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.