The World Bank weeds out corruption: Will it touch the roots?

8 April 2006

A series of loan suspensions and internal investigations has everyone at the World Bank talking about corruption; despite high-profile moves by president Paul Wolfowitz, the root causes of corruption – underpaid civil servants, an acceptance of bribery by big business, and dirty money – remain largely unaddressed.

In the US, the Bank has been under intense pressure to stamp out corruption from a series of senate hearings over the last two years. The latest of these hearings, held by the Committee on Foreign Relations on 28 March heard testimony from William Easterly, professor of economics at New York University and former advisor to Bank past president James Wolfensohn; Ruth Levine of the Center for Global Development; and Adam Lerrick, director of the Gailliot Center for Public Policy at Carnegie Mellon University. Lerrick was scathing in his remarks on the Bank: “The Bank gives itself good marks and boasts that more than three quarters of projects completed had ‘satisfactory outcomes’. But when the auditors are captive, when the timing of judgment is premature, when the criteria are faulty and when the numbers are selectively manipulated – how credible are the conclusions?”

One of the first steps that Wolfowitz took in response to the pressure after assuming the reigns at the Bank was to commission an external review of systems of transparency, accountability, ethics and integrity (see Update 47). Led by Harvard University economics professor Robert Pozen, little has been heard about the review but it is assumed to be informing many of the actions that Wolfowitz is pursuing.

rhetorically promoting transparency while maintaining secrecy

In February, the WB, IMF, and other multilateral development banks agreed to create a ‘framework for preventing and combating fraud and corruption’. The accord would “increase information sharing, standardise definitions of corruption, improve the consistency of investigative procedures and ensure mutual support for compliance and enforcement”. It is to be completed in time for the Bank’s annual meetings in September.

Over the past six months, Wolfowitz has held up an unprecedented number of loans over fears about corruption. These include:

  • Chad: The Bank led a donor fact-finding mission to Chad end March. This was the first visit since president Wolfowitz suspended loans to the country in January, saying the government had breached an agreement with the Bank when it changed a law to access the oil profits from a controversial pipeline that were meant to benefit social programmes for the poor. The Bank also froze pipeline profits saved in a London escrow account, which include royalties from the pipeline’s operator, Exxon Mobil (see Update 49).
  • Kenya: The Bank announced end January that it was concerned about corruption in Kenya and it would not clear delayed loans of $265 million until it is convinced the government was serious in tackling the problem. This came after widespread criticism earlier in the month for its approval of two loans worth $145m, only days after a dossier produced by former anti-corruption official John Githongo chronicled corruption at the highest levels within the Kibaki government. Three ministers have been forced to resign as a result of the revelations. Colin Bruce, the Bank’s Kenya country director, said a World Bank team was conducting a “forensic exercise” on the delayed projects before it forwards a request for approval to its board if it is satisfied. The audit is scheduled to end in June.
  • Congo: A newspaper report about Congolese president Denis Sassou-Nguesso’s extravagant hotel bills while staying in New York last September was passed to Wolfowitz. He was also informed that KPMG, the firm that audits Congo’s state oil company, had refused for three years running to sign off on its financial statements. Despite an IMF decision that the country deserved debt relief, Wolfowitz has decided that the Bank will not follow suit.
  • India: The Bank has held up over $1 billion in health loans due to corruption concerns.
  • Bangladesh: The Bank has cancelled road contracts, health, nutrition and municipal services projects, due to corrupt bidding practices. Two government officials have since been fired, and Wolfowitz plans to ban the private firms involved from future World Bank contracts.
  • Uzbekistan: The Bank announced in March that it would stop making new loans to Uzbekistan. Between 1992 and 2005, the Bank had approved $639 million for 16 projects there, none of which will be affected by the decision. It also offers analytical, capacity building and technical assistance to the government, which the World Bank office would continue to offer. The European Bank for Reconstruction and Development ceased lending to the government in 2004, citing slow reforms and human rights violations. Transparency International, an anti-corruption NGO, rates Uzbekistan among the world’s most corrupt countries.
  • Yemen: In October, the Bank said it would reduce by 34 per cent its upcoming three-year loan assistance package to Yemen, starting July 2006, because of a lack of government transparency and good governance.
  • Argentina: The Bank has interrupted a project in Argentina that topped up the wages of poor workers. Some of the money seems to have greased the ruling Peronist party’s electoral machine before elections in 2003, and the government has brought charges against one senior official and fired ten others.

Wolfowitz has ordered a sweeping review of what went wrong in the Agency for the Execution of Works in the Public Interest to Combat Unemployment programme (AGETIP), which passed Bank loans to non-governmental agencies for public-works projects in french-speaking Africa. A four-month investigation by the US News & World Report released in March has revealed that federal prosecutors are currently investigating the activities of Leslie Jean-Robert Paen. Shortly after joining the Bank in 1989, Paen became a chief architect of the AGETIP programme.

Getting to the roots

While many observers applaud these attempts to weed out corruption, Wolfowitz has so far failed to systematically address the roots of the problem.

The normalisation of petty corruption in developing countries has in part been driven by IFI conditions which maintain civil service salaries at an arbitrary percentage of already inadequate budgets. The aid industry has fuelled the importance of patronage in many countries by overpaying consultants, driving upwards accountability, and turning a blind eye to corruption in regimes that ‘they can deal with’. This is exacerbated by the World Bank’s ‘pressure to lend’ culture where staff are rewarded for the volume of the portfolio they manage.

The Bank has been painfully slow to investigate and ultimately disbar companies found guilty of malpractice, fraud or bribery. Canadian engineering firm Acres International was allowed to continue bidding on Bank projects for two years after it had been indicted for bribery over its involvement in the Lesotho Highlands Water Project.

Before his departure, past president James Wolfensohn commissioned Robert Vaughn of the American University law school to provide a blueprint for the modernisation of the Bank’s whistleblower protection policies. In the nine months since the Bank received the Vaughn report in June 2005, Wolfowitz has refused to publicly release the report, consult staff on Vaughn’s recommendations, or accept any offers from experts to help implement the analysis. The Government Accountability Project, which leaked the report in February 2006, said “this continues the pattern of the Bank rhetorically promoting transparency while maintaining secrecy on management proposals to combat corruption.”

Finally, the IFIs are a central part of an international financial system which has both actively and tacitly supported the global proliferation of dirty money flows. This includes financing, for example, despots like former Nigerian president Sani Abacha who is estimated to have stolen $4.5 billion, and failing to prioritise action against an estimated $5 trillion which the Tax Justice Network estimates has flown from developing countries into tax havens in the last three decades (see at issue, Update 49).

What is needed?

Greater transparency: The Global Transparency Initiative is calling for the Bank to move away from a checklist approach and towards the presumption of disclosure for all official documents. Continued progress in national-level budget transparency will be crucial. Elected representatives must be more involved in the contraction, implementation and evaluation of loan and grant agreements. Representatives of civil society budget monitoring efforts should be allowed greater access, including to donor roundtables and consultative groups.

Strengthening internal mechanisms: Huguette Labelle, chairwoman of the board of directors of anti-corruption NGO Transparency International, has argued that “the institutional integrity department [an internal World Bank corruption monitor] should be sufficiently resourced and should react in a more timely fashion to really make a difference”. Government Accountability Project insists that the Bank institute the recommendations of the Vaughn report, specifically procedures to protect staff from reprisal for coming forward to tell of misconduct. The Bank says it is taking steps to streamline bottlenecks in the sanctions procedure. It must not shy away from investigating and debarring large, multinational companies in a timely fashion.

A consistent, transparent framework for deciding when to suspend loans is urgently needed. Backing up these decisions requires that truly independent audits be conducted of Bank operations; in his testimony to the US senate hearings, William Easterly was highly critical of both the independence and the effectiveness of the Independent Evaluation Group, citing personal experience of “pressure being brought to bear from the rest of the Bank”.

Minimum international standards for extractive projects: The Publish What You Pay coalition has called on the Bank to revisit the recommendations of the 2004 Extractive Industries Review, and adopt minimum standards in governance, transparency and human rights that must be fulfilled before approving oil, gas and mining projects in institutionally weak countries.

A final note of caution

Many civil society organisations have called for increased use of World Bank conditions to deal with the issue of corruption. This may open the door for economic policy conditionality wrapped in good governance clothing. Dealing with dirty money must not equate to the surrender of national policy-making space. What some may label as corruption, others see as, for example, much-needed protection for domestic industry. There are many at the Bank and beyond who are all too ready to recommend rapid liberalisation of trade, finance and government procurement as the answer to the problem of corruption.