CAO Cases

Arne Hoel, The World Bank

Latin America & the Caribbean

Guatemala / Real LRIF-01/Coban

Complainant
Local NGOs on behalf of several affected communities
Date Filed
October 29, 2014
Concerns
Impacts on water, livelihood, indigenous peoples, lack of information and consultation, social and environmental due diligence
Case Status
Open - Compliance
 

Synopsis

Complaint

In October 2014, CAO received a complaint from community members residing near the Santa Rita project, a 23-megawatt hydro-electric power plant on the Río Icbolay in Alta Verapaz, Guatemala. The project is managed by a local development company, Hidroeléctrica Santa Rita (“HSR”), which is partly owned by Latin Renewables Infrastructure Fund (“the Fund”), a financial intermediary. IFC made an equity investment in the Fund in 2012, and thus, is exposed to the Santa Rita project. 

 

The complaint was submitted by two local organizations, Colectivo Madre Selva and the Consejo de Pueblos de Tezulutlan on behalf of several communities downstream and upstream of the Santa Rita project.  The complainants raise concerns regarding a range of environmental and social issues related to the project. They allege that the project did not meet IFC’s consultation requirements for free, prior, and informed consent. They are concerned that HSR has not addressed their concerns regarding the project’s design and has not considered its potential for adverse impacts on local water sources. They fear that the project will compromise their ability to generate income and to sustain their livelihoods. Further, they assert that their opposition to the project has been met with violence, repression, and criminalization of community leaders. The complainants have requested that their individual names be kept confidential.


 

CAO Action

CAO found the complaint eligible for further assessment in November 2014 and an assessment of the complaint was conducted in January 2015. During the assessment, although the Fund and HSR expressed willingness to engage in a CAO facilitated dispute resolution process, the complainants however indicated a preference for the case to be handled by CAO’s compliance function. In accordance with CAO's Operational Guidelines, the case was referred to CAO Compliance for appraisal of IFC's environmental and social performance. CAO completed its appraisal in July 2015 with a decision to initiate a compliance investigation.

 

CAO’s investigation report was released on October 30, 2017. In its report, CAO made several non-compliance findings in relation to IFC’s review and supervision of its investment in the Fund and the Santa Rita project.   

 

IFC Pre-investment Review

IFC was aware that its investment in the Fund involved a high degree of environmental and social (E&S) risk given the sector and regional focus. IFC acknowledged that such projects could have negative impacts on local communities, including Indigenous Peoples. IFC also acknowledged the Fund lacked experience in the management of E&S risk. To help avoid and mitigate these risks, IFC agreed to support the Fund to develop a best-in-class E&S Management System and closely monitor the Fund’s compliance with IFC E&S requirements. IFC negotiated the right to review the Fund’s E&S due diligence for its first three projects. IFC’s investment in the Fund was approved in May 2012 and first disbursement complete in July 2012.

 

CAO finds that IFC appropriately categorized this investment as high risk and required the Fund to implement IFC’s Performance Standards. However, CAO also finds that IFC’s pre-investment review was not commensurate to risk. IFC did not have an adequate understanding the contextual risks associated with its investment in the Fund and gave insufficient consideration to the challenges that the Fund would face in implementing IFC’s recently updated Indigenous Peoples requirements. Further, CAO finds that IFC’s approach to the review of the Fund’s E&S due diligence (ESDD) was flawed as it did not provide IFC staff with sufficient time or information to determine whether the Fund was applying IFC’s standards to its projects. In making this finding, CAO notes that IFC’s standards for E&S review of Fund projects went beyond market guidance.

 

IFC review of Santa Rita project

IFC reviewed the Fund’s ESDD for its proposed investment in the Santa Rita project in August 2012. In its review, IFC noted gaps in the analysis of risks and impacts, and recommended additional mitigation measures. However, CAO finds that IFC’s review overlooked weaknesses in the ESDD as relevant to the issues raised in the complaint. Key shortcomings in the ESDD that IFC did not identify included: (a) gaps in the environmental assessment information presented, including that it related to an earlier – and significantly smaller – version of the project; (b) the lack of a social impact assessment; (c) inadequate analysis of the project’s expected impacts on biodiversity, land use, drinking water, livelihoods, and cultural heritage; and (d) the lack of an assessment of whether the dam met World Bank design and safety standards. Further, IFC’s review was not sufficient to ensure that the Fund had correctly assessed the application of Performance Standard 7 to the project, in particular the requirement for Free Prior Informed Consent, nor did IFC give due consideration to prior protests against the project.

 

IFC’s Supervision post review of Santa Rita project

As initial construction works for the project commenced, opposition intensified. In July 2013, project opponents damaged project machinery and a road block was established by some community members opposing the project at the nearby village of Monte Olivo. In August 2013, two children and a former worker at the project were killed at an incident in Monte Olivo. The circumstances surrounding this incident remain unclear. Following a July 2014 agreement between some community representatives and HSR to recommence construction of the project, in August 2014, police temporarily removed a road block erected by project opponents. In October 2014, representatives of indigenous community members opposing the project met with IFC and subsequently filed a complaint with CAO. 

 

Over four years after IFC’s disbursement to the Fund, the road block in Monte Olivo remains in place. In this context, CAO finds that IFC did not sufficiently engage with the Fund to address the rising tensions, violent incidents, and serious allegations of E&S impacts raised by local community members and their representatives. CAO also finds that the prevalence of community opposition was sufficient for IFC to require a reevaluation of the applicability of its Indigenous Peoples standards to the project.

 

More broadly, CAO’s findings raise questions as to the effectiveness of IFC’s control over compliance when it comes to the application of its E&S standards to high risk financial Intermediary investments.


 

Status

CAO’s investigation report and IFC Official Response were released on October 30, 2017.

CAO will keep this compliance investigation open and monitor the situation until actions taken by IFC assure CAO that IFC is addressing its noncompliance findings. 

All documents relating to this case are available under "View Documents" below.

 

 

Status as of October 30, 2017


Project information

Institution
IFC
Project Name & Number
Real LRIF 31458
Department
Private Equity & Investment Funds
Company
Latin Renewables Infrastructure Fund, L.P.
Sector
Power
Region
Latin America & the Caribbean
Country
Guatemala
Environmental Category
FI1
Commitment
US $15 million equity investment

Case Tracker

Ombudsman

  • Eligible: Completed
  • Assessment Period: Transferred

Compliance

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