IIn 2014, IFC disclosed a $100 million equity investment in Bilt Paper B.V., a company incorporated in the Netherlands. Bilt Paper owns subsidiaries that are leading pulp and paper manufacturers in India and Malaysia. Bilt Paper is a subsidiary of Ballarpur Industries Limited (BILT), which is headquartered in India and is also a previous IFC investee company. IFC also disclosed a $50 million direct loan and $100 million in syndicated loans in addition to its equity investment. Part of the investment proceeds were potentially to be directed to Sabah Forest Industries (SFI), whose operations are located in the Sabah state of Malaysia.

In June 2015, Building and Woodworkers International (BWI) union, filed a complaint on behalf of the Sabah Timber Industry Employees Union (STIEU), a BWI affiliate in Sabah, Malaysia. The complaint raises concerns about freedom of association for the workers of SFI and project compliance with IFC’s Performance Standard on Labor (PS2). 

The CAO found the complaint eligible for assessment in June 2015. Following discussions with the parties and the preference for compliance expressed by one of the parties, the case proceeded to CAO’s compliance function for appraisal of IFC’s due diligence of the project in accordance with CAO’s Operational Guidelines.

On April 13, 2018, CAO completed its compliance investigation for the Bilt Paper-02 complaint. As the complainants’ concerns relate to unionization of workers, the applicable PS2 requirements include: a) not to discourage workers from forming or joining organizations of their choosing and (b) to refrain from attempts to influence and control workers’ organizations. CAO finds that, prior to approval of the project, IFC did not correctly apply these requirements to SFI. Hence, IFC’s pre-investment review and mitigation of risks associated with the union recognition issue were insufficient to provide assurance of PS2 compliance.

Following approval of the project in 2014, CAO finds that IFC did not discharge its supervision duty in relation to the Freedom of Association issues raised in the complaint. During the initial stages of supervision (2014/15), IFC did not conduct the analysis necessary to determine SFI’s compliance with PS2. Between 2015/16, IFC suspended supervision at the client’s request. Thereafter, CAO finds that IFC did not exercise remedies in relation its client that it acknowledged was in breach of PS2, and was unwilling to accept IFC advice on the issue. CAO concludes that shortcomings in IFC’s review and supervision of this project have contributed to adverse outcomes for the complainants.

In its response to the compliance investigation, IFC determined that there was little scope under the circumstances for further IFC intervention, given the expected imminent sale of SFI’s assets already finalized under a court receivership. Once the sale went through, IFC noted that neither it nor Bilt Paper would have any direct contractual relationship with SFI or leverage to effect further progress. IFC committed that it would, in any case, engage with the new owner to explain IFC’s E&S due diligence findings and, to the extent relevant, mitigation measures associated with achieving PS2 compliance.
In May 2018, the sale of SFI to a private Malaysian-owned company, Pelangi Prestasi Sdn Bhd (PPSB), was confirmed by the Chief Minister of Sabah. However, as of the date of CAO’s case closure, the sale had not been completed and IFC’s investment in Bilt Paper remained active.

CAO released a monitoring report in June 2020. CAO finds that IFC’s response to the compliance investigation at the level of the project is Unsatisfactory, as IFC has taken no actions that address CAO’s findings in relation to the project. In explaining the decision not to take up the findings with its client, IFC noted its lack of leverage and standing to engage with the receiver of SFI or with the new owner. IFC noted that the sale of SFI has not been completed as authorities did not agree to transfer the relevant forestry licenses from SFI to the new buyer. IFC noted that SFI operations have been shut down during this period. IFC also did not report engaging with the proposed buyer of SFI.

CAO finds that IFC’s response at the level of its policies, procedures, practice and knowledge, is Partially  Unsatisfactory. While IFC’s attention to contextual risk screening in particular has developed significantly in the period since the Bilt investment, other potentially systemic aspects of CAO’s findings have not been addressed.
Nevertheless, CAO has decided to close its monitoring of the investigation considering that the client no longer has managerial oversight or control of SFI. Matters relating to IFC’s supervision of client compliance with PS2 freedom of association commitments may be addressed through CAO’s ongoing Advisory mandate.

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