A case filed by communities in India has prompted the first internal probe of the International Finance Corporation (IFC), the Bank’s private sector arm, for its lending through financial intermediaries, highlighting concerns about the transparency and effectiveness of this lending.
In April, the IFC’s internal grievance mechanism, the Compliance Advisor Ombudsman (CAO), reacted to rising concerns about the institution’s use of intermediaries, such as banks and private equity firms (see Update 73), by announcing a review of financial sector investments. The review will focus on whether the IFC’s social and environmental assurance process – which includes the IFC’s minimum performance standards (see Update 74, 71) – is working for financial sector investments, which now account for around half of IFC activity. Initially, a sample of investments will be studied, with the assessment due by end 2011.
In May, the temperature of this review was raised after the CAO deemed a complaint about IFC lending through financial intermediaries eligible for assessment – the first time this has happened. Community groups in the Indian state of Odisha (formerly Orissa) filed the case against the IFC, complaining of negative social and environmental impacts of the Kamalanga coal power plant. This plant is run by GMR Kamalanga Energy Limited (GKEL), who received financing from the private equity India Infrastructure Fund, who themselves received a $100 million equity investment from the IFC in 2008.
The complainants also allege that the company did not adhere to legally mandated procedures when acquiring land, has not offered proper compensation, and that it used intimidation and force. Amulya Nayak, of community group Odisha Chas Parivesh Surekhsa Parishad, said “the company never shows any regard for community health. It ignores villagers’ requests to not dump its garbage [next] to adjacent agricultural lands. GKEL employs dynamite blasting at the project site, which causes cracks in nearby houses and [the] primary school building. [The] project also extracts [a] huge water volume and we witness in our bore wells the depleting water level, which is the main source of drinking, cooking and washing for thousands of families.”
“Our inability to secure the most fundamental information about this [financial intermediary] loan … shows [the] IFC does not practise its supposed commitment to transparency”, added Vijayan MJ of NGO Delhi Forum, which is one of the complainants. The CAO will first make an attempt to mediate between the parties, but if no resolution can be reached, a full investigation will be launched.
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