WB responsible for abused loans

WB responsible for abused loans

By Jeffrey A. Winters

LONDON (JP): The current debate over the World Bank,
corruption, and Indonesia has come down to a single key question:
is the Bank justified in washing its hands of responsibility for
the corruption of almost US$10 billion in Bank loan funds and
shifting all blame and costs to the Indonesians?

On moral grounds the answer is obvious. It would be
dishonorable and unjustified for the Bank to shirk its
responsibility. But what about on legal grounds?

Here we get to the true heart of the debate. Dennis de Tray,
the country director for Indonesia, recently made the position of
the Bank perfectly clear. He said, "the development projects and
reform programs the Bank finances do not belong to us: they are
owned by the government. It is the government that is responsible
for ensuring that the money it borrows is spent for the purpose
intended and that it is protected from leakage through bribery
and corruption."

In other words, the Bank is saying that although it knew a
large share of the money it was providing was being
systematically stolen, and although it took no effective steps to
stop or even reduce the theft of funds, the legal burden lies
with the Indonesian government while the financial burden,
including the many billions in debt that never went for
development, lies with the Indonesian people.

And with the recent initiatives on corruption just announced,
the Bank is also saying that while it agrees that $10 billion
stolen during the New Order is regrettable, the best it can offer
now is more loans and more debt to try to reform the system in
the hope that corruption can be reduced in the future.

In fact, de Tray is not on solid legal grounds in arguing that
all responsibility lies with the Indonesians. The "Articles of
Agreement" is the founding charter of the World Bank and sets
forth the legal provisions for the Bank's conduct and
responsibilities. It is a detailed document covering all aspects
of the Bank's operations, its relationship to member countries,
voting rights, and even rules on the withdrawal and suspension of
membership. The "Articles" have been amended at regular
intervals since the Bank was founded at Bretton Woods in July,
1944.

If we look closely at Article III, Section 5, Paragraph (b),
it is immediately apparent where de Tray got the inspiration for
the language he used above to try to shift all blame and all
financial burdens to the Indonesian side.

Article III deals with "General Provisions Relating to Loans
and Guarantees." Section 5 deals more specifically with "Use of
Loans Guaranteed, Participated in or Made by the Bank." It is
Paragraph (b) that is of crucial interest for determining if the
Bank can legally claim that all responsibility lies with the
Indonesian side.

Paragraph (b) reads: "The Bank shall make arrangements to
ensure that the proceeds of any loan are used only for the
purposes for which the loan was granted, with due attention to
considerations of economy and efficiency and without regard to
political or other non-economic influences or considerations."

What does this mean? It means that putting aside political
and other distorting considerations, the Bank is charged with the
responsibility to take steps that "ensure," which means
guarantee, that loan funds are spent only for their intended
purpose (which presumably does not include buying luxury cars and
houses for officials). And it stipulates that the Bank should
achieve this objective in the most economical and efficient
manner possible.

Nowhere does it say that the Bank should stop at merely
lecturing a government about rampant corruption, even though this
has no effect. Nowhere does it say that the Bank should keep
loaning larger and larger amounts of money every year, even
though there is abundant evidence that, as the Bank's own leaked
confidential memo admits, 20-30 percent was routinely stolen. It
says the Bank bears a legal burden of ensuring funds get used as
they should.

Given the language of Paragraph (b), which provides us with a
clear understanding of the legal responsibilities of the World
Bank regarding the funds it loans, we are only left with the
factual question of whether the Bank conducted its operations in
Indonesia according to its legal mandate.

There are two ways to approach this question. One is to assess
what the Bank proactively did to meet its responsibilities. The
other is let the results speak for themselves. On both counts,
the evidence is overwhelming that the Bank did not make the
arrangements necessary to ensure funds were not stolen and
diverted.

The Bank's supervisory activity for on-going projects was
never designed to ensure the integrity of funds. Bank task
managers relied almost entirely on local project managers who
self-report. As any tax specialist knows, self-reporting systems
work cleanly only if there are random and surprise audits. Even
if you conduct detailed audits of only 5 percent of all projects,
managers would be much less likely to cheat because they never
know if they might get caught. The Bank does conduct evaluations
of projects after they are finished, but these never involve
detailed investigations of the use of funds.

The best proof that the Bank failed to operate according to
Paragraph (b) is that corruption was rampant in Bank projects for
years, and there is no evidence that the levels of corruption
were being reduced from year to year.

The Bank's culpability in the loss of $10 billion in loan
funds is compounded by the fact that there was widespread
awareness among Bank staff that the money was leaking and
disappearing. In my interviews with Bank officials in Jakarta and
the U.S. over a seven year period beginning in 1990, I was always
stunned that no one was deeply troubled about admitting that a
third of Bank funds get stolen.

While I agree the World Bank should not conduct itself like an
imperial power (though some would say it has been doing exactly
that for decades), and while it should not take Indonesian law
into its own hands, on other matters the Bank routinely imposes
its mandates, procedures, rules, and conditions on client
countries.

On corruption, it chose to look the other way and take no
effective steps to meet the requirements of Paragraph (b).
Soeharto's New Order had no right or claim to Bank loans, and the
Bank could have threatened to cut off access unless the
corruption matter was addressed satisfactorily, or unless there
was at least a clear pattern of improvement. The Bank would have
been justified in quoting Paragraph (b) as the reason it was
required by law to take such severe actions.

Now it is time to decide what should happen. The Indonesian
people (and I don't mean the government, but rather the people
the government has been intimidating for over three decades) have
been left holding all the debt burden. It is true that the
Indonesian government bears legal responsibility for how loan
funds are used. But it is also true that the World Bank,
according to its own articles and regulations, shares that legal
responsibility.

Instead of shifting all the blame to the Indonesians, who
were, after all, living under a military dictatorship praised
incessantly by the Bank, the time has come for the Bank to start
preparing a debt reduction package of $10 billion.

The Bank could create a lot of good will by acknowledging its
failure to stem corruption in Indonesia and voluntarily absorbing
part of the burden that now rest unfairly on the shoulders of
Indonesia's poor. If the Bank chooses the path of resistance, the
Indonesians have a solid legal basis from which to demand a debt
reduction through the proper channels -- including, if necessary,
the World Court.

The writer is professor of political economy at Northwestern
University and the author of Power in Motion: Capital Mobility
and the Indonesia State.