World Bank aid should not leak
World Bank aid should not leak
By Sri Pamoedjo Rahardjo
JAKARTA (JP): Recent allegations from the World Bank report
suggest that Indonesian officials have siphoned 20 percent of the
country's loan for their personal gain. Some experts even
estimate a higher figure. The accusation is a very serious one.
Is siphoning funds out of a multilateral agency such as the World
Bank possible? Let us look at the structure of project costs and
sources of financing and illustrate where the leakage could
possibly have occurred.
It should be understood that foreign assistance from a
multilateral agency is a loan to the government. This means that
the borrowing country is required to pay back the amortized loan,
including interest and other charges. Theoretically, the loan is
requested by the government and granted by a funding agency to
support and as complementary funding for a government project. In
practice, government officials are technically advised by the
lending agency about what projects the agency is interested in
supporting.
The project cost is usually reflected by two sources of
financing: the Bank loan and the government development funds
(known as "DIP"). Irrespective of where the funds come from, the
project costs are meant to support the activities identified in
the project. In the implementation of these projects, government
administrators are faced with an almost classic management issue,
for example, difficulties in project fund disbursement due to
varying and sometimes unsynchronized requirements in the DIP and
Bank loan disbursements.
The table (below) illustrates a range of sources for financing
a project. The allocation of funds identified as coming from the
lending agency or from the government aims to provide sufficient
funds for the project in its entirety.
The lending agency advises whether it will support fully or
partially the respective project components. It will usually fund
activities such as civil works, technical assistance, equipment,
development and transfer of technology. The lending agency's
policy allows procurement of goods and services from its member
countries through internationally accepted standards for
procurement. On the other hand, the government could elect to
fund fully or partially such activities as local training, in-
country education, community-based participation, local
administrative and recurrent costs, and the payment of taxes. The
procurement of goods and services related to this expenditure is
governed by prevailing national procedures.
Before the loan becomes effective, the government project
implementation unit is supposed to prepare a detailed project
implementation plan which unfortunately is not always completed
or completed effectively. The plan is intended to help integrate
work activities within and across various agencies, and help
disburse the funds properly and expediently. It is also meant to
be the road map project administrators and the lending agency
officers refer to for their respective planned activities.
To implement an activity, the government project
administrators would have to comply with internal procedures to
obtain administrative support within the government bureaucracy
depending upon the size and cost of the activity. The approved
project activity will subsequently be sent to the lending agency
to obtain a no objection letter as a basis for disbursement.
For a project activity to be funded through the loan, it
requires thorough reviews executed by all related offices and
officers in the lending agency. The review includes a check for
compliance with the loan agreement, lending agency's guidelines,
and would allocate sufficient time for competitive bidding or
other appropriate procurement procedures. Thus, theoretically the
siphoning of loan funds is not possible since the technical
decision on the use of the loan has gone through strict
procedures for concurrence of the lending agency.
For activities, which require government financing as
counterpart funds, no special attention from the Bank officers is
exercised other than a reliance on the government administrators
to follow the prevailing government procedures. Therefore, if any
misappropriation by government officials were to occur, it would
be mainly from this counterpart budget and not from loan funds.
The use of government financing is, in fact, the area for concern
since aberrations from the project objectives can happen because
top management can unilaterally decide to use the funds for other
purposes as long as, by implication, they are related to the
project objectives.
The illustrative cost structure suggests that leakage from the
Bank financed components to government officials is theoretically
nil because the decision to disburse must go through the scrutiny
and concurrence of the lending agency.
In practice, the lending agency favors the involvement of
reputable international firms or local firms that have
demonstrated sound technical and fiscal capabilities. Wherever
there is a scarcity of reputable local firms, twining with an
established international firm is encouraged by the government as
well as the funding agency. There is a very thin line between the
government's desire for transfer of technology and allocating
local awards to a well-connected group. If the favored group does
not deliver, one could consider this as a form of fund leakage.
Counterpart funds are usually set to help support supervisory
and administrative activities. Lack of understanding in local
business practices by the lending agency can cause some
misunderstanding. It is probably not in the institutional
culture of a lending institution to offer snacks, lunch,
accommodation, local transportation and sometimes honorarium
during project meetings. Local field visits by government and
Bank officials require funding by government counterpart funds or
expenditures are passed on to local contractors who will find
creative means to meet these extra expenses including gifts as
tokens of appreciation.
Another possible area for concern is the use of counterpart
funds for in-country education and training, preparation for
overseas training, and other related expenses. The classic issue
during implementation is the difficulty of recruiting available
and eligible candidates within the time frame of the project. In
order to avoid further delays, the project implementation unit
recruits candidates who oftentimes are not the intended project
target to avail themselves of the allocated funding. In effect,
the project will not derive the direct benefits expected of the
project component.
Counterpart funds are set to provide funds to cover internal
expenditure, such as taxes, local costs involved in procurements,
incentives or overtime fees for civil servants. While cases of
corruption by individual government officials could occur, lack
of empathy about local cultural practices on the part of the
lending agency could also lead to a misunderstanding on the use
of funds to facilitate project implementation rather than to
incur a significant delay in the project. A practical project
administrator may opt for the first option.
While government counterpart funds are more prone to
experience leakage, a parallel system of reviews and audits are
already in place. Project activities are supposed to be reviewed
at various management levels and audited by state inspectors,
e.g., the respective ministry, the Supreme Audit Agency (BPK) and
the Development and Finance Control Board (BPKP). When
endorsements are obtained from these respective agencies, it is
supposed to mean that disbursements are in order because the
specific project activity has met its objectives and has complied
with the national accounting standard.
The investigation for misuse of government funds is clearly
the domain of state auditors and inspectors. What is even more
important in these times of scarce resources is that development
projects should be implemented effectively and efficiently as
well as completed on time. The majority of projects in Indonesia
are experiencing significant delays.
The social cost resulting from these delays is incomparable to
the financial loss. The average time elapsing until project
completion in Indonesia is between two to three years. There are
two practical consequences resulting from delays in project
implementation and completion.
First, Indonesia has to pay additional interest and commitment
charges for the said loans which in effect is a reverse siphoning
of resources to the lending agency. Second, expected project
benefits could already become obsolete or negated due to the time
lapsed.
In conclusion, the alleged leakage due to the siphoning of
development loan funds is a serious matter and should be attended
to by the appropriate agencies. Lending agencies and the
government alike need to synchronize, co-ordinate and improve
project guidelines with efficient procedures and planned with
enough sensitivity for the local culture and acceptable
practices.
These should be aimed at more timely and successful completion
of projects that have been developed with great care, analysis
and commitment to implement them.
The writer is a social and economic observer and former
regional development bank officer.
Table: Range of Possible Proportion of Sources of Project Financing
Project Components/Activities Total Cost Bank Loan Government
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Staff Development
(a) in-country 100 20-55 80-45
(b) Overseas 100 100 0
Consultants' Services
(a) Local 100 50-100 50-0
(b) International 100 100 0
Furniture, Equipment, Materials
(a) Furniture 100 0-100 100-0
(b) Equipment/Materials 100 20-70 80-30
Civil Works
(a) Site Development 100 100 0
(b) Construction 100 20-70 80-30
Research/Special Studies
(a) Research 100 100 0
(b) Special Studies 100 0 100
Operational & Recurrent Costs
(a) Project Management 100 20-90 80-10
(b) Recurrent Costs 100 0 100
Taxes and Duties 100 0 100
Contingencies 100 100 0
Interest During Construction 100 100 0
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Total Project Costs 100 50-50 50-40