Dear Development Finance Institutions: It’s Time for an Intervention
By Brian Ganson
In Mozambique, natural resources are at the heart of a conflict that, so far, has resulted in estimates by UNHCR of thousands dead and as many as one million displaced. Fighting between a toxic mix of mercenaries, foreign troops, and a guerilla insurgency results in war crimes by all sides, with no end in sight. Once again, the drive to exploit oil, gas, and minerals is dividing the country and undermining any real chance at peaceful development.
Amid this tragedy, the African Development Bank (AfDB) developed its response: a press release trumpeting that it won a “Deal of the Year 2020” award for the Mozambique Liquid Natural Gas Area 1 Project. Therein, we are told that this was the largest direct investment to date in Africa, with the potential to “transform global energy markets.” No mention was made of how such projects exacerbate social divisions and violence in Mozambique. Rather, the Bank assures us that it manages its projects to the highest social and environmental standards to advance development goals.
The AfDB’s celebration of its complicity in Mozambique’s crisis suggests either deep cynicism, or a profound break with reality. This would be sad enough if the Bank were only failing its own development mandate. But it is also wreaking havoc on those citizens of Africa and their partners who are in fact working tirelessly for inclusive and peaceful development. It’s time for an intervention, with the AfDB and the other Development Finance Institutions (DFIs) who appear similarly detached from the tragic consequences of how they conduct business.
The way DFIs do business feeds conflict and violence
Mozambique is just one manifestation of what has become an apparently unbreakable, destructive pattern. With Guinea, the International Finance Corporation (IFC) promised us that it was “mining for long term change.” Instead, it was feeding the dynamics of marginalization and exclusion underlying the current popular unrest and military coup by failing to prevent or manage the local abuses and lack of meaningful development associated with its projects. In Sierra Leone, the pathways of private sector development promoted by the DFIs—by further concentrating power in elites and deprioritizing opportunities in the informal sector—have rebuilt the corrupt, patronage economy that was a contributing factor to the civil war. The “business environment reforms” promoted in Ghana disenfranchised thousands of artisanal miners in the name of “bankable” commercial mining projects, leading to social and economic upheaval in mining areas and beyond. And, in Uganda, the promise of IFC investment encouraged the government to use guns and flamethrowers—murdering children—to clear land for a private company.
The DFIs are hard-pressed to point out a major private sector investment resulting from their efforts in a fragile context that has substantially reduced political marginalization, addressed intergroup economic inequality, or built the social cohesion required for peaceful and inclusive development.
The DFI business model is at the heart of the problem
The business model of DFIs perpetuates destructive outcomes in fragile contexts. For example, since 1984 the IFC has issued its own bonds on world capital markets, effectively becoming a commercial bank in pursuit of AAA credit ratings. Meanwhile, the IFC’s first investment—a loan to Siemens to build components for state-owned utilities in Brazil—might have been daring in 1957. Today, the IFC deals in a commoditized finance market where it competes with other commercial banks and investor groups. And yet, the IFC must get the money out the door to support a cost and salary structure that looks far more like Goldman Sachs than it does any development or peacebuilding organization. This has pushed the IFC into committing 40% of its portfolio to particularly fragile contexts by 2030. With these institutional pressures, commercial considerations trump all others within the DFIs. There are no governance structures that are willing or able to stop peace-negative practices in fragile contexts in the face of an overwhelming desire to generate bank business through mega-deals. DFI insiders regularly recount how environmental and social concerns are sidelined in approvals, disbursements, and monitoring in fragile contexts, reducing standards and processes to cynical public relations exercises.
So in Mozambique, the AfDB pretends that its investments are bringing development, even while the fighting continues. Similarly, in Burundi from 2011 to 2015, the IFC through its Conflict-Affected States in Africa initiative celebrated the contributions of the private sector to peaceful development, ignoring how the politicization of business contributed strongly to the instability and violence that came to a head in 2015.
It’s time to set aside the prevarications. The IFC Performance Standards are now 20 years old; the Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, 10. And yet, the IFC and other DFIs remain utterly incapable of proactively or dependably delivering on their promises of participatory decision-making, human rights, inclusive and sustainable development, and conflict resolution that might actually help to make DFI investments peace positive.
DFIs need to take a back seat to authentic peacebuilding efforts
Delivering on the promises of peace-positive investment in fragile contexts is difficult. Stakeholders must understand opportunities in the real economy that directly address the needs of poor, vulnerable, and marginalized groups at scale. From a process standpoint, groups in conflict must be accompanied as they build sufficiently broad consensus on a path forward. Furthermore, peacebuilding requires profound changes in power relations and institutional relations, meaning that resistance by parties with vested interests must be anticipated and managed.
Consequently, private sector development in fragile and conflict affected contexts effectively constitutes a continuation of peace negotiations. Whether at the level of the individual firm and its host community or of policy at the national level, what matters is the working trust that is built (or broken) between competing groups as the economic dimensions of sustainable peace and development are deliberated.
Peaceful outcomes therefore require a peacebuilding approach to business and peaceful development. Critical processes, including the development of environmental and social risk assessments and risk mitigation plans, should be independently mediated and externally audited. Conflict resolution processes should be similarly independent from DFI oversight and control. The evidence is compelling that such approaches can and do result in more peace- and development-positive outcomes.
Consequential State and Civil Society Intervention is Called For
The actions of the DFIs in places like Mozambique suggest that they will be unwilling to relinquish their privileged and powerful roles in directing the pathways of private sector development in peacebuilding environments. Thus, we need interventions that will restrain their negative actions.
One promising development is the US Supreme Court decision in Jam v. International Finance Corporation, holding that the IFC’s commercial investment activities subject it to accountability in US courts for harm to local communities. It should also worry the DFIs that—as interest in corporate criminal accountability grows—their possible complicity in war crimes and gross human rights abuses has no statute of limitations.
A more proactive approach would be for DFI shareholders—the same governments who typically bear the costs of peacekeeping and peacebuilding operations—to insist that the DFIs make their investment decisions part of, and subsidiary to the decisions of, independently mediated peacebuilding processes with a specific focus on a just and inclusive economy.
This is a project not only of promoting better ideas related to investment and peace. It is also one of careful, courageous, and coordinated mobilization of coalitions, institutions, resources, and accountability structures. Efforts must be sustained to prevent backsliding into patterns of investment that replicate the political economy that led to violence, and instead lead to a private sector that advances reconciliation amidst peaceful development.
Professor Brian Ganson heads the Africa Centre for Dispute Settlement at the Stellenbosch Business School, a platform for research and reflection at the nexus of the private sector, conflict and development. He is also a Senior Fellow of the Fletcher School’s Council on Emerging Market Enterprises. BGanson@SUN.ac.za.
Photo by World Bank Photo Collection is licensed under CC BY 2.0
