[Senate Hearing 108-734]
[From the U.S. Government Publishing Office]
S. Hrg. 108-734
COMBATING CORRUPTION IN THE
MULTILATERAL DEVELOPMENT BANKS
[PART III]
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 28, 2004
__________
Printed for the use of the Committee on Foreign Relations
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN D. CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming RUSSELL D. FEINGOLD, Wisconsin
GEORGE E. VOINOVICH, Ohio BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee BILL NELSON, Florida
NORM COLEMAN, Minnesota JOHN D. ROCKEFELLER IV, West
JOHN E. SUNUNU, New Hampshire Virginia
JON S. CORZINE, New Jersey
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
?
C O N T E N T S
----------
Page
Ayittey, George, Ph.D., Distinguished Economist in Residence,
economics department, American University, Washington, D.C..... 25
Prepared statement........................................... 30
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Rich, Bruce M., international program manager, Environmental
Defense, Washington, D.C....................................... 3
Prepared statement........................................... 7
Appendix
Additional Material Submitted for the Record
The African Development Bank: A Rare Success on a Troubled
Continent, submitted by Don Sherk, international economic
consultant and former United States executive director to the
African Development Bank....................................... 51
Summary of Trip Report: Peru and Paraguay, March 26 to April 6,
2004, submitted by Nilmini Rubin, SFRC professional staff
member......................................................... 61
Summary of Trip Report: Lesotho and South Africa, August 24 to
September 2, 2004, submitted by Nilmini Rubin, SFRC
professional staff member...................................... 65
(iii)
COMBATING CORRUPTION IN THE
MULTILATERAL DEVELOPMENT BANKS
(PART III)
----------
Tuesday, September 28, 2004
United States Senate,
Committee on Foreign Relations,
Washington, D.C.
The committee met at 2:40 p.m., in room SD-419, Dirksen
Senate Office Building, Hon. Richard G. Lugar, chairman of the
committee, presiding.
Present: Senator Lugar.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order.
The committee meets today to continue our review of United
States policy toward the multilateral development banks, the
MDB's. Today we will focus on three regional development banks:
the Asian Development Bank, the African Development Bank, and
the European Bank for Reconstruction and Development. This is
the third in our series of hearings examining ways that the
United States Congress and our Government can contribute to
anti-corruption and anti-fraud efforts at the multilateral
development banks. Our committee is committed to ongoing
oversight of the multilateral development banks through
hearings, project visits, interviews, and document reviews.
We are pleased to be joined by Mr. Bruce Rich,
International Program Manager for Environmental Defense, and
Dr. George Ayittey, Distinguished Economist in Residence at
American University. The committee also invited Mr. Mark
Sullivan, United States Executive Director of the European Bank
for Reconstruction and Development, and Ambassador Paul Speltz,
U.S. Executive Director to the Asian Development Bank.
Regretfully, United States Treasury officials did not allow
Mr. Sullivan and Mr. Speltz to provide testimony regarding the
anti-corruption strategies of the banks to which they are
assigned. This is an unfortunate development because Congress
and this committee oversee the annual United States
contribution of more than $1 billion to the multilateral
development banks and the MDB reauthorization is scheduled to
be considered by the Congress next year.
The United States has strong national security and
humanitarian interests in alleviating poverty and in promoting
progress around the world. That is why the Congress funds
foreign assistance programs and also why we fund multilateral
development banks. The MDB's leverage our resources to promote
poverty reduction and development around the world.
Since 1960, the United States has provided more than $39
billion in direct contributions to the MDB's.
Corruption impedes development efforts in many ways. Bribes
can influence important bank decisions on projects and on
contractors. Misuse of funds can inflate project costs, deny
needed assistance to the poor, and cause projects to fail.
Stolen money may prop up dictatorships and finance human rights
abuses. Moreover, when developing countries lose development
bank funds, through corruption, the taxpayers in those poor
countries are still obligated to repay the development banks.
So, not only are the impoverished cheated out of development
benefits, they are left to repay the resulting debts to the
banks.
In our May 13 hearing, we learned that MDB's have been
taking steps to curb corruption, but that more needs to be done
to ensure that bank funds are used properly. Our witnesses
provided clear recommendations for the MDB's to minimize
leakage of development financing. They recommended changing the
incentives at the MDB's so that staff would have less pressure
to lend. Witnesses also recommended that MDB's focus more
actively on supervision and auditing of MDB lending. They
argued for more transparency in operations and a requirement
that borrowers improve transparency within their governments.
In our July 21 hearing, we learned that the United States
Treasury Department does encourage anti-corruption efforts of
the MDB's and reviews all MDB loans. Treasury, however, has
limited ability to investigate the misuse of MDB funds.
According to Under Secretary John Taylor, ``The first line of
attack, if our staff hears about issues like this, is to work
through our executive directors at the institutions.''
In written testimony provided to the committee, Mr. Dennis
Schindel, Acting Inspector General for the Treasury Department,
advised that ``the international agreements that established
MDB's and the U.S. law that implements the agreements makes
clear that MDB's possess an effective immunity to OIG's
authority.''
During our July hearing, we also learned that the
Government of Lesotho was strained financially during its
prosecution of corruption related to a World Bank-financed
project and that there is not currently a mechanism to assist
poor countries that want to prosecute corruption related to
their loans. It was suggested that the MDB's harmonize anti-
corruption policies and mutually recognize blacklists. For
example, a company that is debarred from the World Bank can
still receive contracts from other MDB's.
The testimony we will hear today will be important to the
future recommendations of our committee. The challenge of
preventing waste, fraud, and corruption at the MDB's must be
tackled with vigor.
We welcome our distinguished witnesses and we look forward
to their insights.
Gentlemen, I will ask you to testify in the order that I
have introduced you. Let me say at the outset that your full
statements will be made a part of the record in full, and you
may proceed as you wish, either to give the statements in full
or to summarize. Following that, the committee will raise
questions of you. Mr. Rich.
STATEMENT OF BRUCE M. RICH, INTERNATIONAL PROGRAM MANAGER,
ENVIRONMENTAL DEFENSE, WASHINGTON, D.C.
Mr. Rich. Thank you, Mr. Chairman, members of the
committee, for this opportunity to testify this afternoon
concerning the corruption in the Asian Development Bank. You
are to be commended for this series of three hearings on
corruption in the MDB's. The multilateral development banks, in
an interconnected world where economic development and
political stability are more critical than ever, are unique
institutions, and they have the potential to play an important
and critical, much-needed role in fostering these goals in
poorer countries.
However, as we heard in the previous two hearings, the
cancer of systematic corruption threatens to undermine the
purposes for which the multilateral development banks were
established. We heard that 20 to 30 percent of World Bank
lending and other donor funds, such as those of the ADB, may
have been stolen in Indonesia, according to the World Bank's
Jakarta-based staff as expressed in leaked internal World Bank
memos from the late 1990's. In other countries with analogous
levels of corruption, the amounts may even be greater.
The Asian Development Bank has lent $105 billion,
approximately, since its inception in 1966. Some of its major
borrowers, such as Bangladesh, rank even lower on lists of
international perceptions of corruption than Indonesia. If 30
percent of ADB lending has succumbed to leakage over the years,
that would amount to over $30 billion in stolen funds.
In our examination of the situation in the Asian
Development Bank concerning control and oversight of corruption
and diversion of loans, we found that it appears to be much
weaker than at the World Bank. To date, the Asian Development
Bank has begun to take some relatively timid measures to
address corruption, but in our view these measures are so
inadequate that many informed observers, both inside and
outside the ADB, would characterize them as cosmetic, whatever
the intention. Like the other multilateral development banks,
the Asian Development Bank suffers from the well-documented
``culture of loan approval'' where staff are rewarded for
processing and pushing loans but not for monitoring projects
and ensuring quality. I go into detail in my statement about
that. It is perceived to be as bad at the ADB as anywhere else,
perhaps worse.
But I have to add that the ADB suffers from a deeper
organizational crisis that is no secret. Over the past 3 years,
two non-U.S. executive directors of the institution, one
representing the United Kingdom and other countries, the other
representing Australia and a constituency of countries, made
very public statements to their colleagues and peers referring
to a deeply entrenched institutional culture of patronage and
lack of accountability for carrying out ADB policies, and that
applies to the corruption issue.
The Donors' Agreement for the Eighth Replenishment of the
soft-loan agreement of the Asian Development Fund, which was
negotiated by the U.S. Treasury and which came out earlier this
year, hardly mentions the word ``corruption.'' It does not
address how the ADB is going to reduce leakage from its
lending. There is a lot of talk about governance, reforming the
personnel system, promoting results management, development
effectiveness, et cetera. But from reading the donors'
agreement, you would not even have the impression that
corruption or leakage was an issue or a problem, nor in
examining some of the other initiatives which are proposed,
such as a new human resources strategy, which if you had to
name one initiative that has been suggested will help change
the institutional culture at the ADB, it is this new human
resources strategy. As I explain in detail in my testimony, if
you read the drafts of this strategy, again the word
``corruption'' hardly appears and there are no specific
references as to how they are going to address this issue in
rewarding personnel, changing incentives, and so on and so
forth.
In light of all that, I might add that the donors'
agreement is an agreement to pump billions more into the Asian
Development Bank, and the U.S. share is going to be about $460
million. Therefore, it is particularly deplorable that Treasury
has refused to allow the U.S. Executive Director of the ADB to
appear today. The Treasury Department has a fiduciary duty to
help ensure that the Asian Development Bank complies with its
legal duty and its charter, its articles of agreement, which is
also part of U.S. law. And article 14, subsection xi of the
charter requires the institution to ``take the necessary
measures to ensure that the proceeds of any loan made,
guaranteed or participated in are used only for the purposes
for which the loan was granted.'' But Treasury, though not
having anyone appear today, is in a few weeks going to come
before this committee and ask it to authorize nearly a half
billion dollars more in the coming 3 years for that
institution.
Well, in my prepared statement, which is quite detailed--I
would be reading for the next hour if I were to read it in its
entirety, so I am obviously not going to do that--I go over a
number of the issues in more detail. I will just summarize them
and conclude.
One, I represent an environmental organization in the U.S.
with over 400,000 members and supporters, Environmental
Defense. Our international program looks at environmental
sustainability and MDB lending, but we are concerned with the
corruption issue because it is part of this culture of loan
approval. And lack of attention to corruption, as one can see
in some of the case studies in our testimony, has led to
massive environmental and social harm to affected people in
specific projects.
I go into detail about a couple of recent projects which
are particularly outrageous: one, a wastewater treatment plant
in Thailand; the other, a major highway construction/transport
project in Sri Lanka. We would like the committee really to go
to the Treasury Department and ask for independent forensic
corruption audits of these projects.
I would like to mention just a couple of the points in the
Sri Lanka project because it has some analogies with the
Lesotho case that was discussed in detail in the last hearing.
This was a $90 million loan for road construction in
southern Sri Lanka. Here, just as in Lesotho, you had a case of
an allegedly corrupt contractor that hired an agent to do the
corrupting. The agent, I guess appropriately enough, was called
``Access International.'' It purportedly had high contacts in
the Sri Lankan Prime Minister's office. It purportedly bribed
the project authority to try to win the bid for this project.
The company in question is a Japanese company, Kumagai Gumi. In
the pre-bidding, the pre- qualification, the company did not
qualify. Among the other things, it had a net negative
financial risk and could have been threatened with bankruptcy.
Three other companies did qualify. The Asian Development Bank
then sent a letter allegedly to the Sri Lankan treasury asking
them, by way of exception, to nevertheless consider this
company. The company then was allowed to submit a second bid
after all the other companies had made their bids. Since it
knew what the bids were and its bid was slightly under what was
required, it won the contract.
The road was built in a somewhat different place with cost
overruns of nearly 100 percent and displacement of hundreds of
households, thousands of people, environmental impacts, wetland
being affected, five temples being partly damaged, so on and so
forth.
In the Sri Lankan newspapers, the attorney general on the
front pages was quoted. He was asked, well, why did you allow
this company--it had not prequalified--to bid and it violated
Sri Lankan procurement rules, ADB procurement rules, and so on?
He is quoted as saying, well, we would not even have thought of
it except the ADB sent us this request saying we should, and it
is an ADB project.
Well, what is particularly indicative of the state of anti-
corruption investigations in Sri Lanka for the ADB is that last
year, 2003, the anti-corruption unit sent its first proactive
mission to investigate corruption in procurement in ADB
projects in Sri Lanka. And they looked at a few and they chose
another project in which they found no corruption, though I was
told they did notice weak financial controls where, if someone
had been corrupt, they could have stolen money, but they found
nothing. But they did not look at the most notorious ADB
project in the country, which was all over the front pages of
the newspapers.
In our statement, we look at two studies that were
conducted recently, one just a few months ago by the Bank
Information Center looking expressly at how the ADB is
implementing its anti-corruption policy. It came out with the
anti-corruption policy in 1998. In 2000, it issued operational
procedures for anti-corruption. Basically these procedures
required it to assess, which is a logical first step, the risk
of corruption in its country lending strategies in specific
project appraisal reports and in post-project evaluations.
Well, this study of the Bank Information Center called ``Zero
Tolerance?'' because zero tolerance is a quotation from the
ADB's anti-corruption policy, looked at a whole variety of
studies, dozens and dozens and dozens, and there is a
remarkably consistent record of non-implementation. The issue
of corruption hardly appears in a whole number of country
strategies, project appraisal reports, and post- project
evaluations conducted in the past 4 years when the ADB anti-
corruption policy was in effect.
Similarly, Environmental Defense looked at 49 different
project evaluation reports for the ADB in recent years, and a
number of them really did identify irregularities that would be
a proxy for corruption, huge cost overruns, contracting
irregularities, et cetera. But the word ``corruption'' never
appears. There is no investigation of corruption.
Well, to conclude, what is the ADB doing to fight
corruption and what more should be done? Well, we mention that
the donors' agreement and this new human resources strategy,
which is supposed to be a linchpin of changing the
institutional culture, does not hardly mention the word
``corruption.'' There is nothing very specific in the human
resources strategy, which apparently was discussed in the ADB
board yesterday about how they are going to address corruption.
So we think that before the committee authorizes $460 million
for the Asian Development Fund, a lot more questions need to be
answered, and perhaps directives need to be attached to the
legislation that would accompany that authorization. Certainly
in the human resources strategy, there needs to be much more
specificity on how they are going to create incentives and deal
mechanically with the issues of auditing corruption. Naturally
they need simply to apply their existing policies, and for
that, you need more resources, more staff, et cetera.
There is a new public information policy that is being
elaborated right now. A lot more can be done there to make all
kinds of information public to affected people in the recipient
countries and frankly to the parliaments and the U.S. Congress
that have to authorize all this money. To start with, the ADB
should publish much more detail on its own internal budget and
how it is allocating resources to focus more on monitoring and
administration of loans, rather than promoting loan approval.
You had mentioned and Under Secretary Taylor mentioned the
issue of debarment proceedings in the anti-corruption units of
the MDB's. The ADB does not make public its debarment of
companies or individuals for corruption. They should do this.
And this whole issue of cross-debarment, of harmonization of
anti-corruption actions is a great recommendation, and the U.S.
should really promote that very vigorously.
The ADB has an anti-corruption unit, which they are trying.
I spent an hour and a half talking to the Auditor General on
the phone in Manila, and he is a candid man fighting an uphill
battle. But they need more resources and staff. There are only
five people in the ADB anti-corruption unit. There are 55 in
the World Bank's Department of Institutional Integrity. I think
Richard Thornburgh has even in his report said they should have
as much resources as they need in the World Bank. So the ADB
level of staffing in their own anti-corruption unit, to be
proportional to the World Bank, would be at the level of around
14.
Finally, I think the main point I would like to emphasize
is that in our overview, which is detailed much more in my
statement, of the situation with anti-corruption in the ADB, we
think it would really be irresponsible to authorize some $460
million from the U.S. taxpayers more for this institution
unless there are much clearer answers and signs of real
progress of things being done in terms of anti-corruption,
changing the institutional culture in the ADB. The record now
is pretty abysmal and disturbing. We hope we can work with the
committee and your staff, who I think are just great--they have
been very helpful in discussing this--over the coming weeks for
perhaps questions, measures, and so on that we can think about.
Well, thank you very much.
[The prepared statement of Mr. Rich follows:]
Prepared Statement of Bruce M. Rich
I. INTRODUCTION
Mr. Chairman, Senators of the committee, thank you very much for
the opportunity to testify this afternoon concerning corruption and the
Asian Development Bank (APB). The Chairman and the committee are to be
commended for the series of three hearings on corruption and the
Multilateral Development Banks (MDBs) that have been held since May. In
an interconnected world where economic development and political
stability are more critical than ever, the MDBs are unique institutions
that have the potential to play an important and much needed role in
fostering these goals in poorer countries.
However, as we heard in the previous two hearings, the cancer of
systemic corruption threatens to undermine the purposes for which the
MDBs were established. As much as 20 to 30% of World Bank lending and
other donor funds, such as those from the ADB, may have been stolen in
Indonesia, according to the World Bank's Jakarta-based staff as
expressed in leaked memos from the late 1990s. In countries with
analogous levels of corruption, the amounts may be the same or even
greater.
The ADB has lent some $105 billion since its inception in 1966.
Some of its major borrowers, such as Bangladesh, rank even lower on
lists of international perceptions of corruption than Indonesia. If 30%
of ADB lending has succumbed to ``leakage'' over the years, that would
amount to well over $30 billion in stolen funds. You yourself, Mr.
Chairman, correctly ventured that the total amount diverted from
cumulative World Bank lending since the institution's inception may be
as much as $100 billion. Although the World Bank is in most respects
the leader in anti-corruption efforts amongst the MDBs, there are
serious questions about whether current efforts are adequate to deal
with the scale of corruption that occurs in some of the World Bank's
major borrowing countries. These countries are also the major borrowers
of the regional MDBs, including the ADB.
The situation regarding control and oversight of corruption and
diversion of loans appears to be much worse at the ADB than at the
World Bank. To date, while the ADB has begun to take some relatively
timid measures to address corruption, these measures are so inadequate
that many informed observers within and outside the ADB would
characterize them as cosmetic, whatever the stated intention. Like the
other MDBs, the ADB suffers from the well-documented ``culture of loan
approval''--where staff are rewarded for processing and pushing loans,
but not for monitoring projects and ensuring quality. But that the ADB
suffers from a deeper organizational crisis is no secret, and over the
past three years at least two non-US. Executive Directors of the
institution have made public statements referring to a deeply
entrenched institutional culture of patronage and unaccountability.
The Donors' Agreement for the Eighth Replenishment of the soft-loan
window of the Asian Development Fund, which the U.S. Treasury and the
finance ministries of other countries negotiated this year for the
period 2005-2008, hardly mentions the word corruption. It does not
explicitly address what the ADB can do to reduce ``leakage'' from its
lending. There is significant discussion of emphasizing governance,
reforming the personnel system, and promoting results management and
development effectiveness. But if the scale of corruption is not
acknowledged in an agreement to pump billions more (of which the U.S.
share is to be $461 million) into the institution, it undermines
confidence in the reform measures proposed.
Therefore it is deplorable that the Treasury Department has refused
to allow the U.S. Executive Director of the ADB to appear today,
particularly given that on May 13, 2004 the U.S. Executive Directors of
the Inter-American Bank and World Bank did appear for the committee's
first hearing on corruption and the MDBs. The Treasury Department has a
fiduciary duty to help ensure that the Asian Development Bank complies
with its legal duty, as required in Article 14 (xi) of its Charter: to
``take the necessary measures to ensure that the proceeds of any loan
made, guaranteed or participated in are used only for the purposes for
which the loan was granted and due attention to considerations of
economy and efficiency.'' Although Treasury has refused to allow the
U.S. Executive Director to appear before this committee to answer
questions regarding ADB corruption, it will soon ask the committee to
authorize nearly a half billion dollars of appropriations for that same
institution.
In the rest of my statement I will examine in more detail the
following issues: the concern of environmental organizations such as
Environmental Defense over corruption in development lending; the
external context of corruption at the ADB; the culture of loan
approval, patronage, and lack of accountability at the ADB; studies
that reveal the extent of the almost total non-implementation of much
of the ADB's 1998 Anti-Corruption Policy and 2000 Operational Policy on
Corruption; projects that clearly demonstrate negligence of the part of
ADB in investigating corruption; the adequacy of ongoing and proposed
reforms for the ADB; and specific recommendations that we believe
should be implemented before fully authorizing U.S. replenishment of
the ADB's soft window, the Asian Development Fund (ADF), next year.
II. ENVIRONMENTAL ORGANIZATIONS AND CONCERN FOR CORRUPTION IN THE ADB
Environmental Defense is a national environmental organization with
more than 400,000 members and supporters nationwide. While most of our
work is domestic, the International Program of Environmental Defense
has conducted research and advocacy concerning the environmental and
social impacts of MDB lending for 20 years, and has made numerous
submissions to Congressional authorization and appropriations
committees regarding these institutions. A number of years ago, our
concern regarding the quality of MDB lending led us to examine the
issue of institutional incentives and controls at these institutions.
Why are organizations such as Environmental Defense, which are
primarily focused on promoting environmentally sustainable lending
policies at the international financial institutions, so concerned
about corruption? The ``culture of loan approval'' and ``pressure to
lend,'' which has been documented in the world Bank and other MDBs for
more than a decade, has often also contributed to failures in the
implementation of policies designed to mitigate adverse environmental
and social impacts of MDB lending. This is quite clear in some examples
of recent ADB projects, discussed later in this statement, such as the
Thailand Samut Prakarn Wastewater Management Project and the Sri Lanka
Southern Transport Development Project. Measures to address the
institutional problems relating to corruption at the MDBs would also go
a long way towards improving overall project quality with respect to
environmental and social impacts.
III. CORRUPTION AND THE ADB: THE EXTERNAL CONTEXT
Corruption in the multilateral development banks can occur at
three, interconnected levels. First, there is corruption of individual
members of staff and management for personal gain. Second, there is
corruption in procurement for provision of goods and services for
specific investment projects. The example of the corrupt bidding
practices, through agents, of international companies involved in the
world Bank Lesotho Highlands Project--discussed in the committee's July
21, 2004 hearing--provides an example. Third, there is systemic
corruption on the part of government officials and ministries in
borrowing countries, where substantial percentages of development
assistance are stolen over years or decades, with at least passive MDB
complicity. The case of Indonesia, discussed in the May 13, 2004
hearing, has become one of the best-documented and publicized examples.
There are indications that the ADB, through both its organizational
deficiencies and its external lending environment, is more susceptible
to corruption than the world Bank on all three levels. The following
sections of this statement will examine the ADB's internal culture and
effectiveness as it relates to these three types of corruption. It is
important to emphasize here that the external lending environment of
the ADB is extremely corruption prone and calls for an extraordinary
level of due diligence--a commitment to which the institution has not
shown.
The ADB's top five cumulative borrowers, and its largest borrowers
in 2003, are among the most corrupt countries on earth, as analyzed in
recent years by Transparency International. Its five biggest cumulative
borrowers are Indonesia ($19.3 billion), China ($13.3 billion);
Pakistan ($13.55 billion), India ($13.315 billion), and Bangladesh
($7.32 billion). The ADB approved some $6.105 billion in loans for
fiscal year 2003, of which $1.532 billion were for Indonesia, $1.488
billion for China, $871 million for Pakistan, $275 million for Sri
Lanka, and $262 million for India.
Transparency International ranks countries annually according to a
Corruption Perception Index (CPI), from a possible highest rating of 10
(highly clean) to 0 (highly corrupt). In 2003, Transparency published
133 rankings: Indonesia is rated near the bottom at number 122, with a
CPI ranking of 1.9. Bangladesh ranks dead last at 133 on the list with
a CPI of 1.3. Pakistan, the third largest cumulative borrower and third
most important borrower for FY 2003, ranks 92 with a CPI of 2.5. India
ranks number 83 with a CPI of 2.8 and China number 66 with a CPI of
3.4. Moreover, a number of the ADB's smaller borrowers such as Cambodia
and Laos, while notoriously corrupt, do not even have a Transparency
International rating. In contrast, countries ranked in the top five
such as Finland, New Zealand, and Singapore had CPI ratings ranging
from 9.7 to 9.4.
Such a lending environment should call for controls on corruption
as perhaps the number one institutional priority. Instead ADB
management has only belatedly and timidly recognized the seriousness of
the issue, despite having promulgated a good governance policy (for its
borrowers, not for itself!) in 1995, an Anti-Corruption Policy in 1998,
and more detailed Operational Procedures on Anti-Corruption in 2000.
My own conversations with ADB officials (some of whom were quite
forthcoming, some of whom wish to remain anonymous) revealed concerns
over the quality of financial reporting and accounting from borrowers.
While the ADB offers technical assistance to borrowers for
``governance'' programs, it has not made rigorous financial reporting
and accounting for its own loans a priority, which would be the first
and single most important thing it could do to begin to catalyze better
accounting by borrowers. I was told that the ADB now requires that
financial reports be submitted in a timely and regular manner, and that
ADB staff are supposed to read the reports, but it's not clear what
attention is actually paid to them.
IV. A DYSFUNCTIONAL INTERNAL CULTURE: LOAN APPROVAL, PATRONAGE, LACK OF
ACCOUNTABILITY AND TOLERANCE OF CORRUPTION
The ADB suffers from the same ``culture of loan approval'' as the
world Bank and other MDBs, with a concurrent lack of resources and
commitment to monitoring and implementation. But it also suffers from a
deeper institutional crisis: it is no secret that the ADB's internal
culture is one that has fostered--and still continues too often to
foster--a climate that turns a blind eye to corruption. Stephen Baker,
a former Executive Director to the ADB representing Australia, shared
his reflections with his peers in February 2001. He stressed that
following the Asian financial crisis there was a ``rude awakening to
the damage wrought by corruption'' and that the ADB still had ``to get
far tougher with those who `skim and scam' on. ADB projects and those
governments which are party to, or allow it to happen.'' \1\ This
former ADB Executive Director also alerted his colleagues to the poor
performance of the ADB: ``Having previously worked under the premise
that every $1 of investment must return at least $1.10, it was
depressing to find from the evaluation reports that some projects
returned as little as 30 cents on the dollar and even some of the
generally successful ones only 60 cents on the dollar. Even more
depressing was the fact that in certain sectors, the Bank kept lending
and kept failing.'' \2\
---------------------------------------------------------------------------
\1\ Stephen Baker, ADB--Wherefore Art Thou (Reflections of a Board
Member who spent three interesting years with the Bank), February 2001,
p. 10.
\2\ Ibid., p. 1.
---------------------------------------------------------------------------
Just fifteen months ago (June 2003), Frank Black, former Executive
Director to the ADB for United Kingdom, Germany, Austria and Turkey,
noted that ``the Bank's appointments, promotion, appraisal and
incentive systems are in need of a thorough overhaul. The system lacks
transparency at present, and there is a prevalent `patronage' system,
whereby staff of sometimes dubious quality, can rise in the institution
by aligning themselves with powerful `patrons' in senior positions.''
\3\
---------------------------------------------------------------------------
\3\ Frank Black, The Asian Development Bank (ADB): A Unique
Contribution? The Effectiveness of the Financing and Political Role of
the ADB in Reducing Poverty in the Asia/Pacific Region (prepared by
Frank Black, departing Executive Director for Austria, Germany, Turkey
and the United Kingdom at the ADB, June 2003), p. 8.
---------------------------------------------------------------------------
Black, in his widely circulated critique of the Bank, stated that
the ADB ``is perceived as very government-oriented'' and ``can too
easily slip into playing the role of propaganda mouthpiece for some
governments (and not always the most democratic or legitimate
governments).'' Black argues that ADB's ability to promote good,
governance in its borrowers is often hampered by an institutionally
rooted conflict of interest where major borrowers are also
shareholders. The Board itself is part of the problem since ``it is
almost entirely reactive to, and very effectively `contained' by the
Bank's management, and by its `consensus culture.' '' According to
Black, ``[t]oo often, and particularly in the case of institutional
reform and some sensitive policy issues, this can mean either `no
change' or a series of backroom deals and compromises presented as
`consensus,' but amounting to the lowest common denominator.'' \4\
---------------------------------------------------------------------------
\4\ Ibid., pp. 4, 8.
---------------------------------------------------------------------------
These deeper institutional crises feed into and reinforce the
culture of loan approval. Pushing money out the door represents the
path of least resistance for a management and board that is reluctant
to exercise independence and rigor vis a vis major borrowing
governments. In the words of former Executive Director Baker,
``Considerable energy is spent on preparing projects and programs for
Board approval. Far less is spent on ensuring they are successfully
implemented.'' \5\
---------------------------------------------------------------------------
\5\ Stephen Baker, ADB--Wherefore Art Thou (Reflections of a Board
Member who spent three interesting years with the Bank), February 2001.
---------------------------------------------------------------------------
A former relatively high ranking ADB official with extensive
operational experience prepared the following comments on the internal
dynamics of the culture of loan approval at the ADB:
The ``organizational ethos'' of the ADB is ``lending.'' This
is their raison d'etre. The organizational structure including
staffing is geared towards this. This is further reinforced
with the bank recruitment, staff deployment and performance
policy.
The personnel policy practiced over the years is heavily
weighted towards loan processing rather than administration.
This has its consequences. First, staff recruitment tends to
favor those with project formulation and processing experience
over applicants experienced in project administration. Second,
the HR performance system is skewed to reward staff with
demonstrated record in processing loan and technical assistance
operations than those in project administration. This is seen
in the number of managerial positions being occupied by staff
rewarded for their performance in loan processing and
perpetuating this practice.
In the bank, the weekly Board meeting agenda is dominated by
discussions on loan proposals. Similarly, management meetings
are convened to appraise loans. Performance at these meetings
defines staff's career and promotion prospects.
The importance of loan administration has been largely
undermined by the attention to loan approvals. The lesser
attention to loan administration can lead to abuses of loan
funds that are easily detected The arduous and less
``glamorous'' task of loan administration is relegated to staff
with ``weaker'' performance. Most loan administration staff
have been less successful in project processing relatively
``less fluent'' in the bank's working language (English) and
generally ``older staff.'' Managerial attention is focused on
pursuing the timely completion of project processing leading to
``approved loans'' in line with organizational goal compared
with loan administration.
The bank has delegated wide ranging approving authority to
implementing agencies to accelerate disbursement as a sign of
effective project implementation. This is often the area for
potential abuse that unfortunately, the bank is not always in
the position to fully understand. Documentation relating to
contract awards is submitted to the bank, post-ante, with a
certification on adherence to bank's procurement guidelines.
However, it does not preclude the implementing agencies from
malpractices such as collusion and price-fixing among
contractors. This is difficult to detect particularly since
loan administration officers are encouraged to approve such
awards quickly to speed up disbursement, which is their
performance measure.
The inadequate attention to loan administration is also
reflected in the resources set aside for its staffing and
supervision missions. In general, the staff team responsible
for processing a loan devotes their full time attention to
``deliver'' the project for approval including funds for
several appraisal related missions. On the other hand, a loan
administration staff has to supervise a number of projects,
This includes combining several project supervision activities
into a single mission. To supplement staff resources, the bank
uses loan administration clerks (Filipino staff many of whom
were ex-secretaries) to accompany professional staff on
supervision missions. Their responsibility is to verify post-
ante contract awards against claims for disbursements. The loan
administration professional's main task is to report on
physical implementation.
Some estimates of total funds corrupted from other MDBs have
reached 30 percent. Internally we feel that this level of
losses is the same if not higher at the ABB.
This individual has asked to remain anonymous. I believe that most
knowledgeable observers inside and outside the ADB would not challenge
his analysis.
In this atmosphere, ADB management has shown an almost cavalier
approach to the consistent and effective implementation of its own
declared policies and procedures. In response to documented examples of
major violations of ADB policies in complaints before the ADB's
Inspection Panel, Management has denied every alleged violation in
every case: the Samut Prakam Wastewater Management Project, the Sri
Lanka Southern Transport Development Project, and most recently the
Pakistan Chashma Right Bank Irrigation Project (Stage III). The first
two projects are discussed in more detail in section VI of this
statement.
The Chashma Right Bank Irrigation Project is the most recent ADB
management response (May 2004) to an Inspection claim. This is a
project for which the ADB committed $172.6 million (60% or the total
project cost of $296.52 million) for a 171-mile irrigation canal along
the Indus River, including the construction of 72 distribution canals,
68 cross-drainage structure, and 91 bridges. The most recent ADB
financing was approved in 1999. The project area in northwest Pakistan
impacts part of the Northwest Frontier Province bordering Afghanistan.
A grievance committee for the project received complaints from almost
9,000 people detailing economic hardship and livelihood losses
resulting from the project. A major issue is that ADB never prepared,
as required by ADB policy, a resettlement and rehabilitation action
plan to address the forced displacement, land and livelihoods losses to
thousands of people caused by the project's huge infrastructure
footprint. In November 2002, representatives of local affected
communities requested an independent inspection of the project, and the
inspection finally commenced in December 2003 . ADB management issued
its response to the draft inspection report in May 2004.
ADB management's expressed views on ADB policies and procedures in
this May 2004 document are disturbing and revealing. Management strikes
a defensive pose and asserts that no ADB Operational Policies and
Procedures were violated because ``[j]udgment also applies to the
interpretation given to Operational Policies and Procedures themselves.
It is for this reason that the ADB's `internal laws' are not written as
rule based statutes but as operational principles. . . . This set up .
. . means that Management (as well as the Board) are called upon to
make evaluations and decisions about what is possible and `doable'
while adhering to the integrity and spirit of ADB's internal laws. . .
. With the above in mind, Management feels it relevant to highlight
that many (all) of the operational principles in place in the past and
today are drafted on the understanding that `one rule does not fit
all.' Professional judgment fills the vacuum.\6\
---------------------------------------------------------------------------
\6\ ADB, Comments of ADB Management to the Inspection Panel on the
Panel's Draft Report on the Chashma Right Bank Irrigation Project
(Stage III) (Loan 1145-Pak [SF] in the Islamic Republic of Pakistan,
May 2004, pp. 3-4.
---------------------------------------------------------------------------
And what a vacuum it is! The management response goes on to state
that the ``vacuum'' for ad hoc differing applications of policy and
procedures based on ``professional judgment'' of management ``is needed
in relation to all due diligence areas, including: technical,
commercial, economic, financial, legal, institutional, environmental,
social, gender, indigenous peoples, resettlement.'' To assert that
``one rule does not fit all'' and that ``professional judgment [of
management] fills the vacuum'' for implementing ADB policies,
including, and especially for, financial and legal procedures, policies
and requirements, is an extraordinary declaration of unaccountability
for an international public financial institution.
The issues of internal personnel culture and culture of loan
approval are mentioned in the ADB's Eighth Replenishment Donors'
Agreement for the ADF. The ADB is also preparing a new internal Human
Resources strategy. Whether there is any reasonable expectation that
changes will be more than cosmetic, timed in anticipation of another
donor replenishment, is an open question to which this statement will
return in Sections VII and VIII.
V. EVIDENCE OF SYSTEMATIC NON-COMPLIANCE WITH ADB ANTI-CORRUPTION
POLICIES AND PROCEDURES: TWO RECENT STUDIES
A. ``Zero Tolerance'' For Implementing the Anti Corruption Policy and
Procedures?
In fact, it is precisely in the area of corruption where we have
the most recently documented and most analytically rigorous studies of
systematic ADB non-compliance with declared policies. The March 2003
study commissioned by the Washington, DC Bank Information Center,
``Zero Tolerance:'' Assessing the Asian Development Bank's Efforts to
Limit Corruption in its Lending Operations, by attorney Steve Herz,
reveals a remarkably consistent record: ``We found that the ADB almost
never complied with the policy requirement to explicitly address
corruption issues in its reports, assessments, and evaluations''
(emphasis in original). \7\
---------------------------------------------------------------------------
\7\ Steve Herz, ``Zero Tolerance?:'' Assessing the Asian
Development Bank's Efforts to Limit Corruption in its Lending
Operations, (Washington D.C.: Bank Information Center, March 2004), p.
iii.
---------------------------------------------------------------------------
The study examined in detail the ADB's policy response to
corruption, particularly its commitments under its Charter, 1998 Anti-
Corruption Policy, and 2000 Operational Procedures on Anti-Corruption.
It then analyzed how the ADB implemented these policies and procedures
in three major stages of the project cycle: country economic and
strategy studies, project appraisals, and project performance
evaluations. The study examined eight recent Country Strategy reports
for eight ADB borrowing nations and 18 recent project appraisal reports
(known in the ADB as Reports and Recommendations of the President to
the Board or RRPs) for three major ADB borrowers with high levels of
corruption: Indonesia, Pakistan, and Bangladesh. Finally, the study
examined 16 project completion and project performance audit reports in
eight different borrowing countries.
The findings are a remarkable exposure of the culture of
unaccountability and non-compliance in the ADB.
Article 14 (xi) of the ADB's Articles of Agreement states that
``the Bank shall take the necessary measures to ensure that the
proceeds of any loan made, guaranteed or participated in are used only
for the purposes for which the loan was granted and with due attention
to considerations of economy and efficiency.'' In 1998, the ADB
published its Anti-Corruption Policy, which Herz notes, does not refer
to the fiduciary requirement in the Articles of Agreement to take ``the
necessary measures'' to ensure ADB funds are used for the purposes
intended. The policy takes a narrower ``more instrumental approach and
grounds its anti-corruption efforts in the pursuit of development
effectiveness rather than the obligation to safeguard Bank funds.'' \8\
---------------------------------------------------------------------------
\8\ Ibid., p. 4.
---------------------------------------------------------------------------
The Anti-Corruption Policy specifies three priorities: ``(i)
supporting . . . effective, accountable, and transparent public
administration as part of the ADB's broader work on governance and
capacity building; (ii) supporting promising anti-corruption efforts on
a case by case basis and improving the quality of the ADB's dialogue
with Developing Member Countries on a range of governance issues,
including corruption; and (iii) ensuring that the ADB's projects and
staff adhere to the highest financial and ethical standards.'' \9\ The
policy cautions staff about ``initiatives that are largely cosmetic in
nature and designed to foster the illusion of progress without the
substance.'' \10\ The Policy declares ``a `zero tolerance' policy when
credible evidence of corruption exists among ADB staff or projects''
and that ``ADR's anti-corruption effort will place particular emphasis
on the implementation of practical and cost-effective preventative
control measures . . . .'' \11\
---------------------------------------------------------------------------
\9\ ADB, Anticorruption, (typeset version of the official policy
paper approved by the Board on 2 July 1998), para. 34, pp. 19-20.
\10\ Ibid., p. 26.
\11\ Ibid., p. 28.
---------------------------------------------------------------------------
For country programming and strategies, the Operational Procedures
``direct management and staff to assess whether ADB projects are likely
to be affected by corruption (luring their design or implementation,
whether a country's ability to attain its national development
objectives are being compromised by corruption, and whether the
government is willing or able to control corruption. In preparing these
documents management and staff are instructed to use plain language and
avoid using euphemistic language that may obscure the nature of the
problem.'' \12\
---------------------------------------------------------------------------
\12\ Ibid., p. 5, citing ADB Anti-Corruption Operational Procedures
at paragraphs 27 and 54.
---------------------------------------------------------------------------
In looking at eight recent Country Strategy Papers, CSPS, (for high
corruption risk Bangladesh, Cambodia, India, Indonesia, Laos, Nepal,
Pakistan, Viet Nam), the BIC study found negligible implementation of
the Policy and Operational Procedures. None of the eight assessed the
impact of corruption on a country's ability to attain national
development objectives, and none assessed in any way the government's
ability and willingness to control corruption. Seven of the eight had
no mention of how ADB projects might be affected by corruption during
design or implementation (for Indonesia there was a general, vague
mention, not in `plain' non-euphemistic language). Only one CSP, for
Indonesia, discussed how the ADB could specifically address corruption.
\13\ In contrast, the study examined World Bank Country Assistance
Strategies for all eight countries and found that the World Bank had
addressed three or four of the corruption issues explicitly and
specifically for seven of the eight countries, and examined two out of
four in the case of one country.
---------------------------------------------------------------------------
\13\ Ibid., p. 7.
---------------------------------------------------------------------------
Going on to project appraisal, the study looked at 18 ADB appraisal
reports (RRPs) approved by the Board in 2002 for three of the ADB's
biggest, and riskiest borrowers: Bangladesh, Pakistan, and Indonesia.
Regarding assessment of the borrower's management and procurement
capacity, 17 of 18 RRPs had no mention of the issue. The risk of theft
and misappropriation of project funds was not considered in any of the
18 reports. Fifteen of eighteen reports provided no assessment of
corruption risk in the project on achieving its objectives. Finally, 13
of 18 reports proposed no specific measures to mitigate project
corruption risks.
For post-project auditing, the study examined eight recent Project
Completion Reports (prepared by the ADB's operations staff one to two
years after completion) and eight Project Performance Audit Reports
(prepared by the independent Operations Evaluation Department three
years after completion). The 16 evaluation reports were selected for
four of the ADB's biggest, most at risk for corruption, borrowers:
Bangladesh, Indonesia, India, and the Philippines. The ADB had a
perfect score: in none of the 16 project evaluation reports for four of
the more corrupt countries on earth did ADB operations staff and
performance auditors assess possible corruption in any respect. \14\
---------------------------------------------------------------------------
\14\ Ibid., p. 11.
---------------------------------------------------------------------------
Apparently, this is how the ``ADB's anti-corruption effort will
place particular emphasis on the implementation of practical and cost-
effective preventative control measures. . . .'' We see clearly how
management's ``professional judgment fills the vacuum'' in interpreting
ADB policies and procedures as flexible principles so that ``one rule
does not fit all.'' No rule applies to anyone at anytime.
The BIC study ventures four possible explanations for the miserable
record of compliance, which basically restate the problems of the
internal ADB management culture discussed above in Section IV. First,
management has not given staff any guidance. on how to assess
corruption issues. It would seem that the Anti-Corruption Policy and
Operational Procedures are largely cosmetic ornaments or public
relations tools, rather than serious directions for ADB operations.
Second, the loan approval culture still prevails, along with the
concurrent lack of resources for supervision and monitoring. Third, ADB
staff do not want to embarrass borrowing governments on the Board or
make them lose face. Fourth, there is a lack of institutional
leadership in top management, starting with the President.\15\
---------------------------------------------------------------------------
\15\ Ibid., p. 10.
---------------------------------------------------------------------------
The ``Zero Tolerance'' study was discussed earlier this year with
ADB officials, including the Auditor General of the institution, who
has stated that he agrees with 99% of the findings. Such candor is
praiseworthy, and perhaps a first harbinger of change in the attitudes
of some in management. Nevertheless, the current situation remains
abysmal.
B. ``The ADB in its Own Words''
``Record keeping also seems to have been abandoned'' ``This
Project did not benefit from having a logical framework'' ``No
identification of beneficiaries was attempted, and thus no
basis was provided for measuring impact on beneficiaries''
``The project was implemented more or less as planned, but at
greatly increased cost with substantial delays'' ``Overall
ADB's supervision of the Project was not adequate''--
Conclusions from recent ADB Project Performance Audit Reports.
When corruption is not explicitly addressed in project evaluations
(as is the case of the ADB), poor performance (cost and time overruns,
reported contracting irregularities, shoddy appraisal with few or no
measurable indicators for project success) can often be a proxy
indicator for corruption in borrowers at high risk for bribery and
fraud. In July 2003, Environmental Defense released an analysis of
almost all publicly available Project Performance Audit Reports (PPARs)
of ADB projects in Indonesia, Pakistan and Sri Lanka.\16\ Most of the
PPARs were conducted in the past six and a half years, during which
time the ADB's Anti-Corruption Policy has been in effect.
---------------------------------------------------------------------------
\16\ Stephanie Gorson Fried, Ph.D. and Shannon Lawrence,
Environmental Defense, with Regina Gregory, ADB Watch, The Asian
Development Bank: In its Own Words: An Analysis of Project Audit
Reports for Indonesia, Pakistan, and Sri Lanka, Environmental Defense,
July 2003. In the case of Pakistan and Sri Lanka, we examined every
PPAR the ADB had made publicly available on its website (23 for
Pakistan, 16 for Sri Lanka); and for Indonesia we analyzed 70% of the
publicly available reports, some 21 out of 30. Presumably ADB
management chose to make public a representative sample of its audits,
a sample which at the very least did not present a view of the ADB's
record that was skewed towards worse than average performance.
---------------------------------------------------------------------------
We found a disturbing record of poor performance, where project
sustainability--whether or not a project provides lasting, long-term
economic and social benefits--was lacking for the vast majority of
projects: based on the sample of ADB publicly available audits at the
time, 70% of ADB projects in Pakistan and Indonesia were not likely to
provide long-term benefits, and 78% in Sri Lanka. It should be painted
out that in its 2000 assessment of multilateral development
institutions, the bi-partisan U.S. Congressional International
Financial Institution Advisory Committee (the Meltzer Commission)
identified project sustainability as the key indicator for measuring
these institutions' performance.
In a number of these projects, clear warning signals of fraud were
identified--e.g. ``contracting irregularities'' resulting in cost
overruns and shoddy, substandard construction--without any mention or
analysis of perhaps the most likely explanation: corruption. In the
majority of the 49 PPARs we analyzed, project appraisal and preparation
was also gravely deficient; most projects lacked coherent, measurable
systems to measure the project's delivery of benefits. The lack of
monitorable indicators in projects makes diversion of funds easier to
perpetrate and harder to detect and prove.
A reading of the findings of these audit reports reveals poor
performance and irregularities time and time again, which at the very
least would call for consideration of whether or not corruption played
a role. For example, the 2000 audit report for the $36.5 million ADB
loan for the Sri Lanka Road Improvement Project uncovered a convoluted
bidding process where rising costs reduced the planned road
construction to 147 kilometers instead of 390, but the project still
incurred a 23% cost overrun.\17\ The 1999 audit of the Sri Lanka Walawe
Irrigation Improvement Project (ADB financing of nearly $20 million)
found that consultant fees were almost three times greater than
appraised, accounting for 20% of construction costs.\18\ The 2002 audit
of the $151 million ADB loan for the Indonesia Third Local Roads
Project identified 1,800 separate road contractors who were hired under
``local competitive bidding procedures.'' There were 10,000 person-
months of domestic consultants and 500 person-months of international
consultants. Most of the ensuing road construction was sub-standard,
using cheap unstable penetration macadam (penmac) rather than higher
quality machine laid hot mix, such as asphaltic concrete. As a result,
``35 percent of the penmac surfaces had severe defects within 3 years;
all of these roads were likely to soon be in poor condition unless
effective maintenance was applied.'' \19\
---------------------------------------------------------------------------
\17\ The Asian Development Bank: In its Own Words, p. 90, citing
Asian Development Bank Post-Evaluation Office, Project Performance
Audit Report on the Second Road Improvement Project in Sri Lanka, June
2000, paras. 11 and 19.
\18\ Ibid., p. 39, citing Asian Development Bank Post-Evaluation
Office. Project Performance Audit on the Walawe Irrigation Improvement
Project in Sri Lanka, December 1999, Section II, p. 3.
\19\ Ibid., p. 9, citing Asian Development Bank Post-Evaluation
Office. Project Performance Audit on the Third Local Roads Project in
Indonesia, December 2002, p. 9.
---------------------------------------------------------------------------
The lack of monitorable benefits indicators is particularly
alarming for non-project program loans. Two agricultural program loans
for Sri Lanka totaling $140 million lacked performance indicators,
ignored the government's institutional capacity to handle the money,
and indeed, lacked ``a logical framework specifying quantitative
performance indicators'' \20\ The audit of a $250 million Food Crop
Sector program loan for Indonesia found ``no performance indicators
against which Program impact could be assessed.'' \21\
---------------------------------------------------------------------------
\20\ Ibid., pp. 40-41.
\21\ The Asian Development Bank: In its Own Words, p. 2, citing
Asian Development Bank Post-Evaluation Office. Project Performance
Audit on the Food Crop Sector Program in Indonesia, December 1997, p.
6.
---------------------------------------------------------------------------
These and many other examples show the development cost of the
ADB's refusal to seriously carry out its fiduciary duty and take
necessary measures to ensure that its loans are used effectively and
efficiently for the purposes intended.
VI. NEGLIGENCE OF THE ADB IN INVESTIGATING CORRUPTION IN MAJOR PROJECTS
Non-governmental and community organizations in ADB borrowing
countries have complained about financial irregularities and corruption
in ADB projects for years. We see flagrant cases where corruption has
been linked not only to irregular procurement and massive cost overruns
but--most importantly from the standpoint of local communities--also to
major changes in the location and design of large infrastructure
projects. These unappraised changes have resulted in major, unmitigated
social and environmental impacts. Two of the most flagrant examples are
described below.
A. The Thailand Samut Prakarn Wastewater Treatment Plant
The ADB approved a total of $230 million in loans for this project.
When the original $150 million loan was approved by the ADB Board in
1995, the project was appraised as two industrial wastewater treatment
plant on both sides of the Chao Phraya River in Thailand. The ADB board
approved a loan for a project which in effect was never implemented:
following the loan approval the Thai Pollution Control Board moved the
site of the plant 20 kilometers away to build a single plant in the
Klong Dan district. Only one company--the NVSPKG Joint Venture--
submitted a bid for the construction, a violation of both Thai and ADB
procurement rules.
Building the plant on the changed site resulted in a cost overrun
of 87% (from $507 million to $946 million; among other things, a,
pipeline had to be built to transfer the wastes from the industrial
plants near the original site) and serious environmental, social and
economic impacts on some 60,000 villagers--most of them dependent on
coastal fisheries that would be polluted by the wastewater plant
discharges--living adjacent to the new site. To finance the cost
overruns caused by the change of location, ADB management asked the ADB
Board to approve an $80 million supplemental financing loan in 1998.
ADB policies and procedures clearly required a reappraisal of the
project at that time, since it was not the project that was approved in
1995, but this was not done. Nor were any of the requisite
environmental impact or social studies conducted based on the new site.
Over the past several years, the Thai press has printed numerous
articles alleging that this seemingly illogical and costly site change
was. linked to a massive land fraud conspiracy among various Thai
government officials. For example, the Bangkok Post reported on
November 15, 2002 that the Thai Development Research Institute found
the company that won the bid was linked to a former Science Minister
and his relatives, and the then deputy Commerce Minister and the Deputy
Industry Minister happened to be co-owners of the land at the new site.
A major consultant to the project, Seatec International Asia
Technology, was owned by a former politician who also jointly owned
some of the land at the new site: \22\ ``Thai law enforcement
authorities believe that PCD [the Thai Pollution Control Authority,
Executing Agency for the project] officials, executives of the Joint
Venture, and the owners of the Klong Dan property conspired to inflate
the purchase price of the [land] parcels by as much as 1000 percent.''
\23\ Thai authorities have brought criminal indictments against senior
officials of the Pollution Control Authority, real estate developers,
and executives of the contractor. \24\
---------------------------------------------------------------------------
\22\ Supawadee Suanpoolthong, A Case Study of Corruption:
Politicians exploited plan ``at every stage,'' Bangkok Post, November
15 2002.
\23\ Steve Herz, ``Zero Tolerance?'' Assessing the Asian
Development Bank's Efforts to Limit Corruption in its Lending
Operations (Washington D.C.: Bank Information Center, March 2004), p,
22, citing Bangkok Post, Klong Dan Wastewater Plant Scandal: Vartana,
Nine Others Accused: Graft Report Names VIPs, Senior Officials (11 June
2002); and The Nation (Bangkok), Making the Case for Graft at Klong
Dan, (18 July 2003).
\24\ Ibid., citing citing Bangkok Post, Klong Dan Wastewater Plant
Scandal: Vartana, Nine Others Accused: Graft Report Names VIPs, Senior
Officials (11 June 2002).
---------------------------------------------------------------------------
Several Thai Government entities launched investigations into
corruption in the project. A Special Committee of the Thai Senate
``found corruption at every stage of the project.'' \25\ The Thai Prime
Minister stated last year that the ADB project was ``riddled with
corruption.'' This has become one of the biggest, most public
corruption scandals in Thai history and more remains to be uncovered:
``Many in Thailand now suspect that the collusive land deals are only
the tip of the iceberg of the corruption on the Samut Prakam project,
and that far grander corruption is likely to have occurred in the
procurement and construction of the project.'' \26\
---------------------------------------------------------------------------
\25\ Luntharimar Longcharoen, Slap in the ADB's Face: The Klong Dan
Wastewater Treatment Project Corruption Scandal, TERRA (Towards
Ecological Recovery and Regional Alliance), Bangkok.
\26\ Herz, Zero Tolerance, citing and The Nation (Bangkok), Making
the Case for Graft at Klong Dan, (18 July 2003).
---------------------------------------------------------------------------
So how has the ADB responded to corruption allegations in Samut
Prakam? June 2000 ADB Special Review Mission to Klong Dan found no
evidence of irregularities in the land acquisition process. The
affected communities at Klong Dan then filed claims of violations of
ADB policies before the ADB Inspection Panel and the ADB Anti-Cormption
Unit of the Office of the ADB Auditor General (OAG). But the Inspection
Committee of the ADB's Board, which has to approve inspections, refused
to allow the Panel to pursue the corruption allegation, arguing that it
was outside the Panel's jurisdiction and that the Anti-Corruption Unit
was conducting its own investigation. The Anti-Corruption Unit never
conducted a full investigation, arguing that the Thai government was
already on the case. The ADB mainly examined the allegation that an ADB
official involved with the project had a conflict of interest, and
concluded by rejecting the allegation.\27\ The Auditor General of the
ADB has stated that while the ADB did not release its internal findings
to the Thai authorities, it did pass on some ``tips'' to them.
---------------------------------------------------------------------------
\27\ See Herz, pp. 24-25 and footnotes,
---------------------------------------------------------------------------
Meanwhile, ADB management's February 2002 response to the
Inspection Panel investigation claimed there were no violations of ADB
policy and procedures in the way the project was conducted. The
Inspection Panel released its report in March 2002, and found
violations of six major ADB policies, including management's failure to
conduct a complete reappraisal of the project when supplemental
financing was requested in 1998. After a heated Board discussion, with
some major borrowing countries arguing against the findings of the
Inspection Panel, the Board basically endorsed the report's
recommendations for remedial measures to address the needs of the
affected population, but did not address any internal issues concerning
violations of ADB policy and procedures, let alone corruption. \28\
---------------------------------------------------------------------------
\28\ See Bank Information Center, Washington D.C., BIC Project
Factsheet #8: The ADB funded Samut Prakarn Wastewater Management
Project in Thailand, Updated July 2002.
---------------------------------------------------------------------------
In early 2003, the Thai government declared the contract for the
plant null and void, and the Pollution Control Department announce that
it is pursuing legal actions against the contractors to sue for
recovery of all funds paid under the contract. All consulting contracts
have been terminated.\29\
---------------------------------------------------------------------------
\29\ Asian Development Bank, Samut Prakam Wastewater Management
Project, Fourth Semi-Annual Report to the Board of Directors on the
Implementation of the Recommendations of the Board Inspection Committee
as Adopted on 24 March 2002, April 2004.
---------------------------------------------------------------------------
The plant remains unfinished and the numerous legal actions filed
by. Thai authorities are unresolved. The ADB closed both loans for
Samut Prakam in December 2003; the 1998 supplemental loan of $80
million for cost overruns and almost $131.7 million of the original
1995 $150 million loan had already been disbursed. The ADB cancelled
the balance of $18.3 million. None of the remedial measures to address
the harm done to local communities have been carried out.\30\
---------------------------------------------------------------------------
\30\ Ibid.
---------------------------------------------------------------------------
The continued lack of a full investigation of the ADB's
responsibility for not monitoring, supervising, and addressing the
massive corruption in this debacle is a scandal. Certainly once the
corruption allegations and huge cost overruns began to surface in the
late 1990s, it could and should have intervened, demanded a full
forensic audit of the project, and halted disbursements on loans. What
we have instead is the observation of the Board Inspection Committee's
February 28, 2002 response to the Inspection Panel (which was not
allowed to address corruption): ``A sudden increase of $421 million in
the estimated cost of a recently approved ADB project is a significant
event.'' \31\
---------------------------------------------------------------------------
\31\ ADB Board Inspection Committee, Inspection Request, Samut
Prakarn Wastewater Management Project, 28 February 2002, Para. 38, p.
7.
---------------------------------------------------------------------------
And what has the ADB learned? Following the second hearing of this
committee on corruption and the MDBs in July 2004, the Far Eastern
Economic Review published an article posing that very question to ADB
officials. The director of the ADB's Mekong Department declared ``we
learn from Samut Prakam as much as we learn from other projects.'' \32\
Given the ADB's record, this is not encouraging.
---------------------------------------------------------------------------
\32\ Christopher Gay, Thai Project Yields Graft and New Policies,
Far Eastern Economic Review, July 20, 2004.
---------------------------------------------------------------------------
B. The Sri Lanka Southern Transport Development Project
The Sri Lanka Southern Transport Development Project is an ongoing
controversy with some analogies to Samut Prakam: after the ADB Board
approved loans for a major infrastructure project that was appraised in
one location, the location was changed, causing massive cost overruns,
environmental damage, and economic hardship for affected populations.
Evidence of procurement irregularities in the ADB-funded project were
publicized in the Sri Lankan press. The lead contracting company
reportedly bribed the project head who was subsequently dismissed by
the government. Affected communities filed an Inspection Panel claim in
2001, and again in 2004 after their original claim was rejected by the
ADB Board Inspection Committee. The Board Inspection Committee
reaffirmed management's assertions that no policies were violated,
despite the recommendation of an. Inspection Panel member that an
inspection proceed. Although the corruption charges became a widely
publicized national scandal, the ADB continues to turn a blind eye to
mounting evidence of major procurement irregularities, cost overruns,
and corruption in this $90 million loan.
The Sri Lanka Southern Transport Development Project involves the
construction, under the authority of the government Road Development
Agency (RDA), of a high-speed highway link from the capital, Colombo,
to the Southern city of Mataria. Much of the original route and area of
impact for the road (a trace three kilometers wide) was moved to a
different location after the project was appraised and approved. The
changed road route. is, according to the June 4th complaint submitted
to the ADB by Sri Lankan community groups, twice the cost of what was
presented to ADB Board when it approved the loan.\33\ The result is
that the number of households displaced and destroyed by the
construction more than doubled, to at least 1,315, as opposed to the
environmental assessment of the original route, which affected 622
houses.\34\ The altered route will destroy a valuable wetland, 1,000
hectares of rice paddies, rubber, tea, fruit and vegetable gardens
belonging to the local inhabitants. Five temples will be damaged. The
affected communities were not consulted, and the ADB, the claimants
allege, has violated its environmental, social and resettlement
policies.
---------------------------------------------------------------------------
\33\ Joint Organization of the Affected Communities on Colombo-
Matara Highway, Submission of Complaint: Southern Transport Development
Project Sri Lanka, Loan SRI 1711, 4th June 2004 (complaint submitted to
the Asian Development Bank Special Project Facilitator as part of the
revised ADB inspection claim process), p. 3.
\34\ Ibid., p. 2.
---------------------------------------------------------------------------
The affected communities filed a lawsuit against the Road
Development Authority (RDA) and won a judgment from the Sri Lanka
Supreme Court in January 2004 that RDA had violated both the National
Environmental Act and the rights of the petitioners under the Sri
Lankan Constitution.\35\ To violate the laws of its borrowers is a
blatant contravention of ADB policies for projects it finances,
monitors and supervises.
---------------------------------------------------------------------------
\35\ Ibid., Appendix 2 containing details of Inspection Request and
new evidence, and Appendix 9, Supreme Court Judgment.
---------------------------------------------------------------------------
Allegations regarding contracting irregularities emerged in Sri
Lankan newspapers in 2001 and 2002, which were confirmed by a
parliamentary Committee on Public Enterprises. In the bidding process
for the project, 29 companies applied, and three met the pre-
qualification bidding procedures, based on a number of considerations,
including the financial condition of the prospective contractors. A
Japanese company, Kumagi Gumi, did not meet the pre-qualification
criteria,\36\ and in fact had a negative financial worth. Kumagi hired
an agent, Access International, to help win the contract. As is typical
with this sort of arrangement, Access would win a hefty fee if it paved
the way, as it were, for a successful contract award for its client.
Sri Lankan newspapers reported that Access had influential political
connections, including in the Prime Minister's Office.\37\ Access is
alleged to have bribed the RDA project official, for example by
installing a new diesel generator in his home, giving him the use of a
new SUV, and promising financial rewards if Kumagi won the
contract.\38\ This use of agents as motors of corruption to win
contracts in some respects recalls the case of the Lesotho Highlands
Project, discussed in the committee's July 21, 2004 hearing.
---------------------------------------------------------------------------
\36\ To pre-qualify companies had to score 60 points in an
evaluation framework assessing their financial stability, technical
capacity etc. The pre-qualifying companies had scores of 95, 79 and 75.
Kumagi's score was 54.
\37\ Frederica Jansz, COPE shoots down Southern Highway, Sunday
Leader (Sri Lanka), October 27, 2002; Frederica Jansz, Of Highways and
Backroom Access, Sunday Leader (Sri Lanka), November 1, 2001.
\38\ Ibid.
---------------------------------------------------------------------------
After the pre-qualification process was complete, the ADB
reportedly sent a letter to the Sri Lankan Treasury requesting that
Kumagi Gumi nevertheless be considered as a bidder on the project.
Three companies, including Kumagi, participated in the final bidding;
only Kumagi was allowed to submit a second alternative bid. Kumagi
knowing the lowest bid of the other two companies, was naturally able
to submit another, lower bid, and win the contract. All of this is
recounted in two Sri Lankan newspaper articles, which I have submitted
for the record. In the aftermath, the bidder that would have under
normal procedures won the contract, protested, repeating the same
allegations, and threatened to bring legal action.
The Sri Lankan parliamentary Committee on Public Enterprises (COPE)
conducted an investigation, and concluded that both national government
procurement guidelines and those of the ADB had been violated.\39\ The
Attorney General of Sri Lanka, when asked how Kumagi could have won the
contract in violation of national and ADB tender guidelines, reportedly
stated: ``Kumagi Gumi had been accommodated purely on a suggestion by
the ADB on February 13, 2001, particularly since it is an ADB funded
project and the guide on pre-qualifications specifically provides [in
such cases] for ADB approval.'' \40\
---------------------------------------------------------------------------
\39\ Ibid.
\40\ Ibid.
---------------------------------------------------------------------------
When the ADB Anti-Corruption Unit undertook its first mission to
perform spot procurement audits in a borrowing country last year, it
went to Sri Lanka, but did not look at the Southern Transport
Development Project.\41\ According to ADB staff, they do not wish to
pursue anti-corruption claims against a project where an Inspection
Panel claim may be underway or pending. This is truly a perverse and
counter-productive approach, since not only does the Inspection Panel
not appear to investigate corruption, it is likely that projects with
Inspection Panel claims underway may be precisely the ones where
corruption abuses may be better documented.
---------------------------------------------------------------------------
\41\ The Anti-Corruption Unit examined another project, and no
corruption. It found weak financial controls which could have been
exploited for corruption if corruption were present in the project.
---------------------------------------------------------------------------
Meanwhile, the STDP project proceeds and Kumagi remains the
contractor. Neither ADB management nor the ADB Board appear to be
interested in investigating the extremely serious procurement
irregularities and cost overruns in this case.
The June 2004 complaint of affected communities notes:
The ADB Board of Directors approved a project which was
significantly different to the one being implemented. ADB
management is disbursing funds for a Project that is different
from the one approved by the Board in 1999. ADB management has
not carried out a full review of the Project to ensure that the
current project is in compliance with ADB policies nor has it
sought approval for the Project's increased costs.\42\
---------------------------------------------------------------------------
\42\ Ibid., p. 4.
This would seem to be a clear, prima facie case of ADB management
and its Board failing to fulfill its fiduciary duty under the Articles
of Agreement to ``take the necessary measures to ensure that the
proceeds of any loan made, guaranteed, or participated in are used only
for the purposes for which the loan was granted. . . .''
VII. WHAT IS THE ADB DOING TO COMBAT CORRUPTION?
In 2001, a departing Executive Director made the following comments
to his colleagues on the Board and to the management and staff of the
ADB:
Perhaps one of the most signs scant breakthroughs that has
resulted from the Asian Crisis is the rude awakening of the
damage wrought by corruption. Unfortunately this realization is
yet. to translate into a widespread appreciation of what
amounts to ``good governance'' in the form of transparency,
accountability and responsibility, but at least it is a
beginning. But the real question for an organization such as
the ADB is ``where do you start?''
My view is that it has to firstly start at home. For example
in relation to contracts, not only must the Bank be exemplary
from within (and I have little to criticize on that account),
but also, in its lending operations, the standards applied must
be of a high order and strictly enforced. We have to get far
tougher with those who ``skim and scam'' on ADB projects, and
those governments which are party to, or allow it to happen.
That may result in lower lending levels, but ultimately the
outcomes will reward the effort, and send clear signals to the
donors and the region that ADB is delivering a graft-free
product to the ultimate benefit of the poor which it seeks to
assist. With each product there should be a ``warts and all''
assessment of leakage.\43\
---------------------------------------------------------------------------
\43\ Stephen Baker, ADB--Wherefore art thou? (reflections of a
board member who spent 3 interesting years with the Bank), p. 10.
However, in the past few years the ADB has failed to systematically
apply its Anti-Corruption Policy and Procedures. It has not
investigated the most flagrant, scandalous and well publicized examples
of corruption, such as the Thailand Smut Prakarn Project and the Sri
Lanka Southern Transport Development Project. This lack of
institutional leadership and managerial integrity concerning a public
international financial institution's most basic fiduciary duty is most
disturbing.
Conversations with ADB staff and Executive Directors' offices
reveal differing perspectives on the institution's commitment to fight
corruption. Some assert that over the past year ADB management has
finally started to realize the seriousness of the issue and there is a
new resolve to deal with the problem. The ADB's Auditor General is both
candid and hopeful, but concedes that change is just beginning and
progress is fragile. Some senior staff are deeply cynical about the
institution's ability to change, noting that cosmetic commitments to
reform come in cycles in anticipation of new ADF replenishments or ADB
capital increases.
With these caveats in mind, we shall examine the anti-corruption
potential of several ongoing initiatives: (a) the Donor's Report for
the Eighth ADF Replenishment (2005-2008); (b) Performance Based
Allocation of country lending; (c) halting disbursements on loans when
borrowers refuse to address corruption; (d) the new Human Resources
Strategy; (e) an ongoing review of the implementation of the ADB's
Anti-Corruption and Governance policies; (f) the new information
disclosure (Public Communications) policy of the ADB, still in draft
revision; (g) the role of the Anti-Corruption Unit in the Auditor
General's Office (OAG).
A. The June 2004 Donors' Report for the Eighth ADF Replenishment
The ADF IX (Eighth Replenishment) Donor's Report \44\ reveals a
general awareness of institutional problems in the ADB, but, as noted
above, barely mentions the word corruption. The Donor's Report does not
address the scale of potential ``leakage'' from ADB lending, let alone
suggest anything as specific as the short suggestions made in Stephen
Baker's farewell observations to the Executive Board in 2001. It does
emphasize a ``Managing for Development Results (MfDR)'' framework, to
be administered by a Results Management Unit (RMU): ``MfDR at ADB will
incorporate measures of effectiveness, efficiency, client satisfaction,
and staff satisfaction. The RMU is developing these indicators drawing
on global best practices. . . .'' \45\ With respect to specific
measures to combat corruption in ADB loans, this is not very
illuminating.
---------------------------------------------------------------------------
\44\ Asian Development Bank, ADF Donors' Report, Development
Effectiveness for Poverty Reduction, June 2004.
\45\ Ibid., pp. 6-7.
---------------------------------------------------------------------------
The Donors' Agreement notes the need for a ``merit-based culture''
and that ``the current incentive structure is weighted towards new
tending; they [donors] suggested that ADB reorient incentives towards
implementation and development outcomes.'' To that end a new Human
Resources Strategy is being developed. ``ADB is planning early remedial
action, including: (i) revising staff incentives to promote greater
attention to project quality rather than lending targets . . . (iv)
implementing a human resources strategy focused on improving
performance management and providing for greater accountability.'' \46\
It is very difficult with commitments in such general, vague language
to assess how deep or effective they are; the credibility of such
proposals lies in the details and implementation. The avoidance of any
specific discussion in the text of glaring problems in ADB performance,
and above all the almost total avoidance of the corruption issue, can
only fuel serious skepticism.
---------------------------------------------------------------------------
\46\ Ibid., pp. 7-8.
---------------------------------------------------------------------------
B. Performance Based Allocation
The Donors' Report cites improving the Performance Based Allocation
(PBA) of ADF resources. The promotion of Performance Based Allocation
in the MDBs was mentioned by Treasury Under Secretary for International
Affairs John Taylor in testimony before this committee on July 21,
2004. The idea is to allot lending based on overall country
performance, as assessed by ADB-promoted indicators. The ADF IX Donors'
Report proposes a greater significance of PBA for country lending
allocations, and an increase of the effective weight of governance
considerations in the PBA to 50%.\47\
---------------------------------------------------------------------------
\47\ Ibid., p.16.
---------------------------------------------------------------------------
The ADB has had a PBA system in place since 2001. This system does
not appear to have had any impact on the implementation of the Anti-
Corruption Policy and Procedures, nor caused any perceptible change in
management's willingness to investigate even the most glaring
corruption scandals associated with ADB projects. Although a revised
PBA system could have the result of reducing lending allocations to
borrowers that rank low on the Transparency International Index, many
of the ADB's major borrowers fall into this category. Moreover,
allotting resources to borrowers based on general ``governance''
rankings would seem to have little relevance to stopping actual ongoing
corruption of ADB resources if the ADB itself has no idea of the extent
of ``leakage'' from its country lending.
C. Suspending Loans When Borrowers Do Not Address Corruption
One unambiguously promising development has occurred in the past
year: the reported halting of disbursements on two loans to Indonesia
because of corruption concerns. Although the 1998 ADB Anti-Corruption
Policy provides for this type of recourse, until last year it had never
been utilized. Reportedly ADB management and the Board are considering
halting disbursements on a third loan to Indonesia, again for
corruption.
D. The New Human Resources Strategy
The Donors' Report also refers to new ADB Human Resources Strategy
which was discussed yesterday (September 27) by the ADB's Board. The
Human Resources Strategy contains a somewhat franker acknowledgement of
ADB's institutional problems: ``There is a widespread perception that
the internal appointment and promotion processes are not transparent
and are not structured to ensure merit-based decision making . . .
Staff consider that there is undue non-disclosure of information about
the processes, and combined with the lack of objective criteria for
recruitment and selection, they do not have an appropriate level of
information to substantiate decisions. These factors create a strong
level of distrust and cynicism about how the organization makes HR
decisions.'' \48\ There is a grotesque irony here: it is clear that ADB
staff complain that they suffer from the same lack of access to
information, and arbitrary, unaccountable non-implementation of ADB
policies--at least concerning human resources management--that
communities and NGOs affected by ADB projects constantly protest.
---------------------------------------------------------------------------
\48\ Asian Development Bank, Human Resources Strategy: Revised
Draft for Discussion, 5 July 2004.
---------------------------------------------------------------------------
The new Human Resources Strategy proposes general measures that in
one sense we all can agree with: a ``Focus on Results'' and ``Linkage
Between Performance and Incentives'' looking at, inter ailia,
``internationally accepted best practices in its HR management policies
and practices.'' \49\ But exactly what results and incentives is the
strategy referring to, and how will these plans be implemented?
---------------------------------------------------------------------------
\49\ Ibid., p. 8.
---------------------------------------------------------------------------
The Summary of the Action Plan notes that the ``lack of objective
criteria to aid selection for each position'' will be remedied by the
establishment of ``an ADB-wide competency framework and skills
inventory'' by the end of 2004. A ``stronger linkage between salary
increase and improved performance evaluation to ensure high level
performers are rewarded with higher salary increases'' will be
established. Finally, the Action Summary states that to establish a
``clear understanding of unacceptable behaviors and consequences'' for
staff through 2005 there will be ``a more effective internal governance
system,'' ``mandatory code of ethics seminars for all staff,'' and a
``review and strengthen[ing of] policies, processes and appropriate
sanctions to ensure staff compliance.'' \50\
---------------------------------------------------------------------------
\50\ Ibid., pp. 10-16.
---------------------------------------------------------------------------
In the July 5, 2004 ``Revised Draft'' of the Human Resources
Strategy, there is no mention of the priorities expressed in the ADF
Donors' Report of ``reorient[ing] incentives towards implementation and
development outcomes,'' ``promot[ing] greater attention to project
quality rather than lending targets''--let alone any reference to
country lending ``leakage.'' The ``Summary of Actions'' in the Human
Resource Strategy does not contain the slightest indication of what the
specific content or orientation of the new performance indicators will
be. Reading the text literally, one could fill in almost any possible
set of institutional priorities, goals and values. It is a document
proposing purely instrumental measures which are almost completely
disconnected from the very real corruption and project performance
problems that threaten to undermine the ADB's very mission.
E. Reviewing the Implementation of the Anti-Corruption and Governance
Policies
The ADB is also conducting a review of the implementation of its
Governance and Anti-Corruption Policies to consider ``the governance
and anti-corruption priority actions for the period 2005-2009.'' \51\
The studies of NGOs discussed in Section V (``Zero Tolerance'' and
``The ADB in Its Own Words'') have already, as one staff member told
us, done a significant part of the work the ADB should have done
itself. The committee should be kept appraised of the progress of this
effort, particularly regarding the ``priority actions'' that the review
will identify for the next five years.
---------------------------------------------------------------------------
\51\ ADB, Fighting Poverty in Asia and the Pacific: Achieving
Results Together. Review of the Implementation of the Governance and
Anti-Corruption Policies (ADB internal document, 6 pages), p. 1.
---------------------------------------------------------------------------
F. Revised Public Communications Policy
The ADB is currently revising its ``Public Communications''
[information disclosure] Policy. Non-governmental groups have welcomed
progress in this area, noting that the draft proposals of the ADB do go
beyond the current disclosure standards at some other MDBs.\52\ But
there are a number of critical areas of particular relevance to
assessing the ADB's corruption efforts where more information should be
disclosed--starting with, for example, more detailed disclosure of the
ADB's own operational budget, resource allocation, and expenditures and
outlays.\53\
---------------------------------------------------------------------------
\52\ Letter of Jennifer Kalafut and Mishka Zaman, Bank Information
Center, to Mr. Robert Salmon, Principal Director, Office of External
Relations, Asian Development Bank, May 28, 2004.
\53\ Ibid., p. 6.
---------------------------------------------------------------------------
G. The Anti-Corruption Unit
Finally there is the role of the Anti-Corruption Unit itself. The
ADB Anti-Corruption Unit, with five professionals, appears to be
understaffed in relation to the 55-person strong Department of
Institutional Integrity (TNT) at the World Bank. According to the
report undertaken by Richard Thornburgh and his associates in July 2003
indicate that the World Bank plans to further increase its anti-
corruption staffing levels.\54\ In the case of the ADB, with
approximately $6 billion a year in loan commitments compared to the
World Bank's $24 billion, an appropriate staffing level for the Anti-
Corruption Unit should be at least around 14.
---------------------------------------------------------------------------
\54\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
Concerning the Proposed Strategic Plan of the World Bank's Department
of Institutional Integrity, and the Adequacy of the Bank's Mechanisms
and Resources for Implementing that Strategy, July 9, 2003, p. 6.
---------------------------------------------------------------------------
The Anti-Corruption Unit, which is under the authority of the ADB's
Office of the Auditor General (OAG), is primarily reactive in its
function, investigating cases of alleged corruption when someone files
a complaint. An Oversight Committee (analogous to the World Bank
Sanctions Committee) rules on whether individuals and firms should be
blacklisted and barred from future ADB business (usually for a limited
period of several years). With a much smaller staff than the World
Bank's INT, Anti-Corruption Unit investigations have lead to the
debarment of 207 firms and individuals, as opposed to 288 to date at
the World Bank. The World Bank makes its debarments public, but the ADB
does not. The Thornburgh reports on fighting corruption at the World
Bank emphasized in the strongest terms the desirability of automatic
publication of debarments.\55\
---------------------------------------------------------------------------
\55\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
Concerning the Debarment Processes at the World Bank, August 14, 2002,
pp. 82-83.
---------------------------------------------------------------------------
The rationale for not naming debarred companies and individuals at
the ADB seems to be two-fold. First, the news of debarment supposedly
spreads rapidly in the business and consulting community, since
debarred firms doing business in the Asia-Pacific region have to alert
possible business partners of their status for every prospective ADB
contract. Second, large, powerful firms bring tremendous political
pressure to bear when confronted with potential debarment. Public
debarment would likely make this pressure on the ADB, given its
closeness to governments, even more intense. It is true that some major
industrialized donor nations play an extraordinarily hypocritical role
in lobbying for their businesses behind the scenes at the MDBs. ADB
staff informed us that the Ambassador to the Philippines of a donor
country directly protested the prospective debarment of a major company
for corruption, claiming that the ADB Anti-Corruption policy was not
intended to have such consequences. Nevertheless, the argument for
automatic publication of debarments is strong, I will return to it in
my summarizing recommendations.
Since the Anti-Corruption Unit serves a primarily reactive
function, it is at best only one part of an effective strategy to
address corruption. Proactive and preventative measures, as the
Thornburgh World Bank reports stress, are equally important. The Anti-
Corruption Unit has begun, despite its limited resources, to undertake
proactive spot procurement audits of projects. As it is, the
effectiveness of the Anti-Corruption Unit is also limited by the
restrictions and limitations ADB Management and the Board have put upon
it. For example, there appears to be a de facto rule that the Anti-
Corruption Unit will not conduct pro-active investigations of projects
if an Inspection Panel claim is in process or pending, nor when there
is an ongoing government corruption investigation. But these are
precisely the cases where there may be greater evidence of ADB
negligence or complicity.
VIII. CONCLUSION AND RECOMMENDATIONS
Mr. Chairman, Richard Thornburgh and his colleagues made the
following observation concerning the World Bank, which I believe
applies even more urgently to the Asian Development Bank:
It is important to recognize that any responsible business
would have been attempting from the time of its inception, to
stem fraud and corruption that interfered with its mission. In
the Bank, however, senior management began to acknowledge the
problem openly only in 1996--after a half century of operation
and after significant amounts had already been lost to fraud
and corruption. The Bank has a lot of catching up to do.\56\
---------------------------------------------------------------------------
\56\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
Concerning the Proposed Strategic Plan of the World Bank's Department
of Institutional Integrity, and the Adequacy of the Bank's Mechanisms
and Resources for Implementing that Strategy, July 9, 2003. pp. 5-6.
In the Asian Development Bank there is still a question as to what
extent senior management has even ``began to acknowledge the problem.''
We have seen the documented non-implementation of the Anti-
Corruption Policy and Procedures and the unwillingness of ADB
management to investigate some of the most flagrant and well-publicized
cases. Current organizational plans at the ADB do not explicitly
address the issue of corruption, let alone propose explicit measures to
reduce it. One reads the ADF Eighth Replenishment Donors' Report, and
the July 2004 draft Human Resources Policy, and comes away with the
impression that major ``leakage'' of ADB loans and procurement abuses
are hardly a problem. The Performance Based Allocation system at the
ADB, in place since 2001, seems to have had little impact on
Management's commitment to implementing the Bank's Anti-Corruption
Procedures and to investigating controversial cases. General governance
rankings and corresponding country lending allocations will not address
the corrupt diversion of ADB resources if the institution itself is not
assessing corruption risk in its own country strategy and lending
instruments. The most positive development at the ADB has been the
willingness to halt disbursements on two loans when the borrower was
not adequately guarding against corruption. But such actions are
insufficient and long overdue.
Mr. Chairman, we believe the record of the ADB in addressing
corruption is so poor that it would be irresponsible to authorize
hundreds of millions of dollars for this institution--as Treasury will
ask the committee to do in the coming year--without a clearer idea as
to the steps ADB is taking to implement reforms that will effectively
address corruption. Some of these reforms are elaborated as
recommendations below.
Recommendations
In the course of these hearings, a number of quite detailed and
relevant recommendations were made by other witnesses which also apply
to the ADB. The testimony of Manish Bapna of the Bank Information
Center (BIC) on May 13, 2004 sets forth a framework of recommendations
which we strongly endorse. Carrying out a number of these
recommendations would in effect simply be a matter of rigorously
implementing the ADB's existing Anti-Corruption Policy and Operational
Procedures on Anti-Corruption.
A. The First recommendation of the May 13, 2004 BIC testimony
calls for ``Evaluating Corruption Risks in Project and Sector
Operations Explicitly.'' The ADB should rigorously implement
its Anti-Corruption Operational Procedures to explicitly assess
corruption risk in its country strategy programs, project
appraisal, and project performance evaluation reports. This
will require, as the BIC statement notes, the development of
clear diagnostic tools and indicators for staff to conduct a
rigorous assessment of corruption risks for different sectors
and types of loans.
B. The second recommendation calls for special attention to
and methodologies for risky sectors and loans: for example,
extractive industries (oil, mining and gas), large
infrastructure, and private sector operations, and, we would
add, for non-project, program loans. With respect to extractive
industries, a comprehensive set of recommendations can be found
in the World Bank commissioned Extractive Industries Review
(MR). One of the most important recommendations would require
revenue transparency concerning royalties and fees paid to
borrowing governments by private extractive companies supported
by the MDBs, and ensure that revenue management systems are in
place to account for the pro-poor uses of those revenues.
Regarding program lending, former ADB Executive Director
Frank Black told his colleagues that the ADB, in comparison to
the World Bank, ``has much weaker in-house capacity in managing
programmatic lending.'' \57\ Since the ADB has increased
programmatic lending in recent years, diagnostic tools and
indicators to assess, monitor and address corruption risks in
programmatic lending should be a top priority.
---------------------------------------------------------------------------
\57\ Frank Black, departing Executive Director for Austria,
Germany, Turkey and the United Kingdom, ADB, The Asian Development Bank
(ADB): A Unique Contribution? The Effectiveness of the Financing and
Political Role of the ADB in Reducing Poverty in The Asia/Pacific
Region, June, 2003, p. 4.
C. Enhancing Transparency and Disclosure is a critical
preventative measure to reduce the likelihood of corruption in
ADB operations. The ongoing revision of the ADB Public
Communications Policy presents a timely opportunity for
progress, The Bank Information Center and other NGOs have
submitted a number of recommendations for the improvement of
---------------------------------------------------------------------------
the current draft Public Communications Policy, such as:
1. The ADB should start by releasing more detailed
information on its own budget, including information on
its internal allocation of resources, and actual
expenditures and outlays. It should provide a
transparent, public and detailed account, for example,
of how the ADB will allot more budgetary and staff
resources for monitoring and improvement of project
performance and quality, including addressing
corruption, as opposed to loan preparation and
approval.
2. The ADB should routinely disclose documents in
draft form, before final decisions are made on a
policy, project or program. One of the main purposes of
disclosure, of course, is to obtain input to improve
the final policy, project or program.
3. Civil society organizations have called upon the
ADB to disclose Aide Memoires, documents produced
throughout the project cycle that outline Bank and
Borrowing Government agreements on steps taken in
project development and implementation. Disclosure of
Aide Memoires would be particularly useful in the anti-
corruption fight by providing interested and affected
civil society groups information on specific
commitments their governments are supposed to be
undertaking with ADB money. It should be pointed out
that the IMF now discloses Country Letters of Intent,
which are documents in which governments describe what
steps and measures they have committed themselves to
under IMF Standby Agreement loans.
4. The proceedings of the Board of Directors should
be open to the public. Transcripts and summaries should
be publicly available. This would be very important
step towards holding the Board itself more accountable
for oversight, including fiduciary oversight, of ADB
operations. As noted by former ADB Executive Directors
Baker and Black, the Board is too often divided and/or
weak in performing its basic oversight duties. Great
transparency of its proceedings will help create
incentives for better and more effective Board
performance.
5. Greater access to information for project
beneficiaries and affectees will also be an added brake
on corruption. The ADB must make translation of certain
documents (pertaining to project planning and
implementation stages) mandatory, and must employ more
proactive means of seeking opinions of those who stand
to gain or lose from the ADB's interventions .
6. Finally, access to information needs to be better
organized and centralized: all relevant project
information should be collected on a single place on
the Bank's website; and ADB public information centers
need to be established in all its borrowing countries.
D. Changing the internal culture and institutional
incentives. This is perhaps the most important and challenging
issue. The main vehicle at present for advancing this agenda
appears to be the new Human Resources Strategy. Yet, as noted,
drafts of the policy have almost no reference to corruption nor
specifics on how staff would be evaluated in addressing the
issue. The committee should ask for clarifications from
Treasury on exactly how the new Human Resources Strategy will
systematically address corruption risks in ADB operations.
For example, there are specific well-designed ``business
tools'' that the ADB and other MDB staff could and should be
required to use to guard against corruption. Transparency
International in the U.K. has developed a number of check-lists
and questionnaires for use in banks and international agencies
conducting due diligence in the Construction and Engineering
Industry. A recurring problem in international procurement is
the use of corrupt agents to win contracts for bidders.
Transparency International, U.K. has developed a comprehensive
``Agency Questionnaire'' along with a guide to evaluating
answers with respect to likely indicators of corruption (see
www.transparency.org.uk).
Finally, ADB Management's decisions in areas besides the
Human Resources Strategy, such as the allocation of resources
and staff for implementation of the Anti-Corruption Policy,
decisions to release more information as described in sub-
section C, decisions to proactively investigate corruption
scandals, and to halt loan disbursements in certain cases, will
be indicators of a changed internal culture.
E. Galvanizing the Board in its Oversight and Fiduciary
Duties: Stephen Baker described his first impressions when he
assumed is position as an Executive Director as frustrating
ones: ``The impression gained was that the role of the Board
was restricted merely to endorsement of management initiatives.
. . . During casual discussions with staff it became apparent
that the Board was regarded by some as more of a liability than
an asset, or to quote, `a waste of money.' '' \58\ Frank Black,
another departing Executive Director, told his colleagues in
June last year that ``while virtually all donor and some
borrowing shareholders have concerns about the Bank's internal
governance and a commitment to promoting institutional reform,
the Board, at least as it operates at present, does not provide
sufficient impetus.'' \59\
---------------------------------------------------------------------------
\58\ Stephen Baker, ADB--Wherefore art thou? (reflections of a
board member who spent 3 interesting years with the Bank), February,
2001, p. 1.
\59\ Frank Black, departing Executive Director for Austria,
Germany, Turkey and the United Kingdom, ADB, The Asian Development Bank
(ADB): A Unique Contribution? The Effectiveness of the Financing and
Political Role of the ADB in Reducing Poverty in The Asia/Pacific
Region, June, 2003, p. 8.
---------------------------------------------------------------------------
Although we believe that the U.S., along with some other
shareholders, has tried to galvanize the ADB Board to ensure
better oversight, we believe that the Board has failed to get
management to adequately carry out its fiduciary duties. One of
the most important things the U.S. could do to create
incentives for the Board to improve its own focus and that of
management, would be to promote the improved information
disclosure measures mentioned above, especially the full and
timely disclosure of all Board proceedings and transcripts.
F. Changes in the Debarment Process: In the July 21, 2004
hearing before this committee, Treasury Undersecretary John
Taylor made two recommendations regarding debarment of corrupt
companies which we strongly endorse. First is the automatic
publication of debarred companies in the ADB and other MDBs.
There is simply no good excuse for the ADB practice (we believe
this is true in the IDB also) of keeping the names of debarred
companies and individuals anonymous. In the words of Richard
Thornburgh and his associates:
The greatest proponents of public disclosure are
[World] Bank employees with field experience involving
procurement issues they favor as widespread a
dissemination as possible . . . As noted by another
[Bank staffer] lecturing by the Bank against corruption
will not work by itself, ``fear must be placed in the
hearts'' of those willing to give or take a bribe, One
of the few things that can provoke such fear is the
prospect of a public debarment.\60\
---------------------------------------------------------------------------
\60\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
Concerning the Debarment Processes at the World Bank, August 14, 2002,
pp. 82-83.
The second recommendation is cross-debarment from all the
MDBs when a company has been debarred from one of them. It
would be entirely illogical, and counter-productive, for one
MDB to go to the cost and effort of an investigation resulting
in the debarment of a company for corruption, while the same
company would still be able to do business with its sister
institutions--indeed, in some cases, sister institutions
working in the same region or country. Moreover, public cross-
debarment would have a still more leveraged deterrence effect
for other potential bribers and bribees.
If the company is a U.S. one, it should also be debarred from
doing business with other U.S. agencies operating abroad,
including USAID, the U.S. Export-Import Bank, and the Overseas
Private Investment Corporation. Through the OECD Development
Assistance Committee (DAC) and the OECD Working Group on Export
Credits, the U.S. should also seek similar cross-debarment
commitments for the bilateral aid agencies and export credit
agencies of other donor nations.
G. Greater Readiness to Halt Loan Disbursements When
Government Borrowers Are not Addressing Corruption: As noted
earlier, this is one of the strongest signals the ADB can send
that it is serious about corruption. One occasionally hears
concerns that slowing lending and halting disbursements for
whatever reason will have a negative development impact, since
it may increase the number of governments that are paying more
money back to the ADB than they are receiving in new loan
disbursements. But lending more to indebted governments of poor
countries when substantial percentages of loans are being
diverted is unconscionable, saddling nations with a debt that
is increasingly viewed as illegitimate. It is also a violation
of the most basic fiduciary duty in the ADB's charter; namely,
to ensure loans are used for the purposes intended.
H. Strengthening the Anti-Corruption Unit: We noted that the
ADB Anti-Corruption Unit is much smaller in proportion to the
Asian Development Bank than the Department of Institutional
Integrity (INT) is to the World Banks In coordination with
other ADB Board members, the U.S. should call for an increase
in staffing and resources for the Anti-Corruption Unit, so that
its resources are least proportionally closer to those of INT
in the World Bank. This would probably mean, for example, an
increase of staff size from five to around fourteen.
The Anti-Corruption Unit should be no longer hindered from
undertaking anti-corruption investigations, whether in response
to a complaint or proactively, in cases where there may be
ongoing Inspection Panel investigations or in-country
government corruption investigations.
The Anti-Corruption Unit should be given more resources to
conduct more numerous and frequent proactive spot corruption
and procurement investigations, something which it did for the
first time last year in Sri Lanka and is currently planning in
Viet Nam.
I. Proactive, Independent Forensic Audits of Corruption for
the Thailand Samut Prakarn and Sri Lanka Southern Transport
Development Projects: The ADB's failure to investigate the
blatant evidence of corruption and procurement irregularities
in the Thailand Samut Prakarn Wastewater Treatment Plant and
Sir Lanka Southern Transport Development Project is
particularly disturbing. No one appears to be held accountable
in the ADB for the blatant mismanagement of these projects, nor
does the institution appear to have learned much from the
corruption aspects of these cases, since the ADB itself has not
conducted a thorough corruption investigation in either
instance. We would recommend that the committee call upon
Treasury to request ADB management to commission independent
corruption investigations of these projects, whether through
the Anti-Corruption Unit or outside consultants. We believe
that the lessons learned would greatly inform wider range
efforts to change staff incentives vis a vis corruption, and
prevent such abuses from occurring in the future.
It is also imperative that ADB management find some means of
delivering restitution and assistance for the communities that
have been adversely affected by the mismanagement of these two
projects. The affected communities in these two ADB projects
are truly ``corruption refugees.''
The Chairman. Well, thank you very much, Mr. Rich, for your
testimony and your very comprehensive statement that
accompanies it.
Dr. Ayittey.
STATEMENT OF GEORGE AYITTEY, PH.D., DISTINGUISHED ECONOMIST IN
RESIDENCE, ECONOMICS DEPARTMENT, AMERICAN UNIVERSITY,
WASHINGTON, D.C.
Dr. Ayittey. Mr. Chairman, I am extremely grateful and
very deeply honored to be asked to testify before your
committee regarding corruption and the African Development
Bank.
I have been one of those angry Africans who have been
involved in development of the continent for the past 30 years
or more. The reason why I use the term ``angry'' is because
over the past 4 decades or so, all sorts of western
organization multilateral development banks have pumped more
than $500 billion to try and encourage or spur development in
Africa. But all these efforts have produced very little
results. As a matter of fact, Africans today are worse off than
they were in 1960 when they gained their independence from
colonial rule.
Now, there is something maddening about all this. We are
talking about a continent which is tremendously rich in mineral
resources. There is no need, there is no reason why Africans
should be mired in poverty as they are today.
Now, another aspect of this is that not only have American
taxpayers wasted their money, but Africans are left with the
bill to pay. I mean, they are responsible to repay the loans
that were taken to spur development. If American taxpayers want
to throw away their money, they should not ask the African
people to pay it back.
I would like to sort of focus on the African Development
Bank because that is where the continent's real problems are
sort of situated. I should mention that the structure of the
operations of the African Development Bank is different from
the Asian or the other regional development banks because the
African Development Bank deals directly with governments. As a
matter of fact, about 98 percent of its loans is granted to
government ministries and agencies. Now, the African
Development Bank is not really involved in the contracting out
of these loans for the projects. It just approves the
application and the funds go to governments, and the
governments are responsible for ensuring that contracts are
subjected to international bidding, et cetera. So within the
African Development Bank itself, there is a limited scope for,
say, corruption or kickbacks and bribery and receiving
commissions, for example. So if we are looking for the reasons
why the corruption has sort of been responsible for the
nonperformance of the bank's portfolio, we need to look more
elsewhere.
The bank's overall portfolio has not performed very well to
achieve its intended objectives. I went to the bank's web site
and the latest information I could get was for 1997 for its
portfolio performance. For that year, 31 percent of the bank's
entire portfolio was considered to be problem projects. 31
percent problem projects. And the worst part was that of the
ongoing projects, 40 percent of them were considered to be at
risk which, if you add the two percentages up, it means that
more 70 percent of the bank's portfolio is not performing.
Now, as I indicated earlier, corruption within the bank
itself is not one of the main culprits. The main culprits lie
elsewhere. The first of these is that the bank, like the World
Bank, has been a victim of the environment in which it
operates. It operates in what I call a sea of coconut republics
where government does not exist. What we have in many African
countries is a government which has been hijacked by a phalanx
of thugs and bandits who choose the instrument of the state to
enrich themselves, their cronies, their tribesmen, and exclude
everybody else. I call this a vampire state. I have inserted in
my testimony the wealth and the personal fortunes of many of
Africa's autocrats. Some of them are worth more than billions
and billions of dollars. As a matter of fact, the President of
Nigeria, Obasanjo, himself claimed that corrupt African leaders
have stolen at least $140 billion from their people since
independence.
And foreign aid has not been spared either. Let me quote
you what The Economist magazine wrote, that for every $1
foolish westerners lent Africa between 1970 and 1996, 80 cents
of that flowed out of Africa as capital flight and typically
into Swiss ban accounts to buy mansions on the Cote d'Azur in
France, for example, which meant that 80 percent of the loans
or the aid that foolish westerners gave Africa never got to the
people. It flowed right out of Africa.
And the former British assistant secretary of state for
international development, Lynda Chalker, revealed that 40
percent of the wealth created in Africa is invested outside the
continent.
Now, last month the African Union revealed that Africa
loses an estimated $148 billion due to corruption annually.
Now, if you take the amount that Africa loses to corruption,
that is 100 times more than what Africa receives in aid even
from all sources.
Now, it is in this environment that the African Development
Bank has to operate. Now, over 95 percent of its clients are
government ministries and agencies. In 2003, last year, 121
project loans were approved by the African Development Banks,
and 98 percent of all those loans went to government ministries
and agencies. So far this year and at its web site, the African
Development Bank says that 19 project loans have been approved,
as posted on its web site, but only 2--only 2 of them--went to
non-government borrowers.
Now, there has been some mission creep within the African
Development Bank. The bank often deals with what we call crafty
bandits who sort of hijack and sort of pervert such buzzwords
as ``development,'' ``democracy,'' ``foreign investment,''
``rule of law,'' et cetera. To them ``development'' means
developing their pockets and seeking foreign investment means
investing the loot in a foreign country.
Now, these guys are not very serious about policy reform.
You ask them to privatize inefficient government-owned
enterprises, and they will sell them to themselves and to their
cronies.
You ask them to respect the rule of law, and they will bend
the law to respect their whims. In Zimbabwe, for example, The
Economist writes that it is the thieves who are in charge and
their victims face prosecution.
You ask them to trim the bloated bureaucracies that they
have, and what they will do is they will set up a government of
less government intervention.
You ask them to promote private enterprise, and they will
set up a ministry of private enterprise.
Now, this kind of chicanery is what has stymied reform and
growth in Africa.
You notice that ever since September 11th when the U.S.
declared war on terrorism, many of Africa's autocrats are also
fighting against terrorism when they themselves are the real
state terrorists. Even Charles Taylor of Liberia once claimed
that he was fighting against terrorism. He even set up an anti-
terrorist unit. And you also have regimes in Sudan, in Zimbabwe
all fighting terrorism.
In other words, the point which I want to get across is
that they take such buzzwords and then pervert it and use it as
bona fide. The African Development Bank is often duped by these
gangster regimes and co-opted to become an extension of their
treasury. The bank's original mission has become so elastic
that it has lost its meaning. The terms ``poverty reduction''
and ``capacity building'' have been perverted and corrupted by
governments to define every project submitted to the bank for
funding. Currently the bank has approved a loan for capacity
building of rural women in Ethiopia, whatever that means. There
are many other examples and I have compared these examples,
which I took from their web site in January of this year.
The African Development Bank in Djibouti signed a loan
agreement to finance basic health services. There is also
another loan to Senegal to support private sector adjustment
support program. The details are there. In Sudan, for example,
the African Development Bank is providing institutional support
to government for poverty reduction. In Tanzania, the African
Development Bank is also providing institutional support in the
ministry of finance. In Ghana, you have a poverty reduction
support.
There are many, many flaws and conceptual problems with
this. Number one, if you give loans to African governments and
you are reinforcing the status economic development approach
which has failed Africa miserably. By status development
approach, I mean the state-led development effort. We are not
encouraging the private sector. You are reinforcing this notion
that it is the state which must initiate development. That is
the first wrong with this particular approach. Now, the African
Development Bank should be giving more loans to the private
sector, not to the government.
The second problem is that allocating more African
Development Bank loans to the state or the modern sector simply
defies common sense. Africa is made up of three sectors. There
is the modern sector, and there is the traditional sector, and
there is the informal sector. The vast majority of the African
people live in the informal and the traditional sectors.
Agriculture is their main occupation. You cannot develop Africa
by ignoring the informal and the traditional sector, nor can
you develop the informal and the traditional sectors if you do
not understand how they operate. But you see these are the
very, very two sectors which African governments neglected
after independence.
The African Development Bank is repeating the same error.
As a matter of fact, if you look at the bank's own commitment
to agriculture, it has remained low at 18.5 percent of its
total portfolio. And the agricultural portfolio's performance
has been the worst. The bank itself says this: ``Performance of
the agricultural portfolio is below the bank's average
performance. In 1997, 16 percent of the 142 agricultural sector
projects were rated as problem projects, and 23 percent of the
agricultural sector projects were rated as unlikely to attain
their developmental objectives.''
Now, is it is also debatable whether the African
Development Bank should be in the humanitarian or the relief
assistance business at all. Another additional problem is that
the African Development Bank in providing loans for basic
programs such as education, health care is of concern because
these are basic services which normal governments should be
providing to their citizens out of normal tax receipts, and in
normal circumstances the African Development Bank should not be
in this particular business.
And more worrisome is the fact that the African Development
Bank is becoming increasingly involved in the policy reform
area. It is of increasing concern because African autocrats are
simply not interested in reform. Period. The reason why I am
saying this is because billions of dollars have been spent by
the World Bank, the multilateral institutions, foreign donors
to try and bribe and cajole recalcitrant despots to implement
economic and political reform.
Now, the democratization process in Africa has stalled.
Back in 1990, there were four democracies, and after the
collapse of the Soviet Union, there was a wave of
democratizations throughout the continent. The number of
democracies rose. Now it is stuck at 16 out of 54 African
countries, which means that tyranny remains the order of the
day in Africa. The autocrats are simply not interested in
reform.
The record on economic reform is even worse. The World Bank
itself spent $25 billion trying to persuade African governments
to restructure their economies. And over the period of time,
1981 to 1991, the World Bank said out of the 29 adjusting
African countries, only 6 of them have been successful, which
means that 6 out of 29 gives a failure rate of more than 80
percent. So the policy reform area is not the area where the
African Development Bank should be. Even the World Bank tried.
It could not succeed. Occasionally, the World Bank comes up
with a phantom list of success stories, only for the list of
countries to disappear in a year or 2.
Now, the other problem that the African Development Bank
has is that it does not have enforcement mechanisms. It
responds feebly. It can set up anti-corruption conferences, and
indeed it has. But its missions in various African countries
are only manned by a skeleton staff which cannot enforce
anything at all. But even if it tries to enforce strict
accountability rules, it will clash with domestic governments
and may be seen as interfering in the domestic affairs of these
various governments. So it can only take tepid steps, such as
holding conferences and workshops on corruption and withdrawing
from the Lesotho water project, which was riddled with
corruption. You cannot have reform in the bank itself without a
concomitant reform of the environment within the bank operates.
Now, I would like to make a couple of suggestions in terms
of improving bank operational efficiency assuming that there is
nothing that can be done to clean up the environment within
which the bank operates.
First of all, the bank's scope of operations needs to be
limited. The original objective of promoting regional
development to meet especially energy needs has been submerged
in favor of a far more expansive objective.
Right now, the mission of the bank has even crept even
further to embrace NEPAD. Now, NEPAD is badly structured. NEPAD
is the New Partnership for Africa's Development. It is badly
structured, badly structured because it was modeled after the
Marshall aid plan, and number two, African civil society, the
people were not consulted when this document was put together.
Yet, the African Development Bank wants to invest $372.5
million in NEPAD.
Now, for real development to take place in Africa, the
African Development Bank should limit--and this is my own
suggestion--to 20 percent its portfolio lending to African
government ministries and agencies. The focus should be on the
private sector, not on the government sector.
Now, second, it should also limit its lending to countries
on the verge of implosion. The African Development Bank was
headquartered in Ivory Coast, and the country blew up. And when
the country blew up, the African Development Bank had moved to
Tunisia. Liberia, Sierra Leone, for example, the African
Development Bank had many projects there. When those countries
blew up, the African Development Bank lost all those loans used
to fund those projects.
Now, number three, the African Development Bank should
focus on the informal and the traditional sectors. That is
where the real people of Africa are, and they want to help
themselves. All they need is a small, micro-credit finance.
Now, I have indicated in my testimony such small micro-finance
projects which were funded, one of them in Bamako to a certain
woman who was unemployed and she set up a local small business
with a loan of just $50 from Oxfam. Just $50. Now she is able
to operate and open up her own bank for rural women.
Now, there is another success story in Senegal also funded
by Christian Aid, another one in Ethiopia funded by Action Aid
for Development. These are small, small projects which help the
real people. That is the area where the African Development
Bank should be, not lending money to crooked governments in
Africa.
Thank you.
[The prepared statement of Dr. Ayittey follows:]
Prepared Statement of George B.N. Ayittey, Ph.D.
I am extremely grateful and honored to be called upon to testify
before the Senate Foreign Relations Committee again--my second time in
two years--regarding corruption and the activities of the African
Development Bank.
For the past 30 years or more, I have been actively involved in the
promotion of genuine, grass-roots development in Africa for the obvious
reason that, not only am I an African but the African continent remains
the least developed in the Third World in spite of immense mineral
wealth. Therefore, African development remains close to my heart.
Over the past four decades since independence in the 1960s, all
sorts of foreign aid agencies and multi-lateral development banks
(MDBs), including the World Bank and the African Development Bank have
been involved in Africa's development, pumping more than $500 billion
into Africa. But the results have been negligible. Most Africans are
worse off today than they were at independence in the 1960s. Much of
the funds came in the form of soft loans, for which the African people
are liable to repay. Africa's total foreign debt today stands at $350
billion. There is something maddening about this state of affairs.
American taxpayers not only wasted their money but we Africans have to
repay for loans from which we derived little or no benefit. Obviously,
something has gone fundamentally wrong with these MDB loan programs.
This year American taxpayers are going to shell out $1 billion to the
MDBs. You can throw American taxpayers money away but don't ask the
suffering African people to pay it back.
I would like to focus my testimony today on the African Development
Bank loan programs and begin by making a few key points. I will then
follow with additional elaboration. These points ar more fully
developed in a paper I will submit for the Record.
1. Overall Performance of AfDB Loan Portfolio
AfDB lending programs have not performed well to achieve their
intended objectives. The Bank is slow in updating information at its
website. The latest that it has at its website for its portfolio
performance is for 1997. For that year, 31 percent of the Bank's entire
portfolio was considered ``problem projects'' and unlikely to attain
their development objectives. Worse, of the on-going projects, 40
percent were considered to be at risk. This means that over 70 percent
of the Bank's portfolio is ``non-performing.''
Corruption within the African Development Bank--kickbacks, bribery,
and commissions on projects--are difficult to document or prove due to
their illegality, although nepotism, administrative and staff problems
are known to pervade the AfDB. But these are not the main culprits
behind the poor performance of the Bank's portfolio.
2. The Environment of Corruption, Collapsed States and Coconut
Republics
Rather, AfDB--like the World Bank--has been a victim of the
environment in which it operates. The Bank operates in a sea of
``coconut republics'' where ``government'' does not exist. What exists
is a ``vampire state,'' where the machinery of the state has been
hijacked by a phalanx of gangsters and thugs to enrich themselves,
their cronies, tribesmen and exclude everyone else. The richest persons
are heads of state and their ministers and quite often the head of
state himself is the chief bandit. In 1997, the fortunes of African
heads of state were published by French Weekly (May, 1997) and
reprinted in the Nigerian newspaper, The News (August 17, 1998):
1. General Sani Abacha of Nigeria 120 billion FF (or $20 billion)
2. President H. Boigny of Ivory Coast 35 billion FF (or $6 billion)
3. Gen. Ibrahim Babangida of Nigeria 30 billion FF (or $5 billion)
4. President Mobutu of Zaire 22 billion FF (or $4 billion)
5. President Mousa Traore of Mali 10.8 billion FF (or $ $2 billion)
6. President Henri Bedie of Ivory Coast 2 billion FF (or $300 million)
7. President Denis N'guesso of Congo 1.2 billion FF (or $200 million)
8. President Omar Bongo of Gabon 0.5 billion FF (or $ $80 million)
9. President Paul Biya of Cameroon 450 million FF (or $70 million)
10. President Haile Mariam of Ethiopia 200 million FF (or $30 million)
11. President Hissene Habre of Chad 20 million FF (or $3 million)
Speaking to representatives of African civic groups meeting in the
Ethiopian capital, Addis Ababa, to prepare the African Union to be
launched in South Africa, Nigeria's President, Olusegun Obasanjo, said
that ``corrupt African leaders have stolen at least $140 billion
(95 billion) from their people in the decades since
independence'' (The London Independent, June 14, 2002; web posted).
Foreign aid has not been spared, either. Says The Economist (Jan.
17, 2004): ``For every dollar that foolish northerners lent Africa
between 1970 and 1996, 80 cents flowed out as capital flight in the
same year, typically into Swiss bank accounts or to buy mansions on the
Cote d'Azur'' (Survey; p. 12). At the Commonwealth Summit in Abuja,
Nigeria on December 3, 2003, former British secretary of state for
international development, Rt. Hon. Lynda Chalker, revealed that 40 per
cent of wealth created in Africa is invested outside the continent.
Chalker said African economies would have fared better if the wealth
created on the continent were retained within. ``If you can get your
kith and kin to bring the funds back and have it invested in
infrastructure, the economies of African countries would be much better
than what there are today, she said (This Day [Lagos], Dec 4, 2003). On
October 13, 2003, Laolu Akande, a veteran Nigerian freelance
journalist, wrote that:
Nigeria's foreign debt profile is now in the region of $25-
$30 billion, but the president of the Institute of Chartered
Accountants of Nigeria, ICAN, Chief Jaiye K. Randle, himself an
eminent accountant and social commentator has now revealed that
individual Nigerians are currently lodging far more than
Nigeria owes in foreign banks. With an estimate he put at $170
billion it becomes immediately clear why the quest for debt
forgiveness would remain a far fetched dream.'' (http://
nigeriaworld.com/columnist/laoluakande/articles.html)
In August 2004, an African Union report claimed that Africa loses
an estimated $148 billion annually to corrupt practices, a figure which
represents 25 percent of the continent's Gross Domestic Product (GDP).
``Mr. Babatunde Olugboji, Chairman, Independent Advocacy Project, made
this revelation in Lagos while addressing the press on the survey
scheduled to be embarked upon by the body to determine the level of
corruption in the country even though Transparency International has
rated Nigeria as the second most corrupt nation in the world''
(Vanguard, Lagos, Aug 6, 2004. Web posted at www.allafrica.com).
This is the environment in which the AfDB operates and over 95
percent of its clients are ministries and agencies of these
``governments.'' In 2003, 121 project loans were approved by the AfDB;
98 percent went to government ministries and agencies. So far this
year, 19 project loans have been approved, as posted at its website;
only two went to non-government borrowers.
3. Mission Creep and Problem Portfolio
The Bank often deals with crafty bandits, who hijack and corrupt
such buzzwords as ``development,'' ``democracy,'' ``foreign
investment,'' and ``rule of law.'' ``Development'' to the ruling
vampire elites means developing their pockets and they seek ``foreign
investment'' by investing the loot in foreign bank accounts.
Ask them to privatize state enterprises and they would sell the
companies to themselves and their cronies at fire-sale prices. In 1992,
in accordance with loan conditionalities, the Government of Uganda
began a privatization effort to sell-off 142 of its state-owned
enterprises. However, in 1998, the process was halted twice by Uganda's
own parliament because, according to the chair of a parliamentary
select committee, Tom Omongole, it had been ``derailed by corruption,''
implicating three senior ministers who had ``political responsibility''
(The East African, June 14, 1999). The sale of these 142 enterprises
was initially projected to generate 900 billion Ugandan shillings
(Ushs) or $500 million. However, by the autumn of 1999 the revenue
balance was only 3.7 billion Ushs.
Ask them to respect the rule of law and they would rather bend the
law to respect their whims. In January 2000, the ruling party's
(KANU's) gang of thugs known as Jeshi la Mzee (``the old man's army''),
attacked a group of opposition leaders outside parliament who were
protesting against the resumption of IMF assistance. ``It was the
protesters, not the thugs, who were arrested'' (The Economist, Feb 5,
2000; p. 42). Said The Economist (March 16, 2002): ``In Zimbabwe, the
thieves are in charge and their victims face prosecution'' (p. 18).
Ask them to trim their bloated bureaucracies and limit government
intervention in the economy and they will establish a ``Ministry of
Less Government Intervention.'' Ask them to establish a market-based
economy and place more emphasis on the private sector and they will
create a ``Ministry of Private Enterprise,'' as Ghana did in 2002.
Ask them to establish democratic pluralism and they will create
surrogate parties, appoint their own Electoral Commissioners, empanel a
gang of lackeys to write the constitution, inflate the voter's
register, manipulate the electoral rules and hold coconut elections to
return themselves to power. Even African children could see through
this chicanery and fraud. Said Adam Maiga, from Mali: ``We must put an
end to this demagoguery. You have parliaments, but they are used as
democratic decoration'' (BBC News website, May 10, 2002).
Ever noticed that since September 11, 2001 and the U.S. declaration
of ``war on terrorism,'' all sorts of African despots have also claimed
to be fighting terrorism in order to win U.S. sympathy and aid? Never
mind that these tyrants are themselves the real state terrorists! The
regimes of Omar Bashir of Sudan, Yoweri Museveni of Uganda and Robert
Mugabe of Zimbabwe were all fighting terrorists! Even former President
Charles Taylor of Liberia established an Anti-Terrorist Unit to
terrorize the people!!
Aided by a gaggle of intellectual collaborators, they resist any
attempt at reform. Reform becomes a charade, the rule of law a farce.
Eventually, the coconut republic implodes: Somalia (1993), Rwanda
(1994), Burundi (1995), Zaire (1996), Sierra Leone (1997), Liberia
(1999), and even Ivory Coast (2000), where the AfDB was headquartered.
The AfDB is often duped by these gangster regimes and co-opted to
become an extension of their treasury. The Bank's original mission has
now become so elastic that it has lost its meaning. The terms--
``poverty-reduction'' and ``capacity building'' have been perverted or
corrupted by these governments to define every project submitted to the
Bank for funding. Currently, the Bank has approved a loan for
``capacity building of rural women in Ethiopia''--whatever that means.
Here are some examples of projects of dubious value that are being
funded in 2004 by the AfDB posted at its website (www.afdb.org):
Jan 15: AfDB and Djibouti Sign Loan and Grant Agreements
totaling the Equivalent of US$ 5.94 Million to finance the
Basic Health services Reinforcement Project (Health I Project);
Jan 16: AfDB and Senegal Sign a US$ 35.67 Million Loan
Agreement to finance the Private Sector Adjustment Support
Program (PSASP) in Senegal;
March 5: In response to the deadly earthquake, which
occurred in the Al Hoceima region on 23 February 2004, the AfDB
provided, through an accelerated procedure, an emergency grant
of $500,000 to Morocco. The assistance, obtained from the
Special Emergency Relief Fund of the AfDB, was intended to meet
part of the foreign currency cost of humanitarian aid for the
victims of the earthquake;
March 17: AfDB approves a Loan and a Grant of $37 Million to
finance Healthcare Development in the Democratic Republic of
Congo;
March 17: AfDB approves a Loan and a Grant of $7.74 Million
to finance the Education Sector Support Project in the
Democratic Republic of Congo;
March 31: AfDB Provides Education Sector Support To Chad;
April 12, 2004: AfDB, Liberia sign humanitarian emergency
grant agreement; and
May 5, 2004: AfDB and Tunisia sign a loan agreement for
railway infrastructure modernization.
Sudan
The AfDB is providing ``Institutional Support to the Government for
Poverty Reduction.'' The project has two main components, namely, (a)
Short-term training courses for Government personnel from the Ministry
of Finance and National Economy and Social Sector Ministries, and the
carrying out of short-term studies in key policy areas; and (b) the
provision of technical assistance and (c) Computer & office equipment.
AfDB is also providing ``Humanitarian Emergency Relief Support to
the Victims of the 2003 Floods'' in Sudan. The proposed humanitarian
relief assistance entails the provision of kits to prevent cholera and
water-borne diseases, drugs and supplies, spraying equipment and
chemicals for environmental sanitation. It will complement the
assistance provided by other donors in different areas of need.
Tanzania
AfDB is funding the following projects:
Rural Marketing Program involving the following components:
(i) Market infrastructure and facilities; (ii) Market
organization; (iii) Marketing information and communication
systems; (iv) Agricultural marketing policy and regulations and
(v) Extension, research and training.
Support for Strategic Plan Action Plan for Vocation &
Technical Education Project. The project consists of the
following 4 components: (i) Upgrading renovation & construction
of vocational training centers; (ii) Improvement of the quality
in Graphic School; (iii) Curriculum & Staff development and
(iv) Project management. Environmental Category II.
Institutional Support in the Ministry of Finance. The
projects will consist of the following components: (i) Aid
information management system; (ii) Training (short-term
courses, workshops and study tours); (iii) Purchase of vehicles
& computers; (iv) Strengthening the Government technical audit
systems and (v) Provision of technical support to the ADB Desk
Office.
Ghana
AfDB is funding the following projects:
Emergency Relief to Drought Victims;
Health Services Rehabilitation III--The project will comprise
the following components: (i) strengthening district health
services; (ii) support to the national blood bank; (iii)
support to the national HIV/ AIDS control program and (v)
support to the Project Management Unit;
Senior Secondary School Support Project III--The key
components are: (a) Expand access; (b) Improve quality of
Teaching and Learning; (c) Management Efficiency; and
Poverty Reduction Support.
There are many conceptual and practical problems with many of these
loan projects. First, loans to African government ministries and
agencies for development purposes reinforces the statist (state-led)
development approach that has failed miserably in Africa. Africa's post
colonial history shows that the vampire state has been the major
obstacle to development. Why should the AfDB be providing more loans to
the state and not the private sector where wealth is created?
Second, allocating more AfDB loans to the state or modem sector
defies common sense. There are three Africas: modem, informal, and
traditional Africa. They do not operate by the same logic and rhythm.
The vast majority of the African people live in the informal and
traditional sectors. Agriculture is the main occupation of the people.
Africa cannot be developed by ignoring the two sectors; nor can they be
developed without understanding how they work. But these were precisely
the two sectors African leaders and elites neglected. The AfDB is
repeating this error. The Bank's commitment to agriculture has remained
low at 18.5 percent of its total portfolio and its agricultural
portfolio's performance has been the worst. ``Performance of the
agricultural portfolio is below the Bank's average performance. In
1997, 16 percent of 142 agricultural sector projects were rated as
problem projects with respect to implementation progress (IP). Twenty-
three percent of the agricultural sector projects were rated unlikely
to attain their development objectives (DO)'' (Agricultural and Rural
Sector Policy, 2000. Posted at http://www.afdb.org/projects/polices/
pdf/agri_policy_apr2000.pdf?nl=7&n2=1&n3=00.
Third, it is debatable whether AfDB should be in the humanitarian
relief assistance business, but the increasing provision of Bank loans
for basic programs such as education and health care is of concern.
These are services which a normal government should provide its
citizens out of tax receipts under normal circumstances. But then
again, a normal government does not exist in much of Africa. Of more
immediate concern, however, is the increasing involvement of the AfDB
in the ``policy reform'' area.
Billions of dollars were spent by the World Bank, multi-lateral
institutions and foreign donors to bribe or cajole recalcitrant African
despots to implement political and economic reform. But the
democratization process, which gained momentum after the collapse of
communism in 1989 has been stalled or reversed by political chicanery
and strong-arm tactics. In 1990, only 4 of 53 African countries were
democratic. This tiny number grew to 15 in 1995 but shrank somewhat to
13 in 1997 and bounced back 1016 in 2004: Botswana, Benin, Cape Verde
Islands, Ghana, Kenya, Madagascar, Malawi, Mali, Mauritius, Nainibia,
Nigeria, Sao Tome & Principe, Senegal, Seychelles, South Africa and
Zambia. Even then, the application of a rigorous definition of
``democracy'' would reduce this number. Besides periodic elections,
democracy requires a constitution that is freely negotiated, a neutral
and independent media, an independent judiciary, an independent central
bank, as well as a neutral and professional armed forces--requirements
which some of the ``democratic'' countries listed above would fail to
satisfy.
The record of economic reform sponsored by the World Bank and the
IMF is even more dismal. According to UNCTAD (1998), ``Despite many
years of policy reform, barely any country in the region has
successfully completed its adjustment program with a return to
sustained growth. Indeed, the path from adjustment to improved
performance is, at best, a rough one and, at worst, disappointing dead-
end. Of the 15 countries identified as `core adjusters' by the World
Bank in 1993, only three (Lesotho, Nigeria and Uganda) are now
classified by the IMF as `strong performers' '' (p xii).
The World Bank itself evaluated the performance of 29 ``adjusting''
African countries it had provided more than $20 billion in funding over
the ten-year period, 1981-1991. Its report, Adjustment Lending in
Africa, released in March 1994, concluded that only six African
countries had performed well: The Gambia, Burkina Faso, Ghana, Nigeria,
Tanzania, and Zimbabwe. It may be noted that 6 out of 29 gives a
failure rate in excess of 80 percent. More distressing, the World Bank
observed that ``no African country has achieved a sound macro-economic
policy stance'' (p.6). Barely a year later, however, this number had
shrunk to two: Burkina Faso and Ghana. By 1995, SAP was on the verge of
collapse in Ghana. By March 2001, the incoming Kufuor administration
had placed Ghana, the Bank's ``star pupil'' on the HIPC intensive care
unit and on July 5, 2002, the outgoing World Bank Resident Director in
Ghana admitted that the Bank probably made a mistake in tagging Ghana
an ``economic success story.'' Ghana's real per capita income is about
10-15% below 1983 level when the structural adjustment program was
launched in 1983.
4. Lack of Enforcement Mechanisms
Projects approved by the AfDB are supposed to have been ``vetted''
by national governments in transparent processes. The Bank may also set
guidelines on transparency, oversight, cost control and accountability
measures. But it cannot enforce them since Bank representatives reside
in most client countries often with a skeleton staff for basic tasks
excluding public liaison. The total absence of full resident missions
in some countries of operation makes it difficult to evaluate the
projects it finances, disseminate information and engage in public
dialogue. AfDB also has to be careful in its oversight activities
without interfering with the political process or becoming ensnared by
it. If it becomes too involved, it risks becoming an ``enabler.''
Therefore, even if the Bank becomes squeaky clean, it can only take
tepid steps such as holding conferences and workshops on corruption or
withdrawing from the Lesotho Water Project that was riddled with
corruption. Bank reform without a concomitant ``environmental reform''
would be meaningless.
5. Improving the Bank's Operational Efficiency
Assuming that the ``environment'' remains as it is and cannot be
reformed, then the following suggestions wifi be made to improve the
AfDB's operational efficiency.
Its scope of operations needs to be limited.. Original objective of
promoting regional development to meet especially energy nees has been
submerged in favor of a far more expansive purview that now serves as
an extension of domestic treasuries. It has further been expanded. The
African Development Bank Group has already approved $372.5 million for
NEPAD infrastructure projects (AfDB Financial and Operational Analysis,
2003. Posted athttp://www.afdb.org/financial/pdf/
adb_financial_presentation_may2004e.pdf
NEPAD (New Partnership for Africa's Development) undertakes ``to
respect the global standards of democracy, whose core components
include political pluralism, allowing for the existence of several
political parties and workers' unions, fair, open, free and democratic
elections periodically organized to enable the populace to choose their
leaders freely.'' It also includes a ``peer review mechanism'' by which
African leaders who misrule their countries would be subject to
criticism by fellow African leaders according to commonly agreed
standards. NEPAD was trumpeted as ``Africa's own initiative,''
``Africa's Plan,'' ``African crafted,'' and therefore ``African
owned.'' While African leaders deserve credit for at least making the
effort to craft an ``African initiative,'' NEPAD is fatally flawed in
many ways.
First, it turned out NEPAD too was modeled after a foreign plan:
The U.S. Marshall Aid Plan, which rebuilt Europe after World War II.
How could it be ``African crafted'' when it is a copy of the Marshall
Aid Plan? How could Africa claim ownership over someone else's idea?
Furthermore, the $64 billion in investment NEPAD sought from the West,
reflected the same old aid dependency syndrome.
Second and more serious was the blatant dishonesty and double-speak
that infected NEPAD. Speaking at the four-day OAU Civil Society
conference (June 10-14, 2002), President Obasanjo of Nigeria noted that
the involvement of civil society is required in order to make the on
going establishment of African Union (AU) and NEPAD successful. ``I
would like to reiterate that much of what Africa has today gained in
the areas of political and social sphere have been derived from the
direct influence of Civil Society Organizations (CSOs). This attitude
should continue,'' he added (The Daily Monitor, Addis Ababa, June 14,
2002). Prime Minister Meles Zenawi on his part said that the role of
civil society is essential in making a sustainable development and
integration in Africa. Meles noted that the success of African Union
with NEPAD lies in collective efforts of all Africans at the grass root
levels (The Daily Monitor, Addis Ababa, June 14, 2002). NEPAD also
claims to be ``people-oriented.'' Yet, NEPAD was ``crafted'' without
consultation with Africa's NGOs and civic groups.
No civic group, church, political party, parliament or democratic
body took part in its formulation. Only a small coterie of African
leaders deliberated on the document, excluding the political leadership
of the rest of Africa. In fact, most governments and civil society
organizations in Africa first learnt about NEPAD from the western media
when President Thabo Mbeki presented it in Davos at the World Economic
Forum in January 2001 after a chaotic evolution. Then dubbed the
Millennium Partnership for African Recovery (MAP), crafted by
Presidents Mbeki and Bouteflika, it was merged with the Omega Plan,
spearheaded by President Abdoulaye to create the Compact For African
Recovery by the Economic Commission for Africa (ECA), which
subsequently metastasized into NEPAD.
A furor erupted in Africa when it became clear that NEPAD was
crafted more to placate Western donors rather than address issues of
concern to the African people. On Jan 9, 2001, representatives of some
200 social movements, organizations and institutions, meeting in
Bamako, Mali, issued ``The Bamako Declaration,'' strongly condemning
the lack of consultation with civic society. Another joust came in
March 2002, when the Southern African Catholic Bishops Conference
(SACBC) slammed NEPAD, calling the plan ``ambiguous'' and some of its
proposals ``dubious.'' The Bishops averred that ``NEPAD may not achieve
its purpose because of lack of consultation with those the plan would
affect'' (Mail & Guardian, Johannesburg. March 8, 2002). In fact, such
has been the history of other grandiose initiatives and mega-plans
announced by African leaders at various summits to address Africa's
woes. Nothing is subsequently heard of them.
For real African development, the AfDB should:
A. Limit to 20 percent of its portfolio lending to African government
ministries and agencies. The statist development model has not
served Africa.
B. Limit its lending to countries on the verge of implosion. AfDB lost
many of its investments to state collapse.
C. Focus on the informal and traditional sectors where the vast
majority of the African people. Genuine economic development
must come from small-scale projects and with micro credit, poor
Africans can lift themselves out of poverty and prosper. On
June 24, 2002, the BBC posted on its website the successful
tales of three African entrepreneurs. The following is a short
account of their stories.
Bamako, Mali: In the space of five years, Mariam Jaras Dirassouba
rose from being a housewife to a bank manager. She had been unemployed
with no access to credit and few opportunities to generate cash to
support her family. Her story began when she and a group of Malian
women started borrowing small sums of money of up to $50 from an Oxfam-
backed local organization. With their loans, the women started money-
making projects, including selling spices or kindling in the local
markets. Their success led the women to demand training to set up a
cooperative bank to help their friends and neighbors. When the number
of women grew to 260, the bank was in a position to issue big loans of
$1,000 or more to finance much more ambitious business plans, including
a mango juice factory and a cloth dying business. Mme Jaras Dirassouba
became the manager. Thus, the women gained the skills to access the
formal banking system while giving other women the chance to borrow
money to start out in business.
Kebemer, Senegal: Collecting rubbish gave a new financial freedom
to a group of women in the small town of Kebemer. The women borrowed
money to buy a horse and cart, employed rubbish collectors, and earn a
salary by cleaning up the streets on a daily basis. Since the local
authorities lacked funds, garbage piled up, causing illnesses among the
children playing outside. When people saw the benefits of the daily
service, they were willing to pay for it. The project has not only
reduced health problems, but it has also created income and employment
for 20 people. The idea of a new force of dustbin women was first
conceived in 1998 and got off the ground after Christian Aid provided
the loan for the first horse and cart. The women then earned enough
money to buy more than 300 dustbins and 10 horses and carts, and employ
administrators to organize the project, spanning 500 homes. There were
profits left over to invest in new moneymaking projects, including
traveling to Mauritania and Gambia to buy shoes for resale in their
local towns.
Dekaya, Ethiopia: Bee-keeping is a traditional activity in Dekaya
in southern Ethiopia, using hives made out of hollow logs. Farmers
introduced more innovatively designed hives from Germany while still
making the hive out of local wood. The improvements raised
productivity, with each hive producing about 26 kg of honey, compared
to the 3 kg produced with the old-fashioned method. About 150 farmers
benefited from the new technology, after Action for Development
provided technical training and the loans for the first hives to be
used. The farmers then set themselves up as a cooperative, with the aim
of securing their own loans from banks to buy new hives in the future.
With such success, the children could go to school, have access to
better accommodation, and one man has been able to build a new house
with the money raised from selling honey.
The problem is, it is foreign charities which are providing these
small but productive microcredit. I believe this is the area where the
AfDB should be structured to be in, rather than providing loans to
crooked African governments.
Thank you.
The Chairman. Well, thank you very much, Doctor, for that
very comprehensive statement.
I suspect because of the inability to obtain this testimony
from Treasury, we have not heard as much today as we might have
on the European Bank for Reconstruction and Development and the
Asian Bank. But nevertheless, the African Development Bank we
have heard a good bit about. So I want to begin my questioning,
because you have made some direct suggestions, Dr. Ayittey.
To what extent has the United States' contribution, the
$460 million we are talking about for reauthorization next
year, what percentage of the money is being furnished by the
United States in one form or another, not just that
reauthorization sum but the overall support of the bank?
Mr. Rich. Are you referring to the Asian Development Bank?
The Chairman. Yes. No. In this case the African Development
Bank. Now, pardon me. Was the Asian Development Bank the one?
The $460 million that had been mentioned.
Mr. Rich. That is what the Treasury is going to be
requesting this committee to authorize in a few weeks for the
Asian Development Bank.
The Chairman. For the Asian Development Bank. All right.
And what was the authorization for the African Development
Bank, or are we into the picture at all?
Mr. Rich. I am not sure of that.
The Chairman. In other words, I am trying to think of at
what point----
Dr. Ayittey. I think this year, for fiscal year 2004, the
United States committed to provide $1 billion. I do not know
how much of that will be going to the African Development Bank
yet.
The Chairman. Now, $1 billion is for what?
Dr. Ayittey. That is the total to the multilateral
development banks.
The Chairman. For all the multilateral development banks.
Dr. Ayittey. For all of them, yes.
The Chairman. But next year, it is your understanding, that
$460 million is for the Asian Development Bank.
Mr. Rich. Yes. Well, that will be a 3-year authorization
for the soft loan window of the Asian Development Fund. That is
like the international development association for the World
Bank. So they have a 3-year replenishment. So you will be asked
to authorize about $460 million for the next 3 years, 2005 to
2008.
The Chairman. But the billion dollars, though, is
approximately the American taxpayers' contribution to all the
banks annually?
Dr. Ayittey. Yes.
Mr. Rich. Yes.
The Chairman. So we are dealing, however, specifically next
year with the 3-year authorization for the Asian Development
Bank.
Mr. Rich. Yes.
The Chairman. But some money will be going to the African
Bank and some money to the European Reconstruction Bank.
Dr. Ayittey. And the Inter-American Bank.
The Chairman. Yes, and the World Bank.
Mr. Rich. I would like to point out that it is not just
the actual paid-in money. It is approximately $1 billion a year
for all the multilaterals, but there is a much smaller paid-in
amount every year for a number of them for not the soft loan
windows, but for the main lending facilities, like the
International Bank for Reconstruction and Development and the
World Bank. We pay in a little bit, but every dollar that we
pay in every year, then I think in the case of the World Bank,
there is something like $17 of a callable capital, which is
basically a guarantee of the World Bank's loans from the U.S.
Treasury Department.
The Chairman. That is the leverage effect.
Mr. Rich. That is the leverage effect. So that $1 billion
is hard, paid-in cash, but then there are basically the
guarantees, the potential liability of American taxpayers,
which runs into many billions more through that leverage effect
every year.
The Chairman. I suppose, in trying to grasp in my own
mind's eye what sort of leverage the United States has with any
of these banks--in other words, if we had only a small
contribution and other countries all around the world are
putting the capital into it, then we could get exercised in
this committee about all of this and hear witnesses. But yet,
the banks might very well say, well, that is your view, but on
the other hand, the way the world works is our view, and we are
still headed down the trail that we are headed down.
What effect does really what we are talking about here
today have on potential conduct of these banks?
Mr. Rich. Mr. Chairman, I am glad you asked that question
because it has a tremendous impact. The U.S. by far in most of
these institutions is either the biggest shareholder or a co-
equal as the biggest shareholder. In the Asian Development
Bank, we are equal with Japan, approximately. Though it is true
that the U.S. only pays in a certain percentage--like in the
World Bank, I think it is 17 percent approximately and so on--
what we say and do on the executive board really carries
weight.
Let us take the example of this Asian Development Bank soft
loan fund authorization for the next 3 years. I think this
committee is best placed, almost in the world, to exercise
leverage because if we threaten to withhold just a tiny
percentage, that is the language that these institutions really
understand. You can write them letters. As you point out, they
have scores--in the case of the World Bank, over hundred--
shareholders, and they do feel somewhat unaccountable. But if
we threaten to withhold at least, unless we get better answers,
better results through the U.S. Executive Director, just a
small percentage of the funding, it has a leveraged effect
because other countries then do not want to contribute quite as
much because there is sort of a burden-sharing arrangement. If
the U.S. contributes less, then why should they contribute
their full share?
And secondly, it just sends the message. It is more
difficult than dealing with a U.S. Government agency, but
nevertheless, the U.S. representatives, the executive directors
on these institutions can promote policy reforms. They can
lobby and cajole the other board members to do things. They can
point out that if things are not done, it is going to undermine
the confidence of the U.S. Congress just to keep writing blank
checks, and so on and so on. Because of our unique system in
the United States where committees, such as the foreign
relations committees, really do control the money with our
division of powers, we are better placed than almost any other
forum in the world to really make these institutions more
accountable.
The Chairman. Mr. Rich, concentrate just briefly on the
Asian situation as opposed to the African one, which we will
talk about in a moment. To what extent are Asian countries
seized by what Dr. Ayittey described as this culture of
corruption? Are there a good number of instances among the
clients of the Asian Development Bank that really have pretty
good operations, that even if the oversight were a great deal
more intensive, would pass muster? And to what extent are we
dealing with a good number of clients, or how many, who really
would not pass muster, who, as a matter of fact, if you make a
government-to-government loan or a bank-to-government loan, you
are likely to run into persons who are at the public trough?
Mr. Rich. Well, there is a way of getting a rough idea
because Transparency International every year publishes a list
of countries, and they poll hundreds and hundreds of
businessmen, investors, and so on around the world and they
create a perception of corruption index, a PCI index.
The Chairman. What is Transparency International?
Mr. Rich. Well, Transparency International is a
nongovernmental organization. It is actually based in Berlin,
but it is an international organization. It was originally
formed by former World Bank executives who for years in the
'80's and early '90's had tried to raise the issue of
corruption in the World Bank to no avail.
Now, one must add that after Mr. Wolfensohn came in in
1996, he at least began to use the ``C'' word. What they are
doing is not enough, but that at least was a step forward.
At the Asian Development Bank, I think they are almost in
the pre-1996 years in that sense because they have not had that
strong leadership.
So they formed an NGO to fight corruption, and one of the
things they do--they have a web site and so on and they have
national offices--is that they do this annual corruption rating
risk, and they have a system that ranks countries from zero to
ten. Ten is completely clean. Zero is totally corrupt.
What you find on this list for 2003 is that some of the
Asian Development Bank's biggest borrowers, its top five
borrowers both last year in 2003 and cumulatively, are among
the most corrupt countries on earth. Indonesia is number 122
out of 133. Bangladesh is dead last at number 133.
In that atmosphere, what on earth can the Asian Development
Bank do? I went into a lot of detail in my statement. But this
has even been said to the Asian Development Bank's board by a
couple of departing executive directors. Stephen Baker, who
represented Australia and a number of other countries, in 2001
left the board, and he circulated a statement to the board and
management of the ADB. He said, what do you do in this context?
Yet, what the ADB can do, you start at home. You start by
making your own loans and your own products as corruption-free
as they can be. And this means having the highest standards,
really putting resources and making it a priority, putting
staff and resources to investigate corruption, make sure that
the ADB loans and projects at least are leveraged islands of
good practice that will then hopefully have a leveraged
ricochet effect to promote good practice in these countries.
This is what they do not do. So good housekeeping starts at
home.
This is true of the World Bank too. They said, well, we are
going to have technical assistance projects or loans for these
countries. We are going to give seminars and all this. But then
they have no idea--this is true in the World Bank. It is true
in the Asian Development Bank. It is true in all--how much
money is being stolen or leaking. They cannot even come up with
a reasonable estimate of how much is disappearing in their own
lending.
I think that is one thing that the committee could do
through the U.S. executive directors of all these institutions.
Surely, they will not deny that nothing is being stolen. It is
common knowledge that a certain percentage is being stolen.
Dick Thornburgh said that in his statement in one of his
reports of the World Bank. He said a lot has been stolen in the
past, and the bank did not begin to address this until 1996.
You would think that any responsible business that was critical
to its mission would be doing this.
So they have got to start by finding out a lot more and
providing the taxpayers of the donor countries with some honest
answers.
The Chairman. Well, logically if, as you say, after looking
at Transparency International's ratings of countries--and you
cited two of these--would the Asian Development Bank then make
its loans to NGO's in those countries as opposed to the
governments? And if so, is there a sufficient audit trail for
NGO's that might do humanitarian work in those countries?
Mr. Rich. Well, I think you have to look at it on a
region-by-region basis. I think in Africa, where the
governments are particularly weak, I know that USAID for years,
in fact decades, has funneled a lot of its resources through
voluntary organizations like CARE, NGO's, and so on if you want
to reach local people.
But I think it is also important to lend to governments but
with very strict controls and to focus on administration rather
than just pushing the money out because you have to find ways
of strengthening these governments. You cannot have countries
that are totally failed states and just leave them as failed
states.
The way these institutions can do this is lend less, but
pay a lot more attention to using specific loans as ways of
building up capacity and monitoring that capacity within
government ministries.
I think these institutions were set up to lend mainly to
governments. They should be doing more with civil society, but
you know, NGO's can be corrupt too. Anyone can set up an NGO.
You might say internationally it is an unregulated sector.
The Chairman. Well, that is even more pessimistic if the
NGO's likewise are corrupt.
But, Dr. Ayittey, you have mentioned 121 projects at the
African Development Bank. Only two went to NGO's; 98 percent
went to governments. And you have described most of these
governments in a cultural crisis and some of the cusp of
implosion I think is the word that you used.
Now, someone, just an ordinary person, listening to all
this would wonder what are we doing. We are doing it obviously
because both of you know--and you are in the field. You have
been there for years--there are a lot of very poor people in
this world, tremendous poverty, tremendous difficulty. So the
humanitarian impulses of this country and the world are to help
people. But what we are running up against, at least in the
testimony today and even more so in the African Development
Bank, is this is going to be very difficult to do, that is,
making large loans to whom, and how do you bring about
accountability. What do you say to that?
Dr. Ayittey. Well, it is a very tricky problem and it is a
dilemma. I fully appreciate your question.
But at the same time, we have to recognize the fact that
you cannot loan money to build bridges, only to see the bridges
blown up in an insurgency, for example. We always have to ask
ourselves, whom do we want to help? Do we want to help the real
people, or do we want to help the governments? The governments,
as I indicated, are not accountable to their people. Only 16
African countries are democratic.
The Chairman. How do you get to these real people? How do
you loan money to them?
Dr. Ayittey. First of all, we need to have responsible,
accountable governments in Africa. That is why political reform
and economic reform is important. So why do we not tell the
African Development Bank that you should never loan money to
any government--let me backtrack a bit. This is why I said that
it should limit its exposure to these corrupt governments to,
say, 20 percent of its portfolio and focus more on the private
sector. That is where the real people are.
Failing that, Congress can mandate and say the African
Development Bank should not deal with governments which are not
accountable or should only be in those countries which are
democratic. Or Congress could say that the African Development
Bank should not lend money to any country which is at the
bottom of the Transparency International corruption index list,
for example.
The Chairman. You make good sense, but you have also
testified that only 16 of the governments of the 54 or so are
democratic.
Dr. Ayittey. Well, yes, so that we put pressure on the
rest of them to democratize.
The Chairman. By not giving them money.
Dr. Ayittey. Yes. Because the money is not going to help
the people anyway.
The Chairman. Now then we try to get to the people in these
places, but how do we do that? If these governments are corrupt
and they are authoritarian----
Dr. Ayittey. This is why we need to establish, let us say,
both. Let us take Bangladesh, for example, where the Crimean
Bank has performed wonderfully. It is important that we set up
such micro-credit NGO's, say, in Africa.
The Chairman. Micro-credit is a way of getting at this.
Dr. Ayittey. Yes.
Oxfam, for example, gave $50, a small loan, to a woman in
Bamako, Mali, and she has been able to use small loan into
something really big and putting up a bank herself.
The things which will help the real African people are
simple, little projects and not the huge ones that are proposed
by African governments. See, once the project is given to the
African Development Bank, it funds it. Who gets the contract,
the African Development Bank has no role in that. So if the
minister awards a contract to his brother, for example, the
African Development Bank has no control over that.
The Chairman. Yes, I understand that and I think we all do
because you have testified very strongly about this. I am just
still searching for the ray of hope in all this. 20 years ago,
wandering through Indonesia, I saw micro banks and they were
helping a good number of people who were in very small
businesses. This was particularly designed for many women who
were supporting families and had broken circumstances and what
have you. But all told, this is fairly small amounts of money
in a huge place. Now, ideally maybe with the new president of
Indonesia, at least some signs are, that this is a hopeful new
administration, and maybe, as you say, you offer some
incentives. You sort of hold out this.
But then I am, I suppose, asking a question which is
impossible for the two of you to answer. How do we in the
United States Government, whether it is our Congress, our
administration, or so forth, sufficiently influence what has
been the administration of these banks so that they begin to
turn around almost all of their policies in ways that at least
we mutually today feel are more constructive?
Do you have a thought about that, Mr. Rich? And then I will
turn to the Doctor here.
Mr. Rich. Yes. There are two parts to your question: what
can be done and what is the U.S. role in particular.
I think because there has been a lack of critical analysis
of what is going on in these institutions, and since the
Treasury has not bothered to send the representatives, our
statements have focused on the flaws and not on the potential.
But in Africa, we heard in Lesotho--we had this very
dramatic testimony in July of Guido Penso, the chief prosecutor
who was employed by the Lesotho government in a very poor
country. But that was a country that felt it needed to address
the corruption in that massive project. He pointed out that
World Bank had supplied no financial support to them for this
corruption investigation that they conducted.
I think there are a number of countries around the world,
in Africa, even in the poorest like Lesotho, and much more so
than in Asia, countries like Thailand and Sri Lanka, the two
case studies I cite in my testimony, where on the one hand you
have corruption, but on the other hand, you have growing
movements of civil society. You have people in the government
who want to be honest. In the Thailand and Sri Lanka cases, you
have had supreme court cases. You have had attempts to bring
legal actions for corruption in these two ADB projects. What is
particularly scandalous is that the ADB itself provided the
money and was at least a passive accomplice in the Sri Lanka
example and may have been an active accomplice. They refused to
investigate the corruption.
So the institutions can provide financial support for
corruption investigations in these countries. And beginning at
home in their own loans, they need to be much more aggressive
and have much more resources devoted to investigating issues of
corruption in their own loans. So that is something you could
do----
The Chairman. I am just curious. On the Asian side, you
mentioned the Japanese Government provides perhaps almost the
same amount of support. To what extent has that government or
its legislative branch been interested in these issues of
corruption? Are they a potential ally with the United States in
demanding really better accountability?
Mr. Rich. Well, I would say in the past, to be frank, a
lot of people would say no. But I think Japan is changing too.
Even in the finance ministry, there is a younger generation of
bureaucrats and so on who will not stand for the old practices.
So I think it is true in the Asian Development Bank. The head
is traditionally a Japanese and the Japanese finance ministry
provides a lot of the staff and so on. So that is an issue.
But Japan is changing too. We have worked with
nongovernmental groups there in recent years that have been
doing fantastic work. There is interest in the Japanese
parliament. So, again, I think things there are beginning to
change to.
The Chairman. It would occur to me perhaps the Japanese and
their legislative branch would be interested in our hearings
and our interest. Maybe the young reformers would find at least
encouragement----
Mr. Rich. Well, that is a great idea and maybe we can talk
with your staff afterward about how there could be a follow-up
on that.
The Chairman. Yes.
Mr. Rich. That is a fantastic idea.
The Chairman. Because we are really talking about an
international situation. We have a specific responsibility with
American taxpayer funds, but at the same time, we are really
talking about how the world deals with poverty and great
distress in a better, sounder way.
Mr. Rich. The bottom line, these institutions--and
everyone has said this--have great potential to really address
these problems, and because of this, frankly, lack of due
diligence--their primary fiduciary duty is, first of all, to
see that the money is used for the purposes intended. It has
reached alarming proportions, as we see in Africa and other
countries where these projects are not performing. But I think
there is a lot that can be done, but they have to change their
focus. Again, the U.S. executive director to these institutions
cannot do it alone, but if this committee sends much stronger
signals, I think we will see more progress.
The Chairman. Doctor?
Dr. Ayittey. I recognize the box in which this committee
or Congress finds itself in terms of what can it really ask the
multilateral development banks to do to improve the operational
efficiency. But at the minimum, there are certain things that
this committee or Congress can do.
First of all, since the U.S. makes contribution to the
African Development Bank, it could require that the African
Development Bank post at its web site, let us say, the
performance of its portfolio, for example, which would be
updated frequently. The last time I checked, the one which was
there was 1997, which should not be acceptable to Congress, for
example.
The World Bank has an operations and evaluations department
which reviews the performance of its own loans and programs.
Perhaps the African Development Bank could have such a
department within itself. Or maybe better yet, it could have
outsiders to do such operations evaluation.
As I suggested in my testimony, loaning too much money to
the government sector crowds out the private sector, and loans
to the government need to be limited. I pulled 20 percent out
of the hat. Perhaps it could be less. It could be something
like 15 percent. Every effort should be made to focus on the
private sector. That is where wealth is created, not in the
government sector. So it really makes little sense to keep
loaning money to government ministries and agencies.
I have also indicated that certain guidelines need to be
put in place.
I am speaking because a lot of money has been borrowed on
behalf of the African people, and they do not have the capacity
to pay. They had no say, none whatsoever, in how the loans were
distributed, who acquired the loans, what the loans were used
for, for example. So it is also in the interest of the African
people have general accountability and also transparency, for
example. As I indicated, President Obasanjo of Nigeria says
African leaders have stolen $140 billion from their people.
The Chairman. I wonder, just to pick up your suggestion, if
the committee today after this hearing writes to the African
Development Bank and respectfully requests that they update
their web site from 1997 to 2004 and put their portfolio there
and how things are going. My guess is the first impression of
the directors of the bank or whoever would be to wonder where
in the world did this come from and why are these people that
excited about what we are doing. But at the same time, I have
noticed in these hearings, given the computers and the ability
to draw up stories from all over the world, these hearings may
have limited interest in the United States, but they have a lot
of interest. The press is pretty free in a good number of these
countries. As you have both pointed out, stories in the press
in various countries have been raising these questions of their
governments, but likewise probably raising them about us. Why
are you contributing to this malfeasance? Why do you not have
really more oversight and more control?
So I suppose what I am suggesting in the spirit of
transparency, sort of going beyond the group in Berlin or
wherever they are who do that sort of thing annually, that we
might ask for sort of an update to see where things stand, and
likewise, as a prelude, that others are interested in their
business, that we need to see more accountability.
Dr. Ayittey. Yes. I very much endorse what you were
saying. A lot of people, even the African people, want to see
transparency. They want to know what the loans, which were
taken on their behalf, were used for.
The Chairman. We have been interested in this committee--
and this is entirely outside the purview of our hearing today--
in the African Growth and Opportunity Act. I have been the
chief sponsor on the Senate side of this. A good number of very
gifted House Members have done a great deal of work, and we had
a signing ceremony with the President not too long ago in which
he took a conspicuous position in behalf of this act and the
beginnings of our thoughts about trying to finance free
enterprise, private enterprise, in addition to grants. We are
not negating the need for foreign assistance and outright
grants, but we are saying, in essence as you are, that the
development of the private sector in these countries is
tremendously important. This is the first big initiative our
country has taken, and we have renewed that at the request of
all of the ambassadors here in Washington.
So there is intense interest on the edges of this issue,
but because of the international aspect of these banks, they
are beyond really the specifics of AGOA. That is our program.
This is something to which we contribute, along with many
others, and perhaps because the lines of control or oversight
are more indistinct, perhaps the accountability has been lost.
But that is our purpose today, and I want to state that
because some persons really do not like these loans at all. Let
us take a look at the body politic of our country, and they
would say, listening to all of this, why in the world did we
get into all of this? Have we simply lost sight of where the
American taxpayers' money ought to go? Now, that would be
unfortunate if we take sort of a no, nothing, isolationist
position and say essentially all of this is so corrupt, so
hopeless, that until folks get their act together, why, we are
just out of it, and when they do, we will come back into it.
Our thought today is a more proactive one of reform: how do
you get things on track so that there is public support in this
country for an international program, as well as elsewhere. And
that is your intent, and that I think we need to focus on
because I fear, given the track record that both of you are
describing, much more so in Africa than Asia, but maybe sort of
a race to the finish on that, this could be very discouraging
almost to the point of people wondering, when the
reauthorization comes or just the annual appropriation,
whatever it may be, that amounts to $1 billion, this is a lot
of money. In the post election season in this country, there is
going to be a lot more scrutiny on our own deficit of $400
billion in this country and wondering why we are doing certain
things I think with a great deal more rigorous examination
perhaps than there has been before.
Dr. Ayittey. Mr. Chairman, I understand. Please do not
misinterpret my testimony as trying to discourage America from
doing something for Africa. The intent of my testimony is to
improve the operational efficiency of the programs. We want
these programs to work to help the people. We do not want these
loans to support corrupt and crooked governments. So that is
why we want to shift the focus from supporting these
governments to supporting the private sector. That is where the
people are.
The Chairman. Let me just ask another question. We have had
testimony here in our committee now about the HIV/AIDS program.
We have had testimony about the World Food Program and the work
that is being done. In fact, we had the directors, Mr. Morris
and Mr. Tobias, of these two efforts in our country together on
one occasion, and they discussed Zimbabwe, for example. This is
a story all by itself of great difficulty and turmoil, which we
will not get into. But here they were claiming that the average
life expectancy of a person in Zimbabwe has been reduced by
these twin factors of HIV/AIDS and hunger, and maybe some
tuberculosis, from somewhere in the 60's to 37. Now, this kind
of stark change in a whole country really has not been
witnessed in percentage terms even in Russia, where we saw in
the post-Soviet days for the Russian male the average longevity
going down into the mid-50's. That was pretty shocking in a
European country. But 37 and still falling.
So the consequences of all of this are horrible. They are
not only severe, they really are almost beyond our calculation.
And the need for relief for this is apparent. But even then, we
are faced still with how to be intrusive enough, at a time of
hope for reform or lack of reform or so forth, to get to people
who are in need.
Now, to what extent could any of these loan trails follow
the administration of, say, the food program or the AIDS
program. Are there any channels in which somehow or other these
things might come together? Because my judgment is that we are
getting some effect from the hunger relief and from the HIV
anti-viral drugs. It is minimal in some cases but constructive
and we are moving ahead. I am just wondering if there is a flow
path here that might be helpful in terms of the banks.
Dr. Ayittey. Let me, please, make a short interjection,
and that is, there is no question that AIDS is decimating
Africa's labor force and it is going to stunt Africa's economic
growth in the future. There is no question about that. It is a
dreadful disease and it has taken its toll on economic
development.
However, how do you deal with a disease? In fact, I
testified before the advisory commission for AIDS, which was
set up by President Bush. When this disease first struck in the
early 1980's, African governments were in denial. They did not
really take this thing seriously until it blew up. And then
when they belatedly turned their attention to AIDS, they
focused on the wrong side of the equation. They focused on the
treatment side. It is a disease which has no cure, and I think
given Africa's limited resources, in terms of financial
resources, I personally think that it would have made far more
sense to concentrate on the prevention side to try to save more
people from becoming infected.
Now, if you provide Africa with all the resources that are
needed like the anti-retroviral drugs, et cetera, the modern
health care system in many African countries has collapsed.
Many Africans, at least 80 percent of Africans, still rely on
traditional medicine. So the traditional medicine men really
play, in fact, a very important role in this disease as well.
But so far in all these efforts we have ignored them, and I
personally believe there is a cheaper way by which we can do
more to help the AIDS suffers and also prevent the spread of
this disease by embracing these traditional medicine men.
In fact, in South Africa it was the Sangomes who propagated
the myth that if you have sex with a virgin, you would be cured
of AIDS. And that led to all kinds of nasty incidents in South
Africa. See, we learned from that lesson that if you do not
bring them into the campaign against AIDS, they are going to
create more problems. But we are learning from some of these
new things.
The Chairman. Mr. Rich.
Mr. Rich. If I could just add something shortly to that
about the role of the multilateral development banks. Well, we
know that the World Bank has been providing loans for AIDS
programs in a number of countries, like India, for example. But
the problem there is financial assistance is desperately needed
to help these countries support programs, and I would concur
with Dr. Ayittey that perhaps different approaches need to be
tried and there needs to be more communication among the
various international agencies that are dealing with this
issue. Getting countries more into debt for desperately needed
public health programs is not the answer because this is
desperately needed, but obviously these loans do not produce a
financial return.
This administration has been trying to promote, rightfully
so, more grant assistance of the multilateral development
banks. Certainly in this area of public health, it would be
much better if that assistance were given in the form of grants
rather than loans which just increase the debt burden of these
countries. Dr. Ayittey pointed out the collapse of the public
health systems in a number of African countries, for example.
Well, part of that was due to the high indebtedness of
countries and then the very austere financial adjustment
programs that they had to undertake to reduce government
expenditures in all areas to repay their foreign debt. Now you
have sort of a vicious circle, linked with the fact of
countries getting more into debt.
The Chairman. Let me just add one further anecdote. I was
in the country of Georgia in the latter part of August. Now,
this is outside of Asia or Africa, as the case may be, but a
very important friend of the United States where young people
have, in essence, in the Rose Revolution brought about
democracy.
Now, one of the most promising things they have done, which
follows along your testimony today, is to note the culture of
corruption in the country. This has led to the dismissal of
over 85 percent of the whole police force of the country and
hiring of new people who are not on the take, a recognition
that it is wholesale, that it is everywhere, that it pervades
everything that was going on in the place. That was true in the
banks and it was true in the transportation system.
This is tough to do in a poor country. Their resources are
extraordinarily limited and they have the disadvantage still of
some Russian pressures, while I was there, President Putin,
meeting with leaders of Abkhazia, one of the provinces that is
still a part of Georgia and yet not really as much a part of
Georgia as it needs to be, for example.
This is tough going, but it is something that the United
States has to recognize when it occurs. I was pleased with the
Millennium Challenge Account idea, Georgia appeared on the list
of 16 countries that is eligible. There are rewards for these
really heroic attempts to change this culture of corruption
which occurs elsewhere outside Asia and Africa, I might add,
quite apart from our concentration today, and stultifies almost
anything that is occurring.
Now, as a part of this, it was my privilege to be part of a
groundbreaking for a health situation in which Georgians are
going to try to spot pathogens, biological and chemical
pathogens, that might occur in the country, anthrax that might
occur through agricultural origin, quite apart from weapons of
mass destruction and so forth. But in any event, whenever this
occurs, they will share strains of this with hospitals in the
United States. We will work with them on antidotes for these
situations. All of this comes really through our program
dealing with weapons of mass destruction. It is not really
appropriate for the cases we are talking about today, but it
does highlight the fact that when our Government sees this
issue of corruption and health and ways that we can be helpful
and then the $15 million or $20 million that we are putting
into this project is a grant. It is not a loan. So the people
of Georgia are not further obligated, and that is an important
point that you are making, the repayment of the situation.
This is why I have used this hearing sort of to broadly
sketch or to think aloud with you, because you are expert
witnesses, about various courses of action that we might think
about. We will not adopt anything today, but the purpose of the
hearing is to reach out.
Yes, Doctor.
Dr. Ayittey. I would like to bring your attention,
Senator, to some private sector solutions in Africa, for
example, with commercial banks, for example. One of the ways
which they try to limit corruption or bribery is to rotate
their regional managers, for example.
The Chairman. Rotate the regional managers? How would that
do it?
Dr. Ayittey. For the culture of corruption to take root,
the manager needs to build a network of friends, cronies, et
cetera. So now and then you will transfer. This is done by a
commercial bank in my country Ghana. Move them from one
particular region to another region for, say, 2 years and then
move them again. So one of the ways by which we can ensure this
kind of independence and transparency, for example, and reduce
this is not just commercial bank managers but perhaps the
resident mission managers of the African Development Bank, for
example. They stay in, say, Nigeria for 2 years and move them
to Uganda for 2 years or, say, Ethiopia for 2 years. We can
also do that with the governors of central banks in a region,
for example. We can rotate them. The governor of the bank of
Nigeria, move him to Ghana for 2 years, move the governor of
the bank of Ghana to Kenya for 2 years, for example. In other
words, when you start rotating, you try to minimize the extent
of corruption.
The Chairman. I see your point. If we were directing these
banks, we could start rotating these folks today, but as it is,
we will need to suggest this I suppose, that if they are
serious about this--and we presume they are--that this is a
good way practically to break up these circles of cronies that
come locally.
Well, let me ask for any final comment either of the two of
you have. Yes, sir.
Mr. Rich. Thank you. I would just like to emphasize what
you mentioned, that we have seen in a number of these
countries, poor, small countries, Georgia, Lesotho, Thailand,
Sri Lanka, heroic efforts going on within the societies, within
the governments, within the legal system to fight against this.
On the other hand, we have a situation, which I think is well
documented in some cases, of these rather comfortable
international financial institutions up to date having shown a
reluctance and a passivity, relatively speaking, to really help
these progressive forces in these societies, very poor
societies that are fighting against corruption, not
investigating the allegations corruption in their own projects,
not giving financial support to the poorest of countries like
Lesotho where you have investigations of corruption, and not at
least showing the same concern with the cancer of corruption in
their own institutions, in the multilateral development banks,
that the people show in their borrowing countries, at least the
progressive forces. This committee can do a fantastic service
to these institutions and to the poor of these countries that
are supposed to be helped by sending a clear message that
things have got to change and at least to imply that this can
be linked with, as you pointed out, the willingness and the
confidence of American taxpayers just to be writing blank
checks.
Dr. Ayittey. One final point which I would like to bring
to the attention of the committee, and that is the two most
effective antidotes against corruption are, number one, the
free and independent media. A free and independent media exists
in only eight African countries.
The Chairman. Eight?
Dr. Ayittey. Eight African countries.
The second antidote is an independent judiciary to enforce
the rule of law. This is lacking in the vast majority of the
African countries.
The Chairman. A good point. We heard earlier on that
sometimes newspaper stories raise these issues. They were not
persuasive but they raise them, and the fact that there was
this transparency locally, quite apart from international
bankers or us, was probably even more important.
Well, we thank both of you for your very thoughtful
testimony and responsiveness to our questions and our probing
and our thinking aloud together today. We are hopeful that as
we continue our work, that you will be available and will work
with us.
Dr. Ayittey. Thank you.
Mr. Rich. Thank you.
The Chairman. Thank you very much, and the hearing is
adjourned.
[Whereupon, at 4:08 p.m., the committee was adjourned.]
A P P E N D I X
----------
The African Development Bank: A Rare Success on a Troubled Continent
Submitted by Don Sherk, International Economic Consultant and Former
United States Executive Director to the African Development Bank
I. SUMMARY
The United States has a major interest in the African Development
Bank to a large extent because it is unique. This uniqueness stems from
the Bank's still strong pan-African roots, from the Bank's visible
emergence as a professionally staffed and well-managed institution in a
continent subjected to multiple crises and perhaps the world's greatest
concentration of absolute poverty. And it is unique because for nearly
twenty years the United States sat on the sidelines, it was not a
member. Unlike the World Bank and the three other major regional
development banks, the Inter-American Development Bank (IDB), the Asian
Development Bank (AsDB) and the European Bank for Reconstruction and
Development (EBRD) the United States was not a founding member of the
AfDB. Together with its industrial country partners of the OECD the
United States was deliberately excluded from membership in the Bank.
Non-African membership in the AfDB would not occur until 1982, nearly
two decades after the Bank's opening.
The reasons for this exclusion can be found in the ``mind set'' of
the leaders of the newly independent African nations in the early
1960s. The Bank's founding members put great stock in maintaining the
Bank as an African institution. They were well aware that this ``go-it-
alone'' attitude would seriously reduce the resources available to the
Bank for the economic and social development of the continent. However
they wanted the African Development Bank to be their own bank, not
another northern-controlled institution that just happened to have
African members. And this strong desire for an independent, authentic
African institution remains active some thirty-seven years after the
Bank was begun.
Where is the Bank today? if the AfDB were held up against the World
Bank and the other regional development banks (the IDB, the AsDB and
the EBRD) and compared by any common standard of business efficiency,
the Bank would most likely be ranked on the bottom. But if a more
relevant yardstick of achievement and maturity were employed measuring
how far the Bank has traveled in its thirty-seven year history, in what
is easily the most difficult working environment on earth, it would
probably be ranked first. This paper addresses this unique institution,
it historical roots, its curious membership pattern and its recent
reform efforts. How the United States has dealt with this changing
institution is central to the account.
II. INTRODUCTION
The African Development Bank's history marks it as a unique
experiment in North-South relations. Having been established in 1963,
\1\ literally months after many African states had emerged from
colonialism, its founders intended the Bank to be exclusively a pan-
African institution. Although the Inter-American Development Bank and
the Asian Development Bank, founded in 1959 and 1966 respectively, were
created, in part, as a reaction to the industrial countries' dominance
over the World Bank, each of these two regional development banks built
in important roles for the developed countries. Not so for the African
Development Bank. The AfDB was conceived as a bold, some said fool-
hardy, gesture of African solidarity and self-sufficiency. The founding
members of the AfDB, themselves only recently independent, did not want
to create their own bank only to turn around and re-establish a new and
all-to-familiar, financial dependency on their former colonial rulers.
Consequently their bank would be independent of northern financial
links. This self-enforced financial autonomy, quickly showed itself in
the resource flow to the African continent, in dramatic contrast to its
sister institutions the IDB and the AsDB.
---------------------------------------------------------------------------
\1\ Meeting in Khartoum, Sudan, in August of 1963, a majority of
African finance ministers approved the agreement establishing the
African Development Bank and opened subscription to the Bank's capital.
The agreement entered into force in September of 1964 when 65 percent
of the Bank's authorized capital was subscribed by twenty African
nations. (Today there are 53 African members and 24 non-African members
for a total of 77.) The management and staff moved into its present day
headquarters (Abidjan, Ivory Coast) in March of 1965 and in April of
1967 it approved its first two operations: an equity participation in
the National Development Bank of Sierra Leone and a transport loan to
Kenya.
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III. PAN-AFRICAN EXCLUSIVITY
Seen from today's vantage point one could be forgiven for failing
to grasp the intensity of newly independent Africa's insistence on
autonomy. But with leaders such as Nkruma, Toure and Nasser fervently
advocating ``nationalism'' as the correct course for post-colonial
Africa, the mood of the times clearly was one of ``stand alone
independence''. In the words of one of the Bank's early presidents,
Kwame Fordwar ``The bank was an expression of African determination to
help itself and to demonstrate that it was free of its colonial-period
dependence on non-African and largely imperialistic economic
influences. For those of this view, to open up the bank (and admit non-
African states) was precisely to admit that it was impossible to give
concrete expression to this determination in economic terms. For them
it was a total negation of a passionately held ideology which had
inspired and sustained many of them through several years of often
violent anti-colonial conflict.'' \2\
---------------------------------------------------------------------------
\2\ Kwame Fordwar, 1981, The African Development Bank: Problems of
International Cooperation, New York, Pergamon Press, p. 116. Quoted in
Karen A. Mingst, 1990, Politics and the African Development Bank,
University Press of Kentucky, Lexington, Kentucky.
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From the very beginning there were a few African nations who
predicted that pan-African exclusiveness for the new Bank would mean
severely limited resources and probably a more ideological bank than
would be the case had the industrial north been invited to join as was
the case for the Asian and Inter-American Development Banks. But these
countries, notably Ghana, Uganda and the Ivory Coast, were no match for
the powerful oil-rich countries of Nigeria, Libya and Algeria and the
die was cast. When the Bank's capital was finally opened to non-
regional members nearly two decades later (1982) Libya and Algeria
maintained their strong opposition but Nigeria changed its vote
allowing the motion to finally pass. The three countries were able,
however, to influence the terms and conditions that would be applied to
the non-African states when they did finally join the Bank. (See ``The
Opening of the Bank'' in Section V.)
IV. THE EARLY YEARS:
Of the three regional development banks the African Development
Bank was capitalized by the smallest amount: $250 million as compared
to $1 billion for the IDB and the AsDB. By 1968 initial AfDB
subscriptions took up $218 million of which 50 percent was to have been
paid up front in convertible currencies. However, given the financial
shape of most African states, this turned out to be unrealistic and the
AfDB ended up with 25 percent of the subscribed capital actually paid
in. The Bank's limited initial capitalization significantly crimped its
early lending potential. The Bankconsequently got of to a very slow
start. Disbursements through the end of 1969 totaled less than $1
million. And for the period 1970 to 1972 AfDB loan approvals were
averaging only $21 million compared with $685 million for the IDB and
$272 million for the AsDB.\3\
---------------------------------------------------------------------------
\3\ AFDB lending data obtained from English and Mule, The African
Development Bank, 1996, The North-South Institute, p. 20.
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AfDB lending continued to grow slowly in its early years. From 1967
through 1972 cumulative loan approvals totaled only 74 million Units of
Account.\4\ And over its first ten years of operations (1967-1976) the
AfDB Group approved only 153 loans for a aggregate commitment total of
roughly $327 million, (slightly more than 1.1 percent of the World Bank
Group's 1999 lending level) an average of $2.14 million per loan. AfDB
Group lending didn't really begin to reach significant levels until the
Bank's third five-year operations period, 1977-1982, when total
commitments for the period reached $952 million, nearly three times
lending in the first ten years of Bank operations.
---------------------------------------------------------------------------
\4\ From its inception the Bank chose to denominate its loans in
the Bank Units of Account. Since 1971 a ``BUA'' has been the equivalent
of one SDR.
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The Bank's early lending was concentrated in transport,
telecommunication and power projects accounting for over 60 percent of
disbursements to all sectors for the years 1967-1976. By the mid-
seventies lending to agriculture had taken over as the principal
lending sector for the Bank. Over its entire history (1967-1998)
agriculture has remained its leading sector accounting for 23.1 percent
of cumulative Bank Group\5\ loan approvals against 21 percent for
public utilities, 16.3 percent for transport and 15.8 percent for
industry.
---------------------------------------------------------------------------
\5\ With the launching of the African Development Fund (AfDF) and
the Nigerian Trust Fund (NTF) in 1973 and 1976 respectively, the AfDB
was referred to as the AfDB Group.
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The early years of the AfDB clearly set the Bank apart from the
other MDBs. Many of the Bank's early loans were co-financed operations
where the AfDB was called on to serve primarily as a financier. In
other cases the Bank financed projects already identified and pre-
appraised by other international agencies such as the FAO, ILO and
UNESCO. This allowed the Bank to compensate for its still limited staff
and limited project experience. There was no ``country programming'' to
speak of, macro-economic reviews of individual countries were
practically non-existent and sector studies were rare as well. An
allocation formula was employed to ensure that the Bank was not seen as
favoring one African region over another.
The importance of an even distribution of lending across the
continent is instructive. In an institution in which the President is
democratically elected (i.e. not the exclusive choice of one country
ala the World Bank and the Asian Development Bank), being seen as
discriminating against one region or another could have severe
political consequences. The ``right'' to borrow from Africa's Bank was
seen by the AfDB's regional members as one of the distinguishing
features between the AfDB and other MDBs. It is also true that once the
non-regional members of the Bank took on a more influential role and
called for the employment of performance standards in the allocation
process (especially the case with respect to the AfDF) this proposal
was opposed by most African members as being somehow ``un-African''.
V. NON-AFRICAN MEMBERSHIP
A number of factors contributed to the erosion of African sentiment
for remaining an ``African-only'' Bank. First, those African oil-
exporting nations indicated their unwillingness to fund substantially
higher levels of lending activity. Second the development model that
had enamored most of Africa in the Sixties--import substitution, state
enterprise, foreign investment controls and an anti-private sector
bias--began to be examined more critically. Finally, the proven success
of the IDB and the AsDB in being able to increase substantially
resource transfers to their respective regions without necessarily
``selling out'' their institutions to the industrial northern countries
conveyed a practical lesson to many African shareholders.
It was therefore no great surprise to find the AfDB beginning to
tentatively explore the possibility of tapping the financial resources
of the OECD countries to establish a concessional fund. As early as
1968 the Bank contacted a number of donor countries including the
United States to solicit support for such a fund. The Soviet Union and
a number of eastern-bloc countries were also approached. Initially
these approaches failed to generate much enthusiasm from either side.
However the mood, at least on the part of the OECD countries, soon
changed and more positive signals were received.
After nearly three years of discussions and negotiations, both
outside and within the Bank, a draft agreement was produced calling for
the establishment of an African Development Fund (AfDF) The final AfDF
agreement was signed by the AfDB and 13 non-regional ``State
Participants'' in Abidjan in November, 1972. Total initial
contributions to the Fund came to only $83 million including a token $5
million contribution from the AfDB.
Fund operations began in 1973 patterned after the World Bank's soft
loan window, IDA. The terms established for AfDF loans were much like
IDA terms, fifty-year maturities with ten years grace and a service
charge of 0.75 percent. The funds raised in the initial round of
contributions, $83 million, were to be used over the years 1973-1975.
This limited funding was justified by some as an amount that would
allow the donors to become familiar with the AfDB but was not enough to
make more than a small dent in Africa's growing appetite for
concessional funds. Consequently for the first replenishment of the new
AfDF the Bank asked its donors for the amount of $300 million. Two new
donors joined the original 13 and the Bank was able to raise $295
million for the years 1976-1978. The second replenishment of the AfDF
saw another doubling reaching $667 million raised from 21 donor
countries.
To run the AfDF, a separate board of directors was established with
50 percent of the vote allocated to the contributing non-African
countries and 50 percent allocated to the AFDB proper, allowing the
regional members to be involved in Fund operations via their position
in the Bank. The non-African AfDF board members were only given
authority in dealing with AfDF matters and thus the Bank itself
remained a fully African institution. The new AfDF board was composed
of six non-regional directors and six regional directors representing
the AfDB, for a total Fund board of twelve.
The Opening of the Bank
Between the establishment of the African Development Fund in 1973
and the official opening of the Bank's capital to non-African nations
in 1982, the subject of non-African membership was rarely off the
Bank's radar screen. Beginning with the Bank's seventh Annual Meeting
held in Kampala, Uganda in 1971 and carrying right through the 1978
annual meeting held in Libreville, Gabon, the subject was constantly
intruding on Bank business. On five separate occasions a vote to admit
non-African states into the AfDB was taken, and on five separate
occasions it was defeated. However, the vote against opening the Bank's
capital to non-regionals was dwindling with each subsequent vote.
Finally Nigeria broke ranks with the opposition and the opening was
approved.
``African Character of the Bank''
When agreement was finally reached it carried a very important
proviso, to wit: non-African membership was approved as long as the
``African Character of the Bank'' was maintained. It would take four
and a half more years before full agreement was reached and the opening
of the Bank's capital became effective in December of 1982. Much of
this time was occupied in the often-heated debate over exactly what was
meant by the ``African character'' of the Bank and how to maintain it.
What the African character is, and what it is not remains a subject
still very much with us today.\6\
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\6\ For one of the best descriptions of the exhausting negotiations
over the issue of non-African membership in the AfDB please see: Mr.
I.K.N.E. Peprah, ``The African Development Bank: Taking Stock and
Preparing for the 21st Century,'' C.C. Consulting Ltd. Ottawa, Canada,
1994.
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The precise terms of entry were laboriously crafted involving
numerous compromises on each side. AfDB management sought to assure
African members that the introduction of non-African states into the
Bank could be done in such a way as to allow the control of the Bank,
for all practical purposes, to remain in African hands. These
assurances were build upon changes in the Articles of Agreement that
would limit the kinds and types of influence the non-regionals would
have. These changes included the following points:
(1) The President would always be a national from a regional
state;
(2) The Bank's lending operations would be confined to
Africa;
(3) The Bank's headquarters would always be located in
Africa;
(4) Regional members were guaranteed a majority of 66.66% of
the votes;
(5) The Board of Directors would be composed of 18 members,
12 of whom would represent regional member countries;
(6) Recruitment policy will be formulated to preserve the
regional character of the organization (i.e. the vast majority
of the AfDB staff was to be African with staff coming from the
non-regional states to be limited to a token representation;\7\
---------------------------------------------------------------------------
\7\ As of December 1998 there were 978 staff members of the AfDB
Group. Of this number 869 were from regional member countries and 109
from 24 non-regional countries or 11.15 percent, or roughly 4.5
nonregional staff members per non-regional countries. AfDB 1998 Annual
Report, p. 56.
(7) Non-regional membership should not result in reduced
---------------------------------------------------------------------------
contributions to the AfDF;
(8) Non-regional membership should not entail modification in
the Bank's established policy of using only economic criteria
in its loan decisions;\8\ and
---------------------------------------------------------------------------
\8\ See Peprah, op. cit. pp. 18-21.
(9) The AfDB's annual meeting should always be held in a
---------------------------------------------------------------------------
regional member country.
A non-African can appreciate the nervousness and uncertainty that
greeted the brand-new non-regional executive directors when the newly
opened AfDB held its first board meeting in January of 1983. In spite
of the specificity of the above amendments, much remained unclear. When
was the African character placed in jeopardy? What types of decisions,
what types of activities and what types of loan conditionality might
threaten this elusive concept? \9\ As in any new organization, both
sides had to feel the other side out and become comfortable in their
collective decision-making responsibility.
---------------------------------------------------------------------------
\9\ The author served as only the second U.S. executive director
after the opening of the Bank's capital to non-regional members. The
years were from 1985 to 1989. Even after the initial two years of
working together as a board for the full Bank Group, there were
numerous examples of splits along regional/nonregional lines
accompanied by charges and counter-charges concerning the ``African
Character'' of the Bank. These differences would become completely
overshadowed by a major political crisis hitting the AfDB in 1994
involving some regional board members and the President. Following the
election of a new President in 1995 and the departure of all of the
long-serving regional board members there now does seem to be a new
constructive spirit of partnership among both regional and non-regional
directors.
---------------------------------------------------------------------------
Joining AfDB as a ``minority shareholder'' was especially hard for
the United States. The U.S. ranked as the lead or co-equal shareholder
in all the other MDBs: The World Bank, the Inter-American Development
Bank, the Asian Development Bank and the European Bank for
Reconstruction and Development. Although the U.S. couldn't dictate
policies and procedures in these multilateral institutions, it was able
to exercise considerably more influence on the Banks than other
shareholders. This was not true in the African Development Bank.
Because the United States, under the terms of the 1982 agreement,
was required to share 33 \1/3\ percent of the AfDB share capital with
twenty-three other non-African states, it was limited to 5.8 percent of
the capital. This placed the U.S. second to Nigeria in terms of voting
strength. Subsequently Egypt acquired additional shares under the
Bank's share transfer rules and moved from third to second place behind
Nigeria. Consequently today, the U.S. is the third leading shareholder
with 5.6 percent of the Bank's capital. The top ten shareholders of the
AfDB presents a unique mixture bearing on the subject to be considered
next: influence and the AfDB.
Leading AfDB Shareholders*
------------------------------------------------------------------------
Country Percentage of Total Shares
------------------------------------------------------------------------
(1) Nigeria............... 9.7
(2) Egypt................. 5.8
(3) USA................... 5.6
(4) Ivory Coast........... 5.0
(5) Japan................. 4.6
(6) Algeria............... 4.0
(7) Morocco............... 3.7
(8) Libya................. 3.6
(9) Germany............... 3.5
(10) France................ 3.2**
------------------------------------------------------------------------
* 1998 AfDB Annual Report, African Development Bank, Abidjan, Cote
d'Ivoire, 1999, p. 30.
** Tied with Canada.
The AfDB in Flux
The most obvious change non-regional countries made in their first
few years as members of the African Development Bank was in the level
of resources. Non-African membership in the AfDB brought significantly
larger soft-fund replenishments and dramatically improved access to the
major capital markets of the World. With the callable capital of the
industrial OECD countries now available to serve as a funding
guarantee, the AfDB could approach the capital markets on terms not
significantly dissimilar to those given to the AsDB and the IDB.\10\
---------------------------------------------------------------------------
\10\ The key investment rating firms acknowledged the importance of
non-African participation in the AfDB by rating their debt. In January
and February of 1984 first Fitch Investor's Services, Inc. and then
Moody's Investor's Services, Inc. rating AfDB senior debt as Triple A.
Standard and Poors, the other leading investment rating firm, rated
AfDB senior debt as Double A plus. However, in 1990 S&P upgraded the
AfDB rating to Triple A matching the Bank's other ratings. Then in
1995, reflecting the Bank's arrears situation and its governance
problems, S&P reverted to the Double A+ rating for the Bank's senior
debt.
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With a substantial fourth replenishment of the African Development
Fund amounting to $1.45 billion agreed to in May of 1984 to cover the
period 1985-1987 the AfDF was able to expand its lending significantly.
Then in November of 1986 an AD HOC Committee on the Forth General
Capital Increase, appointed by the Bank's Board of Governors, approved
a 200 percent increase in the Bank's capital.\11\ This raised the
authorized capital of the AfDB from $6.3 billion to about $23 billion.
---------------------------------------------------------------------------
\11\ This ``AD HOC Committee'' was established by the AfDB
Governors at the 1986 Annual Meeting in Harare, Zimbabwe, May, 1986.
The capital increase was approved by the Governors' vote at the 1987
Annual meeting in Cairo, Egypt, June 1987.
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AfDB Group lending grew dramatically in the last half of the 1980s,
from $1 billion in annual commitments in 1985 to a record of $3.3
billion in 1990. Much of this expanded lending came about through the
advent of ``policy-based lending'' that allowed the Bank to engage in
fast disbursing structural and sectoral adjustment loans. At the
insistence of the AfDB board of directors, most of this type of lending
was expected to be directed toward co-financed projects in cooperation
with the World Bank. Another indication of the rapidity by which the
AfDB Group expanded it lending in the late 1980s can be seen from the
fact that from 1986 to 1990 AfDB Group lending increased by a total of
$12 billion. Lending for the period 1967 to 1985 resulted in cumulative
lending of a little more than half that amount at $6.8 billion.
The period 1983 to 1990 might be correctly referred to as the
Bank's ``honeymoon'' period. The ``marriage'' between the regionals and
non-regionals went relatively smoothly. There were, from time to time,
differences that surfaced between how the Bank could best promote
African development. Regional executive directors (E.D.s) expressed
frustration with the approach taken by some of the non-regional
directors over how detailed the loan approval process should be.
Regional E.D.s saw the primary purpose of the Bank being the transfer
of resources to the African countries. Non-regional E.D.s saw their
responsibility as being the detailed examination and evaluation of each
individual loan that the Bank's management proposed. Regional E.D.s
thought that the function of project ``post-evaluation'' was of
marginal value absorbing too large a share of AfDB staff and budget
resources. Non-regional E.D.s wanted the post-evaluation function
elevated in importance and advocated that the director of post-
evaluation report directly to the Board and not the Bank's President.
One particular loan intended for the Bank's host country, the Ivory
Coast, was seen as inadequate in several respects. When it appeared
that the Board might be intending to reject the project, an appeal to
African solidarity reaching the level of heads of state resulted in a
majority vote in favor of the project over the unanimous objection of
the non-regional directors.\12\ However, such clear divisions of
position were rare. But when they did occur, there was no question
which side would win as long as the voting structure remained two-
thirds to one-third.
---------------------------------------------------------------------------
\12\ Normally votes on individual loans were rare, with the
President seeking ``consensus'' prior to a final decision. In the case
cited above a recorded vote was called for by an executive director.
---------------------------------------------------------------------------
Undoubtedly the Bank Group in its eagerness to expand lending
commitments to record levels let some loans slip by that should have
been cancelled or substantially redesigned. Non-regional E.D.s in their
desire to appear as good junior partners in a unique multilateral
institution, often went along with loans and programs they might have
resisted more strongly in another institution.
A more serious problem was the credit policy employed by the Bank
in the l980s. The management of the Bank adopted a policy that allowed
African countries with low levels of per-capita income to borrow on
Bank terms when the resources in the Fund were considered inadequate.
As a result, some of the extremely poor African countries, countries
that would be considered only ``IDA eligible'' by World Bank standards,
took on AfDB debt with the corresponding higher interest rates and
shorter maturities. The Bank board changed the credit policy to that
employed by the World Bank in 1995 but it was too late and the Bank's
arrears problem was intensified more than it needed to have been.
Still few saw the AfDB's problems as fundamental. A tightening of
the lending process with some improvements in the Bank's operational
procedures were thought all that was necessary. And with the plentiful
resources provided by substantial AfDF replenishments and by the record
200% capital increase, there was sufficient reason for the non-regional
and regional executive directors to cooperate and get along. All this
changed with the publication of the ``Knox Report.'' \13\
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\13\ The Knox Report is the shorthand reference for ``The Quest For
Quality: Report of the Task Force on Project Quality for the African
Development Bank, April 1994. The Chairman of the task force was David
Knox, formerly World Development Bank Vice President.
---------------------------------------------------------------------------
The Knox Report
From 1992 through 1994 the three regional development banks
followed the lead of the World Bank in assembling expert teams to
review their own lending portfolios. The World Bank's report was known
as the Wapenhans Report after the former World Bank Vice President,
Willi Wapenhans. The report caused a sensation as it found a serious
deterioration in project quality at the World Bank. Coming from staff
from within the World Bank its conclusion that the Bank was more
interested in quantity of new lending than in quality of its individual
loans was seen as confirmation of the concerns of many observers
outside the Bank.\14\
---------------------------------------------------------------------------
\14\ The World Bank, Effective Implementation: Key to Development
Impact, Oct. 2, 1992.
---------------------------------------------------------------------------
Because of the widespread concern generated by the Wapenhans
Report, the Asian Development Bank, the Inter-American Development Bank
and the African Development Bank all launched in short order their own
portfolio reviews. Although the findings in each of these reports were
roughly similar, the Knox Report on the AfDB was the most critical and
hard hitting.\15\ After reviewing the Bank's internal systems and
procedures, conducting numerous interviews with staff and with client
country officials and reviewing available documentation on project
evaluation, the Knox Committee began its report with the following
direct statement: ``The African Development Bank is facing serious
problems of quality of lending.'' In the report's prologue it
identifies three main problems needing to be addressed urgently:
``First, the Bank is pulled in all directions by conflicting goals and
attitudes of its shareholders. This is perhaps the most important cause
of the Bank's inability to deliver quality sustainable project support
to Africa. . . . Second, the gap between the Bank's lending policies
and procedures and its practice. There are areas where policies and
procedures could be strengthened. But, broadly speaking, they are
sound. The problem is that they are not applied or not applied
consistently . . .. Third, the Bank has a great asset in the trust of
its borrowers who look to it as an African institution to help overcome
their problems. But, as borrower after borrower complains, the Bank is
absent when it should be present.'' \16\
---------------------------------------------------------------------------
\15\ The Knox Report has received considerable praise for its
forthright statement on AfDB weaknesses. For example in English and
Mule's book entitled: The African Development Bank, the North-South
Institute, Ottawa, Canada, one finds the following statement: ``Only
thirty-five pages long, it is probably the most complete critique of
the ADB Group to date, and certainly the most credible.'' p. 34.
\16\ The Knox Report, pp. 1-2.
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The AfDB took the report's findings to heart and immediately began
to reform its operational procedures along the lines of the report's
recommendations. An action plan was established and the Bank began to
issue six monthly reports on the progress in implementing the called-
for reforms.\17\ Particular attention was given to the role of post-
evaluation in helping the Bank avoid problems identified with earlier
funded projects. Also, because the Knox report made much over the
inadequate project supervision, the following year's administrative
budget devoted significantly greater resources to this function than
heretofore. Other areas of concern highlighted in the Bank's response
to the Knox Report, entitled ``The Action Plan for Improving the
Quality of Bank's Operations'' are portfolio review, lending policies
and practices, resources and organization, and the Bank's operational
culture.\18\
---------------------------------------------------------------------------
\17\ The AIDB 's response to the findings and recommendations of
the Knox Report was contained in ``The Action Plan for Improving the
Quality of Bank's Operations.'' (AfDB, May 11, 1995)
\18\ Action Plan, Ibid. p. 2.
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A complicating factor for the Bank in the immediate follow-up to
the 1994 Knox Report was the emergence of a political crisis, having
little if anything to do with the presence of non-regional members,
impacting on the Bank's governance structure. Here a dispute between
the Bank's former President and certain long-serving regional executive
directors tended to immobilize the Bank precisely at the time that
shareholder countries were looking to the Bank's board and management
for evidence of reform. Was the Bank moving seriously to address the
weaknesses outlined in the Knox Report? To get their message across,
the principal AfDF donor nations postponed funding the AfDF for one
year effectively stopping concessional lending in 1994/1995. As a
consequence AfDB Group lending for 1995 plunged to 46 percent from its
1994 level (UA 450 million) continuing the sharp downward trend
starting in 1992.\19\
---------------------------------------------------------------------------
\19\ The sixth replenishment of the AfDF was originally scheduled
to amount to $3.42 billion but shortfalls in contributions resulted in
an amount significantly lower at $2.96 billion. These AfDF resources
provided concessional funding for the years 1991-1993. Funding for AfDF
VII to cover the years 1994-1996 was delayed considerably beyond its
intended start time and wasn't approved until mid-1995 at a much
reduced level of approximately $1.5 billion. As a result concessional
fund lending dropped from $894 million in 1993 to $45 million in 1994
and $128 million in 1995. It was not until 1997 that concessional
lending would rebound to earlier levels when AfDF VII resources became
fully available. As a sign that the AfDF deputies were satisfied with
the reform efforts undertaken by President Kabbaj, agreement was
reached in January 1999, to replenish the AfDF by an amount of
approximately $3.1 billion.
---------------------------------------------------------------------------
The Bank got back on track in late 1995 with the appointment of a
new President, Omar Kabbaj from Morocco, and the departure from the
board of several long serving executive directors. The AfDB's Board of
Governors subsequently instituted a two-term limit for board members
and for senior management. Other significant changes of note under the
Bank's Action Plan included the separation of approximately twenty
percent of the staff (225), the appointment of 54 new managers and a
major reorganization of the Bank. In April of 1995 the Governors of the
AfDB adopted a new credit policy for the AfDF putting the fund on the
same footing as IDA. This policy has substantially reduced the number
of countries eligible to borrow from the Bank, limiting them to the
smaller AfDF resource pool.
VI. AMERICAN INFLUENCE IN THE AFDB
How can the results of sixteen years (1983-1999) of participation
in the African Development Bank be summed up? On balance the Bank is a
much more professional institution today than when the U.S. joined.\20\
The Bank has adopted poverty alleviation as its ``central goal''. It
has incorporated into its project design processes gender
considerations, environmental review, private sector support, and civil
society participation in its country assistance planning. In addition
the Bank has committed itself to promoting ``good governance'' to
include respect for the rule of law, accountability, financial
transparency and ``fighting corruption.'' \21\ This mandate and its
components have been strongly promoted by the U.S. and its G-7 allies.
Changes in Bank policies and practices reflecting these goals have all
been adopted over the course of the last several years. For a
``minority'' shareholder this is not a bad record.
---------------------------------------------------------------------------
\20\ A sampling of World Bank staff who have had dealings with the
AfDB will bear this out.
\21\ AfDB, ``The Vision of the African Development Bank'', 1999,
Abidjan, Ivory Coast.
---------------------------------------------------------------------------
But there is a risk that the U.S. sometimes attempts to overloan
the influence ``circuits'' by trying to obtain too many changes and not
allow the new policies to make themselves part of the Bank's permanent
landscape. Two appendixes to this paper are meant to convey how
influence can be either effectively utilized or squandered. The primary
methods of influencing any multilateral institution are listed in
Appendix A. Appendix B lists the sort of goals or changes the U.S. has
sought in all the multilateral development banks going back to the late
Seventies. The goals listed range significantly from the petty to the
major themes of development policy. If influence of any member of a
multilateral organization can be thought of as a finite asset, then
clearly the more ``noneconomic'' goals sought the less likely a country
can employ its influence to achieve institution changes that reflect on
the major development issues of our time.\22\
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\22\ Most OECD members of the multilateral development banks
believe the United States pursues far too many objectives in its
dealings with MDB managements. Combine this with a record of rarely
contributing its pledged amounts to soft fund replenishments of capital
increases on time and the message becomes clear. The United States
risks losing its recognized influential voice in the most important
multilateral development finance institutions in the world.
---------------------------------------------------------------------------
Moreover, if the focus is on U.S. participation in a regional
multilateral development institution such as the African Development
Bank, the question has to be asked, what is the trade-off between
institutional uniqueness and achieving changes in the policies and
practices of that institution. With 5.8 percent of the vote in the
AfDB, the U.S. has made this relatively small voting share accomplish a
very respectable record. But a line does exist where the voting
strength will begin to decrease in effectiveness as the goals sought
are seen as more and more peripheral.
Through its membership in the African Development Bank the U.S. is
buying participation in what is seen to be the most respected
multilateral development institution in Africa. In the words of the
Bank: ``This pan-African ownership, governance structure and staffing
have made it possible for the Bank to accumulate unique experience and
institutional memory of development possibilities, and constraints in
Africa . . . In the area of governance the Bank is generally accepted
as a trusted partner on politically sensitive issues of governance and
thus has a special role to play.'' \23\
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\23\ AfDB, Vision Statement, op. cit. p. 3.
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Is this important to the United States? Is an institution such as
the AfDB capable of assisting Africa move toward sustainable
development, working for the elimination of conflict situations that
seriously erode the strength of involved countries, helping deal with
the widespread AIDs crisis, and a host of other challenges confronting
the continent in the 21st century? I think the answer to both is an
unequivocal yes. There is an added benefit that in the United States is
often overlooked. Learning to operate effectively in an international,
uniquely African, institution as a minority shareholder is not
inconsequential. It is a skill that will serve the nation well in the
years to come and it needs to be strengthened.
APPENDIX A
Shareholder Influence on the MDBs
(1) Meetings With MDB President and Senior Management
(2) Annual Meeting Speech
(3) Initiation and/or Review of MDB Policy Papers
(4) Proposing Select Nationals for Key Staff Positions
(5) Visits to MDB Headquarters:
(A) Governmental
(B) Private Sector
(C) NGOs
(D) Misc.
(6) Replenishment Negotiations (Linking Specific Demands to
Potential Contribution Levels, a la IDA 12 and AfDF 8)
(7) Consensus Building With Like-Minded Shareholders (i.e. G-7
Meetings or Nordic Bloc)
(8) Co-Financing Partner Influences (Bilateral Donors/Private
Sector)
(9) Board Controlled Review Committees/Functions: Evaluation,
Audit, Inspection panel, etc.
(10) Overseas Networks: Diplomatic Posts, Aid Missions, Private
Sector
(11) Capital Market Entry (Authorization to Enter)
(12) Instructions to Executive Directors (Abstentions/No Votes,
Comments)
(13) Meeting Payment Commitments (IDA Tranches, etc.)
______
appendix b
Shareholder Influence Objectives (What Shareholder Influence Gets
``Spent'' On)
(1) Gender Issues
(2) Appropriate Technology
(3) Micro-Credit Designs
(4) Basic Human Needs (BHN)
(5) Poverty Alleviation
(6) Environmental Policies
(7) Environmental Projects
(8) Private Sector Promotion
(9) Recurrent Cost Coverage
(10) Country Assistance Strategies (CAS)
(11) Local Currency Financing
(12) Project Implementation Units (PIUs)
(13) Lines of Credit
(14) National Development Banks
(15) Local vs. Foreign Consultants
(16) Rural Health Projects
(17) Primary vs. Secondary Education
(18) Post Evaluation
(19) Capacity Building
(20) Renewable Energy Projects
(21) Regional Integration
(22) Corruption
(23) Auditing/Accountability
(25) Ownership
(26) Civil Society
(27) Performance Standards
(28) Post-Conflict Policy
(29) NGOs
(30) Structure Adjustment Loans (SALs)
(31) Sector Adjustment Loans (SECALs)
(32) Local Offices
(33) Transparency
(34) National Sovereignty
(35) Program Lending
(36) Staff Quotas
(37) Integrated Rural Development
(38) Financial Sector Reform
(39) Maintenance Systems
(40) Debt Profile Management
(41) Southern NGOs
(42) Poverty Profiles
(43) Privatization
(44) Institutional Reform
(45) Conditionality
(46) Impact Studies
(47) Social Safety Nets
(48) Graduation
(49) Exchange Rate Regime
(50) Trade Policy
(51) Rule of Law
(52) Project Supervision
(53) Partnership
(54) Staff Benefits
(55) Travel Policy
Summary of Trip Report: Peru and Paraguay, March 26 to April 6, 2004
SUBMITTED BY NILMINI RUBIN, SFRC PROFESSIONAL STAFF MEMBER
From March 26 to April 6, 2004, an SFRC staff delegation consisting
of Nilmini Rubin visited Peru and Paraguay as part of the committee's
ongoing inquiry into corruption at the Multi-lateral Development Banks.
I spent 4 days in Peru meeting with individuals from the Inter-American
Development Bank, the government of Peru, and civil society while
looking at numerous projects including the Inter-American Development
Bank-financed Camisea pipeline, Inter-American Development Bank-
financed microlending projects and a World Bank-financed land titling
project. I also spent 7 days in Paraguay focusing on the World Bank and
Inter-American Development Bank-financed Yacyreta dam. There, I met
with management of the Yacyreta dam, government staff, civil society
and people affected by the dam to gain their perspective on the
effectiveness of the World Bank and Inter-American Development Bank as
participants in the project.
Summary
In Peru, I visited the controversial private-sector Camisea natural
gas project (pipeline shown right) that the IDB decided to fund in
2003. The IDB will fund up to $135 million of the estimated total $1.4
billion Camisea project cost. While the government of Peru stresses the
financial benefits of Camisea (1% increase to GDP growth per year, $3.9
billion increase in GDP over 30 years, and $5.1 billion in energy
savings to Peru over 30 years), many NGOs are raising social and
environmental concerns with the project. Currently, compensation
packages for local communities for the environmental impacts (mainly
erosion and deforestation) are being solely determined by the Camisea
gas consortium. Though this compensation structure is permitted by the
IDB, it could invite a downward bias in the size of compensation
packages and is not transparent.
Most of pipeline consortium's contentious decisions about placement
in natural resources and indigenous reserves were made before the IDB
became a financial contributor to the private-sector Camisea project.
Currently, IDB staff argue that it is acceptable for the IDB to join
private sector projects after key decisions were made--even if the IDB
would not have approved of those decisions if it had been a party to
them. The IDB is now requiring environmental guidelines be met but
those requirements do not reconsider pipeline placement. NGO
representatives argued that IDB should not fund any projects that do
not completely conform to IDB environmental guidelines. The private
sector, once made aware of a shift in demands by the IDB, would then
structure projects to conform to IDB guidelines early-on if there is a
small chance that they will eventually request IDB financing. This is a
particularly important issue as the USG is encouraging the IDB to do
more private-sector lending.
Transparent financial structures have not been developed to ensure
that Camisea-generated funds are not misused by the companies, the
Government of Peru, local governments or local communities. Currently,
this does not appear to be under consideration.
In Paraguay, I visited the World Bank and IDB funded Yacyreta dam
project which was built on the Argentine border in order to provide
Paraguay with revenues and Argentina with electricity. When Yacyreta
began in 1973, it was initially budgeted to cost $2 billion of which
$1.7 billion was provided by the World Bank and IDB. The project cost
and debt has skyrocketed to $12.6 billion and still needs an estimated
$800 million to reach completion. Though World Bank and IDB inspection
panels continue to investigate social and environmental problems with
Yacyreta, no forensic audit has been done to determine if funds were
misused. Despite allegation of corruptions, it is not clear if an
investigation has been conducted by the development banks. No companies
have been debarred by the World Bank as a result of the Yacyreta
project.
The initial decision to locate the dam (See Figures 2 and 3,
below.) in a shallow, populated area is shrouded in corruption
allegations. In addition, many Paraguayans believe that the dam
maximized flooding area so that former President Stroessner and his
friends who bought land in the flood plan could receive lucrative
buyouts from the dam management. The Yacyreta dam is 43 miles long--
alternative dam sites on the Argentine-Paraguay border that are
currently under consideration only require a 5 mile long dam across an
unpopulated canyon. (For reference, the Hoover Dam is 0.24 miles long).
The dam placement decision was apparently made before World Bank and
IDB involvement and was not changed by the banks.
Figure 1
Figure 2
Figure 3
It is important to note that Lahmeyer International, a German
company convicted last year by the Lesotho High Court of bribery
related to a World Bank-funded water project, was involved in the
Yacyreta project.
Compensation packages for those flooded out of their homes and
business by the Yacyreta dam were (and still are) solely determined and
implemented by dam management. No outside body was involved in
establishing compensation criteria nor did an outside body serve as a
tribunal for compensation disputes.
The other eight World Bank and IDB projects that I visited in Peru
and Paraguay were smaller-scale and had clearly identifiable benefits.
These projects included microenterprises, small and medium enterprises,
land-titling, elementary education, pre-schools (See Figure 4, below.),
roads, watershed development, as well as sanitation and water delivery
(See Figure 5, below.). In addition to project visits, I attended the
IDB annual meeting in Peru where I met with IDB Executive Directors and
staff, U.S. Treasury Officials, consultants, as well as local and
international NGOs.
Figure 4
Figure 5
One overall concern with the development banks is that project
success or failure is not incorporated into development bank staff
performance appraisals. Staffers responsible for project design and
implementation are not impacted if their projects do not meet
performance benchmarks or are found to not be successful. Linkage, as
is done with USAID performance appraisals, may be helpful to ensure
that development projects meet project goals, do not repeat previous
mistakes, and do not leak funds.
The following persons met with me during my 4 days in Peru:
U.S. Government Personnel
David Lippeatt, Deputy Economic Counselor, U.S. Embassy in Peru
Inter-American Development Bank Personnel
John Ferriter, External Affairs, Inter-American Development Bank
Robert Montgomery, Private Sector Department, Inter-American
Development Bank
Business Community
Fernando Duestua, Institutional Relations, Transportadora de Gas de
Peru S.A. (TGP)
Gonzalo Morant, Gerente Medio Ambiente, Transportadora de Gas de
Peru S.A. (TGP)
Sandra Martinez, Native Communities Affairs, Pluspetrol
Alberto Moons, Vice President, Pluspetrol
Vincent McElhinny, Program Manger, InterAction
Civil Society
Aaron Goldzimer, Social Scientist, Environmental Defense
Abigail Parish, Latin American Program, Bank Information Center
Adam Mendolsohn, Latin American Program, Bank Information Center
Nadia Martinez, Sustainable Energy and Economy Network, Institute
for Policy Studies
Oscar Rivas, Sobrevivencia, Friends of the Earth Paraguay
Haroldo Salazar Rossi, Vice President, Association Interetnica de
Desarrollo de la Selva Peruana (AIDESEP)
Rover Rivas Korinti, Consejo Machiguenga del Rio Urubanba (COMARU)
Carlos Soria, Environmental Lawyer, Foro Ecologico del Peru
Atossa Soltari, Amazon Watch
Elizabeth Vetura Egoavil, Executive President, Entitad de
Desarrollo para la Pequena y Microempresa (CONFIANZA)
Gerardo Porras Dolorier, Legal Asesor, Entitad de Desarrollo para
la Pequena y Microempresa (CONFIANZA)
The following persons met with me during my 7 days in Paraguay:
U.S. Government Personnel
Kevin Johnson, Charge d'Affairs, U.S. Embassy in Paraguay
James Perez, Acting Deputy Chief of Mission, U.S. Embassy in
Paraguay
Wayne Nilsestuen, USAID Director in Paraguay
Steve Marma, Democracy Programs, USAID
Inter-American Development Bank Personnel
John Ferriter, External Affairs, Inter-American Development Bank
Alvaro Cubillos, Representative, Inter-American Development Bank
Alberto C. Passos, Sectoral Specialist, Inter-American Development
Bank
Fernando Orduz, Sectoral Specialist, Inter-American Development
Bank
Carlos Antonia Arze, Social Development Specialist, Inter-American
Development Bank
World Bank Personnel
Peter Hansen, World Bank Representative in Paraguay
Paraguay Public Sector Personnel
Eduardo Petta, District Attorney, Public Ministry, Encarnacion,
Paraguay
Civil Society
Alvaro Caballero, Administrative Manager, Centro de Informacion y
Recursos para el Desarrollo
Sheila Abed de Zavala, Instituto de Derecho y Economica Ambiental
(IDEA)
__________
Summary of Trip Report: Lesotho and South Africa,
August 24 to September 2, 2004
SUBMITTED BY NILMINI RUBIN, SFRC PROFESSIONAL STAFF MEMBER
From August 24 to September 2, 2004, an SFRC staff delegation
consisting of Nilmini Rubin visited Lesotho and South Africa as part of
the committee's ongoing inquiry into corruption at the Multi-lateral
Development Banks. I spent six days in Lesotho meeting with individuals
from the World Bank, the government of Lesotho, civil society and the
business community while looking at numerous projects including the
World Bank-funded Lesotho Highlands Water Project, a World-Bank
financed child development center and an African Development Bank-
financed secondary school. I also spent three days in South Africa
meeting with Development Bank of South Africa officials, business-
people, and other experts, for their perspective on the effectiveness
of the World Bank's actions in Lesotho and their experiences with the
African Development Bank.
Summary
The World Bank, in addition to providing more than $150 million in
financing to the Lesotho Highlands Water project (LHWP), is actively
engaged with the LHDA in providing social and environmental
protections. The Bank provided a panel of experts, regular assessment
missions and consistent engagement with the governments of Lesotho and
South Africa.
Many individuals in Lesotho felt that the World Bank's response to
corruption related to the LHWP was inadequate. The World Bank debarred
one company, Acres International, for three years as well as one
individual, Max Cohen, and his businesses. However, the World Bank has
not debarred the other international companies that were convicted of
bribery in Lesotho.
Several members of civil society and government officials were
dissatisfied with the length of the Acres International debarment. They
were concerned that the World Bank mitigated the debarment because
``Acres had already been ordered to pay a criminal fine by the Lesotho
courts and that the relevant persons involved in Acres' work on the
LHWP are no longer in positions of responsibility in the company.''
They noted that Acres was the only convicted company that had not yet
paid its complete fine.
While the World Bank allowed the companies convicted of bribery to
attend their Sanctions Committee hearing, they did not allow the
government of Lesotho to send a representative or prosecutor to attend
the hearing and summarize the volumes of evidence that were presented
at trial according to the Chief Justice of Lesotho, the Attorney
General of Lesotho, and the chief prosecutor in the LHWP bribery cases.
Lesotho spent a significant amount to prosecute a number of
companies for bribery related to the LHWP. However, despite an earlier
assertion by World Bank staff that the World Bank could contribute to
the cost of prosecution because the ``bank has deep pockets,'' the
World Bank did not provide any funding to assist the government address
the bribery allegations. The World Bank did not provide funding because
it did not have a mechanism to loan or grant money to pay for a
prosecution, according to World Bank staff.
The U.S. Embassy was praised by the Chief Justice of Lesotho for
its assistance during the period of the trials for providing funding
for internet access and Lexis-Nexis (a web-based legal research tool)
so that the judiciary could access the most recent and relevant legal
research. This information tool was not biased towards or against a
conviction, it simply allowed the government of Lesotho access to
important international legal information.
When visiting the Katse Dam (See Figure 6, below.), I met with a
number of villagers that were not satisfied with the compensation they
received for the impact of the dam on their livelihood. Compensation
packages are determined by the implementing agency in a country and are
designed to meet World Bank safeguard policies. In addition to
involuntary resettlement safeguard policies, the World Bank applies
safeguards policies on indigenous peoples, cultural property, dam
safety, the pest management, environment, forests, natural habitat,
waterways and disputed areas to project lending. However, policy-based
lending (also called budget support or adjustment lending), does not
incur safeguards.
If an affected person is not satisfied with the compensation
package they are assigned, there must appeal to the implementing
agency. If the implementing agency does not act, the affected people do
not have recourse through the project. An instrument for recourse is
not a requirement of the World Bank safeguards. The implementing agency
suggested that affected people can appeal to the Ombudsman. The Office
of the Ombudsman did not receive funds or additional staffing through
the LHWP project. The Ombudsman said that a project tribunal to hear
the complaints of affected people would have been helpful.
Near the Katse Dam, I visited a number of villages that were
impacted by the Lesotho Highlands Water project. The agreement between
Lesotho and South Africa stipulates that no person be made worse off by
the Lesotho Highlands Water Project. However, there are a number of
impacts on the villagers (See Figure 7, below.) that are difficult to
address. Reportedly, the HIV/AIDS rate in the project area is higher
than the 29% HIV/AIDS rate in the rest of Lesotho because the disease
was transmitted by dam construction workers to the villagers.
Figure 6
Figure 7
The dam created a barrier that hampers access of villages like
Mapeleng to Katse town where there are medical, social and economic
resources. Affected villagers said that they must now either pay to
cross the dam, pay for a taxi or walk for many hours to reach Katse.
Villagers expressed concern about a Lesotho Highlands Development
Authority-imposed licensing fee now imposing on people who want to fish
on the Katse dam. As many villagers are subsistence farmers, raising
cash to fish or for transportation is a significant challenge. Finally,
some villagers complained that the springs that they used to depend on
dried up after the construction and filling of the Katse dam. They
noted with irony that they had a view of clean mountain water destined
for South African taps but that they lost their access to safe water.
Figure 8, below, is a picture of Mapeleng village next to the Katse
dam. The LHWP includes the development of water systems but a
significant portion of the systems have not yet been built.
Figure 8
The Lesotho Highlands Water Project was developed during a period
when sanctions applied to South Africa. Members of civil society
accused the bank of ``sanctions busting'' in developing the loan for
this two-country project through a trust in Europe. Whether or not this
is true, there is a conception that the project was born in a secrecy
that impacted the adequacy of project design in Katse.
The resettled people that I visited from the Mohale Dam area seemed
less distressed and generally satisfied with their current situation.
Shown below (Figure 9) is a resettled woman who is renting out rooms in
the house built for her. Generally, government officials, civil society
and World Bank staff felt that lessons learned in the resettlement of
people in Katse were applied later when people were resettled from
Mohale.
Figure 9
Lesotho Ministry of Education staff traveled with me to visit a
metal, wood and handicraft workshop at a secondary school that was
financed by an African Development Bank loan (See Figures 10 and 11,
below). We found an unused workshop that had been ready for two years.
Though the building and the teaching supplies had been purchased with
the loan, the government had not yet provided a teacher. This was
discouraging because though the government of Lesotho is paying
interest on the secondary school loan, there is no current benefit to
the children of Lesotho.
A teacher said that the biggest problem faced by the secondary
school was the impact of HIV/AIDS. He said that many of the children
stop coming to school after a parent dies or falls ill. Above is a
picture of students at the secondary school.
The economic impact of HIV/AIDS was highlighted in a garment
factory that I visited, Shinning Century Limited. The factory
reportedly suffers from productivity loss due to absenteeism and low
morale of sick workers, workers that must care for sick family member
and workers that must attend funerals. To address the needs of sick
workers and to keep others from contracting HIV/AIDS, the factory hires
health educators to support HIV/AIDS prevention, voluntary testing,
counseling and treatment for its workers. The factory, owned by
investors from Taiwan, credited the U.S. Africa Growth and Opportunity
Act for its locating in Lesotho.
In South Africa, I visited infrastructure funded by the Development
Bank of South Africa through an African Development Bank line of
credit. The infrastructure included a road, stand-pipe water sources
(See Figure 12, below.) and street lights (See Figure 13, below.) in a
poverty stricken area outside of Johannesburg.
Figure 10
Figure 11
Figure 12
Figure 13
The following persons met with me during my six days in Lesotho:
World Bank Personnel
Katherine Ferrey, Country Counselor, External Relations
Andrew Macoun, Bank African Water Team
Lesotho Public Sector
Liphapang Potloane, Chief Executive, Lesotho Highlands Development
Authority
Mahlape Mothepu, Deputy General Manager, Lesotho Highlands
Development Authority
Tsotang Moeketsi, Lesotho Highlands Development Authority
Richard Ramoeletsi, Field Operations Manager
Peete Molapo, Chief Executive, Lesotho National Development
Corporation
Mahapela Lehohla, Chief Justice
Lisebo Chaka-Makhooane, Registrar of the High Court
Lebohang Maema, Attorney General
Guido Penzhorn, Prosecutor
Sekara Mafisa, Ombudsman
Borotho Matsoso, Director General, Directorate on Corruption and
Economic Offences
Dominique Makara, Deputy Principle Secretary for Education
Mr. Phamotse, Ministry of Education
Mr. Mahloka, Ministry of Education
Satchy Sivam, Contracts Advisor, Ministry of Education
Puseletso Ntiisa-Letuka, Financial Controller, Ministry of
Education
Rafito Mosala, Health Worker
Civil Society & Business Community
Seabata Motsamai, Executive Secretary, Lesotho Council of NGOs
Mothusi Seqhee, Community Worker, Transformation Resource Center
Mr. Momosatale, Transformation Resource Center
Mr. Mamaywe, Transformation Resource Center
Peter Lahann, Transformation Resource Center
Fiona Darroch, Barrister (UK)
Thaba Bosiu, Former Principal Chief, a village near Mohale Dam
Majoalane Modekele, woman resettled in phase 1B of the Mohale Dam
Moea Ramokoatsi, former Community Liason Assistant, phase 1A of the
Katse Dam
Benedict Lueta, villager affected by Katse Dam, Ha Nkokana
Lehlohlondo Thaethe, orphan resettled in phase 1A of the Katse Dam
Khethang Khethan, Chief of Mapeleng village
Ray Haakenson, Beautiful Gate
Laura Robertson, Beautiful Gate
Rafito Mosata, Health Clinic Director
Susan Malefane, Personnel Manager, Shinning Century Limited
Mpho Mohaleroe, Shinning Century Limited
Palesa Motsoeneng, Health Education, Shinning Century Limited
U.S. Government Personnel
Karl Albrecht, Charge d'Affaires
Moroesi Akhionbare, Economics and Commercial Affairs Assistant
The following persons met with me during my three days in South
Africa:
Lesotho Public Sector
R.M. Tekateka, Chief Delegate, Lesotho Highlands Water Commission
South Africa Public Sector
Mike Muller, Director General, Department of Water Affairs and
Forestry
Willie Croucamp, Chief Director, Department of Water Affairs and
Forestry
Martie Van Rensburg, CEO, Trans-Caledon Tunnel Authority
Johan Claassens, Head of Projects, Trans-Caledon Tunnel Authority
Hanri van Loggerenberg, African Development Bank Relationship
Manager, Development Bank of South Africa
Irene Baumbach, Project Manager, Development Bank of South Africa
PN Basson, Project Manager, Development Bank of South Africa
Serame M. Tsomele, Project Accountant, Development Bank of South
Africa
Chris Viljoen, Manager, Water Quality and Environment, Rand Water
Karl Lubout, Manager, Water Quality and Environment, Rand Water
Civil Society & Business Community
Patrick Bond, Professor, Faculty of Management, University of the
Witwatersrand
Jean Roux, Partner, PriceWaterhouseCoopers
Patricia Ntongolo, runs informal day care in a shack on the
outskirts of Johannseburg
U.S. Government Personnel
Jendayi Frazer, U.S. Ambassador
Jeff Hartly, Economic Minister Counselor
Jill Derderian, Economic Affairs Officer