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An internal report sent to the World Bank's board of directors earlier this year was one of the first indications of a sea change. In it, the Bank's operations evaluation department (OED) used the word "corruption" for the first time ever, citing two projects the Sixth Highway Project in Haiti and the Natural Gas Technical Assistance Project in Nigeria. These projects, it explained in its April report, were "among many" which were "severely hampered by lack of transparency, spurious accounting practices, and non-compliance with Bank procurement rules".
If that wasn't enough of a blow, a June memo from Bank president James Wolfensohn announced that henceforth there would be spot audits of countries' programmes apparently sending shock-waves throughout the institution. Wolfensohn had learned during his first year of office that thousands of projects and billions of dollars have slipped through the Bank's oversight procedures. Accordingly, he made the unprecedented decision to do surprise audits on projects in the Bank's major borrowing countries. First on the list are Poland, Kenya and Pakistan.
"We want to put the fear of God in them," says Raghavan Srinivasan, the Bank's chief procurement adviser.
In the past, the World Bank preferred to refer to corruption somewhat obliquely as "misgovernance". Now Wolfensohn is making it a public issue. Bank officials say he has been listening to the critics and reading the news. For when a big borrower and US neighbour like Mexico is riddled with corruption, they note, the subject becomes too big to ignore. The pressure has come from a variety of quarters, including non-governmental organizations (NGOs) such as the Berlin-based anti-corruption lobby group Transparency International (TI) and corporate officials, notably General Electric's Fritz Heimann, who heads TI in the US. Even former World Bank president Robert McNamara has hopped on the bandwagon, suggesting that top corporate executives be asked to sign a public statement they will not engage in corrupt practices. The Bank's board of directors declined to endorse that proposal.
The recognition of corruption as an issue of development is "deepening in the Bank", says Mike Stevens, the public sector management adviser who is the point-person in the Bank on governance. The five files labelled "corruption" on his bookshelves attest to the growing consideration the Bank is giving the topic. When governments perform poorly, he explains, "corruption is often part of the pathology." He notes that the Bank's method of dispersing loans to recipient countries, which then are in charge of managing the procurement process, "is inherently a higher-risk way of doing it than if you control it yourself", There are "tens of thousands of individual contracts being let across the world, and there's no way Bank staff can check on every one of them", he says.
An ulterior motive for the World Bank's unprecedented attack on corruption is to help snap the world out of what one Bank official calls "aid fatigue". Last year, public flows to the developing world were down 9%, to $72 billion, with the US cutting its aid by a third and big donor countries like Germany, France and the UK slicing aid budgets by 4% to 6%.
In today's post-Cold War environment, where aid appears to have lost much of its political imperative, such disbursements are under increased scrutiny. As one measure of extreme protest, the US has decided not to contribute to the 1997-99 funding of the International Development Agency (IDA), the World Bank programme for assistance to the poorest countries, chiefly in Africa, arguing that the assistance has only lined the pockets of the African ruling elite. For in spite of tens of billions of dollars and decades worth of aid, World Bank officials admit, corruption has been rampant in Africa at the same time as many of these countries' economies have virtually collapsed. "There's nothing to show for that aid at all," says Frank Vogl, a former World Bank executive who is now vice-chairman of Transparency International. Some $30 billion of that aid has ended up in Swiss bank accounts, TI has claimed, quoting Swiss banking sources. "It was used as part of the Cold War game of winning friends," says Vogl.
Corruption on the increase
The World Bank is not the only institution trying to improve the value of aid dollars. At the bilateral level, industrialized countries are looking critically at another issue: tied aid the practice of granting aid with the proviso that the proceeds must be used to buy goods and services of the donor's country. "It all comes down to value for money," says a member of the Development Assistance Committee of the OECD, which is in the process of reviewing tied aid (see box page 50). Tied aid and corrupt practices can both be costly for developing countries and often for donors as well. At a time of constrained aid budgets, cost-effectiveness is a top concern. However, highlighting abuses could be used as another excuse for donors to pull out altogether, fears Robert Picciotto, who heads the OED, the Bank's independent review agency.
But the facts cannot be ignored. In the OED's most recent internal evaluations report, it judges that only two-thirds of ongoing projects are "satisfactory", down from 90% of disbursements in 1980, but up slightly from the nadir of 63% in 1992. Karl Ziegler, a former commercial banker in Kenya and now a consultant, notes that at the time the World Bank's loan book was ballooning, the number of staff to supervise them was drastically reduced: "Many projects were under water from day one."
At least part of the cause has been traced to what World Bank officials agree is an upsurge in corruption tainting virtually every country in the developing world (not to mention a few of the industrialized countries). "Corruption has been going up geometrically over the past 10 years," says Srinivasan, who argues simply that "economic development brings more money into play". The OED noted recently that project performance "tends to be less satisfactory in countries where the implementation environment is negatively affected by corruption".
In recent years, the Bank radically switched direction away from mammoth infrastructure projects to such social concerns as education and health and technical assistance. In large part, the change was designed to meet the growing criticisms of environmentalists and advocates for the poor. It was combined with efforts to steer private investment into big project co-financings. That has meant, ironically, that the World Bank's ability to monitor the projects big and small to which it has lent its name has been vastly reduced, possibly opening the door to even more corruption than before.
Previously a handful of heavily-scrutinized giant public works projects dominated World Bank lending. Even in its heyday during the 1980s, structural adjustment lending (itself a reputed source of corruption) garnered only 25% of the money. But now the big contracts comprise just two-thirds, or about $15 billion a year, of Bank disbursements, or 40,000 contracts. The Wappenhansreport of three years ago, named after the board member who headed an internal study, indicated there was virtually no review of these operations, once begun. However, all contracts with a value above $25 million were approved and reviewed by a high-level World Bank committee chaired by the head of procurement before being granted. Moreover, as the Wappenhans report revealed and Wolfensohn learned upon joining the Bank last year, a host of smaller contracts, from consulting to technical assistance to public health and education, along with the new financial tools such as the partial risk guarantees, are entirely ignored by the system of oversight that had been in place since the late 1980s.
"Fifteen years ago [this area] was small money," says Srinivasan. "Now it's the big thing. And it's all disbursed locally; all the papers are kept there and we don't monitor it." These smaller contracts now account for $7 billion in World Bank money a year, or 30,000 contracts. The $2 billion of that which goes on consultancy contracts for banks, accountants and others is among the most open to abuse. Consultancy contracts are not subject to the Bank's vaunted international competitive bidding procedure, and in fact some are tied to donor countries in a fashion usually reserved for bilateral aid. Also, the Bank does not supervise the procurement procedures on projects financed in the private sector that depend on its guarantees, and it scrutinizes only its portion of the $151 billion in co-financings or parallel financings with others.
The random audits that are being instituted could go a long way to close that loophole. Wolfensohn believes the Bank needs more than routine checks even for the smaller contracts, which he referred to in his internal memo: "Disbursements are often made on the basis of statements of expenditures, without the supporting documentation. We depend on our borrowers to have handled these contracts with due diligence and according to the agreed procedures... As a public institution we are accountable for helping our borrowers to see that the money allocated under Bank-financed operations is being spent on what it should be spent on and that our borrowers are getting good value for what is being spent. Annual financial audits alone are not enough, nor is routine supervision by the Bank."
Targets Poland, Kenya, Pakistan
Wolfensohn said he had hired the independent accounting firm of Société Générale de Surveillence (SGS) of Switzerland to handle the first set of audits. The three countries announced after the memo was circulated were Poland, Kenya and, most recently, Pakistan. Only countries comprising a portfolio of at least $1 billion and 20 ongoing projects are being selected. Officially, the Bank has not stated that it suspects corruption in the countries being targeted. But it has chosen some countries that illustrate particular problems. In Pakistan, for example, the $1.8 billion Hub Power Project ushered in a new era of private financing for the type of megaproject that the multilateral institution had previously financed alone or with other governmental agencies. Aided by a partial guarantee and co-financing from the Bank, the innovative financial structure drew in over 40 private banks and led to a boom in private and public investment. The mix of public and private monies that has made Bank oversight minimal on may of its projects, combined with the country's reluctance to embrace procurement reform, has apparently made the Bank edgy.
Donald Strombom, the former World Bank procurement chief who now runs a Washington-based consultancy, International Development Business Consultants, is working on procurement reform in Pakistan through a World Bank contract. "A lot of what the rest of the world thinks is corruption the Pakistanis see as standard, even though bribery is illegal in Pakistan," he says. "It's perfectly normal for people in public office to seek payments to see that things happen. They argue that it's just an extension of a tribal custom." Pakistan ranked third-highest in a Transparency International index of corruption, as measured by a survey of corporate executives, which, however, excluded African and former communist countries from its ranking. As for Kenya, a country beset by scandals, Strombom notes that the Bank ceased lending there during the late 1980s, but after three years started up again. "They're now questioning the wisdom of that; they might turn it off again," he says.
Full reports from the three audits are not expected until the end of the year, but Bank officials expect some preliminary results to be discussed at the annual World Bank/IMF meetings, where the topic of corruption is likely to figure prominently in Wolfensohn's address. The World Bank's new vice-president and controller, Jules Muis, who joined in 1995 from Ernst & Young, is starting his own audits. According to Srinivasan, Muis' staff have targeted Russia "where doubts have been raised" about dealings between government officials and consulting firms, for example.
In addition to audits, Bank procurement rules are being revised to include specific anti-corruption language. Its international competitive bidding procedures already require "internationally advertised, public bidding with public bid opening, pre-disclosed evaluation criteria, and prohibition of negotiations". Such transparency is designed to avoid corruption of the practices. But recently the Bank's board of directors approved tougher language. One crucial change is that bidders will be required to "disclose all commissions payable or paid to agents, within bids". Such agent fees are generally the means used to pay bribes. It is unlikely that someone paying a bribe in such a fashion will disclose it, says Srinivasan. But if the Bank discovers that someone has not met the disclosure requirement, that will provide the rationale to censure them.
The new language adds: "If the Bank determines that a bidder/contractor/consultant is engaged in bribery or fraud, it will deny the award to the bidder, withdraw funds from ongoing contracts if already awarded and 'blacklist' the firm from future participation." Significantly, the new rules allow the Bank to make the judgement that the borrower was engaged in corruption, instead of waiting for judicial authorities to make a ruling, which can pose difficulties if those authorities in the country are also corrupt. "If timely and satisfactory remedial action was not taken by the Borrower, [the Bank] will cancel loan proceeds allocated to the contract," the new rules state.
Dissatisfied bidders often register allegations of extortion and bribery. Srinivasan says that about 20% of all contracts are challenged and, when investigated by the Bank, "99% of the countries change the procedures to satisfy Bank requirements". Recently there have been two cases of alleged misprocurement in China, leading the Bank to believe it had been misled and to cancel projects before they began. In one case, says Srinivasan, the Chinese government chose a US supplier to build a train system even though, as an Italian competitor pointed out to the Bank, the US company did not meet the specifications of the original bid document. The Chinese pleaded ignorance, and no charges of corruption were made. However, three cases involving consultants were more dubious and caused the firms to be blacklisted by the Bank. Two cases involved allegations of fraud, and another was an alleged attempted bribe by a Canadian firm which was a consultant to a contractor. In all cases the contract was suspended before any money had been disbursed.
"Consulting is a big area for corruption," asserts Srinivasan. And it is also a big growth area at the Bank. There are many types of consulting projects, including those that advise on financial systems or privatizations and are handled by the big global investment banks. One field most open to bribery is the drawing up of project specifications: consultants can write specifications that suit one particular country or contractor.
Consultancy contracts for Bank-financed projects are not subject to international advertisement and competitive bidding. Instead, borrowers generally invite proposals from a shortlist of "three to six qualified and experienced firms", according to the Bank's guidelines. Srinivasan says this is because the choice of consultants is much wider than the choice of potential contractors for any infrastructure project, for example. Moreover, while the competitive bidding rules require borrowers to choose the lowest bid, evaluation of the costs of consulting services is much more subjective. But, as part of the anti-corruption drive, the Bank will soon be changing its guidelines for consultants, Srinivasan says. To meet the new procurement rules, borrowers are already required to specify fees paid to them.
Despite all the newly-stated good intentions, the question remains: Will the Bank cancel ongoing contracts, or stop lending to governments known to tolerate corruption? Even within the Bank there is some debate on how much will be done. "All governments have got a problem with corruption," notes Mike Stevens. "It doesn't mean we will stop lending to them." He notes that some countries known to tolerate corruption, particularly in east Asia, still have strong and growing economies, which makes it difficult for a development bank to censure them. But if the Bank perceives that corruption is undermining development in a country, then it is likely to raise the issue with the government and insist that changes be made. If the corruption is in a direct project, it can lead to a suspension, he says. But Stevens, like others at the Bank, is hard pressed to name a case where the drastic step has been taken of cancelling a project in operation.
Finding the evidence
Proving corruption is a difficult task. Finding the "smoking gun" is the tough part, says OED director Francisco Aguirre-Sacasa, who is an attorney by training. "You can't go around accusing people right and left without any proof." Indeed, some board members fear the new procurement guidelines could have serious legal repercussions, as they might be challenged for superseding the rule of law in any recipient country.
Aguirre-Sacasa, who has spent years in several African countries, including five years in Zaire, says the Bank quit lending to Zaire in 1993 because it suspected extensive corruption by the country's military dictator of over 30 years, President Mobutu Sese Seko reputed to be one of the five richest men in the world. "There were too many cases for us to ignore," says Aguirre-Sacasa. He cites the deterioration of the state-owned copper company, Gecamines, which had been one of the greatest sources of foreign exchange. "Those monies were being siphoned off," he says. And as the economic performance slid, the country that had been one of the wealthiest in Africa was unable to meet its tiny portion of the financial commitment to World Bank programmes. "We didn't have any direct evidence," he says, "but public investment programmes were not being put to appropriate use." For example, Zaire received funding for "forest projects that didn't exist". In spite of all the suspicions, the Bank never publicly stated that corruption was the reason it quit lending to Zaire.
Mobutu is one of the world's longest-reigning leaders, a brutal dictator supported by the west since 1965. The decision to stop lending to Zaire was perhaps the surest sign of the end of Cold War concerns that had kept so many nations in Africa and elsewhere awash in World Bank money. But political issues still drive the countries recovering from communism. "The Bank is very serious about helping these countries make the transition to a market economy," explains one Bank insider. "But we also recognize that corruption has been a problem."
Russian president Boris Yeltsin's ability to use $5 billion of multilateral funds for his re-election campaign this summer against a strong Communist Party, without any censure thus far from those institutions, is just one sign that political considerations are still at work. World Bank consultant Strombom, who is also working with the Russians on public sector reform, says changing that country is "a real challenge".
"Obviously the Bank would not like to shut down operations in Russia," says Strombom. "But at a project level, we are very concerned about procurement. There is an expectation of influence in contract awards." Strombom is working with Russia's ministry of economy, which is the agency the Bank has chosen to write procurement law for the country instead of the more obvious contact, the ministry of foreign trade. The latter ministry has been riddled with corruption in Russia, and many former high ranking officials have been forced to resign in recent years. The World Bank's auditing of Russian operations is an indication of heightened concerns in what is unarguably its most critical country.
The rise of corruption has forced the narrow market-based economic analysis that for years drove the economist-dominated World Bank and other development agencies, to give way to a broader understanding of what makes economies function. Despite the embracing of free markets by many countries, "the rule of law gives way, and the primacy of parliament, civil service, a critical clergy and the free press are suppressed," notes Ziegler, who runs the Centre for Accountability and Debt Relief in London.
He argues that debt relief for the African nations should be tied to anti-corruption reforms. The Bank hasn't gone that far, but it is now working with many developing countries on institutional reforms.
The World Bank may not be able to police the world, as many argue it should, but Transparency International believes that assuming political leadership, as the Bank is doing, is a major step in the right direction. Vogl comments: "Wolfensohn is saying that we want to make our aid projects more effective and cost-efficient, and to do so we have to make a point of ensuring that the pervasiveness of corruption is reduced." *
To tie or not to tie
Hand in hand with corruption which robs aid recipients of value for money goes the phenomenon of tied aid, which forces them to buy goods and services under an aid programme from the donor country.
There are few good arguments in favour of tied aid. It's costly, often leads to unnecessary projects, and can be a source of corruption. But most aid officials concede that tied aid is better than no aid at all. And at a time when aid budgets are so constrained, ensuring that aid benefits the donor's business community is widely viewed as the only way to get funding. "Countries no longer have the stomach for [untying aid]," says one UK aid official.
Even the World Bank, which prides itself on its international competitive bidding rules, isn't immune from the political pressures that result in tied aid. The institution is tying procurement contracts for its soft-lending arm, the International Development Agency, saying the US will no longer be eligible for them if it doesn't contribute to the programme for assistance to the poorest countries of Africa. In addition, countries contribute $1.1 billion to the World Bank in the form of separately managed trust funds, about 25% of which are tied to contractors, especially consultants, from donor countries.
Tied aid is an even bigger issue for bilateral agencies, and is under investigation at the Development Assistance Committee (DAC) of the OECD, which has been undertaking internal country reviews of members' aid programmes this year. "A lot of aid is simply an export credit," says one DAC member studying the issue. In such cases, the only beneficiary is the business community of the donor country. The DAC has argued that tied aid should not be used to finance commercially viable projects.
But that is not the only problem. Critics argue that recipient countries end up with so-called "white elephant" projects which they don't need, such as, for example, the sophisticated radar detection system which Siemens hopes to build in Tanzania. And there's the problem of imported machinery which the countries can't operate because "they don't have the service level to keep it going", says Loes Lammerts, deputy head of procurement at the ministry of foreign affairs in The Netherlands, the country leading the charge to untie bilateral aid.
A World Bank official points to lack of standardization. In Kenya, for example, finding replacement parts for wells is a nightmare, since they were dug by companies from many different nations. And occasional scandals have erupted, such as the Pergau Dam project in Malaysia, built by UK companies during the Thatcher era with UK aid and linked to an arms sale.
A recent World Bank report on "strengthening the effectiveness of aid" quotes academic studies that estimate the excess costs of tied aid at between 10% and 30% for recipient countries. "It's a tremendous waste of scarce resources," says Transparency International vice-chairman Frank Vogl. He adds that the lack of oversight in tied aid also makes it more prone to corruption, particularly since no country, except the US, outlaws the bribery of foreign officials.
Despite all these issues, the DAC has never made a public statement in support of untying. A September 17 meeting of OECD member country aid agencies was scheduled "to see if there's any common ground to move untying forward", according to one DAC member. But many countries are sceptical of the possibility. "It's like going into a desert," says Lammerts, who says The Netherlands is facing stiff opposition from its business community. Dutch firms claim they cannot compete in an international climate of tied aid, since most Dutch aid is already untied. She claims the greatest resistance to untying comes from the French and the Americans.
According to DAC figures for 1993, 53% percent of French bilateral aid is tied, much of it going to the former French colonies of Africa. In the US, 41% of bilateral aid was officially tied, according to the 1993 DAC numbers. Partially tied aid accounted for 14% of French bilateral aid, and 21% of US bilateral aid.
A recent report by the UK's Overseas Development Administration (ODA) gives little hope for much change, either. The study, which was precipitated by a critical DAC review and the Pergau scandal, agrees that tying aid restricts competition and raises costs. The 1993 DAC numbers indicate that 64% of UK aid was tied, with half of that for technical assistance. The ODA report says that 54% of UK aid was tied in 1994, the latest figures available.
The British report the first any donor country has undertaken on the subject argues that aid tying "is bad for UK exporters other than those benefiting from the aid directly, and reduces incentives for efficiency and growth. The UK would benefit in the long term from unilateral untying". But the ODA argues that the gain would be "very small". The UK would benefit most if all countries untied their aid programs, it concludes, but says the prospect for multilateral untying is unlikely. As a result, the UK will continue to tie its aid as long as other countries do so.
Other countries considered among the worst offenders are Spain and Austria. Much of Spain's aid is administered by the department of commerce and given to Latin American countries. Austria's approach is similar, except that the money goes to the former Eastern Bloc countries which are its neighbours. Among the countries that get high marks for untying aid are The Netherlands and Norway. Japan is widely rumoured to engage in tied aid, even though officially much of its aid is untied. The DAC says its recent review of Japan's practices does not support these rumours.
One big offender is the US. At US Aid, for example, one programme, called DFA (Development Fund for Africa), purports to be untied. But the DAC review found that only US companies are allowed to bid on projects financed through it. After being criticized for this policy by the DAC, the OECD group received a visit from White House staff member Ira Magaziner who told the DAC it was investigating the inconsistency. US Aid says that DFA is exempt from tying requirements, but admits that US companies still get 70% of the contracts.
The DAC is looking at ways of improving tied aid by degrees and making sure that aid which is said to be untied is truly open. For example, one DAC official says that ensuring a competitive procurement process within a country's tied aid programme, or advertising internationally for untied projects, could help recipient countries get better value for money. MC |