Corrupt and Ineffective Development Investment

Bruce Rich, author of Mortgaging the Earth and Foreclosing the Future, shares his thoughts on the recent acquisition of Ecuadorian Amazon by the Chinese oil firm Andes Petroleum Ecuador, as well as the concept of development investment.  

After some seven decades of mixed results in development assistance, there is a growing consensus that the greatest challenge is governance—in both the recipient and the donor countries. It is not just the matter of poor institutional capacity and weak institutions in poorer countries thwarting the putative good intentions of aid agencies, but also mixed, hypocritical political priorities in both donor governments and recipients, willful negligence linked to perverse incentives in development agencies, as well as outright, pervasive corruption. Unfortunately, as knowledge has accumulated about what has gone wrong, it has had little impact on changing the ‘real-politik’ of development investment. In fact, ‘aid-fatique’ in the richer, older industrialized nations and the rise of newly industrializing states with their own foreign assistance and development finance programs is leading to an even more predatory, corrupt geopolitics of development investment.

In the case of Ecuador, for example, rancorous environmental and social disputes plagued U.S. and Canadian-owned oil and mining investments in the Ecuadorian Amazon for many years. These companies have largely pulled out and Chinese investors have taken their place—with even less experience in dealing with environmental issues and deforestation, and less attention to the interests of local communities than their predecessors. 

Yasuni National Park, Ecuador sits atop a major source of oil. While much of the park itself is off-limits, drilling has recently commenced only miles from one of its borders. Photo Credit: -Matt Hewitt- via Flickr

Of course the obvious conclusion is that developing country governments need to take responsibility for egregious resource and land deals on their territory and negotiate more equitable and environmentally sustainable terms. The problem is that these deals go through BECAUSE the host governments are corrupt, hypocritical, or relatively powerless since in some cases they are on the verge of being failed states. The international aid and lending agencies too often are accomplices of these problems, and the international environmental community too often has been naïve or negligent with respect to these governance issues, with the exception of advocacy groups involved in supporting the fights of local communities against such abuses. There are no easy solutions, but if any progress is to be made one has to confront this reality head on.

The most recent example of how broken governance is undermining progress towards sustainability can be seen in the proliferation of fraudulent climate finance deals, where international institutions and their participating governments have learned little from past failures. A salient example is the United Nations Green Climate Fund, the principal international mechanism to channel finance from richer nations to developing countries for climate change mitigation and adaptation. Parties to the United Nations Framework Convention on Climate Change (UNFCCC) agreed to create the Global Climate Fund (GCF) in 2010, and the GCF operates under, and is accountable to the UNFCCC. It has an Executive Board of twenty-four members representing in equal proportion developing and industrialized nations, and is supposed to mobilize by 2020 $100 billion annually. It approved its first projects just last December.

But the GCF is beset by deep flaws that in recent years have characterized both so-called climate finance and the overall effectiveness of development assistance. Rather than addressing these flaws it is on a path to exemplify them.

The GCF outsources the disbursement and management of its funds through financial institutions and international and national agencies that it approves. Though it has developed criteria for accrediting these agencies and the projects it will support through them, in practice oversight and monitoring is limited, since it will have a small staff, with 55 approved positions—including support staff—so far. To date the GCF has accredited over 20 national and international agencies, whose proven record of effective climate finance and development quality is problematic. For example, the GCF accredited African Finance Corporation, a private-public multilateral investment institution that only adopted an environmental policy last year and has no track record in implementing it.

More troubling was the accreditation last year of the Deutsche Bank as the first purely private sector GCF intermediary. Deutsche Bank is the world’s tenth largest financer of coal projects, and has a record of such poor environmental and human rights performance that it was designated in 2014 with the annual “Black Planet Award” for despoiling the earth by numerous NGOs and the German Foundation for Ethics in Economics. It has been subject to massive criminal investigations and fraud charges in the U.S. and U.K. for conspiracy to rig international interbank interest rates and for systematically lying to regulatory agencies and investigators in several countries—resulting in April 2015 in U.S. and U.K. authorities leveling one of the largest fines in history on a commercial bank, some $2.5 billion. The GCF Board then accredited Deutsche Bank just weeks later, in early July


The GCF has accredited Deutsche Bank as a fund manager and distributor for its projects, despite it being the world's 10th largest financier of coal projects. Photo Credit: gravitat-OFF Via Flickr.

In response, twenty-nine non-governmental development and environmental organizations from GCF member countries declared that the accreditation process involved “no substantial assessment of the track record of the institutions concerned,” casting serious doubts on the GCF’s credibility before a single dollar had been disbursed.

There is also a fundamental, and probably unsolvable, conceptual conundrum at the heart of the GCF’s viability: how climate mitigation and adaptation are defined, measured, and monitored. This issue has plagued the evolving global system of climate finance from the outset. The Organization for Economic Co-operation and Development examined twenty-four major funders of climate finance in 2014—bilateral and multilateral aid agencies, investment funds etc.—and found no coherent common definition of what climate finance actually meant. In December 2014, the UNFCCC—to which the GCF reports—found that the UNFCCC itself “does not have a definition of climate finance.”

The whole concept of climate finance is based on what is known as additionality: scarce new public international financial resources should not be wasted on investments that do not result in additional real reductions in greenhouse gas (GHG) emissions (or additional climate resilience in the case of adaptation) from a Business as Usual scenario, or that would be built anyway without additional funds, or that, in the name of fighting climate change, would actually increase overall GHG emissions. Even apparently plausible methodologies can be easily gamed. This was the experience with the UN Kyoto Protocol Clean Development Mechanism, whereby many hydroelectric, wind and solar projects that were already being built or planned in countries like China and India, were nevertheless approved for subsidization through Clean Development Mechanism (CDM) carbon credits. Worse, under political pressure from major developing nations, the CDM also subsidized new coal fired power plants, under the rationale that the new plants would be more efficient, and emit less CO2, than a less expensive dirtier plant. The CDM contracted private companies to independently verify the ‘environmental integrity’ (additionality) and authenticity of its projects, but at one point the CDM was forced to suspend several of the companies responsible for two thirds of the verifications for fraudulent practices—and then after several months reinstated the same companies.

Lago Agrio, or "bitter lake" in Ecuador showcases the potential disasterous aftermath of what can happen when international corporations and entities use the land for fossil fuel production, and then cut corners during clean up. Not only is fossil fuel bad for climate, but it also carries devastating implications for humans and wildlife in the areas surrounding operations who often do not have the money or the power to take action against fossil fuel giants. Photo Credit: Julien Gomba Via Flickr.

A similar scenario is repeating itself in the GCF. Last year at a GCF Board meeting, China, Saudi Arabia and Japan all opposed a proposal that GCF funds not finance fossil fuel projects, including new coal plants. India was reported to at first object to any GCF climate investment criteria at all, arguing that the recipient countries should receive the money and decide themselves the criteria. Japan’s Foreign Ministry argued that “promotion of high efficiency coal-fired power plants is one of the realistic, pragmatic and effective approaches to cope with the issue of climate change.” Japan has included over $1.6 billion in new coal power plant finance in Indonesia, India and Bangladesh in reporting to the UNFCCC its contributions to climate finance. 

At the latest GCF Board meeting just last month (March 2016), over 170 NGOs from around the world protested the GCF’s accrediting two other scandal-plagued multinational banks, HSBC and Credit Agricole, which were both involved in massive lending of more than $15 billion in recent years for new coal plants. HSBC currently has to regularly report to the U.S. government as part of a settlement of recent criminal prosecution for systematic money laundering on the behalf of Latin American drug cartels, the Russian Mafia, North Korea, Al Qaeda, Hezbollah, and other terrorist organizations. This February, the families of American citizen employees of the State Department and Homeland Security murdered by Mexican narco-cartels brought an unprecedented lawsuit in U.S. Federal court against HSBC for “continuous and systematic material support” of these international criminal organizations. Representatives of the GCF Board claim that they hope to catalyze climate friendly changes in the lending behavior of the two giant banks.

These fundamental flaws are a reflection of the hypocrisy and bad faith of quite a few GCF member countries, both donor and developing. Official rhetoric notwithstanding, both donor and recipient governments are complicit in creating the appearance that the GCF is finally beginning to function, rather than ensuring its real effectiveness in reducing GHG emissions or exercising rigorous due diligence in preventing fraud.