFC, but he does not go so far as to probe the deep faultlines in the institutional culture at the IFC. It will take more than a blog to fix those.

The WBG needs to propose a response that is at least as strong as President Zoellick’s response to the Wilmar audit, when he announced a moratorium on all WBG lending to palm oil for 18 months, to allow for root and branch reforms. If the IFC is really committed to addressing the cultural and systemic institutional issue in order to avoid this kind of case happening again and to increase its impact on development, it needs to react to the upcoming CAO audit on Bank Ficosha by proposing a time bound action plan on systemic issues. Such a plan would include concrete actions or reforms that could be discussed with stakeholders at the Annual meetings and be assessed by the Board in a year or two.

If the IFC takes these steps, we feel more reassured that it’s serious about reform.

Submitted by Bretton Woods Project on

IFC statements welcome but concrete action needed

The Bretton Woods Project joins Oxfam in welcoming IFC Executive Vice President Cai’s commitment to ensuring that the IFC will measure its success “by the development impact of our projects — not by the dollar volume of our investments” and to change the institutional culture to that end.

It is encouraging that Cai is committed to aligning staff incentives with the IFC’s purpose as a development institution. Action to that end is certainly important given that according to a recent World Bank Group staff survey, only 30 per cent of IFC staff said they consider development as their main objective, and regard loan volume as more valued by the institution.

The CAO’s December 2013 Dinant report clearly identifies the systemic nature of the challenges faced by the IFC, noting that the failures identified arose, in part, from staff incentives “to overlook, fail to articulate, or even conceal potential environmental, social and conflict risk”, and that staff felt pressured to “get money out the door” and discouraged from “making waves.” Therefore, while Cai’s sentiments are welcome it is notable that his stated commitment to change is framed by a continued unwillingness to acknowledge that the Dinant, Ficohsa, Tata Mundra, GKEL, Dragon and Wilmar cases are not the result of case-specific oversights but reflect institutional problems within the IFC.

CSOs have repeatedly attempted to engage with the IFC on this issue, including through four letters co-signed by over fifty local and international organisations. As outlined in the Bretton Woods Project’s ‘Follow the Money’ report [http://www.brettonwoodsproject.org/2014/04/follow-the-money/], the findings of the IFC’s own internal audit found that “The result of [the] lack of systematic measurement tools is that IFC knows very little about potential environmental or social impacts of its [financial market] lending.” CSOs have therefore called for extensive consultations on the nature and impact of the IFC’s lending and for the joint development of specific mechanisms to address the problems identified by the CAO audit and CSOs. Specific action is required to address these systemic issues and to ensure that IFC lending results in positive developmental impact for the communities it is mandated to support. It is clear that Cai’s blog, while containing some positive statements, is not an adequate response to the important concerns raised on multiple occasions by CSO partners and substantiated by the CAO audit.

Cai’s admission that ‘highly charged’ environments such as Honduras require a more comprehensive and long-term assessment of project risks and consequences is particularly relevant, given his call for the IFC to ‘ramp up’ its work in areas suffering or transitioning from violent conflict. As Cai himself implies in his statement on the Dinant case, the complexities of the IFC’s operational environment cannot serve to justify decisions and projects that are contrary to the IFC’s vision to ‘do no harm.’ The extensive literature documenting the unintended negative consequences of the activities of the World Bank and the international community generally in these settings makes clear the inherent difficulties of working in conflict and post-conflict environments even for organisations that are dedicated to the task. Unfortunately, as Runde and Savoy note in the Center for International and Strategic Studies article ‘Shifting Fortunes at IFC’ [http://csis.org/publication/shifting-fortunes-ifc] the “IFC remains largely culturally and institutionally unequipped to work in these areas. It may require entirely separate vehicles and personnel to staff these opportunities.” It is therefore imperative that before ‘ramping up’ its activities in complex conflict settings the IFC ensures that its oversight mechanisms, incentive structures and choice of financing vehicles are fit for purpose.

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