Why do Multilateral Development Banks finance repeat offenders?

Multilateral development banks (MDBs) are international financial institutions that provide funding and technical assistance to developing countries around the world. These banks finance development projects run by public and private sector actors, and in deciding whether to fund specific projects, MDBs assess whether the proposed project adheres to the bank’s mission and its policies. These due diligence processes do not always prevent development projects from causing harm to local communities; and some clients with many complaints to their name are still approved for project financing. While communities who have been impacted by these projects can file complaints with the Independent Accountability Mechanisms (IAMs) within MDBs, the complaint processes don’t alway consider prior complaints against the same client.

The question that arises is why MDBs continue to empower clients that have a clear history of violating safeguards and causing harm to communities. When MDBs have received prior complaints that project implementers violated the bank’s social and environmental safeguards, why are those clients then able to continue their patterns of harmful practices? And when IAMs have evidence of harm to project-affected communities, why would that not provide context to their dialogue or compliance review process? In this article, we’ll explore this question through a case study: the Nepal Electricity Authority, the public entity that has received funding from major MDBs for multiple projects.

Case Study: The Nepal Electricity Authority

The Nepal Electricity Authority (NEA) is the government entity within the Ministry of Energy that generates and distributes electricity throughout Nepal. Although access to electricity in Nepal has grown to 90% in recent years, access to affordable and reliable power is still rare in rural areas of the country, and many MDB-funded projects are aimed at closing the energy gap. As Nepal’s sole public sector entity charged with power transmission and distribution, the NEA holds enormous power. And with increasing demand for clean energy, comes increased investment interest for climate-friendly energy sources. In August 2022, the NEA announced its plan to achieve “100 percent access to electricity within the next two years.” This move has been billed as a commendable effort to meet Sustainable Development Goal 7–access to affordable, reliable, sustainable and modern energy–well ahead of the target year of 2030. 

However, development is not sustainable when it fails to center and protect vulnerable communities. In 2013, Accountability Counsel and our partners at LAHURNIP supported Sindhuli District villagers in filing a complaint with the World Bank Inspection Panel for issues with the Khimti-Dhalkebar transmission line project. In 2018, AC and LAHURNIP supported another community in the Lamjung District in its complaint with the European Investment Bank’s Complaints Mechanism for many of the same issues. 

Both complaints featured community perspectives alleging serious failures from the NEA, including insufficient information disclosure, inadequate consultation with, and participation from local communities, improper land-use restrictions, land devaluations, inadequate compensation for those affected, and adverse impacts to community resources, sacred sites, and the environment. Both complaints also highlighted the lack of free, prior and informed consent (FPIC) for the project from affected communities, especially indigenous communities. Contrasted with the experiences of these communities is the story of how NEA projects have received at least 2.413 billion USD. 

MDBs have funded at least 20 NEA projects since 1989

A review of MDB project databases revealed at least 20 projects with the NEA as the client or implementer of the project. The projects that have received funding are massive infrastructure projects: multiple hydroelectric dams and electricity transmission lines to increase grid capacity and bring electricity to rural areas of the country. Several projects received funding from more than one MDB. For example, the ADB, EIB, and WB all provided financing for the South Asia Subregional Economic Cooperation Power System Expansion Project; and the massive Tanahu Hydropower Project was financed by the EIB and ADB.

Nearly half of those projects have generated complaints

Project-affected communities have filed complaints against nine different NEA projects, revealing common patterns of NEA practice that go beyond isolated issues encountered in individual projects. These patterns include inadequate compensation offered for land affected by the project but not seized by the project; compensation when the possessor of land lacks documents proving ownership, or holds imperfect title; and the inadequacy of non-financial remedies such as realignment of power lines, or land-for-land compensation. Complaints have also called attention to NEA’s inadequate consultation, lack of disclosure related to project impacts, as well as the lack of effectiveness of local grievance redress mechanisms. 

Beyond these initial project-related harms, complainant communities have also faced reprisals for calling attention to problematic practices. Just last year, after the EIB’s complaint mechanism concluded that allegations in the community’s complaint were founded, the NEA responded with violence. The complaint mechanism had recommended that the EIB and NEA address the project’s non-compliance with the bank’s policies. Instead, the NEA began installing transmission towers without landowners’ consent, while assaulting and arresting other community members. This was not the first time the NEA relied on intimidation to force projects ahead despite findings of noncompliance. Although IAMs have policies prohibiting reprisals against complainants, failure to enforce those policies allows clients to avoid accountability for their multiple impacts on communities. 

Another important accountability gap stems from a structural issue within IAMs that allows clients to avoid scrutiny from IAMs despite multiple complaints, simply by failing to progress complaints past the eligibility assessment. For example, the ADB has been the biggest financier of NEA projects, funding nine projects worth $1.109 billion. Five of those projects generated complaints, but only one of those complaints advanced beyond the eligibility stage. Some of those complaints were closed because communities didn’t follow up within the 21-day eligibility assessment period; others were deemed premature. At least one project generated complaints from two different communities, neither of which was informed of the appropriate office to receive their complaint. For communities with substantive complaints against the same MDB client, these outcomes are clearly inadequate. 

IAMs should consider the context of prior complaints against the same client in their grievance processes. When IAMS receive complaints from communities alleging violations of MDBs’ Social and Environmental Safeguards (SES), they should be able to consider the context of prior complaints submitted against the same client. IAMs only see a relatively small percentage of MDB projects–for those that do make it to their offices for review, IAMs should be able to take into account not just individual instances of bad behavior, but patterns of bad behavior. 

MDBs have an obligation to uphold their own social and environmental safeguards

Despite clear patterns of harm by the NEA, MDBs continue to finance NEA projects without putting in place additional safeguards to prevent the same harms from occurring again. In the last ten years alone, MDBs have funded eleven NEA projects, worth at least 1.864 billion USD. The first complaint against a project implemented by the NEA was filed in 1994, for the World Bank’s Arun III Hydroelectric Project. Yet one of the most recent complaints against an NEA project was filed in October 2021, alleging similar problems as were seen in the Arun III Project and many projects since: inadequate environmental impact assessments, lack of disclosure and consultation with affected communities, and displacement of local communities.

The social and environmental safeguards of MDBs require that they not only remedy harm when it has already occurred, but also prevent future harm. When faced with clients who have repeatedly failed to uphold threshold social and environmental policies, MDBs must make clear that any new funding is contingent on actively protecting communities from facing the risk of repeating past harms. MDBs should incorporate a review process of past complaints into their due diligence when evaluating loans to repeat clients. This basic due diligence review could prevent repeating past harms. A recent report from the OHCHR recommends several policies that MDBs should adopt, including:

• Reviewing “the client’s record of compliance and providing remedy as a condition of new loans or investment”
• Requiring clients to address “any outstanding grievances before they are eligible for repeat funding”
• Requiring “additional safeguard measures for sensitive projects that have previously attracted complaints.”

These commonsense policies could strengthen banks’ commitment to sustainable development without harm, and give communities reason to trust that clients who violate safeguards will face scrutiny.