WB urged to fight corruption in Indonesia

WB urged to fight corruption in Indonesia

WASHINGTON (Dow Jones): The World Bank must tighten a host of
project procedures, if it is to quell the widespread corruption
in Indonesia and elsewhere that is resulting in a "significant
leakage" of World Bank funds, according to an internal Bank memo.

Corruption in Indonesia is "pervasive, institutionalized and a
significant deterrent to overall growth of the economy and
effectiveness of the Bank's assistance," according to a memo by
Jane Loos, regional manager for quality and central operational
services for East Asia and the Pacific at the Bank.

"Practically all key institutions are involved: judiciary,
civil service, security forces, even internal and external audit
firms," she wrote in an Oct. 19 memo, obtained by Dow Jones, to
Jean-Michel Severino, vice president for the East Asia and
Pacific region.

What's worse, Loos said the negative impact of corruption on
development activities financed by the Bank goes well beyond
Indonesia. "Many of our conclusions appear to be relevant to all
country programs in the East Asia Region, and some indeed relate
to Bank-wide systems/procedures," she said after a Sept. 14 to
Sept. 26 investigation in Indonesia.

Loos' memo comes on the heels of a Sept. 20 memo publicly
released by the Bank on combating corruption in Indonesia by
Katherine Marshall, director, the East Asia and Pacific region.
After leading a separate mission to Indonesia from Sept. 13 to
Sept. 20, Marshall also found corruption is "widespread, systemic
and deeply embedded in Indonesia."

Marshall said the extent of the corruption was unclear. But
she added it could become "much worse," and threatened the
withdrawal of international support if the "fundamental soundness
and freedom from corruption" of government programs couldn't be
guaranteed.

Not only is the corruption a problem for the aid recipients in
East Asia, who, suffering from devastating financial crises since
last year, are in dire need of assistance from international
agencies like the World Bank. Indonesia is slated for US$3
billion for general budget support from the Bank alone this year.

But corruption is also a thorn in the side of international
donor institutions themselves, which are often criticized for
wasting resources. Officially, the Bank will only classify the
leaks as "significant," but some officials estimate 20 percent of
the Bank's funds aren't used properly.

In its fight to ensure its money is used as intended, the Bank
recently set up a telephone hotline for callers to inform the
Bank of alleged corruption, a problem that World Bank President
James Wolfensohn has said he wants to root out.

Two separate missions to Indonesia were necessary, because
Loos' analysis was aimed at examining internal processes and
ensuring procedures are as watertight as possible, while
Marshall's team analyzed corruption within the overall
environment in Indonesia, said Peter Stephens, a spokesman for
the Bank.

Loos' team found that Bank procedures are not being applied
uniformly, local supervision is weak, and auditing standards are
below par, according to the memo. "A key problem relating to
leakages in decentralized projects executed at sub-national
levels is weak supervision of physical implementation in the
field," it said.

"Auditing requirements have been allowed to deteriorate into a
superficial exercise; even an agency with overdue audits was not
excluded from receiving new loans."

To combat corruption and the related evaporation of Bank
funds, Loos' memo went beyond Marshall's to recommended
tightening a variety of specific procedures.

They include better defining the Bank's policy of "zero
tolerance" for corruption to mean that managers are accountable
for ensuring project implementation is sound; "all tips will be
pursued;" and sanctions will be promptly applied to staff and
managers who don't adhere to the policy, the Loos memo said.

Bank managers should also "be ready to put real resources"
into fighting corruption, while the Bank should provide more
information on the grounds for misprocurement; clarify the
policies for staff accused of corruption; and issue a code of
conduct with details on inappropriate behavior, such as "do not
consume project resources, hire own cars and interpreters," among
other things, it said.

Loos recommended immediate action in the areas of procurement,
portfolio management, financial management and resident mission
organization and staffing. On procurement, the memo recommended
strengthening supervision of physical implementation in the
field, rather than focusing on the integrity of the bidding
process, as the Bank has in the past.