NGO Sign-on Letter to World Bank on Indonesia Corruption
11/11/98
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RELAYED TEXT STARTS HERE:
Title: NGO Sign-on Letter to World Bank on Indonesia Corruption
Source: Environmental Defense Fund
Status: Distribute freely with proper credit to source
Date: 11/11/98
The following is a periodic email broadcast from the International Program
of the Environmental Defense Fund. Below please find a draft letter and
memorandum written in response to a letter written by World Bank
President, James Wolfensohn and sent to a coalition of 112 Indonesian and
international NGOs which had earlier raised questions about corruption in
the World Bank's loan portfolio in Indonesia. Mr. Wolfensohn's response
to the initial international query about corruption was not satisfactory,
hence the follow-up letter. The manner in which the World Bank addresses
the issue of corruption in Indonesia has serious implications for its
other projects throughout the world. This draft letter and memorandum is
are being circluated worldwide for endorsements (signons) from
environmental, human rights and development NGOs and other civil society
organizations. Please send endorsements and comments to indmdbac@edf.org
or IndoMDB_Action@edf.org. The easiest, of course, may be to use the
reply key on your email handler. Please include your full name,
organization, address, and fax and phone numbers. PLEASE SEND REPLIES BY
NOVEMBER 19.
Thank you very much for your consideration of this matter.
DRAFT LETTER
Dear Mr. Wolfensohn,
We are writing to thank you for your letter of September 3, sent in
response to concerns over World Bank corruption and lending practices
raised by 112 NGOs in 31 countries, with particular reference to
Indonesia. We welcomed the specific responses and commitments in your
letter, such as your engagement to consider the formalization of a process
for environmental assessment for sector adjustment loans. However, we must
express our disappointment that you did not address many of the most
critical specific issues raised by 112 NGOs in 31 countries in our August
18 letter. We are writing to raise, again, these issues which are crucial
for addressing the linked problems of corruption in World Bank lending,
the culture of loan approval, and the Bank's pattern in too many cases of
not acting on evidence of loan mismanagement so as not to offend major
borrowing clients. The lack of an explicit response to several of the
most important points in our letter indicates a failure to send Bank
staff, management and shareholders a strong signal that, in the light of
the Bank's fiduciary responsibilities, a much more intensive and
transparent monitoring of the Bank's portfolio is a pressing priority.
We are aware that the Bank has begun to identify some general approaches
that in theory could limit diversion of Bank lending in Indonesia, for
example in the September 20, 1998 Aide- Memoire of a recent World Bank
Mission headed by Ms. Katherine Marshall, Director of the East Asia and
Pacific Region. We commend the Bank for the posting of this document on
the world wide web. Unfortunately, as we discuss in more detail below,
there is an absence of specific, concrete, credible actions on the part
of the Bank that at the moment give any expectation that these
recommendations can and will be put into operation in a credible,
effective way.
The lack of specific, concrete responses to a number of our key questions
is all the more troubling given World Bank plans to lend $3.5 billion in
quick disbursing loans to Indonesia over the next eight months before the
1999 Fiscal Year 1999 ends on June 30th. We believe that the Bank will
be violating the most basic fiduciary duty to its shareholders if it
proceeds with appraising and approving these proposed loans without
radical institutional changes in its current operating procedures in
Indonesia. To date there is very little evidence that anything has changed
on the ground. Despite plans for a huge increase in lending volume ($3.5
billion in FY 1999 in contrast to $703.2 million in loan commitments for
FY 1998), there is little evidence that civil society has been properly
consulted, that credible, effective anti-corruption measures are in place,
or that the World Bank has taken any steps to hold promised public
consultations in the preparation and appraisal of both ongoing an and
planned Structural and Sector Adjustment loans. All of this stands in
increasingly stark contrast to your well publicized claims to be changing
the Bank's culture from one of loan approval to development effectiveness
that delivers results on the ground.
The Bank's lack of progress in changing its approach in the Indonesia
situation is all the more critical, since it is a test case for ongoing
efforts of the G7 and other Bank shareholding countries to promote long
overdue reforms in the lending practices of the Bretton Woods
institutions. Moreover, we understand that the Bank is preparing $4
billion in quick disbursing loans as part of the larger international
financial support plan for Brazil. We fear that the debacle of public
international lending to Russia, including billions of Bank loans of which
the mainstream international financial press asserts hundreds of millions
are unaccounted for, may be repeated on an even larger scale in Indonesia
and other countries without major, credible changes in the Bank's
approach. For example, as recently as October 24/25 the Financial Times
asserted that "half the $500 million which the World Bank gave the country
[Russia] to restructure its coal industry has gone missing-even as coal
miners sat outside the main government offices in protest against months
without wages," (p. xxvi), reaffirming a similar charge made by Business
Week in August, 1997. I. Issues in our letter of August 18th, 1998 that
have not addressed and answered.
We have attached a memorandum which discusses these unanswered issues in
more detail, but in this cover letter we wish to summarize them as
follows:
1. We are disturbed by your lack of response to our questions about the
disconnect between statements of high ranking Bank officials and the
situation as it is portrayed by internal Bank memoranda. In fact, your
letter of September 3rd has added to this disconnect by stating that "we
lead the world in applying well-established procedures for competitive
procurement of goods and services, controls on disbursement of Bank funds
and ex-post audits on the use of our funds. Bank staff follow
implementation of all our projects closely, including regular site visits,
special technical audits on the effectiveness of fund usage, and regular
scrutiny of expenditure documentation against actual use of funds" and
that the Bank "has begun to deal more effectively in the design of new
projects." Such statements are in direct contradiction to what is widely
acknowledged both outside and inside the Bank to be the case in the
current situation in Indonesia. We refer, for example to the not internal
memorandum of Ms. Jane Loos to Mr. Jean-Michel Severino, Vice President
for the East Asia and Pacific Region, dated October 19, 1998. This
memorandum, which was not publicly released but was widely distributed in
the Bank, notes inter alia the following:
"Our mission confirms earlier reports on corruption in Indonesia: that it
is pervasive, institutionalized, and a significant deterrent to overall
growth of the economy and effectiveness of the Bank's assistance."
"Practically all key institutions are involved: judiciary, civil service,
security forces, even internal and external audit firms."
"We cannot rely on probity of audits both from BPKP (Governmentinternal
audit agency) and local associates of international audit firms."
"Despite apparent compliance with World Bank guidelines and documentation
requirements for procurement, disbursement, supervision and audits, there
is significant leakage from Bank funds."
"We also found that Bank procedures /standards are not being applied
uniformly.A key problem relating to leakages in decentralized projects
executed at subnational levels is weak supervision of physical
implementation in the field, by both the central ministry technical staff
and Bank missions..there is little follow-up by country or sector
management to call into question the operating systems themselves. The
auditing requirements have been allowed to deteriorate into a superficial
exercise; even an agency with overdue audits was not excluded from
receiving new loans."
That the Bank is now risking $3.5 billion in such an environment defies
the imagination, given the negligible progress in instituting basic
reforms, auditing, procurement, transparency, and public consultation.
With all due respect, we feel obliged to communicate to you that we
suspect that one explanation for the disconnect between some of your
statements and the record from recent internal World Bank memoranda is
that you may not always be fully informed by your own senior management.
The Loos report is now the third internal World Bank document to directly
contradict Mr. Severino's and the Bank's public assertions that "we know
exactly where our money is going.. If supervision of our projects produced
any evidence of misappropriation or misallocation of our funds, we would
take swift action to stop it.there is full accountability on the use of
bank funds through a comprehensive system of independent ex-post financial
audits of project accounts." (World Bank Group, "Indonesia and the World
Bank," News Release No. 98/1426/EAP, July 28, 1997)
2. Your letter of September 3 did not respond to our request for the
identification and public release of studies of Corruption in World Bank
lending to Indonesia, including the document prepared by Bank Resident
Staff in Indonesia (RSI) in the summer of 1997. We ask again for the
official release by the Bank of these reports, as well as of the Public
Expenditure Review for Indonesia, which Bank staff promised they would
release to our groups but to date have not. We commend the Bank for its
posting on the web of one report on corruption subsequent to you letter,
the Aide Memoire of the World Bank Team headed by Katherine Marshall,
dated September 20, 1998. We address the recommendations made in that
aide-memoire later in this letter.
3. Your letter lacked specificity and credibility concerning many our
concerns about how Bank procedures and policies have changed to address
ongoing corruption and prevent future diversions in light of its internal
reports on corruption. The policy reforms you referred to in the Public
Reform Support Loan (PSRL) were for the most part introduced not by the
World Bank, but by the International Monetary Fund.
One of the measures your letter cites, "in particular" to "limit the
potential for diversion of funds"-the decentralization of funding of
social programs--is cited in the most recent internal, non-public Bank
memoranda as increasing the risk of corruption, viz. "Shift in project
design from infrastructure /energy projects with large ICB contracts to
social investment projects implemented in numerous provinces and by
various sub-national levels of authority have increased the risk and
probably the size of the leakages [diversions]." (Memorandum of Ms. Jane
Loose to Mr. Jean-Michel Severino, Vice President for the East Asia and
Pacific Region, dated October 19, 1998). Finally, Bank assertions about
the environmental and social sustainability of palm plantation exports in
the PSLR are contradicted by continuing practices supported by the
Indonesian government, including use of fire for clearing and forced
seizure of indigenous lands. A recent report by the Center for
International Forestry Research (CIFOR), a CGIAR institution supported by
the Bank, indicates that "crisis aid" from international institutions may
actually assist the GOI in carrying out environmentally and socially
damaging programs such as the notorious transmigration program in forested
regions of the Outer Islands.1/
4. We welcome and praise your commitment to formalize a procedure for
environmental assessment of Sector adjustment loans, but the Bank has
still not instituted policies for environmental assessment and public
disclosure concerning its fast disbursing Structural Adjustment Loans,
which in the current crisis are the fastest growing part of the Bank's
portfolio.
5. We were deeply disturbed by the lack of any response whatsoever
concerning our questions on the ongoing Bank---Price Waterhouse
investigation of corruption in Indonesia, and our concerns that this
investigation address the main issue, the systematic diversion of
significant portions of the entire Bank Indonesia portfolio, not just
individual cases of corruption by Bank staff.
6. Finally, as we detail in the attached memorandum, there is an evident
disconnect between Bank claims of greater and more transparent involvement
of civil society in Indonesia in the current crisis and the actual
conditions of Bank-NGO interactions as reported by Indonesian and
international groups.
II. The Urgent Need for Concrete, Specific Measures
As we noted at the beginning of this letter, the September 20, 1998 Aide
Memoire by Ms. Katherine Marshall recognizes the urgency of undertaking
specific, concrete measures to deal with corruption in World Bank lending
to Indonesia, especially since the World Bank has mobilized $14 billion
from official donors over the next two years and itself has already
decided to push through $3 billion in quick disbursing adjustment loans
for Indonesia this fiscal year. However, the major actions identified in
the Aide-Memoire ("Fence off the social safety net programs; make
immediate progress in transparency and information; initiate an
irreversible process to define and advance with a national anti-
corruption strategy; prepare meaningful processes and initial actions to
address long-term structural issues") do not appear to be materializing
in any credible fashion. We are disturbed by one aspect in particular of
the Bank's current approach, which is reiterated in the September 20
Aide-Memoire, namely that little effort is being made to investigate the
mechanisms and scale of ongoing corruption in World Bank lending. It would
seem problematic to devise a strategy to alleviate the problem of
systematic corruption in World Bank lending to Indonesia, without a more
comprehensive, detailed investigation of the modalities and mechanisms
that constitute the problem, with a view of formulating specific
corrective approaches, rather than general commitments and statements of
purpose which the Bank does not have a very good record of delivering on.
In fact, the World Bank in its current approach is not taking credible
actions itself to "fence off the social safety net," nor is it practicing
the transparency it preaches. A case in point involves the Public Sector
Adjustment Loan (PSAL), which is being disbursed in two $500 million
tranches. It is not clear at all how this and other quick disbursing
adjustment loans will in reality go to partially support social safety net
programs. Generic claims of the World Bank have little credibility in the
absence of specifically articulated, concrete systems of independent
review and on the ground monitoring. We invite you to corroborate this
yourself-can you find out just where on the ground the first $500 million
tranche of the PSAL has gone?
The systematic nature of the problem, including the fact that "auditing
requirements have been allowed to deteriorate into a superficial exercise"
and the failure to date of "senior management to call into question
operating systems themselves" is described in convincing detail in the
October 19 memorandum of Ms. Jane Loos to the Vice President for East Asia
and the Pacific. Moreover, the Bank has not in its preparation of the
PSAL evidenced much practice of the participation and transparency it is
advocating. There was no public, participatory discussion in the
preparation and appraisal of this loan, nor have its terms and conditions
been made public, nor have high ranking Bank officials responsible for the
Indonesia program-such as the Vice President for East Asia and the
Pacific-met with representatives of Indonesian civil society. There also
has been no indication to date of when the promised participatory
consultation for the Agricultural Adjustment Loan might also take place.
All of this is marked contrast even to the IMF in recent months, whose
Vice President for East Asia has met with representatives of Indonesian
NGOs and which has made public the past two letters of intent.
III. Conclusion
In short, the current situation is most alarming. The Bank is pushing
through what amounts to pure balance of payments support loans into a
government whose systematic corruption- acknowledged in several recent
internal Bank memoranda and reports-will ensure that hundreds of millions
of dollars will be 'leaked,' diverted and stolen; indeed there are strong
indications-expressly acknowledged in the Loos, Marshall, and Dice
reports--that the risk of large scale diversions under the current
transitional regime will be even greater than in the past. We urge you to
alter the preparation and appraisal of the planned structural adjustment
lending so that it is timed with participatory public consultations in
Indonesia to identify and put into place the specific modalities, review
and monitoring systems that would increase the likelihood that past
corruption of World Bank lending will not repeat itself. The modalities
and review and monitoring requirements should be linked to conditioned
disbursements of the loans. Otherwise, the Bank will be reinforcing on a
disastrous scale the culture of loan approval and "incremental approach"
(disbursing loans despite evidence of violation of loan covenants,
inadequate auditing and monitoring etc.) so devastatingly documented six
years ago by the Wappenhans and Morse Commission Reports (as well as the
Bank's two volume official history) as at the root of its poor
performance and unsatisfactory development effectiveness. To proceed with
these loans as currently planned would indicate an institutional optimism
completely disconnected from past experience, reflecting total
institutional amnesia.
Otherwise, it would appear that the main and immediate consequence of this
balance of payments lending will be to provide funds to enable the
Indonesian Government to pay back its existing debt-to the World Bank. The
Bank will not only violate its most basic fiduciary duty to its
shareholders, it will be contributing to and reinforcing moral hazard in
international public lending on a scale hitherto unprecedented in
history. And it will be the Indonesian people who will be left with an
increased debt burden to service over the next generation.
We thank you in advance for your attention to these concerns and look
forward to the Bank's detailed response.
Sincerely,
[NGO Signons here]
Attachment
DRAFT MEMORANDUM
ISSUES IN THE AUGUST 18, 1998 LETTER OF 112 NGOS IN 31 COUNTRIES
THAT REMAIN TO BE ADDRESSED
1. Disconnect Between Statements on Corruption of High Ranking Bank
Officials and Internal Bank Memoranda.
Your letter contained no response to our question of why, a month prior to
the completion of the Bank's internal report on corruption which echoed
widely-held sentiments of Bank staff in Indonesia, the Bank's Vice
President for East Asia and the Pacific, Mr. Jean Michel Severino, stated
in a press release that allegations of massive and systematic
misappropriation of Bank funds in Indonesia -- on the order of 30% of all
project funds -- were "demonstrably untrue" (World Bank Group,
"Indonesia and the World Bank," News Release No. 98/1426/EAP, July 28,
1997). Mr. Severino went on to claim, "We know exactly where our money is
going. . We do not tolerate corruption in our programs."
In the same press release, the Bank's Country Director for Indonesia
stated that, "there is full accountability on the use of bank funds
through a comprehensive system of independent ex- post financial audits of
project accounts. He continued, "the procurement of goods and services
financed under Bank loans is conducted through open, transparent, and
competitive international procedures. Funds are disbursed only to
suppliers of these goods and services under contracts approved by the
Bank." These statements stand in stark contrast to the views of Bank staff
and civil society in Indonesia at the time and appear either woefully
ignorant or purposefully misleading and untrue. Either way, it is clear
that there is a serious "disconnect" between the Bank's public
presentation of information about one of its largest client countries and
its own internal evaluations of the country's practices. This raises
substantial questions about channels of communication within the Bank, and
raises questions whether the pressure to lend and the desire not to offend
a major client has fostered, and continues to foster a climate of internal
censorship within the Bank.
We are disturbed that your letter of September 3rd has added to this
disconnect by stating that "we lead the world in applying well-established
procedures for competitive procurement of goods and services, controls on
disbursement of Bank funds and ex-post audits on the use of our funds.
Bank staff follow implementation of all our projects closely, including
regular site visits , special technical audits on the effectiveness of
fund usage, and regular scrutiny of expenditure documentation against
actual use of funds" and that the Bank "has begun to deal more
effectively in the design of new projects." We refer, for example to the
not publicly released internal memorandum of Ms. Jane Loos to Mr. Jean-
Michel Severino, Vice Prsident for the East Asia and Pacific Region, dated
October 19, 1998. This memorandum, which was widely distributed in the
Bank, notes inter alia the following:
"Our mission confirms earlier reports on corruption in Indonesia: that it
is pervasive, institutionalized, and a significant deterrent to overall
growth of the economy and effectiveness of the Bank's assistance."
"Practically all key institutions are involved: judiciary, civil service,
security forces, even internal and external audit firms."
"We cannot rely on probity of audits both from BPKP (Government internal
audit agency) and ocal associates of international audit firms."
"Despite apparent compliance with World Bank guidelines and documentation
requirements for procurement, disbursement, supervision and audits, there
is significant leakage from Bank funds."
"We also found that Bank procedures /standards are not being applied
uniformly. A key problem relating to leakages in decentralized projects
executed at subnational levels is weak supervision of physical
implementation in the field, by both the central ministry technical staff
and Bank missions..there is little follow-up by country or sector
management to call into question the operating systems themselves. The
auditingrequirements have been allowed to deteriorate into a superficial
exercise; even an agency with overdue audits was not excluded from
receiving new loans."
We reiterate our question, and respectfully request a direct answer as to
how the public statements by Bank officials can be reconciled with
strikingly different and clear observations by Jakarta-based Bank staff,
internal Bank memoranda, and other long-time observers of Indonesian
business practices.
2. Lack of Response to Request for Identification and Public Release of
Studies of Corruption in World Bank Lending to Indonesia
Your September 3 letter contained no response to the first of our five
major queries, namely the request for the public release of the findings
of a 1997 Bank study on corruption in Indonesia, and other such Bank
reports that may exist. We believe that this study is the "secret
document" referred to in the Jakarta Post which has since been "leaked [to
the public] by a conscientious staff member of the bank" ("World Bank Must
Face the Corruption Music," Jakarta Post, 9/23/98). It now would appear
that this document is titled "Summary of RSI Staff Views Regarding the
Problem of "Leakage" from World Bank Project Budgets," and containing
appendices titled "Discussion Points Regarding Improved Transparency in
Procurement Processes" and "Options for Bank-GOI Action to Reduce
Development Budget `Leakage.'" The report is commonly referred to as the
Dice report. We would like to know whether this is, indeed, the only Bank
study of corruption in Indonesia. If there are other Bank studies, we
request that the Bank make their contents available to the public,
especially to Indonesian civil society.
In addition, in a meeting in Washington last November, Bank staff informed
several of our organizations that the Bank was conducting a Public
Expenditure Review for Indonesia, and stated that when the review was
completed, we would receive a copy. We understand that this review was
completed several months ago and includes a rather detailed analysis of
Indonesian government expenditures under Suharto, including information
that would be of use to Indonesian civil society organizations attempting
to work in cooperation with the Bank on uncovering corruption. We
believe it is essential to release this document to organizations of
Indonesian civil society and to the international public at large, and
request the Bank to do so without delay.
3. Lack of Specificity and Problems Concerning Changes in Bank Procedures
and Policies in Lending to Indonesia
A. Our first query also requested details on the extent to which the Bank
had modified its lending practices in Indonesia in light of the internal
1997 corruption report; this question was not answered with any
specificity.
Your letter responds to our query in only the most general manner,
mentioning that since 1996, the Bank has "taken important steps to combat
corruption by tightening auditing procedures in operations we finance"
and that the Bank has "put in place internal safeguards against fraud and
corruption" such as the establishment of "an oversight committee on fraud
and corruption." With respect to Indonesia, your letter refers
principally to the reform program supported by the recent Policy Reform
Support Loan PRSL) and quick-disbursing adjustment loans focusing on the
abolition of various government monopolies and cartels, as well as the
decentralization of funding of social programs supported in part by these
loans. In fact, your letter asserts that "indeed, most of these actions
were taken before we disbursed the first tranche of the Bank [PRSL]
loan."
We are especially disappointed that despite clear staff views indicating
the contrary, your letter asserts in an apparent echo of the July, 1997
press release (cited above) by Mr. Severino and the Bank's Country
Director for Indonesia, that "despite criticisms from some outside
observers, we lead the world in applying well-established procedures for
competitive procurement of goods and services, controls on the
disbursement of Bank funds, and ex-post audits on the use of our funds.
Bank staff follow implementation of all our projects closely, including
regular site visits, special technical audits on the effectiveness of
fund usage, and regular scrutiny of expenditure documentation against
actual use of funds." This was clearly not the case in Indonesia, given
what is now publicly known. Finally, your letter seems to contradict
itself later on by stating that the Bank has "begun to deal more
effectively with corruption in the design of new projects" through
"direct channeling" of funds to beneficiaries, and through "the
involvement of civil society in scrutinizing project implementation," and
that the Bank is "considering further tightening of procurement
procedures; adopting competitive salaries/honoraria for counterpart staff
of project implementation units; establishing benchmark unit prices and
consultant billing rates and requiring justification of any variance"
etc.
These general statements and expressions of intention of what the Bank is
now considering, or has begun to do in new projects, do not present any
concrete information on what exact steps the Bank took in Indonesia over
the past year and one half as part of its anti-corruption program, and to
what extent the nearly $2 billion the Bank approved in loans to Indonesia
between July, 1997 and September 1998 have been prepared, appraised, and
supervised to forestall the risk of the systematic diversion of hundreds
of millions of dollars through the practices identified in the Dice
report.
In particular, we would request a clarification of exactly how- if at
all-- the Bank made the changes in the auditing and procurement
procedures of on-going and planned loans as recommended by RSI in July,
1997 for the Indonesian loan portfolio: B. Issues and Problems with
Efficacy of Bank Policy Reforms in Indonesia.
In your discussion of the positive reforms -- which we welcome -- and
which you state were linked to the recently approved Policy Reform
Support Loan (PRSL) -- i.e. the abolition of monopolies, the lifting of
intra-regional trade distortions, the attempt to include the
Reforestation Fund in the government budget, the widespread audits of
banks, etc. -- we must respectfully point out that most of these reforms
were introduced, not by the World Bank, but by the International
Monetary Fund. According to the IMF, however, the World Bank was
responsible for inserting language in the January, 1998 IMF letter of
intent mandating the privatization and expansion of the environmentally
and socially damaging oil palm sector. In the documentation provided by
the Bank to the Executive Directors prior to their vote on the PRSL, the
Bank simply echoed Indonesian government promises about the environmental
sustainability of oil palm plantations 2/: "Forestry and land management
has been strengthened through the issuance (April 8) of a [GOI] decree
that defines site suitability criteria for oil palm plantation
development. This will limit plantation development to districts
identified for non-forest cultivation in provincial spatial plans, give
priority to land that is already vacant or cleared of forest, and exclude
sites with deep peat soils." 3/
An examination of the Indonesian government's April 8 decree, however,
shows that it fails to address two of the major problems associated with
Indonesian large-scale plantation establishment: the use of fire -- the
decree does not require zero-burn land clearing techniques -- and the
forced seizure of indigenous lands. No mention is made of indigenous
land rights -- hak adat, hak ulayat. Only the general phrase, "land
unencumbered by hak", or "rights" is utilized. "Hak" is a term which, in
the past, has tended to refer to official commercial rights such as
mining, logging concession, other plantation permits. In addition, the
decree is only applicable to palm oil plantations and does not apply to
pulp and other equally damaging plantations. It also allows oil palm
plantation establishment on up to two meter-deep peat soils (a fire
hazard), and mandates a minimum of 10,000 hectares per plantation,
effectively eliminating many smallholders from participation. The
"vacant lands" that are prioritized under this decree for oil palm
expansion are likely to be indigenous forested territories. In
Indonesia, "vacant" or "empty" land is often a euphemism for land under
swidden cultivation by indigenous peoples.
In addition, the Public Information Document for the PRSL which you note
was "posted on the Bank's external website" was only made public after
repeated complaints by EDF that no public documentation had been made
available for months. It was posted on the web a few days after a
particularly heated meeting between Washington-based NGOs, Bank staff and
several Executive Directors of the Bank.
4. More Action Needed on Environmental and Disclosure Policies in
Adjustment Loans
Our fourth query called for full environmental assessment, public
transparency and participation in the preparation and appraisal of fast
disbursing non-project loans. We would like to express our thanks for
your commitment to consider the formalization of a process for
environmental assessment of sector adjustment loans. Our organizations
were disturbed however to hear once again that the Bank currently still
does not require environmental and social assessments for its adjustment
loan portfolio. There is a growing body of research that indicates that
non-project lending by the Bank and IMF indeed has serious direct and
indirect environmental and social impacts that existing Bank policies on
environmental and social issues are intended to address. We believe is
essential that the Bank require a more comprehensive procedure through
which all sector and structural adjustment loans will under go an
assessment that addresses all relevant Bank environmental and social
policies, including those relating to indigenous peoples, resettlement,
and public access to information.
A recent report from the Center for International Forestry Research,
CIFOR, a Bank-supported CGIAR research center, for example, details the
manner in which through "crisis aid" the IMF and other entities engaged
in financing GOI activities may be assisting the GOI in carrying out its
notoriously environmentally and socially damaging transmigration program
in forested regions of the Outer Islands, despite crisis-imposed
shortfalls in the Department of Transmigration's budget.4/ Economic
crises in developing countries typically lead to a decline in government
spending on directed settlement programs and this, in turn, tends to
alleviate pressure on forest cover.
Indonesia's spending on directed settlement or transmigration in 1998-
1999 will probably not decline, however, because, according to CIFOR, the
shortfall will be compensated by non- project foreign assistance. The
Department of Transmigration has a shortfall of seven percent in this
year's budget compared to last year's, but this may be partly offset by
support from the IMF and other sources of foreign aid.
Without through environmental and social assessments, loans such as the
PRSL and planned quick disbursing Bank Structural Adjustment Loans risk
exacerbating some of the environmental and social problems they are
intended to alleviate. Such assessments should include adherence to
policies of public access to information and broad processes of
consultation with communities and NGOs in Indonesia's Outer Islands which
are likely to bear the brunt of activities possibly supported through
such loans. Disbursement and monitoring conditions for non-project loans
should ensure that the use of Bank and other donor funds support socially
and environmentally sound activities.
5. Lack of Response on Details of the Bank's Internal Investigation into
Corruption in Indonesia
Most important and disturbing, your response ignored addressing our fifth
query, concerning the single most important ongoing measure the World
Bank can now take to revise its lending practices in Indonesia to reduce
future corruption in Bank lending, namely to undertake a thorough
investigation of the systematic practices through which Bank funds may
have been diverted from their intended purposes, as identified in the
Dice report. In our letter of August 18, we stated that it will be a
critical mistake to limit the current Bank investigation of corruption,
both in Indonesia and in other borrowers, to individual cases of abuses
of individual Bank staff for immediate financial gain. In Indonesia, any
meaningful investigation of corruption would include all of the aspects
of contracting and procurement as outlined in the Dice report. In our
letter, we provided an outline of the steps necessary for a results-
oriented investigation of corruption, including the need for detailed
assessments of completed Bank infrastructure and other projects in
conjunction with Indonesian civil society organizations; the targeted
auditing of agencies and ministries which have acted as Bank counterparts
in Indonesia, including Bappenas, BANGDA, BPN, PU, etc.; comparisons of
standard GOI salary tables with property and asset ownership evidenced by
Bank counterparts and the basing of future decisions about counterpart
relationships on the existence of corruption indicated by the Bank
investigation; the request for input from the Indonesian public via
Indonesian language radio and newspaper announcements listing projects to
be examined; the set-up of an anonymous tip hotline/Post Office Box, etc.
While we welcome the Bank's announcement that it has set up a corruption
hotline accessible to Indonesians through an international operator, we
note that most Indonesians do not have access to the International Direct
Dial telephone lines necessary to access an international operator. To be
of use, a corruption hotline must be accessible by ordinary Indonesian
citizens form ordinary telephones and include a local number that can be
dialed anonymously and free of charge in each province where the Bank has
projects. In addition, given the cultural reluctance of many Indonesians
-- especially those in rural areas -- to use a telephone, a Post Office
Box number must be provided to ensure that written statements on
corruption (under guarantee of anonymity) may be sent to the Bank.
Initial reports from Indonesian NGOs invited to meetings by the Bank to
discuss corruption in response to our letter of August 18 and earlier
NGO-Bank meetings in Washington have not been encouraging. Indonesian
NGOs have found Bank staff apparently unwilling to undertake an
examination of corruption in existing and past Bank projects; the current
Bank approach appears to focus on future projects without learning from
the past -an orientation which appears disingenuous and destined to
repeat the findings of the 1997 Quality Assurance Group Synthesis Report
appraisal of the Bank's current culture under your tenure: "The lessons
from past experience are well known, yet they are generally ignored in
the design of new operations.institutional amnesia is the corollary of
institutional optimism."
Thus, we would like to request information on the overall goals of the
Bank's corruption investigation and on the progress made to date: for
example, what is the scope of the investigation?
Is it only targeted at individual Bank officials, or is it an
investigation into the processes whereby Bank funds were/are siphoned off
by corrupt government counterpart officials so that they did not/do not
reach the intended beneficiary groups, i.e. the poor. Your letter states,
on fraud and corruption, that "from time to time our internal controls do
reveal wrongdoing by individual staff members of consultants; these have
been, and always will be dealt with swiftly, decisively, and
transparently. . [W]hen we uncover improper behavior, swift and
appropriate action is taken." While we welcome the Bank's commitment to
pursue such wrongdoing, this clearly is not the main manner by which the
diversion and outright theft of Bank funds occurred and may still be
occurring in Indonesia. In addition to investigating "staff members and
consultants," does the Bank intend to investigate and identify corrupt
contractors and sub-contractors on Bank projects? Corrupt government
officials who siphoned money directly out of Bank projects?
Corrupt officials who steered Bank contracts to non-performing businesses
owned by their relatives?
We wish to cite a recent example, one among many, of a fairly typical,
recent Bank infrastructure project which appeared to follow the path of
procurement and auditing corruption enumerated in the Dice report: the
Second Jabotabek Urban Development Project (Loan 3219). This large loan
is of interest since it represents a six-year $175 million investment by
the Bank in Jakarta's water supply-exactly the sort of environmental,
social project which the Bank sees at the heart of its vocation.
[****environmental showcase loan?? -- data on this &on Jabotabek I &
resettlement problems ******] At the end of six years, the Bank's own
1997 and June, 1998 documentation -- which labels the performance of the
project, as well as the conduct of the GOI and Bank staff, "satisfactory"
-- shows that poverty alleviation and water quality goals were largely
unmet; that construction had been handed over to 200 separate
subcontracting firms which provided "only barely acceptable" construction
services; that at one point, six years worth of audit data had not been
submitted by GOI in violation of loan covenants; that Bank funds were
"held up" in transit through the GOI bureaucracy -- the Dice report
documents this as a way for GOI officials to collect interest on Bank
funds; and that in February, 1998 the entire Jakarta water system was
"privatized," "an event parallel to but facilitated by the [Bank]
project."5/ The June, 1998 document, written after the fall of Suharto
and circulated throughout the Bank in July, 1998, failed to mention that
the "privatization" in February, 1998 of assets associated with this six-
year project was actually the take-over of the city water supply by
Suharto's grandson, Ari Sigit, and the son of Liem Sioe Liong, one of
Suharto's closest business partners (see enclosed Straits Times
clipping). The 54 page Bank document repeatedly mentions "two private
consortia," "two private operators" who were taking over the water
supply, but never mentions who they are. The "two private operators"
planned to raise water prices an average of 25%. 6/
We have provided a detailed list of questions pertaining to this project
in Appendix A, and would like to know, in addition to the answers to
those questions, the following information: Is the Bank already
investigating this project? If so, what progress has been made to date?
How has Indonesian civil society been involved in the investigation? Does
the Bank plan to bring criminal charges against subcontractors and
government officials if proven that they were involved in fraudulent
procedures? What steps has the Bank taken to identify the fraudulent
contractors? Are the contractors identified as producing sub-standard
work in this project now banned from Bank contracts? Were any prosecuted
under Indonesian law? Were GOI officials investigated in relation to this
project? Were any found guilty of malfeasance? Were any prosecuted? Were
steps taken to ensure that those individuals are banned from work on Bank
projects? Will the Bank share the results of its investigation with other
international financial institutions such as the Asian Development Bank?
With Indonesian civil society? Did the Bank request that GOI refund some
of the loan that was used fraudulently? In its documentation on this
loan, the Bank lists fifteen other loans related to the Second Jabotabek
Urban Development Project, including one in military- occupied Irian
Jaya. Since the practices identified in this loan appear to be systematic
and wide-spread, does the Bank intend to investigate corruption in these
related Water Supply and Urban Loans?
6. Disconnect Between Bank Claims and Actual Conditions of Interactions
with Indonesian Civil Society and the NGO Community
Concerning your description of the Bank's openness to civil society
participation in the investigation of corruption in its Indonesian
projects -- "We see an important role for civil society in such a[n anti-
corruption] program and are advocating the fullest possible public
participation. We have held regular meetings with NGOs in Jakarta. etc."
-- we can only assume that, perhaps your staff has not provided you with
detailed information regarding the nature of past and current Bank-NGO
interactions and meetings on corruption and other topics in Indonesia.
We have been informed by our Indonesian counterparts that this claim of
openness to NGO participation in discussions of corruption has not
exactly been the case.
The Director of WALHI-the Indonesian Environmental Forum, an umbrella
organization for some 300 Indonesian environmental NGOs --, reports that
over the years Indonesian NGOs were repeatedly rebuffed by the Bank
whenever they attempted to initiate discussions on the corruption evident
in Bank-financed projects. Their calls for an open discussion of
corruption went unheeded as Bank staff assured them that there was a
limit to what the Bank could do and that all World Bank projects were
"clean". According to the International NGO Forum on Indonesian
Development, INFID, a coalition of over 100 Indonesian and international
NGOs,7/ even the recent meetings called by the Bank for "civil society"
have been quite disappointing. In one case, Bank staff approached INFID
for a meeting and attempted to limit the NGO attendees to only three
people. INFID rejected this offer. In other cases, INFID and other NGOs
have been given less than 24 hours notice and no supporting
documentation prior to Bank-sponsored NGO meetings on corruption. The
latest invitation faxed to INFID indicated that only the Director of
INFID would be welcome to attend and did not provide a list of which
other organizations had been invited.
In one of the meetings to which you referred in your letter 8/, INFID,
Indonesian Corruption Watch (ICW) and other NGOs were dismayed at the
Bank's unwillingness -- expressed by Bank officials in response to NGO
requests during the meeting -- to delve into past cases of corruption as
well as the Bank's insistence on trying to design a program to prevent
corruption in the future without examining past corruption in detail. In
the press conference following the Bank-NGO meeting, a member of anti-
corruption NGO Gema Madani stated that it was clear from the meeting that
the anti-corruption rhetoric of the Bank appeared to be a "PR
performance, to gain [a] better social image in order to back up the
inefficient management of the World Bank." 9/ At the same press
conference, in response to reporters' queries, an ICW representative
responded that it was indeed possible that the Bank was acting in
collusion with the Indonesian government to cover up past cases of
corruption. In addition, the Bank conducts its civil society
meetings entirely in English since Bank staff are apparently not capable
of speaking Indonesian. It is difficult to comprehend how non-
Indonesian-speaking Bank staff will be able to take a leadership role a
comprehensive investigation of corruption in Bank projects in Indonesia.
If full civil society participation is desired, it is clear that Bank
staff must either learn to speak Indonesian, or be willing to hire
translators so that they are capable of conducting all meetings with
members of Indonesian civil society in Bahasa Indonesia.
In the opening paragraph of your letter, you refer to the July 30 meeting
between Bank staff in Washington, D.C. and EDF and other NGOs as
reflective of "our desire to encourage a constructive and cooperative
relationship with the NGO community as a partner in our mandate to
promote the economic development of our client countries." In fact, it
took the NGOs involved over a month of attempts to set up that very
meeting which, due to Bank staff inattention to our requests for
scheduling, almost did not occur. We repeatedly requested written
materials to be provided in advance of the meeting by the Bank on the
Agricultural Sector Adjustment Loan which had been planned since
February, 1998, and on the Bank's considered opinion on the
environmental and social impacts of oil palm plantation privatization and
expansion in Indonesia.
After several requests, we received only two general papers (the day
before our meeting), neither of them on the specific topics requested.
Just prior to the meeting, which ended up being scheduled merely forty-
eight hours in advance -- a time period which did not permit the
attendance of many of the Washington-based NGOs which had expressed
interest in being present -- the Bank's Country Program Coordinator
(Indonesia Country Unit) who was handling meeting arrangements on behalf
of the Bank informed us that the issue of corruption was not relevant to
discussions about the planned Agriculture Sector loan in support of palm
oil privatization and expansion. He requested that the topic of
corruption be dropped from the planned NGO agenda. It was only at our
repeated insistence that the issue of corruption was placed on the agenda
at all.
In conclusion, there still appears to be a substantial disconnect in the
information being publicly presented about Bank activities in Indonesia -
- including information on corruption in past and present Bank projects,
and on the process of NGO "participation" in Bank anti- corruption
activities -- and on-the-ground reality.
Footnotes
1. "Indonesia: Policy Reform Support Loan Supplemental Note", World
Bank, 6/26/98.
2. Ibid, p.***
3. Ibid, p.***
4. Sunderlin, William D. 1998. Between Danger and Opportunity:
Indonesia's Forests In an Era of Economic Crisis and Political Change.
CIFOR. September 11, 1998. p.5.
5. "Implementation Completion Report, Republic of Indonesia, Second
Jabotabek Urban Development Project," The World Bank, June 23, 1998
(circulated July 10, 1998).
6. In the end, after the fall of Suharto, the water supply privatization
contract was removed from the Suharto family circle.
7. Report on Corruption Watch Group Meeting with World Bank, Jakarta
(YLBHI), September 1, 1998, other correspondence.
8. "I have asked our Jakarta office to contact the Government and
Indonesian NGOs such as INFID and ICW immediately." p.4
9 Report on Corruption Watch Group Meeting with World Bank, Jakarta
(YLBHI), September 1, 1998.