In the beleaguered field of multilateral development banks, the Inter-American Development Bank (IDB) has one of the stronger reputations among borrowers and the local communities they serve. This summer that reputation took a major blow after the Ituango dam in Colombia’s northern Antioquia province failed, prompting the evacuation of 25,000 people and endangering at least a dozen downstream communities.
— Noticias Caracol (@NCAntioquia) 16 May 2018
While the outrage has largely focused on the IDB, the project was actually financed by IDB Invest – an investment bank legally independent of the IDB but linked to the IDB’s balance sheet – and the China Co-Financing Fund for Latin America and the Caribbean, which IDB Invest administers.
This near-catastrophe shows that it is crucial that the IDB’s safeguards, which are designed to protect communities from the impacts of projects and are generally regarded as strong, are applied to all the bank’s finances. Moreover, financial partners and borrowing countries should always do their own due diligence in case another party doesn’t.
Whereas the IDB traditionally lends to foreign governments, IDB Invest was created to bet on the private sector in Latin America. IDB President Luis Alberto Moreno declared on launching the new office: “If you have a bold idea, talk to us. If you want to push into underserved markets, give us a call. And if you are the kind of company that takes big risks in areas like energy, transportation or agribusiness, then we are the partner you want at your side.”
When finished, Hidroituango will have an installed capacity of 2,400MW, making it Colombia’s first megadam
Unfortunately, rather than raising the level of risk mitigation to match these higher risk projects, it is not clear that IDB Invest adequately applied its parent institution’s safeguards.
The Ituango dam (commonly known as Hidroituango) was to be a showcase for these new partnerships. It was product of a collaboration between the IDB Group, the IDB Invest-administered China Co-Financing Fund for Latin America and the Caribbean, and international commercial banks and institutional investors. By ‘blending’ such a wide array of investors, IDB Invest was able to attract a total of US$1 billion in financing. The project is ambitious. When finished, Hidroituango will have an installed capacity of 2,400MW, making it Colombia’s first megadam.
Hidroituango also carries symbolic importance as a step forward into post-peace deal Colombia. The town of Ituango was an important battleground in the nation’s near 60-year civil war, with the guerrilla group FARC attacking it and later taking it over. In 2016, Ituango was one of 20 sites where FARC fighters gathered to disarm after decades of internal conflict that destroyed much of the country’s infrastructure. Now it is to be the site of the nation’s largest hydroelectric dam, generating electricity for a country moving tentatively towards peace.
However, the dam was not universally accepted. In 2013, the FARC and another leftwing guerrilla group the National Liberation Army (ELN), signed a joint agreement committing to oppose the project. The plans called for the compensation of 474 displaced households through a “restitution of living standards” scheme. As required by the existing safeguards of the Inter-American Investment Corporation (IIC, which was the first iteration of IDB Invest), the contractor Empresas Públicas de Medellín (EPM) held community consultations in affected communities, though only a minority of those affected participated.
Since the dam collapse, community members in eight of the 12 affected towns have filed an official complaint through the Independent Consultation and Investigation Mechanism (ICIM) that serves both the IDB and IDB Invest, alleging two major deficiencies in the dam’s plans.
Firstly, they claim that the environmental impact assessment (EIA) for the project was not subjected to sufficient public consultation and, secondly, that it lacked the required cumulative-impact approach, which considers the incremental effects of past, present and forseeable future actions. This might have signaled the cascading effects of natural or man-made disaster risks on the stability of the dam and alerted to the dangers posed to the environment and to communities living downriver.
The disaster has revealed important details about which safeguards are applicable to IDB Invest’s project and who enforces them. The IDB Invest states that it follows the IDB safeguards but that it does so at its own discretion and with its own team. The issue is whether the IDB Invest safeguard team adequately applied them.
It is crucial for the ICIM investigation to determine whether the IDB Invest team adequately adhered to disaster risk management analysis and if IDB Invest continued to provide technical oversight and support throughout the process. If this were a fully-fledged IDB project, the IDB safeguards unit would have had a detailed disaster risk rating and management plan that included oversight and support throughout.
In this case, disaster was averted because of the IIC/ IDB Invest safeguards that were met: IDB Invest did adequately apply a contingency plan specifying disaster warning and evacuation systems that were carried out swiftly. The Colombian government also played an important role in avoiding loss of life, through executing its own contingency plan.
This Hidroituango case highlights two important lessons. First, if the IDB wants to protect its reputation and its borrowers then it should require entities with links the IDB—such as IDB Invest and its joint fund with China —to apply the same standards as it does itself. By applying due diligence and technical oversight throughout a project, development banks are supposed go beyond other financiers and ensure the quality of a project.
Second, given that accidents can happen with mega-dams no matter how high standards are, each actor in jointly financed project needs to do their own due diligence. As the investors in the Ituango dam have learned, passing the buck to other parties can be costly in terms of local livelihoods, delivering a project on time, the environment, and the reputation of the IDB and its offshoots.
A recent study on development banks in the Andean Amazon by Boston University’s Global Development Policy Center recommends ‘mutually reinforcing’ environmental and social risk management systems. These aim to provide each partner involved in a project with more complete information on a project’s risks and rewards. This is not always clear since parties in co-financed projects often have a different rationale for being part of a project and its risk profile will be different.
Development banks are right to encourage their Chinese counterparts and the private sector to meet the mammoth energy and infrastructure gaps across the world because infrastructure can bring multiple benefits. But they also bring new risks. If those risks are not properly anticipated and mitigated against, they can outweigh the benefits.