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The U.S. Supreme Court Sent a Wake-up Call to Development Banks. Will They Listen? (World Politics Review)

March 11, 2019

From the article:

The shallow waters of the Gulf of Kutch, an inlet of the Arabian Sea along the northwestern coast of India, are ideal for fishing, with coral reefs and mangrove forests that provide breeding grounds for a diverse array of marine life. On the gulf’s northern coast, near the town of Mundra, the gently sloping seabed and calm tides make it easy to catch local delicacies like prawns, pomfret and a type of lizardfish known colloquially as “Bombay duck.” 

The Waghers, a Muslim minority group, have fished these waters for generations. They maintain permanent inland villages, but from September until May, many Waghers erect temporary settlements along the coast. From there, they venture out to fish in small boats and on foot, and their catch is dried, processed and sold to local traders. “It is their skill with using nets that is believed to give the Waghers their name,” Bangalore-based author Srinath Perur wrote in 2016. It derives, he explained, “from the exclamation wah and gher, meaning ‘well laid out’ or ‘well surrounded’ in Kutchi,” which is widely spoken in that region of Gujarat state. 

In recent decades, this centuries-old way of life has been increasingly threatened by industrial development projects along the coast. These include the Tata Mundra Ultra Mega Power Project, a gigantic, 4,150-megawatt coal-fired power plant that was financed in part with a $450 million loan from the International Finance Corporation, or IFC, an arm of the World Bank. Since reaching full generation capacity in 2013, the Tata Mundra plant has provided power to 16 million people in five states. Unfortunately, it has also created a host of problems for the Waghers, who complain that discharges of hot water from the plant’s outfall channel have altered the nearby marine habitat and reduced fish stocks. The groundwater is no longer fit to drink. Coal dust and ash from the plant sickens the villagers and contaminates fish that have been laid out to dry. “The joy has gone away,” Budha Ismail Jam, a local Wagher fisherman who lives near the plant, told The Nation magazine last year.

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The IFC argued that international development banks should receive absolute immunity based on the IOIA, partly because their activities are inherently commercial, so applying restrictive immunity would subject them to an onslaught of foreign-plaintiff litigation and divert resources from their important missions. That was also the primary concern of eight former secretaries of the treasury and secretaries of state, who filed an amicus brief in support of the IFC. 

But the court found those worries to be exaggerated, noting that in reality, many international organizations, including the United Nations and the International Monetary Fund, specify absolute immunity from any kind of judicial proceedings in their charters. The IFC does not, but the court argued that “it is not clear that the lending activity of all development banks qualifies as commercial activity.” Even if it does, potential plaintiffs must meet other standards laid out in the Foreign Sovereign Immunities Act, including that the activity has a “sufficient nexus to the United States.” Development experts and international legal scholars agree that the IFC’s case was unduly alarmist. “This ruling has opened the door a little bit,” says Vijaya Ramachandran, a senior fellow at the Center for Global Development. But, she adds, “we don’t really know whether this is going to lead to a flood of lawsuits.”

A key indicator for other prospective plaintiffs will be the outcome of the Tata Mundra case, which will now go back to lower courts for further litigation. Whether courts agree that a loan to the Tata Mundra Ultra Mega Power Plant project has “sufficient nexus to the United States” is unclear, but lawyers for Earthrights International, the advocacy group that represented the Indian plaintiffs, believe they have a good chance of success. At least one other case, involving farmers in Honduras who say that an IFC-supported company used death squads to terrorize them and dispossess them of their land, is likely to move forward as a result of last month’s ruling. 

While the legal uncertainties are being worked out, observers like Ramachandran say that the IFC and other lenders should take this case as a wake-up call to completely revamp their accountability mechanisms so that they become binding in similar cases going forward. “That currently doesn’t exist, and I think that is the reason the IFC is in this mess,” she says. In practice, that would mean creating an internal ombudsman that can force project management personnel to take corrective actions instead of merely issuing reports.

A strengthened internal accountability mechanism would provide an easier avenue to redress grievances by adversely affected communities, many of whom do not have the resources to pursue legal action in the U.S. But Ramachandran stresses that it is also in the interest of the IFC, which does not want to be in the position of frequently litigating cases in U.S. courts. “Given this ruling, they are probably thinking about it,” she says. “The organization wants to get this right, so I do think they will undertake some steps to carry out reforms.”

 

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