Skip to main content

How the World Bank Can Stop Funding Disaster

Now that the Supreme Court has ruled the World Bank can be sued, what’s next for the organization?

Published in: The Nation
Fishing boats in Kutadi Bandar, with village huts and the Tata Mundra coal power plant in the close background.  © Komala Ramachandra, 2012

Until recently the World Bank enjoyed absolute immunity in the United States from lawsuits. But a US Supreme Court decision on February 27 opens the door for individuals and communities around the world to approach US courts about harm caused by its investments.

The case, Jam v. IFC, involved the World Bank Group’s private-sector banking arm, the International Finance Corporation, and it wound through US courts after farming and fishing communities in India sued the IFC for funding the Tata Mundra coal-fired power plant in the Kutch district of Gujarat. The plaintiffs said the power plant harmed their environment and livelihoods. They sued for compensation in US courts because the IFC, which has its headquarters in Washington, provided a $450 million loan for the construction of the plant.

Lower courts dismissed the lawsuit, saying the IFC had absolute immunity under the International Organizations Immunities Act, which gives international organizations like the World Bank the same immunity from lawsuits as foreign governments and diplomats. But since that law passed in 1945, the United States has carved out several exceptions to foreign-government immunity, including for commercial activities, through the 1976 Foreign Sovereign Immunities Act. The Supreme Court decided the reference to foreign-government immunity was to “an external body of potentially evolving law,” and therefore the same exceptions to immunity should apply to the IFC. The plaintiffs will now return to the lower courts to pursue their case against the IFC.

This major ruling from the highest court in the United States speaks volumes about the lengths that communities harmed by the IFC have had to go in pursuing justice. US courts were not the first avenue the plaintiffs in the India case had tried. They first lodged their complaints with the Compliance Advisor Ombudsman (CAO), IFC’s independent accountability office, alleging that the IFC did not follow its own social and environmental standards.

An audit by the CAO found numerous shortcomings in the project, including failures to consult with local communities and to conduct adequate environmental assessments. However, neither the IFC nor the World Bank’s president and board, who also oversee the IFC, sufficiently addressed those issues or attempted to provide a remedy. When the IFC’s own accountability process failed them, the communities turned to the courts for justice.

Unfortunately, this case is not unique. For years, the CAO and the Inspection Panel, its accountability counterpart for public-sector lending, have responded to community complaints and identified instances of noncompliance and harm caused by IFC and World Bank funding. And often the bank’s management has ignored these findings and has not done anything to correct the problem.

Workers on cotton farms in Uzbekistan and tea plantations in India are still waiting for compensation or other actions to address abuses they suffered, despite commitments at the highest levels of the IFC and World Bank. And so are farmers in the Aguan Valley in Honduras, where they say another IFC-funded company is behind a series of murders. Notably, there is a second pending lawsuit against the IFC in this case in the Delaware District Court.

The World Bank’s lack of respect for its own accountability system has led to this situation. The World Bank is reviewing the operations of the Inspection Panel and a review of the CAO is coming soon. The bank should take this opportunity to strengthen its accountability systems, including the way it responds to these offices. The bank should renew its commitments to the independence of its accountability systems, ensuring sufficient funding and resources to carry out their work.

Only time will tell how the Supreme Court’s ruling on IFC’s immunity will influence its behavior. To stay out of courts, the IFC will need to prevent abuses and limit those harmed by its investments. Rather than ignoring the findings of the Inspection Panel or CAO, the World Bank and IFC should respond to them, not merely on paper, but in concrete and measurable action plans, developed in consultation with the affected individuals and communities. The accountability offices then should monitor and report on progress toward these goals, making sure that that problems are actually addressed and resolved. It should also establish a remedy fund—resources set aside to provide compensation and remediation or take other necessary steps to make communities whole. Doing this will help make sure that when communities are harmed by its projects, they are not only heard but helped. The World Bank and IFC should also create robust systems to learn from every case and incorporate changes into their operations to avoid repeating their mistakes.

The World Bank is approaching elections for its new president later this month. The Supreme Court’s ruling provides an important moment to prioritize respect for environment and human rights and bolster accountability across the bank’s operations.

The countries that make up the World Bank and sit on its board of directors should demand a firm commitment to accountability and concrete answers on how the new leadership plans to achieve inclusive and rights-respecting development. Without stronger leadership in these areas, the World Bank and the IFC risk losing their relevance and authority in the fight to end global poverty.

Your tax deductible gift can help stop human rights violations and save lives around the world.