Does the IFC still have the leverage to push for labour rights?

On Saturday 10 April 2021, a meeting was held between the company management of Karot Power Company LTD – a special-purpose vehicle incorporated in Pakistan and majority-owned by China Three Gorges South Asia Investment Limited (CSAIL) – a representative from the International Labour Organization, the Pakistan Federation of Building and Wood Workers and the project trade union Awami Labour Union. These parties discussed the termination benefits due to the 2000 workers that were illegally dismissed because of the impact of Covid-19, as well as the pending registration of the trade union and collective bargaining negotiations at Karot Hydropower Project, situated about 55 kilometres east of Islamabad in Pakistan. The meeting ended, as many times before, in a deadlock where the company CEO announced that they would never sign a collective bargaining agreement with the union.

The International Finance Corporation (IFC, a member of World Bank Group) is a co-financier of the Karot Hydropower Project, which covers the construction of a 720-megawatt run-of-the-river hydropower plant, including a 95.5-metre-high dam and a 27 km-long reservoir on the Jhelum River. Karot is owned mainly by CSAIL, which was established by the China Three Gorges Corporation (CTGC). Since construction of this mega infrastructure project began in 2016 – co-financed by the IFC and Chinese development institutions as part of the Chinese Belt and Road Initiative – there have been gross violations of labour rights. Workers have faced illegal dismissals, unpaid overtime, inappropriate occupational safety and health measures, and a lack of sufficient medical facilities and treatment in the case of injuries. The management has also actively hindered workers from undertaking legal trade union activities.

The Karot case shows that although the IFC is renowned for having been at the forefront of the development of labour standards for international finance institutions (as exemplified by IFC Performance Standard 2), the actual implementation of its standards is lacking.

Nor have the mitigating actions presented in the environmental and social assessment conducted in advance of the project been followed, even though the risks were identified. It is also important to note that respecting labour rights such as collective bargaining is a legally binding requirement for projects funded by the World Bank Group. Improvements are needed to better uphold and enforce these requirements.

However, the situation at the Karot Hydropower Project is not unique. In 2020, the World Bank published an external review of environmental and social accountability in IFC and Multilateral Investment Guarantee Agency (MIGA, also a member of World Bank Group) projects. One of its most striking conclusions is that “regardless of the mechanism used, IFC/MIGA need a more active response culture and greater willingness to engage with clients and complainants”. The review panel recommend that “when things go wrong, IFC/MIGA should support the client with high-quality environmental and social advice. In cases where the problem is client commitment rather than client capacity, IFC/MIGA should use their available leverage as fully as necessary to move the client to meet its responsibilities under the Performance Standards”. The panel also state that “IFI staff argue that they do not in many cases have the leverage to persuade the client to undertake corrective actions even when the client clearly bears primary responsibility”. The apparent unwillingness of the client and other co-financiers to implement the IFC Performance Standards is also the case at the Karot Hydropower Project.

Using leverage

The IFC’s lack of leverage over its client in the Karot project is partially explained by its minority share in the venture. The IFC has invested in the US$2 billion project in the form of a US$ 100 million loan. The IFC also has a 15 per cent share in the project company, CTGC. Although a minority shareholding comes with responsibilities, it is understandable that the IFC cannot unilaterally enforce its Performance Standards if the client and the co-financiers are unwilling to comply. Furthermore, the host government, Pakistan, has lower labour rights standards than the IFC’s requirements, making it difficult to expect legal enforcement on the project site. Lastly, but perhaps most importantly, with a client that has close links to China, there is often an alternative source of financing available.

All of this raises the question: what should an international financial institution (IFI) do in such a situation? The review panel states in the World Bank report: “Where the client does not accept responsibility but has resources, IFC/MIGA’s contribution will be to use their leverage over the client to the fullest extent possible to generate remedial action by the client. Where client lacks resources, IFC/MIGA may mobilize additional resources with and for the client on a commercial basis. Only in cases where there is no prospect of enabling or requiring the client to commit resources would the question of IFC/MIGA funds outside the scope of the investment agreement arise.”

In addition, in a report commissioned by the Association of European Development Finance Institutions (EDFI), the authors state that in such situations, IFIs “necessitate both close supervision as well as efforts to identify alternative forms of remediation, including partnership with agencies engaged in policy dialogue on labour market governance”. The IFC should therefore increase its efforts to ensure its client generates remedial action and implements the labour standards as defined in Performance Standard 2.

Back to the leverage and influence that the IFC holds. The increased collaboration between Chinese funders and the World Bank is a trend that started with the memorandum of understanding (MoU) signed between the Export-Import Bank of China (China Exim Bank) and the World Bank in 2007.

At the same time China remains the IFC’s third-largest portfolio country and it has a long tradition of engaging with Chinese financial institutions “on adopting international environmental and social best practices”. Furthermore, in 2020, for the first time ever, the IFC’s Office of the Compliance Advisor Ombudsman (CAO) investigated a Chinese financial institution on alleged violations of its environmental standards. So maybe the IFC still has enough influence to follow the recommendations from the World Bank report, and fully engage to achieve labour standards and workers’ rights at the Karot project.

At the time the lease was signed, Karot Hydro was IFC’s largest hydroelectric power project. It represented its first significant collaboration with the China Exim Bank, the China Development Bank, and the Silk Road Fund. The question is, what will the legacy of the project be: proof that through collaboration with Chinese financiers, the IFC can improve labour standards and workers’ right, or evidence that the IFC is willing to compromise its standards for the sake of investment?