Jeffrey A. Winters
Associate Professor of Political Economy
Center for International and Comparative Studies
July 3, 2000
Updated for the INFID Seminar on Indonesia’s Foreign Debt
Jakarta, Indonesia. July 3-5, 2000
[First draft prepared for the conference, “Reinventing the World Bank: Opportunities
and Challenges for the 21st Century,” May 14-16, 1999.
Northwestern University, Evanston, IL]
The Scale of the Problem for Indonesia
COMPARISON OF DEBT BURDEN INDEX5
Indonesia 89 3.2 27.8
Philippines 74 3.1 23.9
Thailand 57 5.0 11.4
Malaysia 51 11.5 4.4
S. Korea 28 12.5 2.2
China 18 8.0 2.3
Taiwan 8 8.0 1.0
Singapore 0 9.0 0.0
Hong Kong 0 14.1 0.0
This table shows that Indonesia’s debt burden index (27.8) is slightly higher than that of the Philippines (23.9), 2.5 times as heavy as Thailand’s (11.4), six times as bad as Malaysia’s (4.4), and twelve times as heavy as China’s (2.3). Theoretically, the Indonesian government should be able to recover some of its domestic debt by selling assets controlled by the Indonesian Bank Restructuring Agency (IBRA). However, IBRA is almost completely dysfunctional. And as time goes on, the burden on the state has increased because the cost of restoring the banking system has increased, interest rates the government must pay have risen as Bank Indonesia has tried to defend the rupiah, and at the same time the value of the assets held by IBRA has declined by a third, according to one estimate.6
There are several points worth noting in these figures. First, of the total external debt, 60 percent is public debt accumulated by the Indonesian government and state enterprises, while 40 percent is foreign debt of private companies. Second, almost all of the government’s foreign debt is to lenders of official capital, whether bilateral or multilateral. This is significant because it means negotiations on the debt have the potential of being based more on political rather than economic considerations (just as most of the initial lending was politically driven as the West sought to uphold the Suharto dictatorship supposedly to defend democracy during the Cold War). And finally, it is rarely mentioned that almost half of Indonesia’s private sector foreign debt is held by foreign companies operating in Indonesia (PMA, $27.9 billion).
Legal Responsibilities of the World Bank
Although the Bank has long had an internal audit function and a system of management controls, the Bank recognized that its internal oversight mechanisms were weak, according to several officials we spoke to. These officials indicated that the Bank lacked a central focal point for reporting and reviewing allegations of wrongdoing and sufficient expertise to investigate allegations of wrongdoing. In addition, while the Bank expected its staff to exhibit strong ethical behavior, the Bank did not have a strong ethics awareness program. The Bank’s external auditor reported in 1998 that the Bank’s internal audit department – a key management oversight unit – had a fairly restricted scope of audit coverage and played a limited role within the Bank. For example, about 78 percent of the 206 internal audit reports conducted from fiscal years 1995 through 1997 were focused on administrative compliance issues, such as country mission office procedures, rather than on determining whether project funds were being used as intended.13
When the GAO report was finished, Senator Mitch McConnell, who had requested the investigation, released a letter criticizing the past practices of the Bank and its slow progress in correcting the most serious problems that lead to criminal debt. Among the problems with the Bank’s efforts at reform, Senator McConnell wrote that “new initiatives introduced [by the Bank] in 1998 to improve financial and procurement procedures only apply to 14% of the Bank’s 1,500 projects. In recent audits, 17 of 25 borrowers showed a lack of understanding or noncompliance with procurement rules. GAO’s review of 12 randomly selected projects identified 5 projects where the borrowing countries implementing agencies had little or no experience managing projects.” He added that “GAO determined that solving [corruption] problems is made more difficult because audits are often late and of poor quality, and the Bank does not evaluate the quality of audits.”
The Indonesian Case
In his final presidential visit [in 1979] he gave almost the same message verbatim to assembled ministers then to Vice President Malik, and finally to President Suharto, face to face. McNamara explained that “it was also necessary to maintain the emphasis on reducing corruption. Outside Indonesia, this was much talked about and the world had the impression, rightly or wrongly, that it was greater in Indonesia than in any but perhaps one other country…. It was like a cancer eating away at the society.”16
There is no hint that this lecture from McNamara resulted in any tightening of Bank supervision of projects in Indonesia. Indeed, although his plan was not adopted, the Bank’s resident director proposed moving away from projects and providing Indonesia with large sector loans that would leave control over disbursement entirely to a government the Bank’s own top management viewed as among the most corrupt on the planet. Perhaps recognizing that McNamara was unlikely to shift the Bank’s posture toward Indonesia, President Suharto “is recorded as making no trace of a response to the demarche on corruption.”17 Suharto certainly recognized that his country had a uniquely close relationship with the Bank and McNamara – “Indonesia was the presidentially designated jewel in the Bank’s operational crown.”18 At a minimum, it is apparent that there was an early appreciation in the World Bank of the ruinous levels of corruption being perpetrated in Indonesia under Suharto’s military-backed rule.
Documentation of procurement, implementation, disbursement and audits for Bank-financed projects are generally complete and conform to all Bank requirements; we have moved aggressively to resolve each and every irregularity for which we have documents (as well as many cases of preventive action and informal corrections of problems).
This declaration is followed
immediately by a direct admission that in Indonesia the Bank had not
made arrangements that ensured that the funds it loaned were used for
their intended purpose:
In aggregate we estimate that at least 20-30% of GOI [government of Indonesia] development budget funds are diverted through informal payments to GOI staff and politicians, and there is no basis to claim a smaller “leakage” for Bank projects as our controls have little practical effect on the methods generally used. [My emphasis]
Among other things, the document
makes the following points:
a) that some officials
were expected to pay bribes in order to be placed in “wet” (lucrative)
positions in the bureaucracy linked to development projects.
b) that leakage pressures
increased during the two years leading up to the 1997 national elections,
and that Suharto’s political party machine, GOLKAR, was the culprit
behind the additional squeeze on the system.
c) audits by government
officials at the ministerial and provincial levels are designed mainly
to find issues or “mistakes” in project implementation, which can then
be fixed or ignored for a fee ranging up to 10% of the project value.
d) corruption across Indonesian government ministries is not uniform, in the experience of Bank staff, and ranges from relatively low (less than 15%, although on very large loans) in the Ministry of Health and the Ministry of Mines and Energy; moderate (15-25%) in eight ministries, including agriculture, education, public works, and religious affairs; and high (over 25%) in an additional four ministries, including forestry and home affairs.
The development projects and reform programs the Bank finances do not belong to us: they are owned by the government. It is the government that is responsible for ensuring that the money it borrows is spent for the purposes intended and that it is protected from leakage through bribery and corruption. This is not to say that we take no action ourselves in this regard. We have always audited, reviewed and monitored our projects to try to safeguard them. We have the strongest and strictest procedures of any development institution. We are continuously seeking ways of strengthening our controls.
The idea that a client state should “own” Bank projects makes perfect sense from the perspective of augmenting a government’s commitment to the project. On my reading, however, this notion of ownership never appears in the Articles of Agreement. And it is fair to ask if such a development approach can legally nullify Article III’s mandate on fiduciary responsibility.
A Postscript on the Conditions on Debt Relief
Project Supervision on Paper
The Bank is required by its Articles of Agreement to make arrangements to “ensure that the proceeds of any loan are used only for the purposes for which the loan was granted.” While this “watchdog” function has been and remains important, the main purpose of supervision is to help ensure that projects achieve their development objectives and, in particular, to work with the borrowers in identifying and dealing with problems that arise during implementation (p. 8).
In a document reproduced by the tens of thousands and circulated to every development ministry in every client country of the Bank around the world, lip service is paid here to project supervision in general and to fiscal accountability of loans in particular. At the level of signals the Bank sends on paper, such “while this” clauses send a clear message that the Bank’s commitment to following the money is half-hearted at best.
Project Supervision in Practice
There are certain levels of procurement, and if you go above certain levels, you have to fill this form out. It involves certain procedures, bidding procedures, competitive aspects of the process, and so on. I always thought this 384 was primarily for us [the Bank, project managers]. I came to find out that basically it's a form for reporting to the EDs [executive directors] so that they know how much business is coming or going through their countries. Because I would say, "well you know this  form isn't filled out..." and they [the speaker’s superiors] would say "well that's ok, it's really just for the EDs." And here I thought we were using it as more of a management tool. But it was really to help the EDs report back about what they were getting, where it was going, etc.26
Although Bank officials regularly
state that effective systems of financial management and documentation
are in place and functioning, current and former task managers who watch
billions of dollars disappear tell a very different story. On how well
project expenditures are documented, a seasoned task manager explained
the situation this way:
They’re documented in a very weak way. There's so much of it where we just don't know. We're trying to make progress [in following the money], and it's happening now. It never happened before, with some rare exceptions. It is happening, but it's a long way from achieving critical mass [as a standard Bank mode of operation] in terms of being able to step back and say "we've got a reasonably tight program here, we're on top of it."
In response to senior management’s
assurances that reliable audits are conducted, this individual disagreed:
They've always had that [local accredited audits]. But the big pressure for the longest time, and it still exists to a large degree, is [that] the audit has to be done on time. But the quality of the audit? Whether they do anything about it afterwards? That for a long time was irrelevant. The only thing that came up on the radar screen [in the project management process or cycle] was “the audit hasn't been submitted, the audit's overdue.” That would come up. In many cases, you get an audit in – and this was the past, and I'm sure they've cut down the time lag on it – in many cases the audit would come in a year and a half, sometimes two years, after the fiscal year in question. It's too damn late – because whatever was wrong, forget it.
The real opportunity for an
auditor to call attention to serious irregularities in a project is
not through the standard boiler-plate numeric report, but through what
the Bank calls a “management letter.” A task manager with extensive
project experience explained:
Even assuming the audit points to serious errors, in many cases they don't submit “management letters,” which are basically, apart from the number crunching, letters that gives the auditor’s opinion on the fiscal management of the project. Either you don't get them [the letters], or if you do get them you don't pay attention. The auditors themselves – and I've talked to a number of them – they admit freely that all they do is look at the books. If the books balance, they say “we've looked at it according to international auditing standards, and we find that the records are in order.” But the records themselves could be fraudulent. Auditors will tell you it's not their job.
Apart from these routine and
arguably ineffectual audits, there is a stronger weapon in the task
manager’s supervision arsenal known as a post-procurement audit.
[T]hat's when you bring in what we call a post-procurement audit, and you actually go out and check [the validity of invoices]. Typically, “you bought three hundred air conditioners? Where are they?” You look at a couple. “There's three in this building? Let me see them.” Check the price. This is a class A air conditioner and you were billed for a class B air conditioner at twice the price – you know, whatever it is, you go out and check. So the [routine] audits don't tell you a thing. In fact, I can tell you from my own personal experience that in many cases, really good book keeping where the records are impeccable, you found flagrant fraud being committed. The books are beautiful. The weird thing is why the corrupt borrowers don't make a better effort to produce a really good set of books, because that wows everyone. "You want something?" Bing, you can access it. "Oh this contract? Here are the records on it. Here's the contract." You got the whole thing. And I've gone in, it's all there, but it's all fraud.27
Thus it is fair to ask, has
the Bank reasonably satisfied its Article III mandate if it claims that
it conducted routine annual assessments of project books by accredited
auditors? According to a task manager who worked on more than a hundred
projects in Africa, such claims fall short.
You've got to go beyond what's on paper. It's only paper. We've had cases when we go out in the field. You go to the [project] accounting office and you ask for documents. "Oh we don't have them. They're over at the ministry. They're somewhere else. We'll have them for you next week." I swear to God, some guy sits up all night writing up invoices. You can see, it's the same handwriting. Fifty different suppliers and it's all the same handwriting. And sometimes they're so saturated with writing that they put the same thing down on five different invoices without knowing it or picking it up. And it goes through the system. And then our guys [back at Bank headquarters] look at it and don't even pick it up.
The accredited auditors conduct narrow assessments that are almost pro forma and which do not detect fraud that ranges from the subtle to the blatant. The task manager concludes: “And so, money gone. In the accounting sense, everything is fine.” In direct response to the assurances from senior management that responsible audits were being conducted on projects, this individual added, “But you have to keep in mind, if they said they're doing post-procurement audits, fine. If they're doing a spot audit of the books, it's next to useless. […] The whole thing is a farce. If somebody tells me a project has been audited, I say, ‘So what? Let me see the audit.’”28
The extent to which the Bank can check statements of expenditure is constrained by several factors. At headquarters it is often difficult to match items claimed for reimbursement with line items in the project accounts and to determine whether the items are eligible for Bank financing. Moreover, Bank staff conducting supervision missions carry out only limited on-site reviews of documentation due to claims on their time for resolving other project management and implementation problems. (24)30
The number of transactions
involved is not small.
The stocks of IBRD and IDA projects currently disbursing are $88.4 billion and $42.5 billion, respectively, against an annual flow of new loan approvals of $14.5 billion and $6.9 billion, respectively, in FY96. This stock of projects collectively generates about 40,000 individual procurement contracts annually, of which 10,000 (60 percent of value) are conducted under international competitive bidding rules, and 20,000 (30 percent of value) are conducted under local bidding rules. About 10,000 contracts undergo prior review by Bank staff (60 percent of value). The remainder are subject to what is termed “post-audit” selective checking after the event to verify that procurement followed the procedures specified in loan documents. (24)31
It is not clear whether in
claiming the remaining 30,000 contracts are “subject to” post-audit
selective checking that the Bank means that the audits are actually
carried out, or that the contracts are simply eligible for such oversight.
A source who worked for years as a task manager argues that post-audits
are, in fact, rarely carried out.
In a post-procurement check, you take a transaction from A to Z. How can we, a banking institution, claiming to be the financial partners in an operation, and having the right of supervising the project in the physical sense, how can we go out there in a two-week supervision mission and not spend a day with the accountant? I can assure you, it does not happen. It is only the rare occasion that it does.32
On the trade-off between cost
and effectiveness, the former task manager agreed that one needs to
be realistic. “There's no question that any institution is going to
have inefficiency and money stolen,” he said. “The point is, do you
just sit back and say ‘oh it's all right,’ or do you make the best effort
to contain it?” As a practical matter, he argued that the key was to
target the worst cases to set a tone: “You take the most egregious cases
and you deal with it.” He continued:
I always like to point out, you've got speed limit signs on the highway, and these represent all the safeguards on paper that Bank people talk about putting in place. But if you don't have a cop behind a billboard every so often, and if they don't see someone pulled over every so often, then people don't obey the speed laws.
He drew an additional parallel to the Internal Revenue Service in the United States. Tax payment is the U.S. is similar to local Bank project management in that both involve self reporting. The I.R.S. enforces honest reporting by in-depth and aggressive audits of only 1 to 3 percent of all corporate and individual tax payers. There are cash penalties for errors and jail penalties for fraud. Although the actual risk of being audited is low, many tax payers fear they will be caught if they cheat. The issue is not whether a large number of audits is conducted, but that tax payers know there is a real chance their fraud will be detected and that there will be real and even serious consequences for committing fraud. It is this concern with being caught or paying a price that is most lacking in the Bank’s approach.
That’s the old argument, isn’t it? They’ve been saying that for years. […] There are a couple fallacies there, and it is much too cavalier an attitude. That's because, in fact, my experience has been – and it's the experience of a lot of other people there [on the operations side of the Bank] – if they're busy stealing 30 percent, they're not paying any real attention to the other 70, even assuming 30 percent is all they're taking. What you're really doing is really ruining the whole effectiveness of the investment itself. I try to tell people […] it's like giving the money to buy a car but they're stealing the money that would buy the gasoline. So what good is the car? It is a fact, I can demonstrate it, and I'll stand by it. I'll prove it anytime.
She offered the following example:
You cut corners and nobody cares. If you let out a contract for $2 million, and you get the few civil servants at the top sharing $600,000 or 30 percent, do they care if the contractor puts in concrete that is just sand and water? Do they care if the contractor doesn't put reinforcing steel in the structures? They don't care. So when Bank people say we're at least getting 70 cents of good development on the dollar, no you don't. Because the contractor either has to make back the money that he's kicked back, or he just figures, “hey, it's open season, I do what I want and no one is going to challenge me.” And so you have this feeding frenzy, and the end result is you get very little development.33
Putting aside who is fiscally
responsible to repay the lost 30 percent, she questioned what genuine
value a country or the poor really get from projects conducted in ways
where such levels of theft are tolerated.
If you get only one dollar out of ten that goes to the poor, is that really worth it? And have you done anything to strengthen the economy for the long term? No. You've only nourished a corrupt government that has no intention of providing services. To me, those arguments are hollow.
She points to a startling pattern
in the African projects the Bank funded for decades, and in which she
participated directly as a task manager.
All you have to do in the case of Africa is travel the length of the continent and see how many derelict projects, buildings rotting, infrastructure rotting because we financed it. […] I can't remember one project in Nigeria, out of all the ones I worked on, that you could look back and say, "Well, hey, we did a good job" – we, us and the Nigerians.
As of the mid-1990s, she explained,
the Bank had done about 2,200 projects in sub-Saharan Africa, with nearly
all of them being seriously undermined by the lack of Bank supervision.
Ask anybody to tell you how many they can think of that really succeeded out of 2,200 projects. Even when you take out the calamities, the drought that has destroyed or hindered progress, or you take out the civil wars. Even when you take all those other factors out, you've still got an awful lot of things that have been done that have gotten nowhere. The money is spent and the debt is incurred. Is the infrastructure there? No. Is it being maintained? No. It's just an endless parade of failure.
She is cautiously optimistic
about recent signs of progress.
It is happening but it has yet to change the culture of the Bank to a considerable extent. I do see beginnings of it. People are using the word “fraud” in meetings. It’s cropping up in memos on the operations side. I’m not talking about the PR side of the anti-corruption battle, where we have our EDI [Economic Development Institute] going out and conducting workshops, where they're training journalists how to expose corruption, or what to look for and how to deal with it in the press. These are all very positive things.
But she adds that too often
the Bank adjusts to criticisms and problems more with public relations
campaigns than with substance.
The thing that troubles me a lot is the Bank's way of dealing with issues – and I think this is still a major part of the Bank's culture – is reorganize, shuffle around, change the names, do anything but actually deal with the issues. There's all this appearance – and appearances are everything – that we're doing something when in fact you see in a number of instances where not only are we not doing anything, but we're going backwards. I'm sure a lot of people would challenge me on that, but I don't think that their challenges would stand up.
At root, according to one task
manager, the obstacles to dealing effectively with corruption today
are the same ones identified in the Wapenhans Report in the early 1990s.
The most important problem is the “culture of approvals,” a tremendous
pressure manifested within the Bank (though rooted also in political-economic
pressures from lending states that want the business and sales generated
by Bank projects). President Wolfensohn has elevated the status of
improving project quality and challenging corruption within the Bank.
But, explains the operations specialist, there is still a basic inconsistency
even in Wolfensohn’s approach:
Although Wolfensohn came on board and there was more emphasis on supervision, there is still this schizophrenia. If you talk to task managers today, they have less budget for supervision now than they did five years ago. It's saying one thing and doing something else. We've got all these anti-corruption activities, and that's positive and long overdue. But at the same time there is still high pressure to lend, and we have things like this [the new draft certification proposal for disbursements] coming up that are going to make it easier to steal, and [provide] less budget for supervision. We're going in two contradictory directions.<34
Wolfensohn’s impact at the
Bank has been mixed. There is no doubt that corruption has a higher
public profile than at any time in the Bank’s history. Many task managers
in Operations, who struggled in vain for decades to try to inject a
higher awareness of corruption and its corrosive impact on projects
and the Bank’s broader goals, now feel the tide is turning. But the
incessant pressure to lend coming from the Executive Directors pulls
in the opposite direction. According to one well-positioned task manager:
I think Wolfensohn has opened the door now. You hear so many stories about him. My sense when I walk down the halls is that one in five may be positive about Wolfensohn, but the other four are not. One way or another he's turned their world upside down, some of them more than others. He is unfortunately sending some mixed signals, and frankly that's the biggest complaint I hear. When I talk to people in the hall, they say "anti-corruption, right, but then he's pushing us for lending." I think the biggest complaint I hear about him is that he's sending these contradictory signals. It's a fair and true complaint. But I also think that if I were in his shoes, knowing the Bank as I do, I'm amazed that he's done what he's done. You're talking about an entrenched bureaucracy that has not only been accountable to no one in the past, but has had so much wealth to play with that nobody could touch them, no one was able to touch them, no one wanted to touch them. And here this upstart comes in and starts screaming and jumping up and down, and swearing and everything else. And this is just a total shock. He has turned their world upside down. But at the same time, how do you change a huge bureaucracy with the kind of history the Bank has, and the power that it has? I'm surprised he's been able to do what he's done. I have a feeling if it were entirely up to him, that we wouldn't be getting these mixed signals quite so much. But he's got to play ball with some people some of the time. This is not a one man show, as much as he tries to make it so.
The answer, this individual
agrees, is to reduce lending until the quality of administration and
supervision in projects, both on the Bank’s part and on the borrower’s
side, is improved to a degree that the resources are not squandered.
He concludes: “We're a long way from turning the corner on the Bank's
culture. There will not be real progress until there's a genuine slowing
down of the lending program. Historically, but certainly over the last
20 years, you could demonstrate with ease that the Bank has lent more
money than the borrowers could absorb.”
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1 Peter Masebu, “Another Call To Write Off Africa's Bilateral Debts,” Africa News, November 2, 1999. Botchwey is a member of the Global Coalition for Africa, an NGO based in Washington, D.C., and he heads the coalition's unit on the African debt. The total African debt owed to bilateral and multilateral lenders at the end of 1999 was approximately $300 billion.
2 As of March 2000, public sector debt was $85.9 billion and private sector debt was $58.5 billion. For clarification, it might be useful to explain some terms. “Total external debt” refers all debt owed to all foreign creditors by “Indonesia.” This includes foreign debt owed by the Indonesian government (public sector) and by all firms operating in Indonesia (private sector, whether domestic or foreign firms). “Total government debt” (also called “public sector debt”) refers to all debt owed by the Indonesian government and consists of external (“foreign”) debt and domestic debt. Before the Asian crisis of 1997 and 1998, Indonesia had very little domestic debt. But to recapitalize the banking system, the government was forced to issue between Rp 530-610 trillion in Central Bank bonds (SBIs). In dollars, this is roughly $80 billion in new domestic debt on which the government pays about 12% in interest (a rate far higher than interest paid on foreign debts). As of June 2000, roughly 85% of the bonds issued to rescue that banking system had floating rates.
3 The World Bank noted in its June 2000 annual report on Indonesia that three-quarters of the $81 billion increase was domestic government debt to finance Indonesia’s banking rescue program. What the Bank failed to mention was the important role the IMF and World Bank played in the 1980s to push through a highly risky banking deregulation (especially Pakto 1988) that opened up the banking system without any protections in place for supervision and control. That irresponsible set of reforms was a time bomb that was finally triggered when the financial storm hit Asia in 1997.
4 It should be noted that the external environment, particularly in the Asian arena, is growing increasingly challenging for the countries of Southeast Asia, especially Indonesia. A high cost will be paid for moving too slowly, and many ASEAN countries could get left far behind. The reasons for this include 1) the fact that China, long secluded during the Cold War, has entered the Asian theater as a major competitor, 2) reduced tensions between China and Taiwan will increase foreign investment in Northeast Asia, 3) reduced tensions between North and South Korea since the Pyongyang summit will also encourage investors, 4) the U.S. approved Permanent Normal Trade Relations (PNTR) with China, and 4) China will soon enter the WTO. Southeast Asia faces a real danger of being swept over by an economic tsunami from the increased attractiveness of countries in Northeast Asia. Indonesia and possibly Vietnam, the two most populous countries in ASEAN, are the two major economic basket cases in Southeast Asia and will likely be hardest hit by the growing competitive pressures in the region.
5 Source: Data in Tom Holland, “Asia’s New Fissure,” Far Eastern Economic Review, 163(26) June 29, 2000, p. 14, with updated data from Bank of Indonesia.
6 See “Value of IBRA-held assets down 30pc since 1998,” South China Morning Post, 26 June, 2000, p.1.
7 Criminal debt is distinct from “odious debt.” Odious debt in international law is defined as loans accumulated by an unrepresentative and oppressive government which are used to repress a country’s citizens. It does not matter if the loans were used according to prevailing law or were stolen or misallocated by officials. Most criminal debt is also odious debt, but not all odious debt is criminal debt. Also, odious debts are exclusively external. Criminal debts can consist of both foreign and domestic debt. In the Indonesian case, significant parts of the country’s foreign debts are criminal. But much of the public debt to bail out the domestic banking sector is also criminal debt because the debt was caused by criminal behavior by bankers and corporations.
9 The World Bank does open the door for the International Court of Justice and the U.N. to play a role in disputes involving the Bank and its clients. See Article X, Section 10.03, Paragraph ( c ), in “General Conditions Applicable to Development Credit Agreements,” International Development Association (a component of the World Bank Group), Washington, D.C., January 1, 1985. In September, 1993, the Bank created its “Inspection Panel,” which was designed to provide an independent forum for people directly and adversely affected by a Bank-financed project. Aggrieved parties can use the Panel to request the Bank to act in accordance with its own policies and procedures for a specific project. The scope of the Panel is severely limited by the condition that no requests can be made after the closing date of a project or once 95% of a project loan has been disbursed. In short, the Inspection Panel is useless as a forum for redress on criminal debt already accumulated.
10 See John W. Head, “Evolution of the Governing Law for Loan Agreements of the World Bank and Other Multilateral Development Banks,” American Journal of International Law, 90(2) April 1996, pp. 214-234. Also see Aron Broches, “International Legal Aspects of the Operations of the World Bank,” 98 Recueil des Cours 297 (1959, III) and Aron Broches, Selected Essays – World Bank, ICSID, and Other Subjects of Public and Private International Law (1995).
11 See Head, p. 220, n. 50.
12 Part of the explanation for why the Bank has not lived up to its fiduciary mandates rests with the geopolitical motives of major powers like the United States. A remarkably candid 1996 U.S. Government Accounting Office study observed that “much of the impetus behind U.S. participation in the Bank during the Cold War era was derived from the perceived utility of the Bank in containing communist expansionism in the developing world. One Bank official commented, for example, that because of U.S. concern about communist insurgency in the area, the Bank remained active in several sub-Saharan African countries long after the corrupt nature of these governments became evident.” (Chapter 2).
13 GAO report, April 2000, p. 11.
14 All of these quotes are from Mitch McConnell, “Statement of U.S. Senator Mitch McConnell on FY2001 Appropriations for International Financial Institutions,” press release, April 6, 2000.
15 Recent evidence that corruption continues to be a major problem despite a change of national leadership weakens the new government’s ability to legitimately demand relief for criminal debt.
16 Devesh Kapur, John P. Lewis, and Richard Webb, The World Bank: Its First Half Century (Washington, D.C.: Brookings Institution Press, 1997), Vol. I, p.492. The authors quoted from a memorandum of the then director of the Resident Staff, Indonesia, Jean Baneth.
18 Ibid., p. 493.
19 Press Release No. 98/1426/EAP, The World Bank.
20 In January of 1999 another Bank document on Indonesia was leaked. This one cited corruption as one of a set of “serious structural problems which were well known to the Bank.” “Indonesia Country Assistance Review,” revised draft, the World Bank, January 6, 1999, p.1.
21 Asia Pulse, June 28, 2000.
22 “Warren C. Baum, “The Project Cycle,” The World Bank, 1982 (first edition 1979, revised edition 1982, ninth printing 1996).
23 Interview with two senior Bank officials (K and J), World Bank Headquarters, Washington, D.C., April 10, 1999.
24 “1997 Framework,” p. _.
25 Interview with a senior Bank official (K), World Bank Headquarters, Washington, D.C., April 10, 1999.
26 Unless otherwise noted, the quotes used in this section are from confidential interviews conducted in Washington, D.C. in April 1999.
27 The respondent continued: “I've argued for years that having a system is fine. Having an accounting system and having safeguards and audits -- it's all fine in principle. But if you don't have people who are running the system who are trustworthy, you're in bad shape.” He said that spot-checking is needed all the way through a project. “When I used to go out in the field on a project, and very few task managers would do this, I would spend a day with the accountant on the project. And I would just randomly say ‘let me see this, this and that [invoice],’ and then I would take those transactions and go from A to Z with them. Go out and see whether in fact this vendor exists. And I've had cases where they didn't exist. You have an invoice, a name of a company, and they supplied office machines. You go look, there's some office machines sitting there, and you can't count all of them. They've never been used. They're just sitting there. So you have this sense they were just bought for the sake of buying them. You go out and you check at a store that sells office machines -- the same make and model number. You price it and you find it's half the price of what we're billed for. You go to the address [of the vendor] and they don't exist. You ask around the neighborhood and they never did exist. So here I've got a fraudulent invoice for equipment that isn't really being used at twice the market price. I mean if that isn't fraud, I don't know what is. And so you come back with that information, and you find that it's a pattern, you know you've got a serious problem on your hands. The auditors don't pick that stuff up.”
28 The source added: “They never really audited the lending operations. They audited the Bank's own internal budget. We had the Operations Evaluation Department auditing the projects, but not necessarily from a financial point of view, just from a goals point of view. It was indeed required every year to have a local audit done. But if the audits don't uncover the problems sufficiently, or if they skirt the problems, and if they don't submit a management letter, which would detail in written form the problems, then you've only got a paper exercise that doesn't bring about any changes.” One task manager I interviewed pointed out that there are also serious conflicts of interest within the international auditing profession that cast doubts on the reliability of audits of the books for Bank projects. She explained: “I had a case where an independent auditor performed audits on a project. They had probably ten times more business on that [same] project – setting up a management information system, setting up accounts, and so on. I asked [a professional accountant at a major firm] if there's a conflict of interest if I'm an accountant-auditor, and I've set up the books, and I've assisted the client in financial management, and now I come in and audit that same client. [He] said, “yeah it is, but it happens all the time.” He said it's something that the industry has never tried to address. The accounting industry, like the banking industry, is not going to jeopardize their relationships with their clients. If you're Price Waterhouse Coopers Librand, are you going to go in and audit the books of your client and say that things are in atrocious shape with all kinds of fraud and embezzlement? All you can do is say the books are in order. It's very difficult to get somebody who can do it in an unbiased way. And even when those firms are not directly involved with a particular project or company, they often have the government or a ministry as a client. For them it's a business decision. He told me that it is a conflict, but we don't look at it as a conflict.”
29 Interview with a senior Bank official (J), World Bank Headquarters, Washington, D.C., April 10, 1999.
30 “1997 Framework,” p_.
31 Ibid., note 27. Thus 30,000 out of 40,000 procurement contracts, representing three-fourths of total purchases and 40 percent of total value, are not carried out under international competitive bidding rules. It is overwhelmingly in this realm that some 30 percent of the value gets stolen inside Indonesia. Note that a single project could have hundreds and even thousands of procurement contracts within it in any given year. Although 40,000 sounds like a staggering number, the number of active projects is much smaller.
32 Confidential interview, Washington, D.C., April 1999.
33 She also rejected arguments that small-scale corruption does not seriously undermine projects. “If you see that happening [on a small scale],” she said, “you can almost bet that with every bit of procurement there's some hanky panky going on one way or another. It adds up and it's a constant blood-letting, every day, money's going out, $500 here, $1,000 there, $3,000 there. It's a constant blood-letting. How can the project function?”
34 The idea behind the new disbursement plan is that a country’s domestic project management capability will be evaluated, upgraded, and then certified by the Bank as fiscally qualified, and thus responsible. The task manager found this approach alarming. “And they say now we will lend to you. Not only that, but because you have a system in place that we've approved, we'll give you the money in tranches. If you report back every quarter, or whatever, we'll just keep releasing the money. In my opinion, and a number of other people at the Bank – certainly people at the operational level – it’s just inviting more problems because even with the controls we have in place now, this spot-checking and so on, we can't begin to do justice to proper fiscal management.”
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