Guatemala: Real LRIF-01/Coban
Local NGOs on behalf of several affected communities
Impacts on water, livelihood, indigenous peoples, lack of information and consultation, social and environmental due diligence
US $15 million equity investment
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 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.
CAO Compliance Monitoring Report
CAO released its first compliance monitoring report in August 2019. Since IFC made its investment in the Fund, IFC has strengthened their internal procedures for appraising and supervising FI investments. In response to CAO’s investigation report, IFC noted improvements it has made regarding fund selection, disclosure and supervision of fund subprojects, legal requirements for E&S non-compliance, and contextual risk analysis. However, IFC’s response did not commit to take any action with its client regarding project level issues raised by the complainants.
Since the release of the investigation report, on the basis of its supervision activities, IFC has determined that the Fund’s E&S performance has improved and is now satisfactory. IFC has not documented engagement with the Fund on the HSR project, or issues related to the impacts of the project as raised in the complaint. In this context, CAO notes that: (a) the complainants continued assertions that residual project impacts remain unaddressed; and (b) the Fund owns a controlling share in the project. While IFC’s supervision documentation summarizes the history of the HSR project and the complaint to CAO, IFC has not adequately supervised the Fund to ensure that it has assessed residual project impacts and, as appropriate, minimized, compensated for or otherwise remedied them in accordance with IFC’s Sustainability Policy (para. 6) and Performance Standard 1 (paras. 4 & 14).
CAO will keep this case open for monitoring 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 August 14, 2019