Birds of a Feather Flock Together

This chapter is about relationships, relationships between actors in the game of project finance. In the advocacy world, it’s common to hear of grand conspiracy theories about how big business and big politics pulls the economic and political strings shaping the world around us in ways that are not always favorable to the most vulnerable, to the poor or to the most needy.

Those that tend to think of themselves as more centrist, less extremist, shrug off such extreme “conspiracy” theories, as too far fetched or to exaggerated. I considered myself one of those people before this case.

Perhaps the most remarkable discovery we made during our advocacy in the pulp mill case has to do with just how interconnected corporate and financial actors are in the decisions that shape private and public sector development.

Most of us presume that global financial actors are somehow part of a large corporate machinery that works collectively to take important financial and investment decisions. We infer this from our common understanding (sometimes this may take the form of intangible but very present clichés positing ideologies like capitalism vs. socialisms, etc.) of how the world operates. What is perhaps chilling is just how right this presumption can be. In our case, we stumbled by chance upon the nuts and bolts and the tangible aspect of this interconnectedness.

CEDHA filed more than a dozen complaints in as many forums around the world in this case, ranging from a complaint to the Compliance Advisory Ombudsman (CAO) of the International Finance Corporation’s (IFC), to National Contact Points in various countries monitoring corporate compliance of the OECD Guidelines for Multinational Enterprise, to National courts, before private financial institutions for violations of the Equator Principles, and at the International Court of Justice (filed by the government of Argentina).

What we witnessed as these various complaints began to go through their due diligence processes, was the very close communication maintained and the overlapping roles the specific persons played in one, two or more of the forums. For instance, Export Credit Agency staff of one country communicated permanently with Export Credit Agency staff of another country[1] on the same case (despite the fact that they were each financing different companies). These in turn communicated closely with staff of IFC (of the World Bank) which was the lead finance institution laying out the social and environmental due diligence framework. We noticed the same relationship between private banks such as Nordea, Calyon, and ING also in some cases with IFC and with Export Credit Agencies.

Another observation which was actually quite remarkable, was the importance that private financial institutions like Nordea, BBVA, ING and Calyon assigned to the decision of IFC to go forward with the a planned loan to the two companies in question, Botnia and ENCE. We made some remarkable discoveries following our interception of confidential information between the Spanish Export Credit Agency (CESCE) and Finnvera the Finnish Export Credit Agency, for examples, which revealed just how ignorant each was about the facts and implications of the case. The reliance on IFC to make the decision to finance or not to finance, was absolute.

The private financial sector was not all that much more savvy. In fact, we found that several large financial actors which portray seriousness and professionalism in their work, which have entire environmental departments, and highly paid international lawyers, were simply clueless about what was actually going on on the ground with the projects they expected to investment multimillion dollar sums into.

It was clear, that despite their appearance, these rather large financial institutions simply do not have the capacity nor effective due diligence mechanisms to determine for themselves, whether or not the projects they finance actually comply with the social and environmental norms which the banks would like them to comply with (or which they commit to ensuring such as under a safeguard framework such as the Equator Principles).

At first, we sensed that the reluctance of banks like Nordea to provide information to us and to the community on how they ensured that the company they were financing (Botnia in this case) was complying with basic social and environmental safeguards, was because they did not want to share information based on what they held were their obligations of corporate secrecy which might place the company at a disadvantage. As our case progressed however, and as we observed Nordea’s relationship with the IFC, and as we maintained discussions with Nordea’s team of lawyers and of CSR staff, we came to realize that in fact, Nordea simply did not know very much at all about their clients capacity to comply, nor could they measure their clients (or their own) actual compliance of the principles to which Nordea insisted that the client comply, for example, the Equator Principles or the IFC Safeguards.

This evaluation may seem surprising, but in fact, it is not so unreasonable to assume that a large financial institution like Nordea is simply not able to have the on-the-ground knowledge of what is going on socially and environmentally in a large multi-million dollar corporate investment like UPM’s Botnia mill Uruguay.

Nordea, ING, Calyon, ICO, CESCE, and Finnvera, all more or less blindly watched and waited for IFC to make a determination on their own decision to finance.


This chapter looks at the structures that often determine how development finance comes together, how the various actors coalesce to formulate an investment project and then how these actors maintain links, channels of communication and collaborate throughout the design and implementation of the project. Understanding this relationship is critical to understanding the political and economic dynamics that make projects viable and thrive.

Part of this analysis is taken from a paper we prepared for New York University in a seminar held in Buenos Aires at the Universidad de San Andres in March of 2007, at the height of our Pulp Mill Case advocacy.

Extracts of this material have been adapted for the purpose of the present publication.

The Structures of International Development Finance

International Development Finance (IDF)[2] for the development of large scale public or private industry (such as extractive industries, petrochemicals, pulp and paper mills, telecommunications, etc.) or public works and services such as dams, roads, sanitation infrastructure, gas lines, ports, energy plants, etc, is generally framed in what tend to be similar normative investment  frameworks.

IDF investments generally have similar normative regulations (national and international) governing them, and are generally promoted and guided by a similar and repeating set of financial and intergovernmental actors that are more interrelated and interdependent than what may often appear.

These actors include for example, the International Financial Institutions (IFIs) such as the International Finance Corporation (IFC) of the World Bank Group (WBG), or regional development banks such as the Inter-American Development Bank (IADB) or the Asian Development Bank (ADB), international guarantee agencies such as the Multilateral Investment Guarantee Agency (MIGA) also of the WBG, Export Credit Agencies (ECAs) which generally are state-owned agencies offering direct investment or guarantees to private companies of the same nationality, large private banks (multinational or national banks of industrialized countries), and sometimes counterpart local banks. As we’ve mentioned earlier, the Botnia and ENCE investments were designed with many such actors participating, including the like of: The World Bank (through IFC and MIGA), ING (which later pulled out), Finnvera (the Finnish ECA), CESCE and ICO (Spanish ECAs), Calyon and Nordea (private banks that replaced ING) and several other smaller banks which we will not name here.

In terms of the regulatory frameworks, governance structures and the economic and political “drivers” which make such IDF viable and sustainable in what may sometimes be volatile social (or economically risky), economic investment environments, we find that IDF responds to what are largely unequal and unbalanced legal and regulatory governance systems, and generally tend to favor investment security over the protection of social and environmental (and human rights) interests, creating a worrying backdrop to IDF which fails to properly secure responsible and sustainable development and protections for local communities bearing disproportionate burdens of the negative impacts of IDF. This is compounded by the fact that the consideration of human rights or social impacts that might derive from an investment are generally handled once much of the financial and operational construct is in place. In this context, the effective consideration and much less “realization” of human rights is limited, and dependent on external variables which do not necessary prioritize a human rights framework, certainly not above financial or economic considerations.

National law, international law, investment agreements (contract law between a company and a host government which are commonly referred to as Host Government Agreements – or HGAs and which generally remain secret), performance standards of IFIs such as the IFC’s Social and Environmental Performance Standards or the IFC’s Disclosure Policy, or international corporate principles and guidelines (such as the OECD Guidelines for Multinational Enterprises, or the Equator Principles), offer important and critical normative frameworks for channeling IDF, and many of these are designed with the intention of either insulating companies and investors from potential social or political downfalls or making investments appear more socially and environmentally responsible.

The degree to which companies actually comply with voluntary codes, for example, is generally deemed low, while the public profile of such commitments can serve to improve corporate image.

Meanwhile, developing countries are generally in great need of Foreign Direct Investment (FDI) which can represent significant portion of national budgets (Botnia’s pulp mill alone represented some 2% of Uruguy’s GDP), and as such, developing country States are willing to modify legislation, and cede national sovereignty to corporate interests, compromising social and environmental protection to secure FDI.  Such was the case with Uruguay, who provided numerous financial benefits and legal conditions to Botnia in order to attract the pulp mill investment.

IDF projects are generally (due to their international nature) governed by norms, laws and regulations which can be categorized as: a) Safeguard Policies or Guidelines established by inter-governmental financial institutions like the IFC, EIB, IADB, or MIGA; b) state norms and regulations as established for ECAs; c) international law; d) a series of voluntary codes or guidelines and commitments as established by private and public financial institutions.

The degree to which these IFI forums will offer (or not) effective entitlement of rights and the mechanisms by which to ensure that the actors involved comply with their due diligence to deliver those entitlements varies widely. Most of the more well known IFIs, sucha s the World Bank agencies (IBRD, IFC, MIGA), or some of the regional development banks (IADB, ADB, EIB, etc.), offer some set of social and/or environmental norms (commonly referred to a safeguard) and a corresponding framework to consider due diligence issues of the projects they finance. Those framework and systems might or might not contain access to justice mechanisms or procedures for complainants to bring concerns and may or may not offer procedural guarantees that claims will be heard.

A Typical Investment Project

As we examine large scale IDF we see a pattern repeated in most investment schemes. The patterns repeat in terms of regulatory framework, financial components and actors and their interrelation. (see graph showing financing breakdown of Botnia pulp mill project).

These actors can be generically summarized as:

  • A Large Multinational Company
  • A public International Finance Institution (such as the International Finance Corporation of the World Bank, or a regional bank such as the Inter-American Development Bank – IADB, or the European Investment Bank – EIB)
  • One or several large or multinational private (or public) banks (which act as direct investors or financial arrangers)
  • Several smaller banks
  • An Export Credit Agency (such as OPIC)
  • A Guarantee Agency (such as MIGA)

The project sponsor (the company who owns or carries out the project) generally seeks financial alliances with the above mentioned actors to provide needed investment funds and also to spread risk amongst financial institutions and insulate the investment from possible externalities.

A large investment such as the Botnia pulp mill projected on the Uruguay-Argentine border, for example originally involved nearly US$1.2 billion dollars of investments spread out amongst:


IFC                  170 million

MIGA              370 million

ING Group      480 million

Finnvera          unknown[3]

Other Source    unknown


This breakdown is a reflective of a common financial structure of a publicly supported private sector IDF project.

What should be noted about this construct is the relative interdependence that the IDF project has on the fluid and complimentary relationship of the construct and relations between the actors.

The project sponsor generally needs investment capital, and begins by seeking support from an IFI such as the IFC for example. The IFC provides loans that may be at privileged market rates but it also provides, more importantly, a degree of legitimacy and security for investors (particularly other banks), lending credibility to the company and to the IDF project it is proposing. We must remember that IDF often occurs in politically or economically unstable developing countries which tend to deter Foreign Direct Investment (FDI) or generate unmanageable (or very costly) risk implications.

The project sponsor or company then seeks private financial bank support, which will in turn look to IFC approval of the IDF. Two additional pieces to the puzzle that are crucial to the investment scheme, are public state support from the home country of the company  (generally provided through what is called an Export Credit Agency or ECA), and support from  a multilateral guarantee scheme, such as MIGA (an agency of the WBG).

In the case of Botnia, the main banks involved were IFC, MIGA, ING (pulled out), Finnvera, Calyon, Nordea and the Nordic Investment Bank.

ENCE sought support from IFC, MIGA, BBVA, CESCE and ICO.

Together these actors provide a tightly woven investment fabric and platform, lending strength, legitimacy and security to the investment project. It is critical to understand that these actors and pieces to the IDF construct work in collaboration, complimentarily and in interdependence with one-another. Any missing piece or (and even more so) a piece that collapses in the IDF construction phase or even in the implementation of the project, risks derailing the investment security and in turn risks collapsing the project itself or greatly increasing the cost of borrowed money. The financial actors look to one-another to provide project security and confidence.

Some mention is worthy of the role played by the IFC in this process, as the IFC has not only helped evolve IDF globally, but it also provides key technical capacity (which other banks simply do not have) to the project sponsor and to other financial institutions (private and public) in the assessment of whether a project is economically, socially and environmentally sound.

It is essentially, the IFC, and its understanding of what is a good project from an environmental and social standpoint, that determines that projects rating relative to its’ impact. When we begin to look at the potential stakeholder and community rights implicated in the IDF project, it is IFC’s environmental and social policy, that sets the policy standard which in turn sets the basis for a rights compliance (or non-compliance, as the case may be).

The IFC does not establish its policy in relation to compliance with human rights, although it mentions a general recognition of the importance of human rights in its new policy safeguards. This is evidently a disconnect, or at very best, a “leap of faith”,  at this stage between the IFI’s policy framework and any given human rights framework (international or otherwise). The former is geared to ensuring social and environmental protection, but is not grounded in binding normative legal process.

In the Botnia pulp mill case, which is an example that can be almost generically applied, the associated financial institutions, including important State agencies like Finnvera (the Finnish Export Credit Agency) as well as large international banks such as Calyon, Nordea, or the Nordic Investment Bank, generally have little (or no) capacity to conduct a trustworthy social and environmental analysis as to project compliance and social and environmental sustainability.

These other financial actors look to the IFC for guidance and evaluation relative to environmental and social impacts. Given that IFC does not ground its policy or directly link it to human rights compliance, we can only conclude that secondary financial actors like a large private bank, or an Export Credit Agency, have even less potential to ensure that their investments are backed by stakeholder and community human rights guarantees.

This becomes an important factor for local stakeholders and their need to protect rights and entitlements, since the agencies that are impacting or making IDF viable to occur in their communities (which often times make commitments to local stakeholders of rights and guarantees), do not have the capacity to determine that their rights and entitlements can be effectively guaranteed in IDF projects.

In the Botnia pulp mill project, for example, we have seen clear evidence of this limitation, with banks such as, Nordea and Calyon, and BBVA (in the ENCE project), with very little or no reliable information relative to rights guarantees. Even the IFC’s ombudsman (the World Bank’s own audit agency) condemning audit against the investments relative to IFC environmental and social policy compliance, was unable to convince the financial banks that IFC conclusions about the project were erred.

This inconsistency and weakness in the IDF normative construct, presents an important risk to upholding stakeholder rights, since the privileged financial relations and interdependence of financial actors, takes clear precedent over the relationship of the FDI project with local stakeholders and their respective rights.

The last piece of the IDF construct that a company will almost always secure before entering into an investment operation, and which will provide a critical legal foundation to the investment, is the host government agreement (HGA). More will be said later about HGAs but it will suffice to say here that HGAs are a fundamental piece respective to company, host government rights, sovereignty issues, and stakeholder rights as they set out the legal conditions, entitlements and limitations under which, companies, host governments and stakeholders can aspire. It will also be important to examine the complaint resolution forums for HGA conflicts, which generally defers to ICSID, a World Bank ad hoc tribunal that handles conflicts arising from host government-company disputes.

Host Government Agreements

Hear No Evil, See No Evil, Speak No Evil

Because most multinational companies and their investors are unnerved by potential political, social or economic unrest when investing abroad, companies generally sign what are called host government agreements (HGAs), with a view to lay out clear rules of engagement for each party. These act like laws within laws, or even laws above laws, especially tailored for foreign enterprises, which govern their relationship with the country while they produce.

Surprisingly, many HGAs remain secret to the general public, and in some cases, even to legislatures, hiding away financial benefits and other legal exceptions bestowed by the Executive Power on foreign multinational. It’s the price of doing business with big business, we’re told. The principle concern most advocacy groups have over HGAs is that we simply don’t know what has been granted the foreign investor, and in some cases, this can mean immunity from the common social and environmental responsibilities assigned to national companies. Some are concerned for instance, that the demands placed by companies and granted by States can undermine human rights obligations of governments.

An example of a known case is Argentina’s decision not to abide by an HGA signed with a French water company Suez, when the Argentine peso was drastically devalued. The HGA promised Suez that it could maintain water prices in dollar value. The peso devaluation would have effectively suddenly raised the price of water 300%. Argentina argued at ICSID, in the international court which took up the case, that abiding by its’ HGA would have led the country to commit human rights violations of the poorest communities at a time of intense social and economic strife.

While foreign multinationals will argue that HGAs are merely commercial contracts and do not violate stakeholder rights, they generally place stakeholders at a disadvantage, as generally States will tend to try to guarantee the corporations rights as established by the HGA above and beyond the rights of stakeholders that might be affected by the investment project.

HGAs are each tailored and designed by the negotiations of interested actors. As such, one would presume that each actor (corporation and State) would negotiate to protect their respective interest. However, practice shows that HGAs look pretty much alike, and generally are designed to protect investment interests, not community stakeholder interests. Companies have learned what format, which clauses, and what specific wording to put into HGAs to best protect their investments. Conversely, States have generally approached HGAs with a willingness to facilitate and open the road for much needed FDI. As such, States, when they negotiate HGAs are generally not thinking about community stakeholders or wording in such agreements to protect stakeholders. Furthermore, conflict resolutions panels generally established under HGAs such as the International Center for the Settlement of Investment Disputes (ICSID), only look at contract/commercial rights established by HGAs and do not have jurisdiction to examine human rights implications of host government decisions to respect company HGAs.

Finally community Stakeholders, are not consulted in the negotiations process of drafting and ratifying an HGA, which necessarily implies that there concerns have little or no weight in the final wording of HGAs.

Disputes over HGA compliance are generally handled by the International Center for the Settlement of Investment Disputes (ICSID), an adhoc panel that was born as a globally accepted gentlemen’s agreement to have the World Bank President intervene to resolve commercial disputes between countries and corporations. Since its creation, cases became so frequent, and the Bank’s President’s capacity to resolve them so overwhelming that a formal team of lawyers (which coincidently are the World Bank’s own legal team), that the ICSID was formally established and operates to this date, in the World Bank’s headquarters in Washington DC. Many have criticized the partial nature of ICSID, as in many disputes, one of the agencies of the World Bank Group is co-financier of the investment.

Some of the critical points to consider in the general characteristics of HGAs are:

  • The prominence and priority assigned to HGAs, in the national legal framework, over national legislation;
  • The large imbalance of power that may exist between the company (which brings large investments) and the host government (local or national) and the subsequent influence that the company exerts on the three branches of government (legislative, judicial, or executive); this can lead to lack of willingness of prosecution;
  • Stabilization clauses in HGAs which limit company liability and place host governments (and stakeholders) at a disadvantage to protect community rights over commercial rights;
  • The lack of stakeholder knowledge about HGA stipulations or even of rights vis a vis corporate impacts;
  • The lack of recourse to local stakeholders under HGAs;
  • The inability or unwillingness of HGA conflict resolution mechanisms (like ICSID) to consider human rights or environmental law obligations in contract disputes between host governments and companies);

HGAs are clearly and generally not designed to protect stakeholder rights, and more so, often work against the protection of such rights. One area which should be advanced in the evolution of HGAs is to look at the implications for stakeholders of stabilization clauses, the incorporation of human rights language into HGAs (possibly wording exempting host governments from abiding with contracts when these place human rights at risk), or also looking at resolution panel jurisdiction in terms of human rights compliance implications of upholding HGAs and corporate interests over stakeholder interests.


Only a few decades ago, large multinational corporations operated in an arena largely void of discussion, consideration or even awareness over the impacts of large scale investments on the environment and much less on human rights or community health or livelihoods. The first considerations arrived relative to environmental protection and labor standards. Slowly this has progressed into a broader realm of human rights and other social norms and conduct. This is a healthy evolution and advancement is being made, in if today we are still far from achieving a common understanding and agreement that corporations are a subject of international human rights law, that they are bound by international human rights, and that they are as accountable as signatory states. As we advance as a society, and as more and more actors come to such an understanding, as in all other evolution of law, law will follow custom, and we will attain this status.

[1] In particular, FINNVERA of Finland with CESCE and/or ICO of Spain.

[2] International Development Finance can be loosely defined in this paper as investments from the private or public sector in large scale industry in amounts ranging from hundreds of millions of even billions of US dollars.

[3] No financial data is publicly available to determine Finnvera participation as is estimated here at 8% diving the remaining un-quantified 16% as 50% Finnvera and 50% other.