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