CAO Cases

Arne Hoel, The World Bank

Latin America & the Caribbean

Honduras / Dinant-01/CAO Vice President Request

Complainant
CAO Vice President Request
Date Filed
April 17, 2012
Concerns
Evictions, security concerns, project due diligence
Case Status
Open - Compliance
 

Synopsis

Background
IFC provided Corporación Dinant, a vertically-integrated palm oil and food company in Honduras, with a corporate loan to enable it to develop young palm oil plantations, increase production capacity in its snacks and edible oils divisions, expand and upgrade its distribution network, and build a biogas facility to generate electricity for own and third-party consumption. The total project cost was estimated at $75 million, and IFC’s proposed investment was a $30 million loan.

 

Dinant is headquartered in Tegucigalpa, Honduras. It owns palm oil plantations across the Aguan and Lean Valleys and operates two palm oil mills and an edible oil refinery near the cities of Tocoa and La Ceiba. The company also operates a port storage facility at Puerto Castilla; owns vegetable greenhouses and a food processing plant in the Comayagua Valley; and has a snacks plant in San Pedro Sula.

 

In April 2012, the CAO Vice President informed IFC that CAO was initiating an appraisal of IFC’s investment in Corporación Dinant in response to concerns raised in a letter to the World Bank president in November 2010 and subsequent discussions between CAO and local NGOs. Key allegations in relation to the project are as follows:


• that IFC’s client (Dinant) conducted, facilitated or supported forced evictions of farmers in the Aguan Valley;

 

• that violence against farmers on and around Dinant plantations in the Aguan Valley occurred because of inappropriate use of private and public security forces under Dinant’s control or influence.

 

• that IFC failed to identify early enough and/or respond appropriately to the situation of Dinant in the context of the declining political and security situation in Honduras, and specifically in the Aguan Valley, following the ouster of President Zelaya in June 2009.

 

CAO Action
Having conducted a preliminary appraisal of IFC’s investment in Dinant, CAO found that IFC’s social and environmental performance warranted further enquiry. Thus, in accordance with its Operational Guidelines, in August 2012, CAO prepared terms of reference for a compliance audit with regard to the following questions:

 

• whether IFC exercised due diligence in its review of the social risks attached to the Project;

 

• whether IFC responded adequately to the context of intensifying social and political conflict surrounding the project post commitment; and

 

• whether IFC policies and procedures provide adequate guidance to staff on how to assess and manage social risks associated with projects in areas that are subject to conflict or conflict prone.

 

CAO’s audit was conducted with input from two expert panelists. According to CAO’s mandate, the audit focuses on IFC’s performance and does not make findings in relation to the allegations against the IFC client.

 

The audit made a number of key findings related to IFC’s environmental and social due diligence, and environmental and social performance during supervision. Specifically:

 

Environmental and Social (E&S) Review

• IFC accepted an overly narrow definition of project E&S risk, without adequate consideration of project context or contemporaneously available sources of information regarding land conflict and insecurity in the Bajo Aguán.

 

• CAO found that IFC’s E&S review was not in compliance with the requirements set out in the Sustainability Policy (2006) and Environmental and Social Review Procedure (ESRP). In a sector and country where risks of conflict and violence around land were or should have been known to the team, CAO finds that IFC’s review was not “commensurate to risk”, and thus did not meet a key requirement of the Sustainability Policy.

 

Integrity Due Diligence

• IFC was or should have been aware of a series of public allegations and negative perceptions in relation to its client that went significantly beyond those that were considered in the course of its integrity due diligence process.

 

• As a result, CAO found that the more detailed six part integrity due diligence process should have been adhered to. IFC’s failure to do this was out of compliance with the relevant procedure.

 

Environmental and Social Categorization of the Project

• IFC’s E&S review process provided the IFC team with insufficient information to categorize the project appropriately.

 

• Given compliant E&S review and IDD processes, the project would properly have been assigned E&S category A (significant adverse impact) rather than B (potential limited adverse E&S impact

 

Disclosure & Consultation

• IFC’s failure to disclose the Dinant E&S Assessment was not compliant with its Policy on Disclosure of Information (para. 13). IFC remains non-compliant on this point.

 

• IFC failed to ensure that the Dinant E&S Assessment met the consultation requirements set out in Performance Standard 1 (para. 21). CAO found no evidence that the communities living most proximate to Dinant’s properties were consulted during the preparation of the E&S Assessment,

 

Adequacy of Review of Conditions of Disbursement

• CAO concludes that IFC did not ensure that E&S conditions of disbursement were met by the client. IFC disbursed US$15 million to a client that was in apparent non-compliance with its E&S undertakings in a risk environment that had deteriorated significantly since appraisal a year earlier.

 

• IFC investment staff did not keep E&S staff appraised of developments in relation to land disputes, and occupations around the client’s plantations of which they were aware.

 

General Supervision (post-disbursement)

• CAO finds IFC’s supervision to have been inadequate in that it failed to “develop and retain the information needed to assess the status of [its client’s] compliance with the Performance Standards (PSs)” as required by the ESRP.

 

• In particular, CAO finds no indication that IFC supervised its client’s PS4 obligations: (a) to investigate credible allegations of abusive acts of security personnel; or (b) that the use of force by security personnel would not be sanctioned other than for “preventative and defensive purposes in proportion to the nature and extent of the threat.”

 

IFC Policy, Procedure and Practice

• IFC non compliance identified in the report are due in large part to problems with the interpretation and application of existing policies and procedures.

 

• The combination of client relationship, operational and compliance functions within project teams can generate conflicts of interest and conflicting incentives for staff and management.

 

• At a time when the Bank Group is being challenged to expand its risk appetite, CAO finds it crucial to also invest in structures that provide management with assurance that E&S risk is being rationally identified and managed.

 

Status
CAO released the audit report on January 10, 2014 together with a response from IFC. CAO will monitor actions taken by IFC to address its findings of non-compliance. The undertakings in IFC’s response will be taken into consideration as part of this process.

The CAO audit report, IFC’s responsea and Consultation Draft: Dinant Enhanced Action Plan, a summary of the key findings, and related documents are available under "View Documents" below.  CAO will prepare a monitoring report in relation to this audit. In the normal course of events, a CAO monitoring report is released not less than one year from the date of public disclosure of an audit report.

 

Status as of August 12, 2014

Project information

Institution
IFC
Project Name & Number
Dinant 27250
Department
Agribusiness
Company
Corporación Dinant
Sector
Agribusiness
Region
Latin America & the Caribbean
Country
Honduras
Environmental Category
B
Commitment
US$30m (A loan)

Case Tracker

Ombudsman

Compliance

  • Under Appraisal: Completed
  • Under Audit: Completed
  • Monitoring: In Process

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