    [Senate Hearing 108-734]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-734

                          COMBATING CORRUPTION IN THE
                         MULTILATERAL DEVELOPMENT BANKS
                                   [PART III]

    =======================================================================

                                    HEARING

                                   BEFORE THE

                         COMMITTEE ON FOREIGN RELATIONS
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                               SEPTEMBER 28, 2004

                                   __________

           Printed for the use of the Committee on Foreign Relations

     Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                     senate

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                         COMMITTEE ON FOREIGN RELATIONS

                      RICHARD G. LUGAR, Indiana, Chairman
    CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
    LINCOLN D. CHAFEE, Rhode Island      PAUL S. SARBANES, Maryland
    GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
    SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
    MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
    GEORGE E. VOINOVICH, Ohio            BARBARA BOXER, California
    LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
    NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West
    JOHN E. SUNUNU, New Hampshire            Virginia
                                         JON S. CORZINE, New Jersey

                     Kenneth A. Myers, Jr., Staff Director
                  Antony J. Blinken, Democratic Staff Director

                                      (ii)

    ?

                                C O N T E N T S

                                  ----------
                                                                       Page

    Ayittey, George, Ph.D., Distinguished Economist in Residence,
      economics department, American University, Washington, D.C.....    25
        Prepared statement...........................................    30

    Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
      statement......................................................     1

    Rich, Bruce M., international program manager, Environmental
      Defense, Washington, D.C.......................................     3
        Prepared statement...........................................     7

                                    Appendix

    Additional Material Submitted for the Record

    The African Development Bank: A Rare Success on a Troubled
      Continent, submitted by Don Sherk, international economic
      consultant and former United States executive director to the
      African Development Bank.......................................    51

    Summary of Trip Report: Peru and Paraguay, March 26 to April 6,
      2004, submitted by Nilmini Rubin, SFRC professional staff
      member.........................................................    61

    Summary of Trip Report: Lesotho and South Africa, August 24 to
      September 2, 2004, submitted by Nilmini Rubin, SFRC
      professional staff member......................................    65

                                     (iii)

                          COMBATING CORRUPTION IN THE

                         MULTILATERAL DEVELOPMENT BANKS

                                   (PART III)

                                  ----------

                          Tuesday, September 28, 2004

                                  United States Senate,
                                Committee on Foreign Relations,
                                                       Washington, D.C.
        The committee met at 2:40 p.m., in room SD-419, Dirksen
    Senate Office Building, Hon. Richard G. Lugar, chairman of the
    committee, presiding.
        Present: Senator Lugar.

     OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
                                INDIANA

        The Chairman. This hearing of the Senate Foreign Relations
    Committee is called to order.
        The committee meets today to continue our review of United
    States policy toward the multilateral development banks, the
    MDB's. Today we will focus on three regional development banks:
    the Asian Development Bank, the African Development Bank, and
    the European Bank for Reconstruction and Development. This is
    the third in our series of hearings examining ways that the
    United States Congress and our Government can contribute to
    anti-corruption and anti-fraud efforts at the multilateral
    development banks. Our committee is committed to ongoing
    oversight of the multilateral development banks through
    hearings, project visits, interviews, and document reviews.
        We are pleased to be joined by Mr. Bruce Rich,
    International Program Manager for Environmental Defense, and
    Dr. George Ayittey, Distinguished Economist in Residence at
    American University. The committee also invited Mr. Mark
    Sullivan, United States Executive Director of the European Bank
    for Reconstruction and Development, and Ambassador Paul Speltz,
    U.S. Executive Director to the Asian Development Bank.
        Regretfully, United States Treasury officials did not allow
    Mr. Sullivan and Mr. Speltz to provide testimony regarding the
    anti-corruption strategies of the banks to which they are
    assigned. This is an unfortunate development because Congress
    and this committee oversee the annual United States
    contribution of more than $1 billion to the multilateral
    development banks and the MDB reauthorization is scheduled to
    be considered by the Congress next year.
        The United States has strong national security and
    humanitarian interests in alleviating poverty and in promoting
    progress around the world. That is why the Congress funds
    foreign assistance programs and also why we fund multilateral
    development banks. The MDB's leverage our resources to promote
    poverty reduction and development around the world.
        Since 1960, the United States has provided more than $39
    billion in direct contributions to the MDB's.
        Corruption impedes development efforts in many ways. Bribes
    can influence important bank decisions on projects and on
    contractors. Misuse of funds can inflate project costs, deny
    needed assistance to the poor, and cause projects to fail.
    Stolen money may prop up dictatorships and finance human rights
    abuses. Moreover, when developing countries lose development
    bank funds, through corruption, the taxpayers in those poor
    countries are still obligated to repay the development banks.
    So, not only are the impoverished cheated out of development
    benefits, they are left to repay the resulting debts to the
    banks.
        In our May 13 hearing, we learned that MDB's have been
    taking steps to curb corruption, but that more needs to be done
    to ensure that bank funds are used properly. Our witnesses
    provided clear recommendations for the MDB's to minimize
    leakage of development financing. They recommended changing the
    incentives at the MDB's so that staff would have less pressure
    to lend. Witnesses also recommended that MDB's focus more
    actively on supervision and auditing of MDB lending. They
    argued for more transparency in operations and a requirement
    that borrowers improve transparency within their governments.
        In our July 21 hearing, we learned that the United States
    Treasury Department does encourage anti-corruption efforts of
    the MDB's and reviews all MDB loans. Treasury, however, has
    limited ability to investigate the misuse of MDB funds.
    According to Under Secretary John Taylor, ``The first line of
    attack, if our staff hears about issues like this, is to work
    through our executive directors at the institutions.''
        In written testimony provided to the committee, Mr. Dennis
    Schindel, Acting Inspector General for the Treasury Department,
    advised that ``the international agreements that established
    MDB's and the U.S. law that implements the agreements makes
    clear that MDB's possess an effective immunity to OIG's
    authority.''
        During our July hearing, we also learned that the
    Government of Lesotho was strained financially during its
    prosecution of corruption related to a World Bank-financed
    project and that there is not currently a mechanism to assist
    poor countries that want to prosecute corruption related to
    their loans. It was suggested that the MDB's harmonize anti-
    corruption policies and mutually recognize blacklists. For
    example, a company that is debarred from the World Bank can
    still receive contracts from other MDB's.
        The testimony we will hear today will be important to the
    future recommendations of our committee. The challenge of
    preventing waste, fraud, and corruption at the MDB's must be
    tackled with vigor.
        We welcome our distinguished witnesses and we look forward
    to their insights.
        Gentlemen, I will ask you to testify in the order that I
    have introduced you. Let me say at the outset that your full
    statements will be made a part of the record in full, and you
    may proceed as you wish, either to give the statements in full
    or to summarize. Following that, the committee will raise
    questions of you. Mr. Rich.

      STATEMENT OF BRUCE M. RICH, INTERNATIONAL PROGRAM MANAGER,
                ENVIRONMENTAL DEFENSE, WASHINGTON, D.C.

        Mr. Rich.  Thank you, Mr. Chairman, members of the
    committee, for this opportunity to testify this afternoon
    concerning the corruption in the Asian Development Bank. You
    are to be commended for this series of three hearings on
    corruption in the MDB's. The multilateral development banks, in
    an interconnected world where economic development and
    political stability are more critical than ever, are unique
    institutions, and they have the potential to play an important
    and critical, much-needed role in fostering these goals in
    poorer countries.
        However, as we heard in the previous two hearings, the
    cancer of systematic corruption threatens to undermine the
    purposes for which the multilateral development banks were
    established. We heard that 20 to 30 percent of World Bank
    lending and other donor funds, such as those of the ADB, may
    have been stolen in Indonesia, according to the World Bank's
    Jakarta-based staff as expressed in leaked internal World Bank
    memos from the late 1990's. In other countries with analogous
    levels of corruption, the amounts may even be greater.
        The Asian Development Bank has lent $105 billion,
    approximately, since its inception in 1966. Some of its major
    borrowers, such as Bangladesh, rank even lower on lists of
    international perceptions of corruption than Indonesia. If 30
    percent of ADB lending has succumbed to leakage over the years,
    that would amount to over $30 billion in stolen funds.
        In our examination of the situation in the Asian
    Development Bank concerning control and oversight of corruption
    and diversion of loans, we found that it appears to be much
    weaker than at the World Bank. To date, the Asian Development
    Bank has begun to take some relatively timid measures to
    address corruption, but in our view these measures are so
    inadequate that many informed observers, both inside and
    outside the ADB, would characterize them as cosmetic, whatever
    the intention. Like the other multilateral development banks,
    the Asian Development Bank suffers from the well-documented
    ``culture of loan approval'' where staff are rewarded for
    processing and pushing loans but not for monitoring projects
    and ensuring quality. I go into detail in my statement about
    that. It is perceived to be as bad at the ADB as anywhere else,
    perhaps worse.
        But I have to add that the ADB suffers from a deeper
    organizational crisis that is no secret. Over the past 3 years,
    two non-U.S. executive directors of the institution, one
    representing the United Kingdom and other countries, the other
    representing Australia and a constituency of countries, made
    very public statements to their colleagues and peers referring
    to a deeply entrenched institutional culture of patronage and
    lack of accountability for carrying out ADB policies, and that
    applies to the corruption issue.
        The Donors' Agreement for the Eighth Replenishment of the
    soft-loan agreement of the Asian Development Fund, which was
    negotiated by the U.S. Treasury and which came out earlier this
    year, hardly mentions the word ``corruption.'' It does not
    address how the ADB is going to reduce leakage from its
    lending. There is a lot of talk about governance, reforming the
    personnel system, promoting results management, development
    effectiveness, et cetera. But from reading the donors'
    agreement, you would not even have the impression that
    corruption or leakage was an issue or a problem, nor in
    examining some of the other initiatives which are proposed,
    such as a new human resources strategy, which if you had to
    name one initiative that has been suggested will help change
    the institutional culture at the ADB, it is this new human
    resources strategy. As I explain in detail in my testimony, if
    you read the drafts of this strategy, again the word
    ``corruption'' hardly appears and there are no specific
    references as to how they are going to address this issue in
    rewarding personnel, changing incentives, and so on and so
    forth.
        In light of all that, I might add that the donors'
    agreement is an agreement to pump billions more into the Asian
    Development Bank, and the U.S. share is going to be about $460
    million. Therefore, it is particularly deplorable that Treasury
    has refused to allow the U.S. Executive Director of the ADB to
    appear today. The Treasury Department has a fiduciary duty to
    help ensure that the Asian Development Bank complies with its
    legal duty and its charter, its articles of agreement, which is
    also part of U.S. law. And article 14, subsection xi of the
    charter requires the institution to ``take the necessary
    measures to ensure that the proceeds of any loan made,
    guaranteed or participated in are used only for the purposes
    for which the loan was granted.'' But Treasury, though not
    having anyone appear today, is in a few weeks going to come
    before this committee and ask it to authorize nearly a half
    billion dollars more in the coming 3 years for that
    institution.
        Well, in my prepared statement, which is quite detailed--I
    would be reading for the next hour if I were to read it in its
    entirety, so I am obviously not going to do that--I go over a
    number of the issues in more detail. I will just summarize them
    and conclude.
        One, I represent an environmental organization in the U.S.
    with over 400,000 members and supporters, Environmental
    Defense. Our international program looks at environmental
    sustainability and MDB lending, but we are concerned with the
    corruption issue because it is part of this culture of loan
    approval. And lack of attention to corruption, as one can see
    in some of the case studies in our testimony, has led to
    massive environmental and social harm to affected people in
    specific projects.
        I go into detail about a couple of recent projects which
    are particularly outrageous: one, a wastewater treatment plant
    in Thailand; the other, a major highway construction/transport
    project in Sri Lanka. We would like the committee really to go
    to the Treasury Department and ask for independent forensic
    corruption audits of these projects.
        I would like to mention just a couple of the points in the
    Sri Lanka project because it has some analogies with the
    Lesotho case that was discussed in detail in the last hearing.
        This was a $90 million loan for road construction in
    southern Sri Lanka. Here, just as in Lesotho, you had a case of
    an allegedly corrupt contractor that hired an agent to do the
    corrupting. The agent, I guess appropriately enough, was called
    ``Access International.'' It purportedly had high contacts in
    the Sri Lankan Prime Minister's office. It purportedly bribed
    the project authority to try to win the bid for this project.
    The company in question is a Japanese company, Kumagai Gumi. In
    the pre-bidding, the pre- qualification, the company did not
    qualify. Among the other things, it had a net negative
    financial risk and could have been threatened with bankruptcy.
    Three other companies did qualify. The Asian Development Bank
    then sent a letter allegedly to the Sri Lankan treasury asking
    them, by way of exception, to nevertheless consider this
    company. The company then was allowed to submit a second bid
    after all the other companies had made their bids. Since it
    knew what the bids were and its bid was slightly under what was
    required, it won the contract.
        The road was built in a somewhat different place with cost
    overruns of nearly 100 percent and displacement of hundreds of
    households, thousands of people, environmental impacts, wetland
    being affected, five temples being partly damaged, so on and so
    forth.
        In the Sri Lankan newspapers, the attorney general on the
    front pages was quoted. He was asked, well, why did you allow
    this company--it had not prequalified--to bid and it violated
    Sri Lankan procurement rules, ADB procurement rules, and so on?
    He is quoted as saying, well, we would not even have thought of
    it except the ADB sent us this request saying we should, and it
    is an ADB project.
        Well, what is particularly indicative of the state of anti-
    corruption investigations in Sri Lanka for the ADB is that last
    year, 2003, the anti-corruption unit sent its first proactive
    mission to investigate corruption in procurement in ADB
    projects in Sri Lanka. And they looked at a few and they chose
    another project in which they found no corruption, though I was
    told they did notice weak financial controls where, if someone
    had been corrupt, they could have stolen money, but they found
    nothing. But they did not look at the most notorious ADB
    project in the country, which was all over the front pages of
    the newspapers.
        In our statement, we look at two studies that were
    conducted recently, one just a few months ago by the Bank
    Information Center looking expressly at how the ADB is
    implementing its anti-corruption policy. It came out with the
    anti-corruption policy in 1998. In 2000, it issued operational
    procedures for anti-corruption. Basically these procedures
    required it to assess, which is a logical first step, the risk
    of corruption in its country lending strategies in specific
    project appraisal reports and in post-project evaluations.
    Well, this study of the Bank Information Center called ``Zero
    Tolerance?'' because zero tolerance is a quotation from the
    ADB's anti-corruption policy, looked at a whole variety of
    studies, dozens and dozens and dozens, and there is a
    remarkably consistent record of non-implementation. The issue
    of corruption hardly appears in a whole number of country
    strategies, project appraisal reports, and post- project
    evaluations conducted in the past 4 years when the ADB anti-
    corruption policy was in effect.
        Similarly, Environmental Defense looked at 49 different
    project evaluation reports for the ADB in recent years, and a
    number of them really did identify irregularities that would be
    a proxy for corruption, huge cost overruns, contracting
    irregularities, et cetera. But the word ``corruption'' never
    appears. There is no investigation of corruption.
        Well, to conclude, what is the ADB doing to fight
    corruption and what more should be done? Well, we mention that
    the donors' agreement and this new human resources strategy,
    which is supposed to be a linchpin of changing the
    institutional culture, does not hardly mention the word
    ``corruption.'' There is nothing very specific in the human
    resources strategy, which apparently was discussed in the ADB
    board yesterday about how they are going to address corruption.
    So we think that before the committee authorizes $460 million
    for the Asian Development Fund, a lot more questions need to be
    answered, and perhaps directives need to be attached to the
    legislation that would accompany that authorization. Certainly
    in the human resources strategy, there needs to be much more
    specificity on how they are going to create incentives and deal
    mechanically with the issues of auditing corruption. Naturally
    they need simply to apply their existing policies, and for
    that, you need more resources, more staff, et cetera.
        There is a new public information policy that is being
    elaborated right now. A lot more can be done there to make all
    kinds of information public to affected people in the recipient
    countries and frankly to the parliaments and the U.S. Congress
    that have to authorize all this money. To start with, the ADB
    should publish much more detail on its own internal budget and
    how it is allocating resources to focus more on monitoring and
    administration of loans, rather than promoting loan approval.
        You had mentioned and Under Secretary Taylor mentioned the
    issue of debarment proceedings in the anti-corruption units of
    the MDB's. The ADB does not make public its debarment of
    companies or individuals for corruption. They should do this.
    And this whole issue of cross-debarment, of harmonization of
    anti-corruption actions is a great recommendation, and the U.S.
    should really promote that very vigorously.
        The ADB has an anti-corruption unit, which they are trying.
    I spent an hour and a half talking to the Auditor General on
    the phone in Manila, and he is a candid man fighting an uphill
    battle. But they need more resources and staff. There are only
    five people in the ADB anti-corruption unit. There are 55 in
    the World Bank's Department of Institutional Integrity. I think
    Richard Thornburgh has even in his report said they should have
    as much resources as they need in the World Bank. So the ADB
    level of staffing in their own anti-corruption unit, to be
    proportional to the World Bank, would be at the level of around
    14.
        Finally, I think the main point I would like to emphasize
    is that in our overview, which is detailed much more in my
    statement, of the situation with anti-corruption in the ADB, we
    think it would really be irresponsible to authorize some $460
    million from the U.S. taxpayers more for this institution
    unless there are much clearer answers and signs of real
    progress of things being done in terms of anti-corruption,
    changing the institutional culture in the ADB. The record now
    is pretty abysmal and disturbing. We hope we can work with the
    committee and your staff, who I think are just great--they have
    been very helpful in discussing this--over the coming weeks for
    perhaps questions, measures, and so on that we can think about.
        Well, thank you very much.

        [The prepared statement of Mr. Rich follows:]

                      Prepared Statement of Bruce M. Rich

                                I. INTRODUCTION

        Mr. Chairman, Senators of the committee, thank you very much for
    the opportunity to testify this afternoon concerning corruption and the
    Asian Development Bank (APB). The Chairman and the committee are to be
    commended for the series of three hearings on corruption and the
    Multilateral Development Banks (MDBs) that have been held since May. In
    an interconnected world where economic development and political
    stability are more critical than ever, the MDBs are unique institutions
    that have the potential to play an important and much needed role in
    fostering these goals in poorer countries.
        However, as we heard in the previous two hearings, the cancer of
    systemic corruption threatens to undermine the purposes for which the
    MDBs were established. As much as 20 to 30% of World Bank lending and
    other donor funds, such as those from the ADB, may have been stolen in
    Indonesia, according to the World Bank's Jakarta-based staff as
    expressed in leaked memos from the late 1990s. In countries with
    analogous levels of corruption, the amounts may be the same or even
    greater.
        The ADB has lent some $105 billion since its inception in 1966.
    Some of its major borrowers, such as Bangladesh, rank even lower on
    lists of international perceptions of corruption than Indonesia. If 30%
    of ADB lending has succumbed to ``leakage'' over the years, that would
    amount to well over $30 billion in stolen funds. You yourself, Mr.
    Chairman, correctly ventured that the total amount diverted from
    cumulative World Bank lending since the institution's inception may be
    as much as $100 billion. Although the World Bank is in most respects
    the leader in anti-corruption efforts amongst the MDBs, there are
    serious questions about whether current efforts are adequate to deal
    with the scale of corruption that occurs in some of the World Bank's
    major borrowing countries. These countries are also the major borrowers
    of the regional MDBs, including the ADB.
        The situation regarding control and oversight of corruption and
    diversion of loans appears to be much worse at the ADB than at the
    World Bank. To date, while the ADB has begun to take some relatively
    timid measures to address corruption, these measures are so inadequate
    that many informed observers within and outside the ADB would
    characterize them as cosmetic, whatever the stated intention. Like the
    other MDBs, the ADB suffers from the well-documented ``culture of loan
    approval''--where staff are rewarded for processing and pushing loans,
    but not for monitoring projects and ensuring quality. But that the ADB
    suffers from a deeper organizational crisis is no secret, and over the
    past three years at least two non-US. Executive Directors of the
    institution have made public statements referring to a deeply
    entrenched institutional culture of patronage and unaccountability.
        The Donors' Agreement for the Eighth Replenishment of the soft-loan
    window of the Asian Development Fund, which the U.S. Treasury and the
    finance ministries of other countries negotiated this year for the
    period 2005-2008, hardly mentions the word corruption. It does not
    explicitly address what the ADB can do to reduce ``leakage'' from its
    lending. There is significant discussion of emphasizing governance,
    reforming the personnel system, and promoting results management and
    development effectiveness. But if the scale of corruption is not
    acknowledged in an agreement to pump billions more (of which the U.S.
    share is to be $461 million) into the institution, it undermines
    confidence in the reform measures proposed.
        Therefore it is deplorable that the Treasury Department has refused
    to allow the U.S. Executive Director of the ADB to appear today,
    particularly given that on May 13, 2004 the U.S. Executive Directors of
    the Inter-American Bank and World Bank did appear for the committee's
    first hearing on corruption and the MDBs. The Treasury Department has a
    fiduciary duty to help ensure that the Asian Development Bank complies
    with its legal duty, as required in Article 14 (xi) of its Charter: to
    ``take the necessary measures to ensure that the proceeds of any loan
    made, guaranteed or participated in are used only for the purposes for
    which the loan was granted and due attention to considerations of
    economy and efficiency.'' Although Treasury has refused to allow the
    U.S. Executive Director to appear before this committee to answer
    questions regarding ADB corruption, it will soon ask the committee to
    authorize nearly a half billion dollars of appropriations for that same
    institution.
        In the rest of my statement I will examine in more detail the
    following issues: the concern of environmental organizations such as
    Environmental Defense over corruption in development lending; the
    external context of corruption at the ADB; the culture of loan
    approval, patronage, and lack of accountability at the ADB; studies
    that reveal the extent of the almost total non-implementation of much
    of the ADB's 1998 Anti-Corruption Policy and 2000 Operational Policy on
    Corruption; projects that clearly demonstrate negligence of the part of
    ADB in investigating corruption; the adequacy of ongoing and proposed
    reforms for the ADB; and specific recommendations that we believe
    should be implemented before fully authorizing U.S. replenishment of
    the ADB's soft window, the Asian Development Fund (ADF), next year.

     II. ENVIRONMENTAL ORGANIZATIONS AND CONCERN FOR CORRUPTION IN THE ADB

        Environmental Defense is a national environmental organization with
    more than 400,000 members and supporters nationwide. While most of our
    work is domestic, the International Program of Environmental Defense
    has conducted research and advocacy concerning the environmental and
    social impacts of MDB lending for 20 years, and has made numerous
    submissions to Congressional authorization and appropriations
    committees regarding these institutions. A number of years ago, our
    concern regarding the quality of MDB lending led us to examine the
    issue of institutional incentives and controls at these institutions.
        Why are organizations such as Environmental Defense, which are
    primarily focused on promoting environmentally sustainable lending
    policies at the international financial institutions, so concerned
    about corruption? The ``culture of loan approval'' and ``pressure to
    lend,'' which has been documented in the world Bank and other MDBs for
    more than a decade, has often also contributed to failures in the
    implementation of policies designed to mitigate adverse environmental
    and social impacts of MDB lending. This is quite clear in some examples
    of recent ADB projects, discussed later in this statement, such as the
    Thailand Samut Prakarn Wastewater Management Project and the Sri Lanka
    Southern Transport Development Project. Measures to address the
    institutional problems relating to corruption at the MDBs would also go
    a long way towards improving overall project quality with respect to
    environmental and social impacts.

               III. CORRUPTION AND THE ADB: THE EXTERNAL CONTEXT

        Corruption in the multilateral development banks can occur at
    three, interconnected levels. First, there is corruption of individual
    members of staff and management for personal gain. Second, there is
    corruption in procurement for provision of goods and services for
    specific investment projects. The example of the corrupt bidding
    practices, through agents, of international companies involved in the
    world Bank Lesotho Highlands Project--discussed in the committee's July
    21, 2004 hearing--provides an example. Third, there is systemic
    corruption on the part of government officials and ministries in
    borrowing countries, where substantial percentages of development
    assistance are stolen over years or decades, with at least passive MDB
    complicity. The case of Indonesia, discussed in the May 13, 2004
    hearing, has become one of the best-documented and publicized examples.
        There are indications that the ADB, through both its organizational
    deficiencies and its external lending environment, is more susceptible
    to corruption than the world Bank on all three levels. The following
    sections of this statement will examine the ADB's internal culture and
    effectiveness as it relates to these three types of corruption. It is
    important to emphasize here that the external lending environment of
    the ADB is extremely corruption prone and calls for an extraordinary
    level of due diligence--a commitment to which the institution has not
    shown.
        The ADB's top five cumulative borrowers, and its largest borrowers
    in 2003, are among the most corrupt countries on earth, as analyzed in
    recent years by Transparency International. Its five biggest cumulative
    borrowers are Indonesia ($19.3 billion), China ($13.3 billion);
    Pakistan ($13.55 billion), India ($13.315 billion), and Bangladesh
    ($7.32 billion). The ADB approved some $6.105 billion in loans for
    fiscal year 2003, of which $1.532 billion were for Indonesia, $1.488
    billion for China, $871 million for Pakistan, $275 million for Sri
    Lanka, and $262 million for India.
        Transparency International ranks countries annually according to a
    Corruption Perception Index (CPI), from a possible highest rating of 10
    (highly clean) to 0 (highly corrupt). In 2003, Transparency published
    133 rankings: Indonesia is rated near the bottom at number 122, with a
    CPI ranking of 1.9. Bangladesh ranks dead last at 133 on the list with
    a CPI of 1.3. Pakistan, the third largest cumulative borrower and third
    most important borrower for FY 2003, ranks 92 with a CPI of 2.5. India
    ranks number 83 with a CPI of 2.8 and China number 66 with a CPI of
    3.4. Moreover, a number of the ADB's smaller borrowers such as Cambodia
    and Laos, while notoriously corrupt, do not even have a Transparency
    International rating. In contrast, countries ranked in the top five
    such as Finland, New Zealand, and Singapore had CPI ratings ranging
    from 9.7 to 9.4.
        Such a lending environment should call for controls on corruption
    as perhaps the number one institutional priority. Instead ADB
    management has only belatedly and timidly recognized the seriousness of
    the issue, despite having promulgated a good governance policy (for its
    borrowers, not for itself!) in 1995, an Anti-Corruption Policy in 1998,
    and more detailed Operational Procedures on Anti-Corruption in 2000.
        My own conversations with ADB officials (some of whom were quite
    forthcoming, some of whom wish to remain anonymous) revealed concerns
    over the quality of financial reporting and accounting from borrowers.
    While the ADB offers technical assistance to borrowers for
    ``governance'' programs, it has not made rigorous financial reporting
    and accounting for its own loans a priority, which would be the first
    and single most important thing it could do to begin to catalyze better
    accounting by borrowers. I was told that the ADB now requires that
    financial reports be submitted in a timely and regular manner, and that
    ADB staff are supposed to read the reports, but it's not clear what
    attention is actually paid to them.

    IV. A DYSFUNCTIONAL INTERNAL CULTURE: LOAN APPROVAL, PATRONAGE, LACK OF
                   ACCOUNTABILITY AND TOLERANCE OF CORRUPTION

        The ADB suffers from the same ``culture of loan approval'' as the
    world Bank and other MDBs, with a concurrent lack of resources and
    commitment to monitoring and implementation. But it also suffers from a
    deeper institutional crisis: it is no secret that the ADB's internal
    culture is one that has fostered--and still continues too often to
    foster--a climate that turns a blind eye to corruption. Stephen Baker,
    a former Executive Director to the ADB representing Australia, shared
    his reflections with his peers in February 2001. He stressed that
    following the Asian financial crisis there was a ``rude awakening to
    the damage wrought by corruption'' and that the ADB still had ``to get
    far tougher with those who `skim and scam' on. ADB projects and those
    governments which are party to, or allow it to happen.'' \1\ This
    former ADB Executive Director also alerted his colleagues to the poor
    performance of the ADB: ``Having previously worked under the premise
    that every $1 of investment must return at least $1.10, it was
    depressing to find from the evaluation reports that some projects
    returned as little as 30 cents on the dollar and even some of the
    generally successful ones only 60 cents on the dollar. Even more
    depressing was the fact that in certain sectors, the Bank kept lending
    and kept failing.'' \2\
    ---------------------------------------------------------------------------
        \1\ Stephen Baker, ADB--Wherefore Art Thou (Reflections of a Board
    Member who spent three interesting years with the Bank), February 2001,
    p. 10.
        \2\ Ibid., p. 1.
    ---------------------------------------------------------------------------
        Just fifteen months ago (June 2003), Frank Black, former Executive
    Director to the ADB for United Kingdom, Germany, Austria and Turkey,
    noted that ``the Bank's appointments, promotion, appraisal and
    incentive systems are in need of a thorough overhaul. The system lacks
    transparency at present, and there is a prevalent `patronage' system,
    whereby staff of sometimes dubious quality, can rise in the institution
    by aligning themselves with powerful `patrons' in senior positions.''
    \3\
    ---------------------------------------------------------------------------
        \3\ Frank Black, The Asian Development Bank (ADB): A Unique
    Contribution? The Effectiveness of the Financing and Political Role of
    the ADB in Reducing Poverty in the Asia/Pacific Region (prepared by
    Frank Black, departing Executive Director for Austria, Germany, Turkey
    and the United Kingdom at the ADB, June 2003), p. 8.
    ---------------------------------------------------------------------------
        Black, in his widely circulated critique of the Bank, stated that
    the ADB ``is perceived as very government-oriented'' and ``can too
    easily slip into playing the role of propaganda mouthpiece for some
    governments (and not always the most democratic or legitimate
    governments).'' Black argues that ADB's ability to promote good,
    governance in its borrowers is often hampered by an institutionally
    rooted conflict of interest where major borrowers are also
    shareholders. The Board itself is part of the problem since ``it is
    almost entirely reactive to, and very effectively `contained' by the
    Bank's management, and by its `consensus culture.' '' According to
    Black, ``[t]oo often, and particularly in the case of institutional
    reform and some sensitive policy issues, this can mean either `no
    change' or a series of backroom deals and compromises presented as
    `consensus,' but amounting to the lowest common denominator.'' \4\
    ---------------------------------------------------------------------------
        \4\ Ibid., pp. 4, 8.
    ---------------------------------------------------------------------------
        These deeper institutional crises feed into and reinforce the
    culture of loan approval. Pushing money out the door represents the
    path of least resistance for a management and board that is reluctant
    to exercise independence and rigor vis a vis major borrowing
    governments. In the words of former Executive Director Baker,
    ``Considerable energy is spent on preparing projects and programs for
    Board approval. Far less is spent on ensuring they are successfully
    implemented.'' \5\
    ---------------------------------------------------------------------------
        \5\ Stephen Baker, ADB--Wherefore Art Thou (Reflections of a Board
    Member who spent three interesting years with the Bank), February 2001.
    ---------------------------------------------------------------------------
        A former relatively high ranking ADB official with extensive
    operational experience prepared the following comments on the internal
    dynamics of the culture of loan approval at the ADB:

              The ``organizational ethos'' of the ADB is ``lending.'' This
            is their raison d'etre. The organizational structure including
            staffing is geared towards this. This is further reinforced
            with the bank recruitment, staff deployment and performance
            policy.

              The personnel policy practiced over the years is heavily
            weighted towards loan processing rather than administration.
            This has its consequences. First, staff recruitment tends to
            favor those with project formulation and processing experience
            over applicants experienced in project administration. Second,
            the HR performance system is skewed to reward staff with
            demonstrated record in processing loan and technical assistance
            operations than those in project administration. This is seen
            in the number of managerial positions being occupied by staff
            rewarded for their performance in loan processing and
            perpetuating this practice.

              In the bank, the weekly Board meeting agenda is dominated by
            discussions on loan proposals. Similarly, management meetings
            are convened to appraise loans. Performance at these meetings
            defines staff's career and promotion prospects.

              The importance of loan administration has been largely
            undermined by the attention to loan approvals. The lesser
            attention to loan administration can lead to abuses of loan
            funds that are easily detected The arduous and less
            ``glamorous'' task of loan administration is relegated to staff
            with ``weaker'' performance. Most loan administration staff
            have been less successful in project processing relatively
            ``less fluent'' in the bank's working language (English) and
            generally ``older staff.'' Managerial attention is focused on
            pursuing the timely completion of project processing leading to
            ``approved loans'' in line with organizational goal compared
            with loan administration.

              The bank has delegated wide ranging approving authority to
            implementing agencies to accelerate disbursement as a sign of
            effective project implementation. This is often the area for
            potential abuse that unfortunately, the bank is not always in
            the position to fully understand. Documentation relating to
            contract awards is submitted to the bank, post-ante, with a
            certification on adherence to bank's procurement guidelines.
            However, it does not preclude the implementing agencies from
            malpractices such as collusion and price-fixing among
            contractors. This is difficult to detect particularly since
            loan administration officers are encouraged to approve such
            awards quickly to speed up disbursement, which is their
            performance measure.

              The inadequate attention to loan administration is also
            reflected in the resources set aside for its staffing and
            supervision missions. In general, the staff team responsible
            for processing a loan devotes their full time attention to
            ``deliver'' the project for approval including funds for
            several appraisal related missions. On the other hand, a loan
            administration staff has to supervise a number of projects,
            This includes combining several project supervision activities
            into a single mission. To supplement staff resources, the bank
            uses loan administration clerks (Filipino staff many of whom
            were ex-secretaries) to accompany professional staff on
            supervision missions. Their responsibility is to verify post-
            ante contract awards against claims for disbursements. The loan
            administration professional's main task is to report on
            physical implementation.

              Some estimates of total funds corrupted from other MDBs have
            reached 30 percent. Internally we feel that this level of
            losses is the same if not higher at the ABB.

        This individual has asked to remain anonymous. I believe that most
    knowledgeable observers inside and outside the ADB would not challenge
    his analysis.
        In this atmosphere, ADB management has shown an almost cavalier
    approach to the consistent and effective implementation of its own
    declared policies and procedures. In response to documented examples of
    major violations of ADB policies in complaints before the ADB's
    Inspection Panel, Management has denied every alleged violation in
    every case: the Samut Prakam Wastewater Management Project, the Sri
    Lanka Southern Transport Development Project, and most recently the
    Pakistan Chashma Right Bank Irrigation Project (Stage III). The first
    two projects are discussed in more detail in section VI of this
    statement.
        The Chashma Right Bank Irrigation Project is the most recent ADB
    management response (May 2004) to an Inspection claim. This is a
    project for which the ADB committed $172.6 million (60% or the total
    project cost of $296.52 million) for a 171-mile irrigation canal along
    the Indus River, including the construction of 72 distribution canals,
    68 cross-drainage structure, and 91 bridges. The most recent ADB
    financing was approved in 1999. The project area in northwest Pakistan
    impacts part of the Northwest Frontier Province bordering Afghanistan.
    A grievance committee for the project received complaints from almost
    9,000 people detailing economic hardship and livelihood losses
    resulting from the project. A major issue is that ADB never prepared,
    as required by ADB policy, a resettlement and rehabilitation action
    plan to address the forced displacement, land and livelihoods losses to
    thousands of people caused by the project's huge infrastructure
    footprint. In November 2002, representatives of local affected
    communities requested an independent inspection of the project, and the
    inspection finally commenced in December 2003 . ADB management issued
    its response to the draft inspection report in May 2004.
        ADB management's expressed views on ADB policies and procedures in
    this May 2004 document are disturbing and revealing. Management strikes
    a defensive pose and asserts that no ADB Operational Policies and
    Procedures were violated because ``[j]udgment also applies to the
    interpretation given to Operational Policies and Procedures themselves.
    It is for this reason that the ADB's `internal laws' are not written as
    rule based statutes but as operational principles. . . . This set up .
    . . means that Management (as well as the Board) are called upon to
    make evaluations and decisions about what is possible and `doable'
    while adhering to the integrity and spirit of ADB's internal laws. . .
    . With the above in mind, Management feels it relevant to highlight
    that many (all) of the operational principles in place in the past and
    today are drafted on the understanding that `one rule does not fit
    all.' Professional judgment fills the vacuum.\6\
    ---------------------------------------------------------------------------
        \6\ ADB, Comments of ADB Management to the Inspection Panel on the
    Panel's Draft Report on the Chashma Right Bank Irrigation Project
    (Stage III) (Loan 1145-Pak [SF] in the Islamic Republic of Pakistan,
    May 2004, pp. 3-4.
    ---------------------------------------------------------------------------
        And what a vacuum it is! The management response goes on to state
    that the ``vacuum'' for ad hoc differing applications of policy and
    procedures based on ``professional judgment'' of management ``is needed
    in relation to all due diligence areas, including: technical,
    commercial, economic, financial, legal, institutional, environmental,
    social, gender, indigenous peoples, resettlement.'' To assert that
    ``one rule does not fit all'' and that ``professional judgment [of
    management] fills the vacuum'' for implementing ADB policies,
    including, and especially for, financial and legal procedures, policies
    and requirements, is an extraordinary declaration of unaccountability
    for an international public financial institution.
        The issues of internal personnel culture and culture of loan
    approval are mentioned in the ADB's Eighth Replenishment Donors'
    Agreement for the ADF. The ADB is also preparing a new internal Human
    Resources strategy. Whether there is any reasonable expectation that
    changes will be more than cosmetic, timed in anticipation of another
    donor replenishment, is an open question to which this statement will
    return in Sections VII and VIII.

       V. EVIDENCE OF SYSTEMATIC NON-COMPLIANCE WITH ADB ANTI-CORRUPTION
                  POLICIES AND PROCEDURES: TWO RECENT STUDIES

    A. ``Zero Tolerance'' For Implementing the Anti Corruption Policy and
            Procedures?
        In fact, it is precisely in the area of corruption where we have
    the most recently documented and most analytically rigorous studies of
    systematic ADB non-compliance with declared policies. The March 2003
    study commissioned by the Washington, DC Bank Information Center,
    ``Zero Tolerance:'' Assessing the Asian Development Bank's Efforts to
    Limit Corruption in its Lending Operations, by attorney Steve Herz,
    reveals a remarkably consistent record: ``We found that the ADB almost
    never complied with the policy requirement to explicitly address
    corruption issues in its reports, assessments, and evaluations''
    (emphasis in original). \7\
    ---------------------------------------------------------------------------
        \7\ Steve Herz, ``Zero Tolerance?:'' Assessing the Asian
    Development Bank's Efforts to Limit Corruption in its Lending
    Operations, (Washington D.C.: Bank Information Center, March 2004), p.
    iii.
    ---------------------------------------------------------------------------
        The study examined in detail the ADB's policy response to
    corruption, particularly its commitments under its Charter, 1998 Anti-
    Corruption Policy, and 2000 Operational Procedures on Anti-Corruption.
    It then analyzed how the ADB implemented these policies and procedures
    in three major stages of the project cycle: country economic and
    strategy studies, project appraisals, and project performance
    evaluations. The study examined eight recent Country Strategy reports
    for eight ADB borrowing nations and 18 recent project appraisal reports
    (known in the ADB as Reports and Recommendations of the President to
    the Board or RRPs) for three major ADB borrowers with high levels of
    corruption: Indonesia, Pakistan, and Bangladesh. Finally, the study
    examined 16 project completion and project performance audit reports in
    eight different borrowing countries.
        The findings are a remarkable exposure of the culture of
    unaccountability and non-compliance in the ADB.
        Article 14 (xi) of the ADB's Articles of Agreement states that
    ``the Bank shall take the necessary measures to ensure that the
    proceeds of any loan made, guaranteed or participated in are used only
    for the purposes for which the loan was granted and with due attention
    to considerations of economy and efficiency.'' In 1998, the ADB
    published its Anti-Corruption Policy, which Herz notes, does not refer
    to the fiduciary requirement in the Articles of Agreement to take ``the
    necessary measures'' to ensure ADB funds are used for the purposes
    intended. The policy takes a narrower ``more instrumental approach and
    grounds its anti-corruption efforts in the pursuit of development
    effectiveness rather than the obligation to safeguard Bank funds.'' \8\
    ---------------------------------------------------------------------------
        \8\ Ibid., p. 4.
    ---------------------------------------------------------------------------
        The Anti-Corruption Policy specifies three priorities: ``(i)
    supporting . . . effective, accountable, and transparent public
    administration as part of the ADB's broader work on governance and
    capacity building; (ii) supporting promising anti-corruption efforts on
    a case by case basis and improving the quality of the ADB's dialogue
    with Developing Member Countries on a range of governance issues,
    including corruption; and (iii) ensuring that the ADB's projects and
    staff adhere to the highest financial and ethical standards.'' \9\ The
    policy cautions staff about ``initiatives that are largely cosmetic in
    nature and designed to foster the illusion of progress without the
    substance.'' \10\ The Policy declares ``a `zero tolerance' policy when
    credible evidence of corruption exists among ADB staff or projects''
    and that ``ADR's anti-corruption effort will place particular emphasis
    on the implementation of practical and cost-effective preventative
    control measures . . . .'' \11\
    ---------------------------------------------------------------------------
        \9\ ADB, Anticorruption, (typeset version of the official policy
    paper approved by the Board on 2 July 1998), para. 34, pp. 19-20.
        \10\ Ibid., p. 26.
        \11\ Ibid., p. 28.
    ---------------------------------------------------------------------------
        For country programming and strategies, the Operational Procedures
    ``direct management and staff to assess whether ADB projects are likely
    to be affected by corruption (luring their design or implementation,
    whether a country's ability to attain its national development
    objectives are being compromised by corruption, and whether the
    government is willing or able to control corruption. In preparing these
    documents management and staff are instructed to use plain language and
    avoid using euphemistic language that may obscure the nature of the
    problem.'' \12\
    ---------------------------------------------------------------------------
        \12\ Ibid., p. 5, citing ADB Anti-Corruption Operational Procedures
    at paragraphs 27 and 54.
    ---------------------------------------------------------------------------
        In looking at eight recent Country Strategy Papers, CSPS, (for high
    corruption risk Bangladesh, Cambodia, India, Indonesia, Laos, Nepal,
    Pakistan, Viet Nam), the BIC study found negligible implementation of
    the Policy and Operational Procedures. None of the eight assessed the
    impact of corruption on a country's ability to attain national
    development objectives, and none assessed in any way the government's
    ability and willingness to control corruption. Seven of the eight had
    no mention of how ADB projects might be affected by corruption during
    design or implementation (for Indonesia there was a general, vague
    mention, not in `plain' non-euphemistic language). Only one CSP, for
    Indonesia, discussed how the ADB could specifically address corruption.
    \13\ In contrast, the study examined World Bank Country Assistance
    Strategies for all eight countries and found that the World Bank had
    addressed three or four of the corruption issues explicitly and
    specifically for seven of the eight countries, and examined two out of
    four in the case of one country.
    ---------------------------------------------------------------------------
        \13\ Ibid., p. 7.
    ---------------------------------------------------------------------------
        Going on to project appraisal, the study looked at 18 ADB appraisal
    reports (RRPs) approved by the Board in 2002 for three of the ADB's
    biggest, and riskiest borrowers: Bangladesh, Pakistan, and Indonesia.
    Regarding assessment of the borrower's management and procurement
    capacity, 17 of 18 RRPs had no mention of the issue. The risk of theft
    and misappropriation of project funds was not considered in any of the
    18 reports. Fifteen of eighteen reports provided no assessment of
    corruption risk in the project on achieving its objectives. Finally, 13
    of 18 reports proposed no specific measures to mitigate project
    corruption risks.
        For post-project auditing, the study examined eight recent Project
    Completion Reports (prepared by the ADB's operations staff one to two
    years after completion) and eight Project Performance Audit Reports
    (prepared by the independent Operations Evaluation Department three
    years after completion). The 16 evaluation reports were selected for
    four of the ADB's biggest, most at risk for corruption, borrowers:
    Bangladesh, Indonesia, India, and the Philippines. The ADB had a
    perfect score: in none of the 16 project evaluation reports for four of
    the more corrupt countries on earth did ADB operations staff and
    performance auditors assess possible corruption in any respect. \14\
    ---------------------------------------------------------------------------
        \14\ Ibid., p. 11.
    ---------------------------------------------------------------------------
        Apparently, this is how the ``ADB's anti-corruption effort will
    place particular emphasis on the implementation of practical and cost-
    effective preventative control measures. . . .'' We see clearly how
    management's ``professional judgment fills the vacuum'' in interpreting
    ADB policies and procedures as flexible principles so that ``one rule
    does not fit all.'' No rule applies to anyone at anytime.
        The BIC study ventures four possible explanations for the miserable
    record of compliance, which basically restate the problems of the
    internal ADB management culture discussed above in Section IV. First,
    management has not given staff any guidance. on how to assess
    corruption issues. It would seem that the Anti-Corruption Policy and
    Operational Procedures are largely cosmetic ornaments or public
    relations tools, rather than serious directions for ADB operations.
    Second, the loan approval culture still prevails, along with the
    concurrent lack of resources for supervision and monitoring. Third, ADB
    staff do not want to embarrass borrowing governments on the Board or
    make them lose face. Fourth, there is a lack of institutional
    leadership in top management, starting with the President.\15\
    ---------------------------------------------------------------------------
        \15\ Ibid., p. 10.
    ---------------------------------------------------------------------------
        The ``Zero Tolerance'' study was discussed earlier this year with
    ADB officials, including the Auditor General of the institution, who
    has stated that he agrees with 99% of the findings. Such candor is
    praiseworthy, and perhaps a first harbinger of change in the attitudes
    of some in management. Nevertheless, the current situation remains
    abysmal.

    B. ``The ADB in its Own Words''
              ``Record keeping also seems to have been abandoned'' ``This
            Project did not benefit from having a logical framework'' ``No
            identification of beneficiaries was attempted, and thus no
            basis was provided for measuring impact on beneficiaries''
            ``The project was implemented more or less as planned, but at
            greatly increased cost with substantial delays'' ``Overall
            ADB's supervision of the Project was not adequate''--
            Conclusions from recent ADB Project Performance Audit Reports.

        When corruption is not explicitly addressed in project evaluations
    (as is the case of the ADB), poor performance (cost and time overruns,
    reported contracting irregularities, shoddy appraisal with few or no
    measurable indicators for project success) can often be a proxy
    indicator for corruption in borrowers at high risk for bribery and
    fraud. In July 2003, Environmental Defense released an analysis of
    almost all publicly available Project Performance Audit Reports (PPARs)
    of ADB projects in Indonesia, Pakistan and Sri Lanka.\16\ Most of the
    PPARs were conducted in the past six and a half years, during which
    time the ADB's Anti-Corruption Policy has been in effect.
    ---------------------------------------------------------------------------
        \16\ Stephanie Gorson Fried, Ph.D. and Shannon Lawrence,
    Environmental Defense, with Regina Gregory, ADB Watch, The Asian
    Development Bank: In its Own Words: An Analysis of Project Audit
    Reports for Indonesia, Pakistan, and Sri Lanka, Environmental Defense,
    July 2003. In the case of Pakistan and Sri Lanka, we examined every
    PPAR the ADB had made publicly available on its website (23 for
    Pakistan, 16 for Sri Lanka); and for Indonesia we analyzed 70% of the
    publicly available reports, some 21 out of 30. Presumably ADB
    management chose to make public a representative sample of its audits,
    a sample which at the very least did not present a view of the ADB's
    record that was skewed towards worse than average performance.
    ---------------------------------------------------------------------------
        We found a disturbing record of poor performance, where project
    sustainability--whether or not a project provides lasting, long-term
    economic and social benefits--was lacking for the vast majority of
    projects: based on the sample of ADB publicly available audits at the
    time, 70% of ADB projects in Pakistan and Indonesia were not likely to
    provide long-term benefits, and 78% in Sri Lanka. It should be painted
    out that in its 2000 assessment of multilateral development
    institutions, the bi-partisan U.S. Congressional International
    Financial Institution Advisory Committee (the Meltzer Commission)
    identified project sustainability as the key indicator for measuring
    these institutions' performance.
        In a number of these projects, clear warning signals of fraud were
    identified--e.g. ``contracting irregularities'' resulting in cost
    overruns and shoddy, substandard construction--without any mention or
    analysis of perhaps the most likely explanation: corruption. In the
    majority of the 49 PPARs we analyzed, project appraisal and preparation
    was also gravely deficient; most projects lacked coherent, measurable
    systems to measure the project's delivery of benefits. The lack of
    monitorable indicators in projects makes diversion of funds easier to
    perpetrate and harder to detect and prove.
        A reading of the findings of these audit reports reveals poor
    performance and irregularities time and time again, which at the very
    least would call for consideration of whether or not corruption played
    a role. For example, the 2000 audit report for the $36.5 million ADB
    loan for the Sri Lanka Road Improvement Project uncovered a convoluted
    bidding process where rising costs reduced the planned road
    construction to 147 kilometers instead of 390, but the project still
    incurred a 23% cost overrun.\17\ The 1999 audit of the Sri Lanka Walawe
    Irrigation Improvement Project (ADB financing of nearly $20 million)
    found that consultant fees were almost three times greater than
    appraised, accounting for 20% of construction costs.\18\ The 2002 audit
    of the $151 million ADB loan for the Indonesia Third Local Roads
    Project identified 1,800 separate road contractors who were hired under
    ``local competitive bidding procedures.'' There were 10,000 person-
    months of domestic consultants and 500 person-months of international
    consultants. Most of the ensuing road construction was sub-standard,
    using cheap unstable penetration macadam (penmac) rather than higher
    quality machine laid hot mix, such as asphaltic concrete. As a result,
    ``35 percent of the penmac surfaces had severe defects within 3 years;
    all of these roads were likely to soon be in poor condition unless
    effective maintenance was applied.'' \19\
    ---------------------------------------------------------------------------
        \17\ The Asian Development Bank: In its Own Words, p. 90, citing
    Asian Development Bank Post-Evaluation Office, Project Performance
    Audit Report on the Second Road Improvement Project in Sri Lanka, June
    2000, paras. 11 and 19.
        \18\ Ibid., p. 39, citing Asian Development Bank Post-Evaluation
    Office. Project Performance Audit on the Walawe Irrigation Improvement
    Project in Sri Lanka, December 1999, Section II, p. 3.
        \19\ Ibid., p. 9, citing Asian Development Bank Post-Evaluation
    Office. Project Performance Audit on the Third Local Roads Project in
    Indonesia, December 2002, p. 9.
    ---------------------------------------------------------------------------
        The lack of monitorable benefits indicators is particularly
    alarming for non-project program loans. Two agricultural program loans
    for Sri Lanka totaling $140 million lacked performance indicators,
    ignored the government's institutional capacity to handle the money,
    and indeed, lacked ``a logical framework specifying quantitative
    performance indicators'' \20\ The audit of a $250 million Food Crop
    Sector program loan for Indonesia found ``no performance indicators
    against which Program impact could be assessed.'' \21\
    ---------------------------------------------------------------------------
        \20\ Ibid., pp. 40-41.
        \21\ The Asian Development Bank: In its Own Words, p. 2, citing
    Asian Development Bank Post-Evaluation Office. Project Performance
    Audit on the Food Crop Sector Program in Indonesia, December 1997, p.
    6.
    ---------------------------------------------------------------------------
        These and many other examples show the development cost of the
    ADB's refusal to seriously carry out its fiduciary duty and take
    necessary measures to ensure that its loans are used effectively and
    efficiently for the purposes intended.

    VI. NEGLIGENCE OF THE ADB IN INVESTIGATING CORRUPTION IN MAJOR PROJECTS

        Non-governmental and community organizations in ADB borrowing
    countries have complained about financial irregularities and corruption
    in ADB projects for years. We see flagrant cases where corruption has
    been linked not only to irregular procurement and massive cost overruns
    but--most importantly from the standpoint of local communities--also to
    major changes in the location and design of large infrastructure
    projects. These unappraised changes have resulted in major, unmitigated
    social and environmental impacts. Two of the most flagrant examples are
    described below.
    A. The Thailand Samut Prakarn Wastewater Treatment Plant
        The ADB approved a total of $230 million in loans for this project.
    When the original $150 million loan was approved by the ADB Board in
    1995, the project was appraised as two industrial wastewater treatment
    plant on both sides of the Chao Phraya River in Thailand. The ADB board
    approved a loan for a project which in effect was never implemented:
    following the loan approval the Thai Pollution Control Board moved the
    site of the plant 20 kilometers away to build a single plant in the
    Klong Dan district. Only one company--the NVSPKG Joint Venture--
    submitted a bid for the construction, a violation of both Thai and ADB
    procurement rules.
        Building the plant on the changed site resulted in a cost overrun
    of 87% (from $507 million to $946 million; among other things, a,
    pipeline had to be built to transfer the wastes from the industrial
    plants near the original site) and serious environmental, social and
    economic impacts on some 60,000 villagers--most of them dependent on
    coastal fisheries that would be polluted by the wastewater plant
    discharges--living adjacent to the new site. To finance the cost
    overruns caused by the change of location, ADB management asked the ADB
    Board to approve an $80 million supplemental financing loan in 1998.
    ADB policies and procedures clearly required a reappraisal of the
    project at that time, since it was not the project that was approved in
    1995, but this was not done. Nor were any of the requisite
    environmental impact or social studies conducted based on the new site.
        Over the past several years, the Thai press has printed numerous
    articles alleging that this seemingly illogical and costly site change
    was. linked to a massive land fraud conspiracy among various Thai
    government officials. For example, the Bangkok Post reported on
    November 15, 2002 that the Thai Development Research Institute found
    the company that won the bid was linked to a former Science Minister
    and his relatives, and the then deputy Commerce Minister and the Deputy
    Industry Minister happened to be co-owners of the land at the new site.
    A major consultant to the project, Seatec International Asia
    Technology, was owned by a former politician who also jointly owned
    some of the land at the new site: \22\ ``Thai law enforcement
    authorities believe that PCD [the Thai Pollution Control Authority,
    Executing Agency for the project] officials, executives of the Joint
    Venture, and the owners of the Klong Dan property conspired to inflate
    the purchase price of the [land] parcels by as much as 1000 percent.''
    \23\ Thai authorities have brought criminal indictments against senior
    officials of the Pollution Control Authority, real estate developers,
    and executives of the contractor. \24\
    ---------------------------------------------------------------------------
        \22\ Supawadee Suanpoolthong, A Case Study of Corruption:
    Politicians exploited plan ``at every stage,'' Bangkok Post, November
    15 2002.
        \23\ Steve Herz, ``Zero Tolerance?'' Assessing the Asian
    Development Bank's Efforts to Limit Corruption in its Lending
    Operations (Washington D.C.: Bank Information Center, March 2004), p,
    22, citing Bangkok Post, Klong Dan Wastewater Plant Scandal: Vartana,
    Nine Others Accused: Graft Report Names VIPs, Senior Officials (11 June
    2002); and The Nation (Bangkok), Making the Case for Graft at Klong
    Dan, (18 July 2003).
        \24\ Ibid., citing citing Bangkok Post, Klong Dan Wastewater Plant
    Scandal: Vartana, Nine Others Accused: Graft Report Names VIPs, Senior
    Officials (11 June 2002).
    ---------------------------------------------------------------------------
        Several Thai Government entities launched investigations into
    corruption in the project. A Special Committee of the Thai Senate
    ``found corruption at every stage of the project.'' \25\ The Thai Prime
    Minister stated last year that the ADB project was ``riddled with
    corruption.'' This has become one of the biggest, most public
    corruption scandals in Thai history and more remains to be uncovered:
    ``Many in Thailand now suspect that the collusive land deals are only
    the tip of the iceberg of the corruption on the Samut Prakam project,
    and that far grander corruption is likely to have occurred in the
    procurement and construction of the project.'' \26\
    ---------------------------------------------------------------------------
        \25\ Luntharimar Longcharoen, Slap in the ADB's Face: The Klong Dan
    Wastewater Treatment Project Corruption Scandal, TERRA (Towards
    Ecological Recovery and Regional Alliance), Bangkok.
        \26\ Herz, Zero Tolerance, citing and The Nation (Bangkok), Making
    the Case for Graft at Klong Dan, (18 July 2003).
    ---------------------------------------------------------------------------
        So how has the ADB responded to corruption allegations in Samut
    Prakam? June 2000 ADB Special Review Mission to Klong Dan found no
    evidence of irregularities in the land acquisition process. The
    affected communities at Klong Dan then filed claims of violations of
    ADB policies before the ADB Inspection Panel and the ADB Anti-Cormption
    Unit of the Office of the ADB Auditor General (OAG). But the Inspection
    Committee of the ADB's Board, which has to approve inspections, refused
    to allow the Panel to pursue the corruption allegation, arguing that it
    was outside the Panel's jurisdiction and that the Anti-Corruption Unit
    was conducting its own investigation. The Anti-Corruption Unit never
    conducted a full investigation, arguing that the Thai government was
    already on the case. The ADB mainly examined the allegation that an ADB
    official involved with the project had a conflict of interest, and
    concluded by rejecting the allegation.\27\ The Auditor General of the
    ADB has stated that while the ADB did not release its internal findings
    to the Thai authorities, it did pass on some ``tips'' to them.
    ---------------------------------------------------------------------------
        \27\ See Herz, pp. 24-25 and footnotes,
    ---------------------------------------------------------------------------
        Meanwhile, ADB management's February 2002 response to the
    Inspection Panel investigation claimed there were no violations of ADB
    policy and procedures in the way the project was conducted. The
    Inspection Panel released its report in March 2002, and found
    violations of six major ADB policies, including management's failure to
    conduct a complete reappraisal of the project when supplemental
    financing was requested in 1998. After a heated Board discussion, with
    some major borrowing countries arguing against the findings of the
    Inspection Panel, the Board basically endorsed the report's
    recommendations for remedial measures to address the needs of the
    affected population, but did not address any internal issues concerning
    violations of ADB policy and procedures, let alone corruption. \28\
    ---------------------------------------------------------------------------
        \28\ See Bank Information Center, Washington D.C., BIC Project
    Factsheet #8: The ADB funded Samut Prakarn Wastewater Management
    Project in Thailand, Updated July 2002.
    ---------------------------------------------------------------------------
        In early 2003, the Thai government declared the contract for the
    plant null and void, and the Pollution Control Department announce that
    it is pursuing legal actions against the contractors to sue for
    recovery of all funds paid under the contract. All consulting contracts
    have been terminated.\29\
    ---------------------------------------------------------------------------
        \29\ Asian Development Bank, Samut Prakam Wastewater Management
    Project, Fourth Semi-Annual Report to the Board of Directors on the
    Implementation of the Recommendations of the Board Inspection Committee
    as Adopted on 24 March 2002, April 2004.
    ---------------------------------------------------------------------------
        The plant remains unfinished and the numerous legal actions filed
    by. Thai authorities are unresolved. The ADB closed both loans for
    Samut Prakam in December 2003; the 1998 supplemental loan of $80
    million for cost overruns and almost $131.7 million of the original
    1995 $150 million loan had already been disbursed. The ADB cancelled
    the balance of $18.3 million. None of the remedial measures to address
    the harm done to local communities have been carried out.\30\
    ---------------------------------------------------------------------------
        \30\ Ibid.
    ---------------------------------------------------------------------------
        The continued lack of a full investigation of the ADB's
    responsibility for not monitoring, supervising, and addressing the
    massive corruption in this debacle is a scandal. Certainly once the
    corruption allegations and huge cost overruns began to surface in the
    late 1990s, it could and should have intervened, demanded a full
    forensic audit of the project, and halted disbursements on loans. What
    we have instead is the observation of the Board Inspection Committee's
    February 28, 2002 response to the Inspection Panel (which was not
    allowed to address corruption): ``A sudden increase of $421 million in
    the estimated cost of a recently approved ADB project is a significant
    event.'' \31\
    ---------------------------------------------------------------------------
        \31\ ADB Board Inspection Committee, Inspection Request, Samut
    Prakarn Wastewater Management Project, 28 February 2002, Para. 38, p.
    7.
    ---------------------------------------------------------------------------
        And what has the ADB learned? Following the second hearing of this
    committee on corruption and the MDBs in July 2004, the Far Eastern
    Economic Review published an article posing that very question to ADB
    officials. The director of the ADB's Mekong Department declared ``we
    learn from Samut Prakam as much as we learn from other projects.'' \32\
    Given the ADB's record, this is not encouraging.
    ---------------------------------------------------------------------------
        \32\ Christopher Gay, Thai Project Yields Graft and New Policies,
    Far Eastern Economic Review, July 20, 2004.
    ---------------------------------------------------------------------------
    B. The Sri Lanka Southern Transport Development Project
        The Sri Lanka Southern Transport Development Project is an ongoing
    controversy with some analogies to Samut Prakam: after the ADB Board
    approved loans for a major infrastructure project that was appraised in
    one location, the location was changed, causing massive cost overruns,
    environmental damage, and economic hardship for affected populations.
    Evidence of procurement irregularities in the ADB-funded project were
    publicized in the Sri Lankan press. The lead contracting company
    reportedly bribed the project head who was subsequently dismissed by
    the government. Affected communities filed an Inspection Panel claim in
    2001, and again in 2004 after their original claim was rejected by the
    ADB Board Inspection Committee. The Board Inspection Committee
    reaffirmed management's assertions that no policies were violated,
    despite the recommendation of an. Inspection Panel member that an
    inspection proceed. Although the corruption charges became a widely
    publicized national scandal, the ADB continues to turn a blind eye to
    mounting evidence of major procurement irregularities, cost overruns,
    and corruption in this $90 million loan.
        The Sri Lanka Southern Transport Development Project involves the
    construction, under the authority of the government Road Development
    Agency (RDA), of a high-speed highway link from the capital, Colombo,
    to the Southern city of Mataria. Much of the original route and area of
    impact for the road (a trace three kilometers wide) was moved to a
    different location after the project was appraised and approved. The
    changed road route. is, according to the June 4th complaint submitted
    to the ADB by Sri Lankan community groups, twice the cost of what was
    presented to ADB Board when it approved the loan.\33\ The result is
    that the number of households displaced and destroyed by the
    construction more than doubled, to at least 1,315, as opposed to the
    environmental assessment of the original route, which affected 622
    houses.\34\ The altered route will destroy a valuable wetland, 1,000
    hectares of rice paddies, rubber, tea, fruit and vegetable gardens
    belonging to the local inhabitants. Five temples will be damaged. The
    affected communities were not consulted, and the ADB, the claimants
    allege, has violated its environmental, social and resettlement
    policies.
    ---------------------------------------------------------------------------
        \33\ Joint Organization of the Affected Communities on Colombo-
    Matara Highway, Submission of Complaint: Southern Transport Development
    Project Sri Lanka, Loan SRI 1711, 4th June 2004 (complaint submitted to
    the Asian Development Bank Special Project Facilitator as part of the
    revised ADB inspection claim process), p. 3.
        \34\ Ibid., p. 2.
    ---------------------------------------------------------------------------
        The affected communities filed a lawsuit against the Road
    Development Authority (RDA) and won a judgment from the Sri Lanka
    Supreme Court in January 2004 that RDA had violated both the National
    Environmental Act and the rights of the petitioners under the Sri
    Lankan Constitution.\35\ To violate the laws of its borrowers is a
    blatant contravention of ADB policies for projects it finances,
    monitors and supervises.
    ---------------------------------------------------------------------------
        \35\ Ibid., Appendix 2 containing details of Inspection Request and
    new evidence, and Appendix 9, Supreme Court Judgment.
    ---------------------------------------------------------------------------
        Allegations regarding contracting irregularities emerged in Sri
    Lankan newspapers in 2001 and 2002, which were confirmed by a
    parliamentary Committee on Public Enterprises. In the bidding process
    for the project, 29 companies applied, and three met the pre-
    qualification bidding procedures, based on a number of considerations,
    including the financial condition of the prospective contractors. A
    Japanese company, Kumagi Gumi, did not meet the pre-qualification
    criteria,\36\ and in fact had a negative financial worth. Kumagi hired
    an agent, Access International, to help win the contract. As is typical
    with this sort of arrangement, Access would win a hefty fee if it paved
    the way, as it were, for a successful contract award for its client.
    Sri Lankan newspapers reported that Access had influential political
    connections, including in the Prime Minister's Office.\37\ Access is
    alleged to have bribed the RDA project official, for example by
    installing a new diesel generator in his home, giving him the use of a
    new SUV, and promising financial rewards if Kumagi won the
    contract.\38\ This use of agents as motors of corruption to win
    contracts in some respects recalls the case of the Lesotho Highlands
    Project, discussed in the committee's July 21, 2004 hearing.
    ---------------------------------------------------------------------------
        \36\ To pre-qualify companies had to score 60 points in an
    evaluation framework assessing their financial stability, technical
    capacity etc. The pre-qualifying companies had scores of 95, 79 and 75.
    Kumagi's score was 54.
        \37\ Frederica Jansz, COPE shoots down Southern Highway, Sunday
    Leader (Sri Lanka), October 27, 2002; Frederica Jansz, Of Highways and
    Backroom Access, Sunday Leader (Sri Lanka), November 1, 2001.
        \38\ Ibid.
    ---------------------------------------------------------------------------
        After the pre-qualification process was complete, the ADB
    reportedly sent a letter to the Sri Lankan Treasury requesting that
    Kumagi Gumi nevertheless be considered as a bidder on the project.
    Three companies, including Kumagi, participated in the final bidding;
    only Kumagi was allowed to submit a second alternative bid. Kumagi
    knowing the lowest bid of the other two companies, was naturally able
    to submit another, lower bid, and win the contract. All of this is
    recounted in two Sri Lankan newspaper articles, which I have submitted
    for the record. In the aftermath, the bidder that would have under
    normal procedures won the contract, protested, repeating the same
    allegations, and threatened to bring legal action.
        The Sri Lankan parliamentary Committee on Public Enterprises (COPE)
    conducted an investigation, and concluded that both national government
    procurement guidelines and those of the ADB had been violated.\39\ The
    Attorney General of Sri Lanka, when asked how Kumagi could have won the
    contract in violation of national and ADB tender guidelines, reportedly
    stated: ``Kumagi Gumi had been accommodated purely on a suggestion by
    the ADB on February 13, 2001, particularly since it is an ADB funded
    project and the guide on pre-qualifications specifically provides [in
    such cases] for ADB approval.'' \40\
    ---------------------------------------------------------------------------
        \39\ Ibid.
        \40\ Ibid.
    ---------------------------------------------------------------------------
        When the ADB Anti-Corruption Unit undertook its first mission to
    perform spot procurement audits in a borrowing country last year, it
    went to Sri Lanka, but did not look at the Southern Transport
    Development Project.\41\ According to ADB staff, they do not wish to
    pursue anti-corruption claims against a project where an Inspection
    Panel claim may be underway or pending. This is truly a perverse and
    counter-productive approach, since not only does the Inspection Panel
    not appear to investigate corruption, it is likely that projects with
    Inspection Panel claims underway may be precisely the ones where
    corruption abuses may be better documented.
    ---------------------------------------------------------------------------
        \41\ The Anti-Corruption Unit examined another project, and no
    corruption. It found weak financial controls which could have been
    exploited for corruption if corruption were present in the project.
    ---------------------------------------------------------------------------
        Meanwhile, the STDP project proceeds and Kumagi remains the
    contractor. Neither ADB management nor the ADB Board appear to be
    interested in investigating the extremely serious procurement
    irregularities and cost overruns in this case.
        The June 2004 complaint of affected communities notes:

              The ADB Board of Directors approved a project which was
            significantly different to the one being implemented. ADB
            management is disbursing funds for a Project that is different
            from the one approved by the Board in 1999. ADB management has
            not carried out a full review of the Project to ensure that the
            current project is in compliance with ADB policies nor has it
            sought approval for the Project's increased costs.\42\
    ---------------------------------------------------------------------------
        \42\ Ibid., p. 4.

        This would seem to be a clear, prima facie case of ADB management
    and its Board failing to fulfill its fiduciary duty under the Articles
    of Agreement to ``take the necessary measures to ensure that the
    proceeds of any loan made, guaranteed, or participated in are used only
    for the purposes for which the loan was granted. . . .''

                VII. WHAT IS THE ADB DOING TO COMBAT CORRUPTION?

        In 2001, a departing Executive Director made the following comments
    to his colleagues on the Board and to the management and staff of the
    ADB:

              Perhaps one of the most signs scant breakthroughs that has
            resulted from the Asian Crisis is the rude awakening of the
            damage wrought by corruption. Unfortunately this realization is
            yet. to translate into a widespread appreciation of what
            amounts to ``good governance'' in the form of transparency,
            accountability and responsibility, but at least it is a
            beginning. But the real question for an organization such as
            the ADB is ``where do you start?''
              My view is that it has to firstly start at home. For example
            in relation to contracts, not only must the Bank be exemplary
            from within (and I have little to criticize on that account),
            but also, in its lending operations, the standards applied must
            be of a high order and strictly enforced. We have to get far
            tougher with those who ``skim and scam'' on ADB projects, and
            those governments which are party to, or allow it to happen.
            That may result in lower lending levels, but ultimately the
            outcomes will reward the effort, and send clear signals to the
            donors and the region that ADB is delivering a graft-free
            product to the ultimate benefit of the poor which it seeks to
            assist. With each product there should be a ``warts and all''
            assessment of leakage.\43\
    ---------------------------------------------------------------------------
        \43\ Stephen Baker, ADB--Wherefore art thou? (reflections of a
    board member who spent 3 interesting years with the Bank), p. 10.

        However, in the past few years the ADB has failed to systematically
    apply its Anti-Corruption Policy and Procedures. It has not
    investigated the most flagrant, scandalous and well publicized examples
    of corruption, such as the Thailand Smut Prakarn Project and the Sri
    Lanka Southern Transport Development Project. This lack of
    institutional leadership and managerial integrity concerning a public
    international financial institution's most basic fiduciary duty is most
    disturbing.
        Conversations with ADB staff and Executive Directors' offices
    reveal differing perspectives on the institution's commitment to fight
    corruption. Some assert that over the past year ADB management has
    finally started to realize the seriousness of the issue and there is a
    new resolve to deal with the problem. The ADB's Auditor General is both
    candid and hopeful, but concedes that change is just beginning and
    progress is fragile. Some senior staff are deeply cynical about the
    institution's ability to change, noting that cosmetic commitments to
    reform come in cycles in anticipation of new ADF replenishments or ADB
    capital increases.
        With these caveats in mind, we shall examine the anti-corruption
    potential of several ongoing initiatives: (a) the Donor's Report for
    the Eighth ADF Replenishment (2005-2008); (b) Performance Based
    Allocation of country lending; (c) halting disbursements on loans when
    borrowers refuse to address corruption; (d) the new Human Resources
    Strategy; (e) an ongoing review of the implementation of the ADB's
    Anti-Corruption and Governance policies; (f) the new information
    disclosure (Public Communications) policy of the ADB, still in draft
    revision; (g) the role of the Anti-Corruption Unit in the Auditor
    General's Office (OAG).

    A. The June 2004 Donors' Report for the Eighth ADF Replenishment
        The ADF IX (Eighth Replenishment) Donor's Report \44\ reveals a
    general awareness of institutional problems in the ADB, but, as noted
    above, barely mentions the word corruption. The Donor's Report does not
    address the scale of potential ``leakage'' from ADB lending, let alone
    suggest anything as specific as the short suggestions made in Stephen
    Baker's farewell observations to the Executive Board in 2001. It does
    emphasize a ``Managing for Development Results (MfDR)'' framework, to
    be administered by a Results Management Unit (RMU): ``MfDR at ADB will
    incorporate measures of effectiveness, efficiency, client satisfaction,
    and staff satisfaction. The RMU is developing these indicators drawing
    on global best practices. . . .'' \45\ With respect to specific
    measures to combat corruption in ADB loans, this is not very
    illuminating.
    ---------------------------------------------------------------------------
        \44\ Asian Development Bank, ADF Donors' Report, Development
    Effectiveness for Poverty Reduction, June 2004.
        \45\ Ibid., pp. 6-7.
    ---------------------------------------------------------------------------
        The Donors' Agreement notes the need for a ``merit-based culture''
    and that ``the current incentive structure is weighted towards new
    tending; they [donors] suggested that ADB reorient incentives towards
    implementation and development outcomes.'' To that end a new Human
    Resources Strategy is being developed. ``ADB is planning early remedial
    action, including: (i) revising staff incentives to promote greater
    attention to project quality rather than lending targets . . . (iv)
    implementing a human resources strategy focused on improving
    performance management and providing for greater accountability.'' \46\
    It is very difficult with commitments in such general, vague language
    to assess how deep or effective they are; the credibility of such
    proposals lies in the details and implementation. The avoidance of any
    specific discussion in the text of glaring problems in ADB performance,
    and above all the almost total avoidance of the corruption issue, can
    only fuel serious skepticism.
    ---------------------------------------------------------------------------
        \46\ Ibid., pp. 7-8.
    ---------------------------------------------------------------------------
    B. Performance Based Allocation
        The Donors' Report cites improving the Performance Based Allocation
    (PBA) of ADF resources. The promotion of Performance Based Allocation
    in the MDBs was mentioned by Treasury Under Secretary for International
    Affairs John Taylor in testimony before this committee on July 21,
    2004. The idea is to allot lending based on overall country
    performance, as assessed by ADB-promoted indicators. The ADF IX Donors'
    Report proposes a greater significance of PBA for country lending
    allocations, and an increase of the effective weight of governance
    considerations in the PBA to 50%.\47\
    ---------------------------------------------------------------------------
        \47\ Ibid., p.16.
    ---------------------------------------------------------------------------
        The ADB has had a PBA system in place since 2001. This system does
    not appear to have had any impact on the implementation of the Anti-
    Corruption Policy and Procedures, nor caused any perceptible change in
    management's willingness to investigate even the most glaring
    corruption scandals associated with ADB projects. Although a revised
    PBA system could have the result of reducing lending allocations to
    borrowers that rank low on the Transparency International Index, many
    of the ADB's major borrowers fall into this category. Moreover,
    allotting resources to borrowers based on general ``governance''
    rankings would seem to have little relevance to stopping actual ongoing
    corruption of ADB resources if the ADB itself has no idea of the extent
    of ``leakage'' from its country lending.

    C. Suspending Loans When Borrowers Do Not Address Corruption
        One unambiguously promising development has occurred in the past
    year: the reported halting of disbursements on two loans to Indonesia
    because of corruption concerns. Although the 1998 ADB Anti-Corruption
    Policy provides for this type of recourse, until last year it had never
    been utilized. Reportedly ADB management and the Board are considering
    halting disbursements on a third loan to Indonesia, again for
    corruption.

    D. The New Human Resources Strategy
        The Donors' Report also refers to new ADB Human Resources Strategy
    which was discussed yesterday (September 27) by the ADB's Board. The
    Human Resources Strategy contains a somewhat franker acknowledgement of
    ADB's institutional problems: ``There is a widespread perception that
    the internal appointment and promotion processes are not transparent
    and are not structured to ensure merit-based decision making . . .
    Staff consider that there is undue non-disclosure of information about
    the processes, and combined with the lack of objective criteria for
    recruitment and selection, they do not have an appropriate level of
    information to substantiate decisions. These factors create a strong
    level of distrust and cynicism about how the organization makes HR
    decisions.'' \48\ There is a grotesque irony here: it is clear that ADB
    staff complain that they suffer from the same lack of access to
    information, and arbitrary, unaccountable non-implementation of ADB
    policies--at least concerning human resources management--that
    communities and NGOs affected by ADB projects constantly protest.
    ---------------------------------------------------------------------------
        \48\ Asian Development Bank, Human Resources Strategy: Revised
    Draft for Discussion, 5 July 2004.
    ---------------------------------------------------------------------------
        The new Human Resources Strategy proposes general measures that in
    one sense we all can agree with: a ``Focus on Results'' and ``Linkage
    Between Performance and Incentives'' looking at, inter ailia,
    ``internationally accepted best practices in its HR management policies
    and practices.'' \49\ But exactly what results and incentives is the
    strategy referring to, and how will these plans be implemented?
    ---------------------------------------------------------------------------
        \49\ Ibid., p. 8.
    ---------------------------------------------------------------------------
        The Summary of the Action Plan notes that the ``lack of objective
    criteria to aid selection for each position'' will be remedied by the
    establishment of ``an ADB-wide competency framework and skills
    inventory'' by the end of 2004. A ``stronger linkage between salary
    increase and improved performance evaluation to ensure high level
    performers are rewarded with higher salary increases'' will be
    established. Finally, the Action Summary states that to establish a
    ``clear understanding of unacceptable behaviors and consequences'' for
    staff through 2005 there will be ``a more effective internal governance
    system,'' ``mandatory code of ethics seminars for all staff,'' and a
    ``review and strengthen[ing of] policies, processes and appropriate
    sanctions to ensure staff compliance.'' \50\
    ---------------------------------------------------------------------------
        \50\ Ibid., pp. 10-16.
    ---------------------------------------------------------------------------
        In the July 5, 2004 ``Revised Draft'' of the Human Resources
    Strategy, there is no mention of the priorities expressed in the ADF
    Donors' Report of ``reorient[ing] incentives towards implementation and
    development outcomes,'' ``promot[ing] greater attention to project
    quality rather than lending targets''--let alone any reference to
    country lending ``leakage.'' The ``Summary of Actions'' in the Human
    Resource Strategy does not contain the slightest indication of what the
    specific content or orientation of the new performance indicators will
    be. Reading the text literally, one could fill in almost any possible
    set of institutional priorities, goals and values. It is a document
    proposing purely instrumental measures which are almost completely
    disconnected from the very real corruption and project performance
    problems that threaten to undermine the ADB's very mission.

    E. Reviewing the Implementation of the Anti-Corruption and Governance
            Policies
        The ADB is also conducting a review of the implementation of its
    Governance and Anti-Corruption Policies to consider ``the governance
    and anti-corruption priority actions for the period 2005-2009.'' \51\
    The studies of NGOs discussed in Section V (``Zero Tolerance'' and
    ``The ADB in Its Own Words'') have already, as one staff member told
    us, done a significant part of the work the ADB should have done
    itself. The committee should be kept appraised of the progress of this
    effort, particularly regarding the ``priority actions'' that the review
    will identify for the next five years.
    ---------------------------------------------------------------------------
        \51\ ADB, Fighting Poverty in Asia and the Pacific: Achieving
    Results Together. Review of the Implementation of the Governance and
    Anti-Corruption Policies (ADB internal document, 6 pages), p. 1.
    ---------------------------------------------------------------------------
    F. Revised Public Communications Policy
        The ADB is currently revising its ``Public Communications''
    [information disclosure] Policy. Non-governmental groups have welcomed
    progress in this area, noting that the draft proposals of the ADB do go
    beyond the current disclosure standards at some other MDBs.\52\ But
    there are a number of critical areas of particular relevance to
    assessing the ADB's corruption efforts where more information should be
    disclosed--starting with, for example, more detailed disclosure of the
    ADB's own operational budget, resource allocation, and expenditures and
    outlays.\53\
    ---------------------------------------------------------------------------
        \52\ Letter of Jennifer Kalafut and Mishka Zaman, Bank Information
    Center, to Mr. Robert Salmon, Principal Director, Office of External
    Relations, Asian Development Bank, May 28, 2004.
        \53\ Ibid., p. 6.
    ---------------------------------------------------------------------------
    G. The Anti-Corruption Unit
        Finally there is the role of the Anti-Corruption Unit itself. The
    ADB Anti-Corruption Unit, with five professionals, appears to be
    understaffed in relation to the 55-person strong Department of
    Institutional Integrity (TNT) at the World Bank. According to the
    report undertaken by Richard Thornburgh and his associates in July 2003
    indicate that the World Bank plans to further increase its anti-
    corruption staffing levels.\54\ In the case of the ADB, with
    approximately $6 billion a year in loan commitments compared to the
    World Bank's $24 billion, an appropriate staffing level for the Anti-
    Corruption Unit should be at least around 14.
    ---------------------------------------------------------------------------
        \54\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
    Concerning the Proposed Strategic Plan of the World Bank's Department
    of Institutional Integrity, and the Adequacy of the Bank's Mechanisms
    and Resources for Implementing that Strategy, July 9, 2003, p. 6.
    ---------------------------------------------------------------------------
        The Anti-Corruption Unit, which is under the authority of the ADB's
    Office of the Auditor General (OAG), is primarily reactive in its
    function, investigating cases of alleged corruption when someone files
    a complaint. An Oversight Committee (analogous to the World Bank
    Sanctions Committee) rules on whether individuals and firms should be
    blacklisted and barred from future ADB business (usually for a limited
    period of several years). With a much smaller staff than the World
    Bank's INT, Anti-Corruption Unit investigations have lead to the
    debarment of 207 firms and individuals, as opposed to 288 to date at
    the World Bank. The World Bank makes its debarments public, but the ADB
    does not. The Thornburgh reports on fighting corruption at the World
    Bank emphasized in the strongest terms the desirability of automatic
    publication of debarments.\55\
    ---------------------------------------------------------------------------
        \55\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
    Concerning the Debarment Processes at the World Bank, August 14, 2002,
    pp. 82-83.
    ---------------------------------------------------------------------------
        The rationale for not naming debarred companies and individuals at
    the ADB seems to be two-fold. First, the news of debarment supposedly
    spreads rapidly in the business and consulting community, since
    debarred firms doing business in the Asia-Pacific region have to alert
    possible business partners of their status for every prospective ADB
    contract. Second, large, powerful firms bring tremendous political
    pressure to bear when confronted with potential debarment. Public
    debarment would likely make this pressure on the ADB, given its
    closeness to governments, even more intense. It is true that some major
    industrialized donor nations play an extraordinarily hypocritical role
    in lobbying for their businesses behind the scenes at the MDBs. ADB
    staff informed us that the Ambassador to the Philippines of a donor
    country directly protested the prospective debarment of a major company
    for corruption, claiming that the ADB Anti-Corruption policy was not
    intended to have such consequences. Nevertheless, the argument for
    automatic publication of debarments is strong, I will return to it in
    my summarizing recommendations.
        Since the Anti-Corruption Unit serves a primarily reactive
    function, it is at best only one part of an effective strategy to
    address corruption. Proactive and preventative measures, as the
    Thornburgh World Bank reports stress, are equally important. The Anti-
    Corruption Unit has begun, despite its limited resources, to undertake
    proactive spot procurement audits of projects. As it is, the
    effectiveness of the Anti-Corruption Unit is also limited by the
    restrictions and limitations ADB Management and the Board have put upon
    it. For example, there appears to be a de facto rule that the Anti-
    Corruption Unit will not conduct pro-active investigations of projects
    if an Inspection Panel claim is in process or pending, nor when there
    is an ongoing government corruption investigation. But these are
    precisely the cases where there may be greater evidence of ADB
    negligence or complicity.

                      VIII. CONCLUSION AND RECOMMENDATIONS

        Mr. Chairman, Richard Thornburgh and his colleagues made the
    following observation concerning the World Bank, which I believe
    applies even more urgently to the Asian Development Bank:

              It is important to recognize that any responsible business
            would have been attempting from the time of its inception, to
            stem fraud and corruption that interfered with its mission. In
            the Bank, however, senior management began to acknowledge the
            problem openly only in 1996--after a half century of operation
            and after significant amounts had already been lost to fraud
            and corruption. The Bank has a lot of catching up to do.\56\
    ---------------------------------------------------------------------------
        \56\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
    Concerning the Proposed Strategic Plan of the World Bank's Department
    of Institutional Integrity, and the Adequacy of the Bank's Mechanisms
    and Resources for Implementing that Strategy, July 9, 2003. pp. 5-6.

        In the Asian Development Bank there is still a question as to what
    extent senior management has even ``began to acknowledge the problem.''
        We have seen the documented non-implementation of the Anti-
    Corruption Policy and Procedures and the unwillingness of ADB
    management to investigate some of the most flagrant and well-publicized
    cases. Current organizational plans at the ADB do not explicitly
    address the issue of corruption, let alone propose explicit measures to
    reduce it. One reads the ADF Eighth Replenishment Donors' Report, and
    the July 2004 draft Human Resources Policy, and comes away with the
    impression that major ``leakage'' of ADB loans and procurement abuses
    are hardly a problem. The Performance Based Allocation system at the
    ADB, in place since 2001, seems to have had little impact on
    Management's commitment to implementing the Bank's Anti-Corruption
    Procedures and to investigating controversial cases. General governance
    rankings and corresponding country lending allocations will not address
    the corrupt diversion of ADB resources if the institution itself is not
    assessing corruption risk in its own country strategy and lending
    instruments. The most positive development at the ADB has been the
    willingness to halt disbursements on two loans when the borrower was
    not adequately guarding against corruption. But such actions are
    insufficient and long overdue.
        Mr. Chairman, we believe the record of the ADB in addressing
    corruption is so poor that it would be irresponsible to authorize
    hundreds of millions of dollars for this institution--as Treasury will
    ask the committee to do in the coming year--without a clearer idea as
    to the steps ADB is taking to implement reforms that will effectively
    address corruption. Some of these reforms are elaborated as
    recommendations below.
    Recommendations
        In the course of these hearings, a number of quite detailed and
    relevant recommendations were made by other witnesses which also apply
    to the ADB. The testimony of Manish Bapna of the Bank Information
    Center (BIC) on May 13, 2004 sets forth a framework of recommendations
    which we strongly endorse. Carrying out a number of these
    recommendations would in effect simply be a matter of rigorously
    implementing the ADB's existing Anti-Corruption Policy and Operational
    Procedures on Anti-Corruption.

              A. The First recommendation of the May 13, 2004 BIC testimony
            calls for ``Evaluating Corruption Risks in Project and Sector
            Operations Explicitly.'' The ADB should rigorously implement
            its Anti-Corruption Operational Procedures to explicitly assess
            corruption risk in its country strategy programs, project
            appraisal, and project performance evaluation reports. This
            will require, as the BIC statement notes, the development of
            clear diagnostic tools and indicators for staff to conduct a
            rigorous assessment of corruption risks for different sectors
            and types of loans.

              B. The second recommendation calls for special attention to
            and methodologies for risky sectors and loans: for example,
            extractive industries (oil, mining and gas), large
            infrastructure, and private sector operations, and, we would
            add, for non-project, program loans. With respect to extractive
            industries, a comprehensive set of recommendations can be found
            in the World Bank commissioned Extractive Industries Review
            (MR). One of the most important recommendations would require
            revenue transparency concerning royalties and fees paid to
            borrowing governments by private extractive companies supported
            by the MDBs, and ensure that revenue management systems are in
            place to account for the pro-poor uses of those revenues.
              Regarding program lending, former ADB Executive Director
            Frank Black told his colleagues that the ADB, in comparison to
            the World Bank, ``has much weaker in-house capacity in managing
            programmatic lending.'' \57\ Since the ADB has increased
            programmatic lending in recent years, diagnostic tools and
            indicators to assess, monitor and address corruption risks in
            programmatic lending should be a top priority.
    ---------------------------------------------------------------------------
        \57\ Frank Black, departing Executive Director for Austria,
    Germany, Turkey and the United Kingdom, ADB, The Asian Development Bank
    (ADB): A Unique Contribution? The Effectiveness of the Financing and
    Political Role of the ADB in Reducing Poverty in The Asia/Pacific
    Region, June, 2003, p. 4.

              C. Enhancing Transparency and Disclosure is a critical
            preventative measure to reduce the likelihood of corruption in
            ADB operations. The ongoing revision of the ADB Public
            Communications Policy presents a timely opportunity for
            progress, The Bank Information Center and other NGOs have
            submitted a number of recommendations for the improvement of
    ---------------------------------------------------------------------------
            the current draft Public Communications Policy, such as:

                      1. The ADB should start by releasing more detailed
                    information on its own budget, including information on
                    its internal allocation of resources, and actual
                    expenditures and outlays. It should provide a
                    transparent, public and detailed account, for example,
                    of how the ADB will allot more budgetary and staff
                    resources for monitoring and improvement of project
                    performance and quality, including addressing
                    corruption, as opposed to loan preparation and
                    approval.

                      2. The ADB should routinely disclose documents in
                    draft form, before final decisions are made on a
                    policy, project or program. One of the main purposes of
                    disclosure, of course, is to obtain input to improve
                    the final policy, project or program.

                      3. Civil society organizations have called upon the
                    ADB to disclose Aide Memoires, documents produced
                    throughout the project cycle that outline Bank and
                    Borrowing Government agreements on steps taken in
                    project development and implementation. Disclosure of
                    Aide Memoires would be particularly useful in the anti-
                    corruption fight by providing interested and affected
                    civil society groups information on specific
                    commitments their governments are supposed to be
                    undertaking with ADB money. It should be pointed out
                    that the IMF now discloses Country Letters of Intent,
                    which are documents in which governments describe what
                    steps and measures they have committed themselves to
                    under IMF Standby Agreement loans.

                      4. The proceedings of the Board of Directors should
                    be open to the public. Transcripts and summaries should
                    be publicly available. This would be very important
                    step towards holding the Board itself more accountable
                    for oversight, including fiduciary oversight, of ADB
                    operations. As noted by former ADB Executive Directors
                    Baker and Black, the Board is too often divided and/or
                    weak in performing its basic oversight duties. Great
                    transparency of its proceedings will help create
                    incentives for better and more effective Board
                    performance.

                      5. Greater access to information for project
                    beneficiaries and affectees will also be an added brake
                    on corruption. The ADB must make translation of certain
                    documents (pertaining to project planning and
                    implementation stages) mandatory, and must employ more
                    proactive means of seeking opinions of those who stand
                    to gain or lose from the ADB's interventions .

                      6. Finally, access to information needs to be better
                    organized and centralized: all relevant project
                    information should be collected on a single place on
                    the Bank's website; and ADB public information centers
                    need to be established in all its borrowing countries.

              D. Changing the internal culture and institutional
            incentives. This is perhaps the most important and challenging
            issue. The main vehicle at present for advancing this agenda
            appears to be the new Human Resources Strategy. Yet, as noted,
            drafts of the policy have almost no reference to corruption nor
            specifics on how staff would be evaluated in addressing the
            issue. The committee should ask for clarifications from
            Treasury on exactly how the new Human Resources Strategy will
            systematically address corruption risks in ADB operations.
              For example, there are specific well-designed ``business
            tools'' that the ADB and other MDB staff could and should be
            required to use to guard against corruption. Transparency
            International in the U.K. has developed a number of check-lists
            and questionnaires for use in banks and international agencies
            conducting due diligence in the Construction and Engineering
            Industry. A recurring problem in international procurement is
            the use of corrupt agents to win contracts for bidders.
            Transparency International, U.K. has developed a comprehensive
            ``Agency Questionnaire'' along with a guide to evaluating
            answers with respect to likely indicators of corruption (see
            www.transparency.org.uk).
              Finally, ADB Management's decisions in areas besides the
            Human Resources Strategy, such as the allocation of resources
            and staff for implementation of the Anti-Corruption Policy,
            decisions to release more information as described in sub-
            section C, decisions to proactively investigate corruption
            scandals, and to halt loan disbursements in certain cases, will
            be indicators of a changed internal culture.

              E. Galvanizing the Board in its Oversight and Fiduciary
            Duties: Stephen Baker described his first impressions when he
            assumed is position as an Executive Director as frustrating
            ones: ``The impression gained was that the role of the Board
            was restricted merely to endorsement of management initiatives.
            . . . During casual discussions with staff it became apparent
            that the Board was regarded by some as more of a liability than
            an asset, or to quote, `a waste of money.' '' \58\ Frank Black,
            another departing Executive Director, told his colleagues in
            June last year that ``while virtually all donor and some
            borrowing shareholders have concerns about the Bank's internal
            governance and a commitment to promoting institutional reform,
            the Board, at least as it operates at present, does not provide
            sufficient impetus.'' \59\
    ---------------------------------------------------------------------------
        \58\ Stephen Baker, ADB--Wherefore art thou? (reflections of a
    board member who spent 3 interesting years with the Bank), February,
    2001, p. 1.
        \59\ Frank Black, departing Executive Director for Austria,
    Germany, Turkey and the United Kingdom, ADB, The Asian Development Bank
    (ADB): A Unique Contribution? The Effectiveness of the Financing and
    Political Role of the ADB in Reducing Poverty in The Asia/Pacific
    Region, June, 2003, p. 8.
    ---------------------------------------------------------------------------
              Although we believe that the U.S., along with some other
            shareholders, has tried to galvanize the ADB Board to ensure
            better oversight, we believe that the Board has failed to get
            management to adequately carry out its fiduciary duties. One of
            the most important things the U.S. could do to create
            incentives for the Board to improve its own focus and that of
            management, would be to promote the improved information
            disclosure measures mentioned above, especially the full and
            timely disclosure of all Board proceedings and transcripts.

              F. Changes in the Debarment Process: In the July 21, 2004
            hearing before this committee, Treasury Undersecretary John
            Taylor made two recommendations regarding debarment of corrupt
            companies which we strongly endorse. First is the automatic
            publication of debarred companies in the ADB and other MDBs.
            There is simply no good excuse for the ADB practice (we believe
            this is true in the IDB also) of keeping the names of debarred
            companies and individuals anonymous. In the words of Richard
            Thornburgh and his associates:

                      The greatest proponents of public disclosure are
                    [World] Bank employees with field experience involving
                    procurement issues they favor as widespread a
                    dissemination as possible . . . As noted by another
                    [Bank staffer] lecturing by the Bank against corruption
                    will not work by itself, ``fear must be placed in the
                    hearts'' of those willing to give or take a bribe, One
                    of the few things that can provoke such fear is the
                    prospect of a public debarment.\60\
    ---------------------------------------------------------------------------
        \60\ Dick Thornburgh, Ronald L. Gainer, Cuyler H. Walker, Report
    Concerning the Debarment Processes at the World Bank, August 14, 2002,
    pp. 82-83.

              The second recommendation is cross-debarment from all the
            MDBs when a company has been debarred from one of them. It
            would be entirely illogical, and counter-productive, for one
            MDB to go to the cost and effort of an investigation resulting
            in the debarment of a company for corruption, while the same
            company would still be able to do business with its sister
            institutions--indeed, in some cases, sister institutions
            working in the same region or country. Moreover, public cross-
            debarment would have a still more leveraged deterrence effect
            for other potential bribers and bribees.
              If the company is a U.S. one, it should also be debarred from
            doing business with other U.S. agencies operating abroad,
            including USAID, the U.S. Export-Import Bank, and the Overseas
            Private Investment Corporation. Through the OECD Development
            Assistance Committee (DAC) and the OECD Working Group on Export
            Credits, the U.S. should also seek similar cross-debarment
            commitments for the bilateral aid agencies and export credit
            agencies of other donor nations.

              G. Greater Readiness to Halt Loan Disbursements When
            Government Borrowers Are not Addressing Corruption: As noted
            earlier, this is one of the strongest signals the ADB can send
            that it is serious about corruption. One occasionally hears
            concerns that slowing lending and halting disbursements for
            whatever reason will have a negative development impact, since
            it may increase the number of governments that are paying more
            money back to the ADB than they are receiving in new loan
            disbursements. But lending more to indebted governments of poor
            countries when substantial percentages of loans are being
            diverted is unconscionable, saddling nations with a debt that
            is increasingly viewed as illegitimate. It is also a violation
            of the most basic fiduciary duty in the ADB's charter; namely,
            to ensure loans are used for the purposes intended.

              H. Strengthening the Anti-Corruption Unit: We noted that the
            ADB Anti-Corruption Unit is much smaller in proportion to the
            Asian Development Bank than the Department of Institutional
            Integrity (INT) is to the World Banks In coordination with
            other ADB Board members, the U.S. should call for an increase
            in staffing and resources for the Anti-Corruption Unit, so that
            its resources are least proportionally closer to those of INT
            in the World Bank. This would probably mean, for example, an
            increase of staff size from five to around fourteen.
              The Anti-Corruption Unit should be no longer hindered from
            undertaking anti-corruption investigations, whether in response
            to a complaint or proactively, in cases where there may be
            ongoing Inspection Panel investigations or in-country
            government corruption investigations.
              The Anti-Corruption Unit should be given more resources to
            conduct more numerous and frequent proactive spot corruption
            and procurement investigations, something which it did for the
            first time last year in Sri Lanka and is currently planning in
            Viet Nam.

              I. Proactive, Independent Forensic Audits of Corruption for
            the Thailand Samut Prakarn and Sri Lanka Southern Transport
            Development Projects: The ADB's failure to investigate the
            blatant evidence of corruption and procurement irregularities
            in the Thailand Samut Prakarn Wastewater Treatment Plant and
            Sir Lanka Southern Transport Development Project is
            particularly disturbing. No one appears to be held accountable
            in the ADB for the blatant mismanagement of these projects, nor
            does the institution appear to have learned much from the
            corruption aspects of these cases, since the ADB itself has not
            conducted a thorough corruption investigation in either
            instance. We would recommend that the committee call upon
            Treasury to request ADB management to commission independent
            corruption investigations of these projects, whether through
            the Anti-Corruption Unit or outside consultants. We believe
            that the lessons learned would greatly inform wider range
            efforts to change staff incentives vis a vis corruption, and
            prevent such abuses from occurring in the future.
              It is also imperative that ADB management find some means of
            delivering restitution and assistance for the communities that
            have been adversely affected by the mismanagement of these two
            projects. The affected communities in these two ADB projects
            are truly ``corruption refugees.''

        The Chairman. Well, thank you very much, Mr. Rich, for your
    testimony and your very comprehensive statement that
    accompanies it.
        Dr. Ayittey.

    STATEMENT OF GEORGE AYITTEY, PH.D., DISTINGUISHED ECONOMIST IN
         RESIDENCE, ECONOMICS DEPARTMENT, AMERICAN UNIVERSITY,
                            WASHINGTON, D.C.

        Dr. Ayittey.  Mr. Chairman, I am extremely grateful and
    very deeply honored to be asked to testify before your
    committee regarding corruption and the African Development
    Bank.
        I have been one of those angry Africans who have been
    involved in development of the continent for the past 30 years
    or more. The reason why I use the term ``angry'' is because
    over the past 4 decades or so, all sorts of western
    organization multilateral development banks have pumped more
    than $500 billion to try and encourage or spur development in
    Africa. But all these efforts have produced very little
    results. As a matter of fact, Africans today are worse off than
    they were in 1960 when they gained their independence from
    colonial rule.
        Now, there is something maddening about all this. We are
    talking about a continent which is tremendously rich in mineral
    resources. There is no need, there is no reason why Africans
    should be mired in poverty as they are today.
        Now, another aspect of this is that not only have American
    taxpayers wasted their money, but Africans are left with the
    bill to pay. I mean, they are responsible to repay the loans
    that were taken to spur development. If American taxpayers want
    to throw away their money, they should not ask the African
    people to pay it back.
        I would like to sort of focus on the African Development
    Bank because that is where the continent's real problems are
    sort of situated. I should mention that the structure of the
    operations of the African Development Bank is different from
    the Asian or the other regional development banks because the
    African Development Bank deals directly with governments. As a
    matter of fact, about 98 percent of its loans is granted to
    government ministries and agencies. Now, the African
    Development Bank is not really involved in the contracting out
    of these loans for the projects. It just approves the
    application and the funds go to governments, and the
    governments are responsible for ensuring that contracts are
    subjected to international bidding, et cetera. So within the
    African Development Bank itself, there is a limited scope for,
    say, corruption or kickbacks and bribery and receiving
    commissions, for example. So if we are looking for the reasons
    why the corruption has sort of been responsible for the
    nonperformance of the bank's portfolio, we need to look more
    elsewhere.
        The bank's overall portfolio has not performed very well to
    achieve its intended objectives. I went to the bank's web site
    and the latest information I could get was for 1997 for its
    portfolio performance. For that year, 31 percent of the bank's
    entire portfolio was considered to be problem projects. 31
    percent problem projects. And the worst part was that of the
    ongoing projects, 40 percent of them were considered to be at
    risk which, if you add the two percentages up, it means that
    more 70 percent of the bank's portfolio is not performing.
        Now, as I indicated earlier, corruption within the bank
    itself is not one of the main culprits. The main culprits lie
    elsewhere. The first of these is that the bank, like the World
    Bank, has been a victim of the environment in which it
    operates. It operates in what I call a sea of coconut republics
    where government does not exist. What we have in many African
    countries is a government which has been hijacked by a phalanx
    of thugs and bandits who choose the instrument of the state to
    enrich themselves, their cronies, their tribesmen, and exclude
    everybody else. I call this a vampire state. I have inserted in
    my testimony the wealth and the personal fortunes of many of
    Africa's autocrats. Some of them are worth more than billions
    and billions of dollars. As a matter of fact, the President of
    Nigeria, Obasanjo, himself claimed that corrupt African leaders
    have stolen at least $140 billion from their people since
    independence.
        And foreign aid has not been spared either. Let me quote
    you what The Economist magazine wrote, that for every $1
    foolish westerners lent Africa between 1970 and 1996, 80 cents
    of that flowed out of Africa as capital flight and typically
    into Swiss ban accounts to buy mansions on the Cote d'Azur in
    France, for example, which meant that 80 percent of the loans
    or the aid that foolish westerners gave Africa never got to the
    people. It flowed right out of Africa.
        And the former British assistant secretary of state for
    international development, Lynda Chalker, revealed that 40
    percent of the wealth created in Africa is invested outside the
    continent.
        Now, last month the African Union revealed that Africa
    loses an estimated $148 billion due to corruption annually.
    Now, if you take the amount that Africa loses to corruption,
    that is 100 times more than what Africa receives in aid even
    from all sources.
        Now, it is in this environment that the African Development
    Bank has to operate. Now, over 95 percent of its clients are
    government ministries and agencies. In 2003, last year, 121
    project loans were approved by the African Development Banks,
    and 98 percent of all those loans went to government ministries
    and agencies. So far this year and at its web site, the African
    Development Bank says that 19 project loans have been approved,
    as posted on its web site, but only 2--only 2 of them--went to
    non-government borrowers.
        Now, there has been some mission creep within the African
    Development Bank. The bank often deals with what we call crafty
    bandits who sort of hijack and sort of pervert such buzzwords
    as ``development,'' ``democracy,'' ``foreign investment,''
    ``rule of law,'' et cetera. To them ``development'' means
    developing their pockets and seeking foreign investment means
    investing the loot in a foreign country.
        Now, these guys are not very serious about policy reform.
    You ask them to privatize inefficient government-owned
    enterprises, and they will sell them to themselves and to their
    cronies.
        You ask them to respect the rule of law, and they will bend
    the law to respect their whims. In Zimbabwe, for example, The
    Economist writes that it is the thieves who are in charge and
    their victims face prosecution.
        You ask them to trim the bloated bureaucracies that they
    have, and what they will do is they will set up a government of
    less government intervention.
        You ask them to promote private enterprise, and they will
    set up a ministry of private enterprise.
        Now, this kind of chicanery is what has stymied reform and
    growth in Africa.
        You notice that ever since September 11th when the U.S.
    declared war on terrorism, many of Africa's autocrats are also
    fighting against terrorism when they themselves are the real
    state terrorists. Even Charles Taylor of Liberia once claimed
    that he was fighting against terrorism. He even set up an anti-
    terrorist unit. And you also have regimes in Sudan, in Zimbabwe
    all fighting terrorism.
        In other words, the point which I want to get across is
    that they take such buzzwords and then pervert it and use it as
    bona fide. The African Development Bank is often duped by these
    gangster regimes and co-opted to become an extension of their
    treasury. The bank's original mission has become so elastic
    that it has lost its meaning. The terms ``poverty reduction''
    and ``capacity building'' have been perverted and corrupted by
    governments to define every project submitted to the bank for
    funding. Currently the bank has approved a loan for capacity
    building of rural women in Ethiopia, whatever that means. There
    are many other examples and I have compared these examples,
    which I took from their web site in January of this year.
        The African Development Bank in Djibouti signed a loan
    agreement to finance basic health services. There is also
    another loan to Senegal to support private sector adjustment
    support program. The details are there. In Sudan, for example,
    the African Development Bank is providing institutional support
    to government for poverty reduction. In Tanzania, the African
    Development Bank is also providing institutional support in the
    ministry of finance. In Ghana, you have a poverty reduction
    support.
        There are many, many flaws and conceptual problems with
    this. Number one, if you give loans to African governments and
    you are reinforcing the status economic development approach
    which has failed Africa miserably. By status development
    approach, I mean the state-led development effort. We are not
    encouraging the private sector. You are reinforcing this notion
    that it is the state which must initiate development. That is
    the first wrong with this particular approach. Now, the African
    Development Bank should be giving more loans to the private
    sector, not to the government.
        The second problem is that allocating more African
    Development Bank loans to the state or the modern sector simply
    defies common sense. Africa is made up of three sectors. There
    is the modern sector, and there is the traditional sector, and
    there is the informal sector. The vast majority of the African
    people live in the informal and the traditional sectors.
    Agriculture is their main occupation. You cannot develop Africa
    by ignoring the informal and the traditional sector, nor can
    you develop the informal and the traditional sectors if you do
    not understand how they operate. But you see these are the
    very, very two sectors which African governments neglected
    after independence.
        The African Development Bank is repeating the same error.
    As a matter of fact, if you look at the bank's own commitment
    to agriculture, it has remained low at 18.5 percent of its
    total portfolio. And the agricultural portfolio's performance
    has been the worst. The bank itself says this: ``Performance of
    the agricultural portfolio is below the bank's average
    performance. In 1997, 16 percent of the 142 agricultural sector
    projects were rated as problem projects, and 23 percent of the
    agricultural sector projects were rated as unlikely to attain
    their developmental objectives.''
        Now, is it is also debatable whether the African
    Development Bank should be in the humanitarian or the relief
    assistance business at all. Another additional problem is that
    the African Development Bank in providing loans for basic
    programs such as education, health care is of concern because
    these are basic services which normal governments should be
    providing to their citizens out of normal tax receipts, and in
    normal circumstances the African Development Bank should not be
    in this particular business.
        And more worrisome is the fact that the African Development
    Bank is becoming increasingly involved in the policy reform
    area. It is of increasing concern because African autocrats are
    simply not interested in reform. Period. The reason why I am
    saying this is because billions of dollars have been spent by
    the World Bank, the multilateral institutions, foreign donors
    to try and bribe and cajole recalcitrant despots to implement
    economic and political reform.
        Now, the democratization process in Africa has stalled.
    Back in 1990, there were four democracies, and after the
    collapse of the Soviet Union, there was a wave of
    democratizations throughout the continent. The number of
    democracies rose. Now it is stuck at 16 out of 54 African
    countries, which means that tyranny remains the order of the
    day in Africa. The autocrats are simply not interested in
    reform.
        The record on economic reform is even worse. The World Bank
    itself spent $25 billion trying to persuade African governments
    to restructure their economies. And over the period of time,
    1981 to 1991, the World Bank said out of the 29 adjusting
    African countries, only 6 of them have been successful, which
    means that 6 out of 29 gives a failure rate of more than 80
    percent. So the policy reform area is not the area where the
    African Development Bank should be. Even the World Bank tried.
    It could not succeed. Occasionally, the World Bank comes up
    with a phantom list of success stories, only for the list of
    countries to disappear in a year or 2.
        Now, the other problem that the African Development Bank
    has is that it does not have enforcement mechanisms. It
    responds feebly. It can set up anti-corruption conferences, and
    indeed it has. But its missions in various African countries
    are only manned by a skeleton staff which cannot enforce
    anything at all. But even if it tries to enforce strict
    accountability rules, it will clash with domestic governments
    and may be seen as interfering in the domestic affairs of these
    various governments. So it can only take tepid steps, such as
    holding conferences and workshops on corruption and withdrawing
    from the Lesotho water project, which was riddled with
    corruption. You cannot have reform in the bank itself without a
    concomitant reform of the environment within the bank operates.
        Now, I would like to make a couple of suggestions in terms
    of improving bank operational efficiency assuming that there is
    nothing that can be done to clean up the environment within
    which the bank operates.
        First of all, the bank's scope of operations needs to be
    limited. The original objective of promoting regional
    development to meet especially energy needs has been submerged
    in favor of a far more expansive objective.
        Right now, the mission of the bank has even crept even
    further to embrace NEPAD. Now, NEPAD is badly structured. NEPAD
    is the New Partnership for Africa's Development. It is badly
    structured, badly structured because it was modeled after the
    Marshall aid plan, and number two, African civil society, the
    people were not consulted when this document was put together.
    Yet, the African Development Bank wants to invest $372.5
    million in NEPAD.
        Now, for real development to take place in Africa, the
    African Development Bank should limit--and this is my own
    suggestion--to 20 percent its portfolio lending to African
    government ministries and agencies. The focus should be on the
    private sector, not on the government sector.
        Now, second, it should also limit its lending to countries
    on the verge of implosion. The African Development Bank was
    headquartered in Ivory Coast, and the country blew up. And when
    the country blew up, the African Development Bank had moved to
    Tunisia. Liberia, Sierra Leone, for example, the African
    Development Bank had many projects there. When those countries
    blew up, the African Development Bank lost all those loans used
    to fund those projects.
        Now, number three, the African Development Bank should
    focus on the informal and the traditional sectors. That is
    where the real people of Africa are, and they want to help
    themselves. All they need is a small, micro-credit finance.
    Now, I have indicated in my testimony such small micro-finance
    projects which were funded, one of them in Bamako to a certain
    woman who was unemployed and she set up a local small business
    with a loan of just $50 from Oxfam. Just $50. Now she is able
    to operate and open up her own bank for rural women.
        Now, there is another success story in Senegal also funded
    by Christian Aid, another one in Ethiopia funded by Action Aid
    for Development. These are small, small projects which help the
    real people. That is the area where the African Development
    Bank should be, not lending money to crooked governments in
    Africa.
        Thank you.

        [The prepared statement of Dr. Ayittey follows:]

                Prepared Statement of George B.N. Ayittey, Ph.D.

        I am extremely grateful and honored to be called upon to testify
    before the Senate Foreign Relations Committee again--my second time in
    two years--regarding corruption and the activities of the African
    Development Bank.
        For the past 30 years or more, I have been actively involved in the
    promotion of genuine, grass-roots development in Africa for the obvious
    reason that, not only am I an African but the African continent remains
    the least developed in the Third World in spite of immense mineral
    wealth. Therefore, African development remains close to my heart.
        Over the past four decades since independence in the 1960s, all
    sorts of foreign aid agencies and multi-lateral development banks
    (MDBs), including the World Bank and the African Development Bank have
    been involved in Africa's development, pumping more than $500 billion
    into Africa. But the results have been negligible. Most Africans are
    worse off today than they were at independence in the 1960s. Much of
    the funds came in the form of soft loans, for which the African people
    are liable to repay. Africa's total foreign debt today stands at $350
    billion. There is something maddening about this state of affairs.
    American taxpayers not only wasted their money but we Africans have to
    repay for loans from which we derived little or no benefit. Obviously,
    something has gone fundamentally wrong with these MDB loan programs.
    This year American taxpayers are going to shell out $1 billion to the
    MDBs. You can throw American taxpayers money away but don't ask the
    suffering African people to pay it back.
        I would like to focus my testimony today on the African Development
    Bank loan programs and begin by making a few key points. I will then
    follow with additional elaboration. These points ar more fully
    developed in a paper I will submit for the Record.

    1. Overall Performance of AfDB Loan Portfolio
        AfDB lending programs have not performed well to achieve their
    intended objectives. The Bank is slow in updating information at its
    website. The latest that it has at its website for its portfolio
    performance is for 1997. For that year, 31 percent of the Bank's entire
    portfolio was considered ``problem projects'' and unlikely to attain
    their development objectives. Worse, of the on-going projects, 40
    percent were considered to be at risk. This means that over 70 percent
    of the Bank's portfolio is ``non-performing.''
        Corruption within the African Development Bank--kickbacks, bribery,
    and commissions on projects--are difficult to document or prove due to
    their illegality, although nepotism, administrative and staff problems
    are known to pervade the AfDB. But these are not the main culprits
    behind the poor performance of the Bank's portfolio.

    2. The Environment of Corruption, Collapsed States and Coconut
            Republics
        Rather, AfDB--like the World Bank--has been a victim of the
    environment in which it operates. The Bank operates in a sea of
    ``coconut republics'' where ``government'' does not exist. What exists
    is a ``vampire state,'' where the machinery of the state has been
    hijacked by a phalanx of gangsters and thugs to enrich themselves,
    their cronies, tribesmen and exclude everyone else. The richest persons
    are heads of state and their ministers and quite often the head of
    state himself is the chief bandit. In 1997, the fortunes of African
    heads of state were published by French Weekly (May, 1997) and
    reprinted in the Nigerian newspaper, The News (August 17, 1998):

     1. General Sani Abacha of Nigeria 120 billion FF (or $20 billion)

     2. President H. Boigny of Ivory Coast 35 billion FF (or $6 billion)

     3. Gen. Ibrahim Babangida of Nigeria 30 billion FF (or $5 billion)

     4. President Mobutu of Zaire 22 billion FF (or $4 billion)

     5. President Mousa Traore of Mali 10.8 billion FF (or $ $2 billion)

     6. President Henri Bedie of Ivory Coast 2 billion FF (or $300 million)

     7. President Denis N'guesso of Congo 1.2 billion FF (or $200 million)

     8. President Omar Bongo of Gabon 0.5 billion FF (or $ $80 million)

     9. President Paul Biya of Cameroon 450 million FF (or $70 million)

    10. President Haile Mariam of Ethiopia 200 million FF (or $30 million)

    11. President Hissene Habre of Chad 20 million FF (or $3 million)

        Speaking to representatives of African civic groups meeting in the
    Ethiopian capital, Addis Ababa, to prepare the African Union to be
    launched in South Africa, Nigeria's President, Olusegun Obasanjo, said
    that ``corrupt African leaders have stolen at least $140 billion
    (95 billion) from their people in the decades since
    independence'' (The London Independent, June 14, 2002; web posted).
        Foreign aid has not been spared, either. Says The Economist (Jan.
    17, 2004): ``For every dollar that foolish northerners lent Africa
    between 1970 and 1996, 80 cents flowed out as capital flight in the
    same year, typically into Swiss bank accounts or to buy mansions on the
    Cote d'Azur'' (Survey; p. 12). At the Commonwealth Summit in Abuja,
    Nigeria on December 3, 2003, former British secretary of state for
    international development, Rt. Hon. Lynda Chalker, revealed that 40 per
    cent of wealth created in Africa is invested outside the continent.
    Chalker said African economies would have fared better if the wealth
    created on the continent were retained within. ``If you can get your
    kith and kin to bring the funds back and have it invested in
    infrastructure, the economies of African countries would be much better
    than what there are today, she said (This Day [Lagos], Dec 4, 2003). On
    October 13, 2003, Laolu Akande, a veteran Nigerian freelance
    journalist, wrote that:

              Nigeria's foreign debt profile is now in the region of $25-
            $30 billion, but the president of the Institute of Chartered
            Accountants of Nigeria, ICAN, Chief Jaiye K. Randle, himself an
            eminent accountant and social commentator has now revealed that
            individual Nigerians are currently lodging far more than
            Nigeria owes in foreign banks. With an estimate he put at $170
            billion it becomes immediately clear why the quest for debt
            forgiveness would remain a far fetched dream.'' (http://
            nigeriaworld.com/columnist/laoluakande/articles.html)

        In August 2004, an African Union report claimed that Africa loses
    an estimated $148 billion annually to corrupt practices, a figure which
    represents 25 percent of the continent's Gross Domestic Product (GDP).
    ``Mr. Babatunde Olugboji, Chairman, Independent Advocacy Project, made
    this revelation in Lagos while addressing the press on the survey
    scheduled to be embarked upon by the body to determine the level of
    corruption in the country even though Transparency International has
    rated Nigeria as the second most corrupt nation in the world''
    (Vanguard, Lagos, Aug 6, 2004. Web posted at www.allafrica.com).
        This is the environment in which the AfDB operates and over 95
    percent of its clients are ministries and agencies of these
    ``governments.'' In 2003, 121 project loans were approved by the AfDB;
    98 percent went to government ministries and agencies. So far this
    year, 19 project loans have been approved, as posted at its website;
    only two went to non-government borrowers.

    3. Mission Creep and Problem Portfolio
        The Bank often deals with crafty bandits, who hijack and corrupt
    such buzzwords as ``development,'' ``democracy,'' ``foreign
    investment,'' and ``rule of law.'' ``Development'' to the ruling
    vampire elites means developing their pockets and they seek ``foreign
    investment'' by investing the loot in foreign bank accounts.
        Ask them to privatize state enterprises and they would sell the
    companies to themselves and their cronies at fire-sale prices. In 1992,
    in accordance with loan conditionalities, the Government of Uganda
    began a privatization effort to sell-off 142 of its state-owned
    enterprises. However, in 1998, the process was halted twice by Uganda's
    own parliament because, according to the chair of a parliamentary
    select committee, Tom Omongole, it had been ``derailed by corruption,''
    implicating three senior ministers who had ``political responsibility''
    (The East African, June 14, 1999). The sale of these 142 enterprises
    was initially projected to generate 900 billion Ugandan shillings
    (Ushs) or $500 million. However, by the autumn of 1999 the revenue
    balance was only 3.7 billion Ushs.
        Ask them to respect the rule of law and they would rather bend the
    law to respect their whims. In January 2000, the ruling party's
    (KANU's) gang of thugs known as Jeshi la Mzee (``the old man's army''),
    attacked a group of opposition leaders outside parliament who were
    protesting against the resumption of IMF assistance. ``It was the
    protesters, not the thugs, who were arrested'' (The Economist, Feb 5,
    2000; p. 42). Said The Economist (March 16, 2002): ``In Zimbabwe, the
    thieves are in charge and their victims face prosecution'' (p. 18).
        Ask them to trim their bloated bureaucracies and limit government
    intervention in the economy and they will establish a ``Ministry of
    Less Government Intervention.'' Ask them to establish a market-based
    economy and place more emphasis on the private sector and they will
    create a ``Ministry of Private Enterprise,'' as Ghana did in 2002.
        Ask them to establish democratic pluralism and they will create
    surrogate parties, appoint their own Electoral Commissioners, empanel a
    gang of lackeys to write the constitution, inflate the voter's
    register, manipulate the electoral rules and hold coconut elections to
    return themselves to power. Even African children could see through
    this chicanery and fraud. Said Adam Maiga, from Mali: ``We must put an
    end to this demagoguery. You have parliaments, but they are used as
    democratic decoration'' (BBC News website, May 10, 2002).
        Ever noticed that since September 11, 2001 and the U.S. declaration
    of ``war on terrorism,'' all sorts of African despots have also claimed
    to be fighting terrorism in order to win U.S. sympathy and aid? Never
    mind that these tyrants are themselves the real state terrorists! The
    regimes of Omar Bashir of Sudan, Yoweri Museveni of Uganda and Robert
    Mugabe of Zimbabwe were all fighting terrorists! Even former President
    Charles Taylor of Liberia established an Anti-Terrorist Unit to
    terrorize the people!!
        Aided by a gaggle of intellectual collaborators, they resist any
    attempt at reform. Reform becomes a charade, the rule of law a farce.
    Eventually, the coconut republic implodes: Somalia (1993), Rwanda
    (1994), Burundi (1995), Zaire (1996), Sierra Leone (1997), Liberia
    (1999), and even Ivory Coast (2000), where the AfDB was headquartered.
        The AfDB is often duped by these gangster regimes and co-opted to
    become an extension of their treasury. The Bank's original mission has
    now become so elastic that it has lost its meaning. The terms--
    ``poverty-reduction'' and ``capacity building'' have been perverted or
    corrupted by these governments to define every project submitted to the
    Bank for funding. Currently, the Bank has approved a loan for
    ``capacity building of rural women in Ethiopia''--whatever that means.
    Here are some examples of projects of dubious value that are being
    funded in 2004 by the AfDB posted at its website (www.afdb.org):

       Jan 15: AfDB and Djibouti Sign Loan and Grant Agreements
            totaling the Equivalent of US$ 5.94 Million to finance the
            Basic Health services Reinforcement Project (Health I Project);

       Jan 16: AfDB and Senegal Sign a US$ 35.67 Million Loan
            Agreement to finance the Private Sector Adjustment Support
            Program (PSASP) in Senegal;

       March 5: In response to the deadly earthquake, which
            occurred in the Al Hoceima region on 23 February 2004, the AfDB
            provided, through an accelerated procedure, an emergency grant
            of $500,000 to Morocco. The assistance, obtained from the
            Special Emergency Relief Fund of the AfDB, was intended to meet
            part of the foreign currency cost of humanitarian aid for the
            victims of the earthquake;

       March 17: AfDB approves a Loan and a Grant of $37 Million to
            finance Healthcare Development in the Democratic Republic of
            Congo;

       March 17: AfDB approves a Loan and a Grant of $7.74 Million
            to finance the Education Sector Support Project in the
            Democratic Republic of Congo;

       March 31: AfDB Provides Education Sector Support To Chad;

       April 12, 2004: AfDB, Liberia sign humanitarian emergency
            grant agreement; and

       May 5, 2004: AfDB and Tunisia sign a loan agreement for
            railway infrastructure modernization.

    Sudan
        The AfDB is providing ``Institutional Support to the Government for
    Poverty Reduction.'' The project has two main components, namely, (a)
    Short-term training courses for Government personnel from the Ministry
    of Finance and National Economy and Social Sector Ministries, and the
    carrying out of short-term studies in key policy areas; and (b) the
    provision of technical assistance and (c) Computer & office equipment.
        AfDB is also providing ``Humanitarian Emergency Relief Support to
    the Victims of the 2003 Floods'' in Sudan. The proposed humanitarian
    relief assistance entails the provision of kits to prevent cholera and
    water-borne diseases, drugs and supplies, spraying equipment and
    chemicals for environmental sanitation. It will complement the
    assistance provided by other donors in different areas of need.

    Tanzania
        AfDB is funding the following projects:

              Rural Marketing Program involving the following components:
            (i) Market infrastructure and facilities; (ii) Market
            organization; (iii) Marketing information and communication
            systems; (iv) Agricultural marketing policy and regulations and
            (v) Extension, research and training.

              Support for Strategic Plan Action Plan for Vocation &
            Technical Education Project. The project consists of the
            following 4 components: (i) Upgrading renovation & construction
            of vocational training centers; (ii) Improvement of the quality
            in Graphic School; (iii) Curriculum & Staff development and
            (iv) Project management. Environmental Category II.

              Institutional Support in the Ministry of Finance. The
            projects will consist of the following components: (i) Aid
            information management system; (ii) Training (short-term
            courses, workshops and study tours); (iii) Purchase of vehicles
            & computers; (iv) Strengthening the Government technical audit
            systems and (v) Provision of technical support to the ADB Desk
            Office.

    Ghana
        AfDB is funding the following projects:

              Emergency Relief to Drought Victims;

              Health Services Rehabilitation III--The project will comprise
            the following components: (i) strengthening district health
            services; (ii) support to the national blood bank; (iii)
            support to the national HIV/ AIDS control program and (v)
            support to the Project Management Unit;

              Senior Secondary School Support Project III--The key
            components are: (a) Expand access; (b) Improve quality of
            Teaching and Learning; (c) Management Efficiency; and

              Poverty Reduction Support.

        There are many conceptual and practical problems with many of these
    loan projects. First, loans to African government ministries and
    agencies for development purposes reinforces the statist (state-led)
    development approach that has failed miserably in Africa. Africa's post
    colonial history shows that the vampire state has been the major
    obstacle to development. Why should the AfDB be providing more loans to
    the state and not the private sector where wealth is created?
        Second, allocating more AfDB loans to the state or modem sector
    defies common sense. There are three Africas: modem, informal, and
    traditional Africa. They do not operate by the same logic and rhythm.
    The vast majority of the African people live in the informal and
    traditional sectors. Agriculture is the main occupation of the people.
    Africa cannot be developed by ignoring the two sectors; nor can they be
    developed without understanding how they work. But these were precisely
    the two sectors African leaders and elites neglected. The AfDB is
    repeating this error. The Bank's commitment to agriculture has remained
    low at 18.5 percent of its total portfolio and its agricultural
    portfolio's performance has been the worst. ``Performance of the
    agricultural portfolio is below the Bank's average performance. In
    1997, 16 percent of 142 agricultural sector projects were rated as
    problem projects with respect to implementation progress (IP). Twenty-
    three percent of the agricultural sector projects were rated unlikely
    to attain their development objectives (DO)'' (Agricultural and Rural
    Sector Policy, 2000. Posted at http://www.afdb.org/projects/polices/
    pdf/agri_policy_apr2000.pdf?nl=7&n2=1&n3=00.
        Third, it is debatable whether AfDB should be in the humanitarian
    relief assistance business, but the increasing provision of Bank loans
    for basic programs such as education and health care is of concern.
    These are services which a normal government should provide its
    citizens out of tax receipts under normal circumstances. But then
    again, a normal government does not exist in much of Africa. Of more
    immediate concern, however, is the increasing involvement of the AfDB
    in the ``policy reform'' area.
        Billions of dollars were spent by the World Bank, multi-lateral
    institutions and foreign donors to bribe or cajole recalcitrant African
    despots to implement political and economic reform. But the
    democratization process, which gained momentum after the collapse of
    communism in 1989 has been stalled or reversed by political chicanery
    and strong-arm tactics. In 1990, only 4 of 53 African countries were
    democratic. This tiny number grew to 15 in 1995 but shrank somewhat to
    13 in 1997 and bounced back 1016 in 2004: Botswana, Benin, Cape Verde
    Islands, Ghana, Kenya, Madagascar, Malawi, Mali, Mauritius, Nainibia,
    Nigeria, Sao Tome & Principe, Senegal, Seychelles, South Africa and
    Zambia. Even then, the application of a rigorous definition of
    ``democracy'' would reduce this number. Besides periodic elections,
    democracy requires a constitution that is freely negotiated, a neutral
    and independent media, an independent judiciary, an independent central
    bank, as well as a neutral and professional armed forces--requirements
    which some of the ``democratic'' countries listed above would fail to
    satisfy.
        The record of economic reform sponsored by the World Bank and the
    IMF is even more dismal. According to UNCTAD (1998), ``Despite many
    years of policy reform, barely any country in the region has
    successfully completed its adjustment program with a return to
    sustained growth. Indeed, the path from adjustment to improved
    performance is, at best, a rough one and, at worst, disappointing dead-
    end. Of the 15 countries identified as `core adjusters' by the World
    Bank in 1993, only three (Lesotho, Nigeria and Uganda) are now
    classified by the IMF as `strong performers' '' (p xii).
        The World Bank itself evaluated the performance of 29 ``adjusting''
    African countries it had provided more than $20 billion in funding over
    the ten-year period, 1981-1991. Its report, Adjustment Lending in
    Africa, released in March 1994, concluded that only six African
    countries had performed well: The Gambia, Burkina Faso, Ghana, Nigeria,
    Tanzania, and Zimbabwe. It may be noted that 6 out of 29 gives a
    failure rate in excess of 80 percent. More distressing, the World Bank
    observed that ``no African country has achieved a sound macro-economic
    policy stance'' (p.6). Barely a year later, however, this number had
    shrunk to two: Burkina Faso and Ghana. By 1995, SAP was on the verge of
    collapse in Ghana. By March 2001, the incoming Kufuor administration
    had placed Ghana, the Bank's ``star pupil'' on the HIPC intensive care
    unit and on July 5, 2002, the outgoing World Bank Resident Director in
    Ghana admitted that the Bank probably made a mistake in tagging Ghana
    an ``economic success story.'' Ghana's real per capita income is about
    10-15% below 1983 level when the structural adjustment program was
    launched in 1983.

    4. Lack of Enforcement Mechanisms
        Projects approved by the AfDB are supposed to have been ``vetted''
    by national governments in transparent processes. The Bank may also set
    guidelines on transparency, oversight, cost control and accountability
    measures. But it cannot enforce them since Bank representatives reside
    in most client countries often with a skeleton staff for basic tasks
    excluding public liaison. The total absence of full resident missions
    in some countries of operation makes it difficult to evaluate the
    projects it finances, disseminate information and engage in public
    dialogue. AfDB also has to be careful in its oversight activities
    without interfering with the political process or becoming ensnared by
    it. If it becomes too involved, it risks becoming an ``enabler.''
    Therefore, even if the Bank becomes squeaky clean, it can only take
    tepid steps such as holding conferences and workshops on corruption or
    withdrawing from the Lesotho Water Project that was riddled with
    corruption. Bank reform without a concomitant ``environmental reform''
    would be meaningless.

    5. Improving the Bank's Operational Efficiency
        Assuming that the ``environment'' remains as it is and cannot be
    reformed, then the following suggestions wifi be made to improve the
    AfDB's operational efficiency.
        Its scope of operations needs to be limited.. Original objective of
    promoting regional development to meet especially energy nees has been
    submerged in favor of a far more expansive purview that now serves as
    an extension of domestic treasuries. It has further been expanded. The
    African Development Bank Group has already approved $372.5 million for
    NEPAD infrastructure projects (AfDB Financial and Operational Analysis,
    2003. Posted athttp://www.afdb.org/financial/pdf/
    adb_financial_presentation_may2004e.pdf
        NEPAD (New Partnership for Africa's Development) undertakes ``to
    respect the global standards of democracy, whose core components
    include political pluralism, allowing for the existence of several
    political parties and workers' unions, fair, open, free and democratic
    elections periodically organized to enable the populace to choose their
    leaders freely.'' It also includes a ``peer review mechanism'' by which
    African leaders who misrule their countries would be subject to
    criticism by fellow African leaders according to commonly agreed
    standards. NEPAD was trumpeted as ``Africa's own initiative,''
    ``Africa's Plan,'' ``African crafted,'' and therefore ``African
    owned.'' While African leaders deserve credit for at least making the
    effort to craft an ``African initiative,'' NEPAD is fatally flawed in
    many ways.
        First, it turned out NEPAD too was modeled after a foreign plan:
    The U.S. Marshall Aid Plan, which rebuilt Europe after World War II.
    How could it be ``African crafted'' when it is a copy of the Marshall
    Aid Plan? How could Africa claim ownership over someone else's idea?
    Furthermore, the $64 billion in investment NEPAD sought from the West,
    reflected the same old aid dependency syndrome.
        Second and more serious was the blatant dishonesty and double-speak
    that infected NEPAD. Speaking at the four-day OAU Civil Society
    conference (June 10-14, 2002), President Obasanjo of Nigeria noted that
    the involvement of civil society is required in order to make the on
    going establishment of African Union (AU) and NEPAD successful. ``I
    would like to reiterate that much of what Africa has today gained in
    the areas of political and social sphere have been derived from the
    direct influence of Civil Society Organizations (CSOs). This attitude
    should continue,'' he added (The Daily Monitor, Addis Ababa, June 14,
    2002). Prime Minister Meles Zenawi on his part said that the role of
    civil society is essential in making a sustainable development and
    integration in Africa. Meles noted that the success of African Union
    with NEPAD lies in collective efforts of all Africans at the grass root
    levels (The Daily Monitor, Addis Ababa, June 14, 2002). NEPAD also
    claims to be ``people-oriented.'' Yet, NEPAD was ``crafted'' without
    consultation with Africa's NGOs and civic groups.
        No civic group, church, political party, parliament or democratic
    body took part in its formulation. Only a small coterie of African
    leaders deliberated on the document, excluding the political leadership
    of the rest of Africa. In fact, most governments and civil society
    organizations in Africa first learnt about NEPAD from the western media
    when President Thabo Mbeki presented it in Davos at the World Economic
    Forum in January 2001 after a chaotic evolution. Then dubbed the
    Millennium Partnership for African Recovery (MAP), crafted by
    Presidents Mbeki and Bouteflika, it was merged with the Omega Plan,
    spearheaded by President Abdoulaye to create the Compact For African
    Recovery by the Economic Commission for Africa (ECA), which
    subsequently metastasized into NEPAD.
        A furor erupted in Africa when it became clear that NEPAD was
    crafted more to placate Western donors rather than address issues of
    concern to the African people. On Jan 9, 2001, representatives of some
    200 social movements, organizations and institutions, meeting in
    Bamako, Mali, issued ``The Bamako Declaration,'' strongly condemning
    the lack of consultation with civic society. Another joust came in
    March 2002, when the Southern African Catholic Bishops Conference
    (SACBC) slammed NEPAD, calling the plan ``ambiguous'' and some of its
    proposals ``dubious.'' The Bishops averred that ``NEPAD may not achieve
    its purpose because of lack of consultation with those the plan would
    affect'' (Mail & Guardian, Johannesburg. March 8, 2002). In fact, such
    has been the history of other grandiose initiatives and mega-plans
    announced by African leaders at various summits to address Africa's
    woes. Nothing is subsequently heard of them.

        For real African development, the AfDB should:

     A. Limit to 20 percent of its portfolio lending to African government
            ministries and agencies. The statist development model has not
            served Africa.

     B. Limit its lending to countries on the verge of implosion. AfDB lost
            many of its investments to state collapse.

     C. Focus on the informal and traditional sectors where the vast
            majority of the African people. Genuine economic development
            must come from small-scale projects and with micro credit, poor
            Africans can lift themselves out of poverty and prosper. On
            June 24, 2002, the BBC posted on its website the successful
            tales of three African entrepreneurs. The following is a short
            account of their stories.

        Bamako, Mali: In the space of five years, Mariam Jaras Dirassouba
    rose from being a housewife to a bank manager. She had been unemployed
    with no access to credit and few opportunities to generate cash to
    support her family. Her story began when she and a group of Malian
    women started borrowing small sums of money of up to $50 from an Oxfam-
    backed local organization. With their loans, the women started money-
    making projects, including selling spices or kindling in the local
    markets. Their success led the women to demand training to set up a
    cooperative bank to help their friends and neighbors. When the number
    of women grew to 260, the bank was in a position to issue big loans of
    $1,000 or more to finance much more ambitious business plans, including
    a mango juice factory and a cloth dying business. Mme Jaras Dirassouba
    became the manager. Thus, the women gained the skills to access the
    formal banking system while giving other women the chance to borrow
    money to start out in business.
        Kebemer, Senegal: Collecting rubbish gave a new financial freedom
    to a group of women in the small town of Kebemer. The women borrowed
    money to buy a horse and cart, employed rubbish collectors, and earn a
    salary by cleaning up the streets on a daily basis. Since the local
    authorities lacked funds, garbage piled up, causing illnesses among the
    children playing outside. When people saw the benefits of the daily
    service, they were willing to pay for it. The project has not only
    reduced health problems, but it has also created income and employment
    for 20 people. The idea of a new force of dustbin women was first
    conceived in 1998 and got off the ground after Christian Aid provided
    the loan for the first horse and cart. The women then earned enough
    money to buy more than 300 dustbins and 10 horses and carts, and employ
    administrators to organize the project, spanning 500 homes. There were
    profits left over to invest in new moneymaking projects, including
    traveling to Mauritania and Gambia to buy shoes for resale in their
    local towns.
        Dekaya, Ethiopia: Bee-keeping is a traditional activity in Dekaya
    in southern Ethiopia, using hives made out of hollow logs. Farmers
    introduced more innovatively designed hives from Germany while still
    making the hive out of local wood. The improvements raised
    productivity, with each hive producing about 26 kg of honey, compared
    to the 3 kg produced with the old-fashioned method. About 150 farmers
    benefited from the new technology, after Action for Development
    provided technical training and the loans for the first hives to be
    used. The farmers then set themselves up as a cooperative, with the aim
    of securing their own loans from banks to buy new hives in the future.
    With such success, the children could go to school, have access to
    better accommodation, and one man has been able to build a new house
    with the money raised from selling honey.
        The problem is, it is foreign charities which are providing these
    small but productive microcredit. I believe this is the area where the
    AfDB should be structured to be in, rather than providing loans to
    crooked African governments.
        Thank you.

        The Chairman. Well, thank you very much, Doctor, for that
    very comprehensive statement.
        I suspect because of the inability to obtain this testimony
    from Treasury, we have not heard as much today as we might have
    on the European Bank for Reconstruction and Development and the
    Asian Bank. But nevertheless, the African Development Bank we
    have heard a good bit about. So I want to begin my questioning,
    because you have made some direct suggestions, Dr. Ayittey.
        To what extent has the United States' contribution, the
    $460 million we are talking about for reauthorization next
    year, what percentage of the money is being furnished by the
    United States in one form or another, not just that
    reauthorization sum but the overall support of the bank?
        Mr. Rich.  Are you referring to the Asian Development Bank?
        The Chairman. Yes. No. In this case the African Development
    Bank. Now, pardon me. Was the Asian Development Bank the one?
    The $460 million that had been mentioned.
        Mr. Rich.  That is what the Treasury is going to be
    requesting this committee to authorize in a few weeks for the
    Asian Development Bank.
        The Chairman. For the Asian Development Bank. All right.
    And what was the authorization for the African Development
    Bank, or are we into the picture at all?
        Mr. Rich.  I am not sure of that.
        The Chairman. In other words, I am trying to think of at
    what point----
        Dr. Ayittey.  I think this year, for fiscal year 2004, the
    United States committed to provide $1 billion. I do not know
    how much of that will be going to the African Development Bank
    yet.
        The Chairman. Now, $1 billion is for what?
        Dr. Ayittey.  That is the total to the multilateral
    development banks.
        The Chairman. For all the multilateral development banks.
        Dr. Ayittey.  For all of them, yes.
        The Chairman. But next year, it is your understanding, that
    $460 million is for the Asian Development Bank.
        Mr. Rich.  Yes. Well, that will be a 3-year authorization
    for the soft loan window of the Asian Development Fund. That is
    like the international development association for the World
    Bank. So they have a 3-year replenishment. So you will be asked
    to authorize about $460 million for the next 3 years, 2005 to
    2008.
        The Chairman. But the billion dollars, though, is
    approximately the American taxpayers' contribution to all the
    banks annually?
        Dr. Ayittey.  Yes.
        Mr. Rich.  Yes.
        The Chairman. So we are dealing, however, specifically next
    year with the 3-year authorization for the Asian Development
    Bank.
        Mr. Rich.  Yes.
        The Chairman. But some money will be going to the African
    Bank and some money to the European Reconstruction Bank.
        Dr. Ayittey.  And the Inter-American Bank.
        The Chairman. Yes, and the World Bank.
        Mr. Rich.  I would like to point out that it is not just
    the actual paid-in money. It is approximately $1 billion a year
    for all the multilaterals, but there is a much smaller paid-in
    amount every year for a number of them for not the soft loan
    windows, but for the main lending facilities, like the
    International Bank for Reconstruction and Development and the
    World Bank. We pay in a little bit, but every dollar that we
    pay in every year, then I think in the case of the World Bank,
    there is something like $17 of a callable capital, which is
    basically a guarantee of the World Bank's loans from the U.S.
    Treasury Department.
        The Chairman. That is the leverage effect.
        Mr. Rich.  That is the leverage effect. So that $1 billion
    is hard, paid-in cash, but then there are basically the
    guarantees, the potential liability of American taxpayers,
    which runs into many billions more through that leverage effect
    every year.
        The Chairman. I suppose, in trying to grasp in my own
    mind's eye what sort of leverage the United States has with any
    of these banks--in other words, if we had only a small
    contribution and other countries all around the world are
    putting the capital into it, then we could get exercised in
    this committee about all of this and hear witnesses. But yet,
    the banks might very well say, well, that is your view, but on
    the other hand, the way the world works is our view, and we are
    still headed down the trail that we are headed down.
        What effect does really what we are talking about here
    today have on potential conduct of these banks?
        Mr. Rich.  Mr. Chairman, I am glad you asked that question
    because it has a tremendous impact. The U.S. by far in most of
    these institutions is either the biggest shareholder or a co-
    equal as the biggest shareholder. In the Asian Development
    Bank, we are equal with Japan, approximately. Though it is true
    that the U.S. only pays in a certain percentage--like in the
    World Bank, I think it is 17 percent approximately and so on--
    what we say and do on the executive board really carries
    weight.
        Let us take the example of this Asian Development Bank soft
    loan fund authorization for the next 3 years. I think this
    committee is best placed, almost in the world, to exercise
    leverage because if we threaten to withhold just a tiny
    percentage, that is the language that these institutions really
    understand. You can write them letters. As you point out, they
    have scores--in the case of the World Bank, over hundred--
    shareholders, and they do feel somewhat unaccountable. But if
    we threaten to withhold at least, unless we get better answers,
    better results through the U.S. Executive Director, just a
    small percentage of the funding, it has a leveraged effect
    because other countries then do not want to contribute quite as
    much because there is sort of a burden-sharing arrangement. If
    the U.S. contributes less, then why should they contribute
    their full share?
        And secondly, it just sends the message. It is more
    difficult than dealing with a U.S. Government agency, but
    nevertheless, the U.S. representatives, the executive directors
    on these institutions can promote policy reforms. They can
    lobby and cajole the other board members to do things. They can
    point out that if things are not done, it is going to undermine
    the confidence of the U.S. Congress just to keep writing blank
    checks, and so on and so on. Because of our unique system in
    the United States where committees, such as the foreign
    relations committees, really do control the money with our
    division of powers, we are better placed than almost any other
    forum in the world to really make these institutions more
    accountable.
        The Chairman. Mr. Rich, concentrate just briefly on the
    Asian situation as opposed to the African one, which we will
    talk about in a moment. To what extent are Asian countries
    seized by what Dr. Ayittey described as this culture of
    corruption? Are there a good number of instances among the
    clients of the Asian Development Bank that really have pretty
    good operations, that even if the oversight were a great deal
    more intensive, would pass muster? And to what extent are we
    dealing with a good number of clients, or how many, who really
    would not pass muster, who, as a matter of fact, if you make a
    government-to-government loan or a bank-to-government loan, you
    are likely to run into persons who are at the public trough?
        Mr. Rich.  Well, there is a way of getting a rough idea
    because Transparency International every year publishes a list
    of countries, and they poll hundreds and hundreds of
    businessmen, investors, and so on around the world and they
    create a perception of corruption index, a PCI index.
        The Chairman. What is Transparency International?
        Mr. Rich.  Well, Transparency International is a
    nongovernmental organization. It is actually based in Berlin,
    but it is an international organization. It was originally
    formed by former World Bank executives who for years in the
    '80's and early '90's had tried to raise the issue of
    corruption in the World Bank to no avail.
        Now, one must add that after Mr. Wolfensohn came in in
    1996, he at least began to use the ``C'' word. What they are
    doing is not enough, but that at least was a step forward.
        At the Asian Development Bank, I think they are almost in
    the pre-1996 years in that sense because they have not had that
    strong leadership.
        So they formed an NGO to fight corruption, and one of the
    things they do--they have a web site and so on and they have
    national offices--is that they do this annual corruption rating
    risk, and they have a system that ranks countries from zero to
    ten. Ten is completely clean. Zero is totally corrupt.
        What you find on this list for 2003 is that some of the
    Asian Development Bank's biggest borrowers, its top five
    borrowers both last year in 2003 and cumulatively, are among
    the most corrupt countries on earth. Indonesia is number 122
    out of 133. Bangladesh is dead last at number 133.
        In that atmosphere, what on earth can the Asian Development
    Bank do? I went into a lot of detail in my statement. But this
    has even been said to the Asian Development Bank's board by a
    couple of departing executive directors. Stephen Baker, who
    represented Australia and a number of other countries, in 2001
    left the board, and he circulated a statement to the board and
    management of the ADB. He said, what do you do in this context?
    Yet, what the ADB can do, you start at home. You start by
    making your own loans and your own products as corruption-free
    as they can be. And this means having the highest standards,
    really putting resources and making it a priority, putting
    staff and resources to investigate corruption, make sure that
    the ADB loans and projects at least are leveraged islands of
    good practice that will then hopefully have a leveraged
    ricochet effect to promote good practice in these countries.
    This is what they do not do. So good housekeeping starts at
    home.
        This is true of the World Bank too. They said, well, we are
    going to have technical assistance projects or loans for these
    countries. We are going to give seminars and all this. But then
    they have no idea--this is true in the World Bank. It is true
    in the Asian Development Bank. It is true in all--how much
    money is being stolen or leaking. They cannot even come up with
    a reasonable estimate of how much is disappearing in their own
    lending.
        I think that is one thing that the committee could do
    through the U.S. executive directors of all these institutions.
    Surely, they will not deny that nothing is being stolen. It is
    common knowledge that a certain percentage is being stolen.
    Dick Thornburgh said that in his statement in one of his
    reports of the World Bank. He said a lot has been stolen in the
    past, and the bank did not begin to address this until 1996.
    You would think that any responsible business that was critical
    to its mission would be doing this.
        So they have got to start by finding out a lot more and
    providing the taxpayers of the donor countries with some honest
    answers.
        The Chairman. Well, logically if, as you say, after looking
    at Transparency International's ratings of countries--and you
    cited two of these--would the Asian Development Bank then make
    its loans to NGO's in those countries as opposed to the
    governments? And if so, is there a sufficient audit trail for
    NGO's that might do humanitarian work in those countries?
        Mr. Rich.  Well, I think you have to look at it on a
    region-by-region basis. I think in Africa, where the
    governments are particularly weak, I know that USAID for years,
    in fact decades, has funneled a lot of its resources through
    voluntary organizations like CARE, NGO's, and so on if you want
    to reach local people.
        But I think it is also important to lend to governments but
    with very strict controls and to focus on administration rather
    than just pushing the money out because you have to find ways
    of strengthening these governments. You cannot have countries
    that are totally failed states and just leave them as failed
    states.
        The way these institutions can do this is lend less, but
    pay a lot more attention to using specific loans as ways of
    building up capacity and monitoring that capacity within
    government ministries.
        I think these institutions were set up to lend mainly to
    governments. They should be doing more with civil society, but
    you know, NGO's can be corrupt too. Anyone can set up an NGO.
    You might say internationally it is an unregulated sector.
        The Chairman. Well, that is even more pessimistic if the
    NGO's likewise are corrupt.
        But, Dr. Ayittey, you have mentioned 121 projects at the
    African Development Bank. Only two went to NGO's; 98 percent
    went to governments. And you have described most of these
    governments in a cultural crisis and some of the cusp of
    implosion I think is the word that you used.
        Now, someone, just an ordinary person, listening to all
    this would wonder what are we doing. We are doing it obviously
    because both of you know--and you are in the field. You have
    been there for years--there are a lot of very poor people in
    this world, tremendous poverty, tremendous difficulty. So the
    humanitarian impulses of this country and the world are to help
    people. But what we are running up against, at least in the
    testimony today and even more so in the African Development
    Bank, is this is going to be very difficult to do, that is,
    making large loans to whom, and how do you bring about
    accountability. What do you say to that?
        Dr. Ayittey.  Well, it is a very tricky problem and it is a
    dilemma. I fully appreciate your question.
        But at the same time, we have to recognize the fact that
    you cannot loan money to build bridges, only to see the bridges
    blown up in an insurgency, for example. We always have to ask
    ourselves, whom do we want to help? Do we want to help the real
    people, or do we want to help the governments? The governments,
    as I indicated, are not accountable to their people. Only 16
    African countries are democratic.
        The Chairman. How do you get to these real people? How do
    you loan money to them?
        Dr. Ayittey.  First of all, we need to have responsible,
    accountable governments in Africa. That is why political reform
    and economic reform is important. So why do we not tell the
    African Development Bank that you should never loan money to
    any government--let me backtrack a bit. This is why I said that
    it should limit its exposure to these corrupt governments to,
    say, 20 percent of its portfolio and focus more on the private
    sector. That is where the real people are.
        Failing that, Congress can mandate and say the African
    Development Bank should not deal with governments which are not
    accountable or should only be in those countries which are
    democratic. Or Congress could say that the African Development
    Bank should not lend money to any country which is at the
    bottom of the Transparency International corruption index list,
    for example.
        The Chairman. You make good sense, but you have also
    testified that only 16 of the governments of the 54 or so are
    democratic.
        Dr. Ayittey.  Well, yes, so that we put pressure on the
    rest of them to democratize.
        The Chairman. By not giving them money.
        Dr. Ayittey.  Yes. Because the money is not going to help
    the people anyway.
        The Chairman. Now then we try to get to the people in these
    places, but how do we do that? If these governments are corrupt
    and they are authoritarian----
        Dr. Ayittey.  This is why we need to establish, let us say,
    both. Let us take Bangladesh, for example, where the Crimean
    Bank has performed wonderfully. It is important that we set up
    such micro-credit NGO's, say, in Africa.
        The Chairman. Micro-credit is a way of getting at this.
        Dr. Ayittey.  Yes.
        Oxfam, for example, gave $50, a small loan, to a woman in
    Bamako, Mali, and she has been able to use small loan into
    something really big and putting up a bank herself.
        The things which will help the real African people are
    simple, little projects and not the huge ones that are proposed
    by African governments. See, once the project is given to the
    African Development Bank, it funds it. Who gets the contract,
    the African Development Bank has no role in that. So if the
    minister awards a contract to his brother, for example, the
    African Development Bank has no control over that.
        The Chairman. Yes, I understand that and I think we all do
    because you have testified very strongly about this. I am just
    still searching for the ray of hope in all this. 20 years ago,
    wandering through Indonesia, I saw micro banks and they were
    helping a good number of people who were in very small
    businesses. This was particularly designed for many women who
    were supporting families and had broken circumstances and what
    have you. But all told, this is fairly small amounts of money
    in a huge place. Now, ideally maybe with the new president of
    Indonesia, at least some signs are, that this is a hopeful new
    administration, and maybe, as you say, you offer some
    incentives. You sort of hold out this.
        But then I am, I suppose, asking a question which is
    impossible for the two of you to answer. How do we in the
    United States Government, whether it is our Congress, our
    administration, or so forth, sufficiently influence what has
    been the administration of these banks so that they begin to
    turn around almost all of their policies in ways that at least
    we mutually today feel are more constructive?
        Do you have a thought about that, Mr. Rich? And then I will
    turn to the Doctor here.
        Mr. Rich.  Yes. There are two parts to your question: what
    can be done and what is the U.S. role in particular.
        I think because there has been a lack of critical analysis
    of what is going on in these institutions, and since the
    Treasury has not bothered to send the representatives, our
    statements have focused on the flaws and not on the potential.
        But in Africa, we heard in Lesotho--we had this very
    dramatic testimony in July of Guido Penso, the chief prosecutor
    who was employed by the Lesotho government in a very poor
    country. But that was a country that felt it needed to address
    the corruption in that massive project. He pointed out that
    World Bank had supplied no financial support to them for this
    corruption investigation that they conducted.
        I think there are a number of countries around the world,
    in Africa, even in the poorest like Lesotho, and much more so
    than in Asia, countries like Thailand and Sri Lanka, the two
    case studies I cite in my testimony, where on the one hand you
    have corruption, but on the other hand, you have growing
    movements of civil society. You have people in the government
    who want to be honest. In the Thailand and Sri Lanka cases, you
    have had supreme court cases. You have had attempts to bring
    legal actions for corruption in these two ADB projects. What is
    particularly scandalous is that the ADB itself provided the
    money and was at least a passive accomplice in the Sri Lanka
    example and may have been an active accomplice. They refused to
    investigate the corruption.
        So the institutions can provide financial support for
    corruption investigations in these countries. And beginning at
    home in their own loans, they need to be much more aggressive
    and have much more resources devoted to investigating issues of
    corruption in their own loans. So that is something you could
    do----
        The Chairman. I am just curious. On the Asian side, you
    mentioned the Japanese Government provides perhaps almost the
    same amount of support. To what extent has that government or
    its legislative branch been interested in these issues of
    corruption? Are they a potential ally with the United States in
    demanding really better accountability?
        Mr. Rich.  Well, I would say in the past, to be frank, a
    lot of people would say no. But I think Japan is changing too.
    Even in the finance ministry, there is a younger generation of
    bureaucrats and so on who will not stand for the old practices.
    So I think it is true in the Asian Development Bank. The head
    is traditionally a Japanese and the Japanese finance ministry
    provides a lot of the staff and so on. So that is an issue.
        But Japan is changing too. We have worked with
    nongovernmental groups there in recent years that have been
    doing fantastic work. There is interest in the Japanese
    parliament. So, again, I think things there are beginning to
    change to.
        The Chairman. It would occur to me perhaps the Japanese and
    their legislative branch would be interested in our hearings
    and our interest. Maybe the young reformers would find at least
    encouragement----
        Mr. Rich.  Well, that is a great idea and maybe we can talk
    with your staff afterward about how there could be a follow-up
    on that.
        The Chairman. Yes.
        Mr. Rich.  That is a fantastic idea.
        The Chairman. Because we are really talking about an
    international situation. We have a specific responsibility with
    American taxpayer funds, but at the same time, we are really
    talking about how the world deals with poverty and great
    distress in a better, sounder way.
        Mr. Rich.  The bottom line, these institutions--and
    everyone has said this--have great potential to really address
    these problems, and because of this, frankly, lack of due
    diligence--their primary fiduciary duty is, first of all, to
    see that the money is used for the purposes intended. It has
    reached alarming proportions, as we see in Africa and other
    countries where these projects are not performing. But I think
    there is a lot that can be done, but they have to change their
    focus. Again, the U.S. executive director to these institutions
    cannot do it alone, but if this committee sends much stronger
    signals, I think we will see more progress.
        The Chairman. Doctor?
        Dr. Ayittey.  I recognize the box in which this committee
    or Congress finds itself in terms of what can it really ask the
    multilateral development banks to do to improve the operational
    efficiency. But at the minimum, there are certain things that
    this committee or Congress can do.
        First of all, since the U.S. makes contribution to the
    African Development Bank, it could require that the African
    Development Bank post at its web site, let us say, the
    performance of its portfolio, for example, which would be
    updated frequently. The last time I checked, the one which was
    there was 1997, which should not be acceptable to Congress, for
    example.
        The World Bank has an operations and evaluations department
    which reviews the performance of its own loans and programs.
    Perhaps the African Development Bank could have such a
    department within itself. Or maybe better yet, it could have
    outsiders to do such operations evaluation.
        As I suggested in my testimony, loaning too much money to
    the government sector crowds out the private sector, and loans
    to the government need to be limited. I pulled 20 percent out
    of the hat. Perhaps it could be less. It could be something
    like 15 percent. Every effort should be made to focus on the
    private sector. That is where wealth is created, not in the
    government sector. So it really makes little sense to keep
    loaning money to government ministries and agencies.
        I have also indicated that certain guidelines need to be
    put in place.
        I am speaking because a lot of money has been borrowed on
    behalf of the African people, and they do not have the capacity
    to pay. They had no say, none whatsoever, in how the loans were
    distributed, who acquired the loans, what the loans were used
    for, for example. So it is also in the interest of the African
    people have general accountability and also transparency, for
    example. As I indicated, President Obasanjo of Nigeria says
    African leaders have stolen $140 billion from their people.
        The Chairman. I wonder, just to pick up your suggestion, if
    the committee today after this hearing writes to the African
    Development Bank and respectfully requests that they update
    their web site from 1997 to 2004 and put their portfolio there
    and how things are going. My guess is the first impression of
    the directors of the bank or whoever would be to wonder where
    in the world did this come from and why are these people that
    excited about what we are doing. But at the same time, I have
    noticed in these hearings, given the computers and the ability
    to draw up stories from all over the world, these hearings may
    have limited interest in the United States, but they have a lot
    of interest. The press is pretty free in a good number of these
    countries. As you have both pointed out, stories in the press
    in various countries have been raising these questions of their
    governments, but likewise probably raising them about us. Why
    are you contributing to this malfeasance? Why do you not have
    really more oversight and more control?
        So I suppose what I am suggesting in the spirit of
    transparency, sort of going beyond the group in Berlin or
    wherever they are who do that sort of thing annually, that we
    might ask for sort of an update to see where things stand, and
    likewise, as a prelude, that others are interested in their
    business, that we need to see more accountability.
        Dr. Ayittey.  Yes. I very much endorse what you were
    saying. A lot of people, even the African people, want to see
    transparency. They want to know what the loans, which were
    taken on their behalf, were used for.
        The Chairman. We have been interested in this committee--
    and this is entirely outside the purview of our hearing today--
    in the African Growth and Opportunity Act. I have been the
    chief sponsor on the Senate side of this. A good number of very
    gifted House Members have done a great deal of work, and we had
    a signing ceremony with the President not too long ago in which
    he took a conspicuous position in behalf of this act and the
    beginnings of our thoughts about trying to finance free
    enterprise, private enterprise, in addition to grants. We are
    not negating the need for foreign assistance and outright
    grants, but we are saying, in essence as you are, that the
    development of the private sector in these countries is
    tremendously important. This is the first big initiative our
    country has taken, and we have renewed that at the request of
    all of the ambassadors here in Washington.
        So there is intense interest on the edges of this issue,
    but because of the international aspect of these banks, they
    are beyond really the specifics of AGOA. That is our program.
    This is something to which we contribute, along with many
    others, and perhaps because the lines of control or oversight
    are more indistinct, perhaps the accountability has been lost.
        But that is our purpose today, and I want to state that
    because some persons really do not like these loans at all. Let
    us take a look at the body politic of our country, and they
    would say, listening to all of this, why in the world did we
    get into all of this? Have we simply lost sight of where the
    American taxpayers' money ought to go? Now, that would be
    unfortunate if we take sort of a no, nothing, isolationist
    position and say essentially all of this is so corrupt, so
    hopeless, that until folks get their act together, why, we are
    just out of it, and when they do, we will come back into it.
        Our thought today is a more proactive one of reform: how do
    you get things on track so that there is public support in this
    country for an international program, as well as elsewhere. And
    that is your intent, and that I think we need to focus on
    because I fear, given the track record that both of you are
    describing, much more so in Africa than Asia, but maybe sort of
    a race to the finish on that, this could be very discouraging
    almost to the point of people wondering, when the
    reauthorization comes or just the annual appropriation,
    whatever it may be, that amounts to $1 billion, this is a lot
    of money. In the post election season in this country, there is
    going to be a lot more scrutiny on our own deficit of $400
    billion in this country and wondering why we are doing certain
    things I think with a great deal more rigorous examination
    perhaps than there has been before.
        Dr. Ayittey.  Mr. Chairman, I understand. Please do not
    misinterpret my testimony as trying to discourage America from
    doing something for Africa. The intent of my testimony is to
    improve the operational efficiency of the programs. We want
    these programs to work to help the people. We do not want these
    loans to support corrupt and crooked governments. So that is
    why we want to shift the focus from supporting these
    governments to supporting the private sector. That is where the
    people are.
        The Chairman. Let me just ask another question. We have had
    testimony here in our committee now about the HIV/AIDS program.
    We have had testimony about the World Food Program and the work
    that is being done. In fact, we had the directors, Mr. Morris
    and Mr. Tobias, of these two efforts in our country together on
    one occasion, and they discussed Zimbabwe, for example. This is
    a story all by itself of great difficulty and turmoil, which we
    will not get into. But here they were claiming that the average
    life expectancy of a person in Zimbabwe has been reduced by
    these twin factors of HIV/AIDS and hunger, and maybe some
    tuberculosis, from somewhere in the 60's to 37. Now, this kind
    of stark change in a whole country really has not been
    witnessed in percentage terms even in Russia, where we saw in
    the post-Soviet days for the Russian male the average longevity
    going down into the mid-50's. That was pretty shocking in a
    European country. But 37 and still falling.
        So the consequences of all of this are horrible. They are
    not only severe, they really are almost beyond our calculation.
    And the need for relief for this is apparent. But even then, we
    are faced still with how to be intrusive enough, at a time of
    hope for reform or lack of reform or so forth, to get to people
    who are in need.
        Now, to what extent could any of these loan trails follow
    the administration of, say, the food program or the AIDS
    program. Are there any channels in which somehow or other these
    things might come together? Because my judgment is that we are
    getting some effect from the hunger relief and from the HIV
    anti-viral drugs. It is minimal in some cases but constructive
    and we are moving ahead. I am just wondering if there is a flow
    path here that might be helpful in terms of the banks.
        Dr. Ayittey.  Let me, please, make a short interjection,
    and that is, there is no question that AIDS is decimating
    Africa's labor force and it is going to stunt Africa's economic
    growth in the future. There is no question about that. It is a
    dreadful disease and it has taken its toll on economic
    development.
        However, how do you deal with a disease? In fact, I
    testified before the advisory commission for AIDS, which was
    set up by President Bush. When this disease first struck in the
    early 1980's, African governments were in denial. They did not
    really take this thing seriously until it blew up. And then
    when they belatedly turned their attention to AIDS, they
    focused on the wrong side of the equation. They focused on the
    treatment side. It is a disease which has no cure, and I think
    given Africa's limited resources, in terms of financial
    resources, I personally think that it would have made far more
    sense to concentrate on the prevention side to try to save more
    people from becoming infected.
        Now, if you provide Africa with all the resources that are
    needed like the anti-retroviral drugs, et cetera, the modern
    health care system in many African countries has collapsed.
    Many Africans, at least 80 percent of Africans, still rely on
    traditional medicine. So the traditional medicine men really
    play, in fact, a very important role in this disease as well.
    But so far in all these efforts we have ignored them, and I
    personally believe there is a cheaper way by which we can do
    more to help the AIDS suffers and also prevent the spread of
    this disease by embracing these traditional medicine men.
        In fact, in South Africa it was the Sangomes who propagated
    the myth that if you have sex with a virgin, you would be cured
    of AIDS. And that led to all kinds of nasty incidents in South
    Africa. See, we learned from that lesson that if you do not
    bring them into the campaign against AIDS, they are going to
    create more problems. But we are learning from some of these
    new things.
        The Chairman. Mr. Rich.
        Mr. Rich.  If I could just add something shortly to that
    about the role of the multilateral development banks. Well, we
    know that the World Bank has been providing loans for AIDS
    programs in a number of countries, like India, for example. But
    the problem there is financial assistance is desperately needed
    to help these countries support programs, and I would concur
    with Dr. Ayittey that perhaps different approaches need to be
    tried and there needs to be more communication among the
    various international agencies that are dealing with this
    issue. Getting countries more into debt for desperately needed
    public health programs is not the answer because this is
    desperately needed, but obviously these loans do not produce a
    financial return.
        This administration has been trying to promote, rightfully
    so, more grant assistance of the multilateral development
    banks. Certainly in this area of public health, it would be
    much better if that assistance were given in the form of grants
    rather than loans which just increase the debt burden of these
    countries. Dr. Ayittey pointed out the collapse of the public
    health systems in a number of African countries, for example.
    Well, part of that was due to the high indebtedness of
    countries and then the very austere financial adjustment
    programs that they had to undertake to reduce government
    expenditures in all areas to repay their foreign debt. Now you
    have sort of a vicious circle, linked with the fact of
    countries getting more into debt.
        The Chairman. Let me just add one further anecdote. I was
    in the country of Georgia in the latter part of August. Now,
    this is outside of Asia or Africa, as the case may be, but a
    very important friend of the United States where young people
    have, in essence, in the Rose Revolution brought about
    democracy.
        Now, one of the most promising things they have done, which
    follows along your testimony today, is to note the culture of
    corruption in the country. This has led to the dismissal of
    over 85 percent of the whole police force of the country and
    hiring of new people who are not on the take, a recognition
    that it is wholesale, that it is everywhere, that it pervades
    everything that was going on in the place. That was true in the
    banks and it was true in the transportation system.
        This is tough to do in a poor country. Their resources are
    extraordinarily limited and they have the disadvantage still of
    some Russian pressures, while I was there, President Putin,
    meeting with leaders of Abkhazia, one of the provinces that is
    still a part of Georgia and yet not really as much a part of
    Georgia as it needs to be, for example.
        This is tough going, but it is something that the United
    States has to recognize when it occurs. I was pleased with the
    Millennium Challenge Account idea, Georgia appeared on the list
    of 16 countries that is eligible. There are rewards for these
    really heroic attempts to change this culture of corruption
    which occurs elsewhere outside Asia and Africa, I might add,
    quite apart from our concentration today, and stultifies almost
    anything that is occurring.
        Now, as a part of this, it was my privilege to be part of a
    groundbreaking for a health situation in which Georgians are
    going to try to spot pathogens, biological and chemical
    pathogens, that might occur in the country, anthrax that might
    occur through agricultural origin, quite apart from weapons of
    mass destruction and so forth. But in any event, whenever this
    occurs, they will share strains of this with hospitals in the
    United States. We will work with them on antidotes for these
    situations. All of this comes really through our program
    dealing with weapons of mass destruction. It is not really
    appropriate for the cases we are talking about today, but it
    does highlight the fact that when our Government sees this
    issue of corruption and health and ways that we can be helpful
    and then the $15 million or $20 million that we are putting
    into this project is a grant. It is not a loan. So the people
    of Georgia are not further obligated, and that is an important
    point that you are making, the repayment of the situation.
        This is why I have used this hearing sort of to broadly
    sketch or to think aloud with you, because you are expert
    witnesses, about various courses of action that we might think
    about. We will not adopt anything today, but the purpose of the
    hearing is to reach out.
        Yes, Doctor.
        Dr. Ayittey.  I would like to bring your attention,
    Senator, to some private sector solutions in Africa, for
    example, with commercial banks, for example. One of the ways
    which they try to limit corruption or bribery is to rotate
    their regional managers, for example.
        The Chairman. Rotate the regional managers? How would that
    do it?
        Dr. Ayittey.  For the culture of corruption to take root,
    the manager needs to build a network of friends, cronies, et
    cetera. So now and then you will transfer. This is done by a
    commercial bank in my country Ghana. Move them from one
    particular region to another region for, say, 2 years and then
    move them again. So one of the ways by which we can ensure this
    kind of independence and transparency, for example, and reduce
    this is not just commercial bank managers but perhaps the
    resident mission managers of the African Development Bank, for
    example. They stay in, say, Nigeria for 2 years and move them
    to Uganda for 2 years or, say, Ethiopia for 2 years. We can
    also do that with the governors of central banks in a region,
    for example. We can rotate them. The governor of the bank of
    Nigeria, move him to Ghana for 2 years, move the governor of
    the bank of Ghana to Kenya for 2 years, for example. In other
    words, when you start rotating, you try to minimize the extent
    of corruption.
        The Chairman. I see your point. If we were directing these
    banks, we could start rotating these folks today, but as it is,
    we will need to suggest this I suppose, that if they are
    serious about this--and we presume they are--that this is a
    good way practically to break up these circles of cronies that
    come locally.
        Well, let me ask for any final comment either of the two of
    you have. Yes, sir.
        Mr. Rich.  Thank you. I would just like to emphasize what
    you mentioned, that we have seen in a number of these
    countries, poor, small countries, Georgia, Lesotho, Thailand,
    Sri Lanka, heroic efforts going on within the societies, within
    the governments, within the legal system to fight against this.
    On the other hand, we have a situation, which I think is well
    documented in some cases, of these rather comfortable
    international financial institutions up to date having shown a
    reluctance and a passivity, relatively speaking, to really help
    these progressive forces in these societies, very poor
    societies that are fighting against corruption, not
    investigating the allegations corruption in their own projects,
    not giving financial support to the poorest of countries like
    Lesotho where you have investigations of corruption, and not at
    least showing the same concern with the cancer of corruption in
    their own institutions, in the multilateral development banks,
    that the people show in their borrowing countries, at least the
    progressive forces. This committee can do a fantastic service
    to these institutions and to the poor of these countries that
    are supposed to be helped by sending a clear message that
    things have got to change and at least to imply that this can
    be linked with, as you pointed out, the willingness and the
    confidence of American taxpayers just to be writing blank
    checks.
        Dr. Ayittey.  One final point which I would like to bring
    to the attention of the committee, and that is the two most
    effective antidotes against corruption are, number one, the
    free and independent media. A free and independent media exists
    in only eight African countries.
        The Chairman. Eight?
        Dr. Ayittey.  Eight African countries.
        The second antidote is an independent judiciary to enforce
    the rule of law. This is lacking in the vast majority of the
    African countries.
        The Chairman. A good point. We heard earlier on that
    sometimes newspaper stories raise these issues. They were not
    persuasive but they raise them, and the fact that there was
    this transparency locally, quite apart from international
    bankers or us, was probably even more important.
        Well, we thank both of you for your very thoughtful
    testimony and responsiveness to our questions and our probing
    and our thinking aloud together today. We are hopeful that as
    we continue our work, that you will be available and will work
    with us.
        Dr. Ayittey.  Thank you.
        Mr. Rich.  Thank you.
        The Chairman. Thank you very much, and the hearing is
    adjourned.

        [Whereupon, at 4:08 p.m., the committee was adjourned.]

                                A P P E N D I X

                                  ----------

      The African Development Bank: A Rare Success on a Troubled Continent

     Submitted by Don Sherk, International Economic Consultant and Former
        United States Executive Director to the African Development Bank

                                   I. SUMMARY

        The United States has a major interest in the African Development
    Bank to a large extent because it is unique. This uniqueness stems from
    the Bank's still strong pan-African roots, from the Bank's visible
    emergence as a professionally staffed and well-managed institution in a
    continent subjected to multiple crises and perhaps the world's greatest
    concentration of absolute poverty. And it is unique because for nearly
    twenty years the United States sat on the sidelines, it was not a
    member. Unlike the World Bank and the three other major regional
    development banks, the Inter-American Development Bank (IDB), the Asian
    Development Bank (AsDB) and the European Bank for Reconstruction and
    Development (EBRD) the United States was not a founding member of the
    AfDB. Together with its industrial country partners of the OECD the
    United States was deliberately excluded from membership in the Bank.
    Non-African membership in the AfDB would not occur until 1982, nearly
    two decades after the Bank's opening.
        The reasons for this exclusion can be found in the ``mind set'' of
    the leaders of the newly independent African nations in the early
    1960s. The Bank's founding members put great stock in maintaining the
    Bank as an African institution. They were well aware that this ``go-it-
    alone'' attitude would seriously reduce the resources available to the
    Bank for the economic and social development of the continent. However
    they wanted the African Development Bank to be their own bank, not
    another northern-controlled institution that just happened to have
    African members. And this strong desire for an independent, authentic
    African institution remains active some thirty-seven years after the
    Bank was begun.
        Where is the Bank today? if the AfDB were held up against the World
    Bank and the other regional development banks (the IDB, the AsDB and
    the EBRD) and compared by any common standard of business efficiency,
    the Bank would most likely be ranked on the bottom. But if a more
    relevant yardstick of achievement and maturity were employed measuring
    how far the Bank has traveled in its thirty-seven year history, in what
    is easily the most difficult working environment on earth, it would
    probably be ranked first. This paper addresses this unique institution,
    it historical roots, its curious membership pattern and its recent
    reform efforts. How the United States has dealt with this changing
    institution is central to the account.

                                II. INTRODUCTION

        The African Development Bank's history marks it as a unique
    experiment in North-South relations. Having been established in 1963,
    \1\ literally months after many African states had emerged from
    colonialism, its founders intended the Bank to be exclusively a pan-
    African institution. Although the Inter-American Development Bank and
    the Asian Development Bank, founded in 1959 and 1966 respectively, were
    created, in part, as a reaction to the industrial countries' dominance
    over the World Bank, each of these two regional development banks built
    in important roles for the developed countries. Not so for the African
    Development Bank. The AfDB was conceived as a bold, some said fool-
    hardy, gesture of African solidarity and self-sufficiency. The founding
    members of the AfDB, themselves only recently independent, did not want
    to create their own bank only to turn around and re-establish a new and
    all-to-familiar, financial dependency on their former colonial rulers.
    Consequently their bank would be independent of northern financial
    links. This self-enforced financial autonomy, quickly showed itself in
    the resource flow to the African continent, in dramatic contrast to its
    sister institutions the IDB and the AsDB.
    ---------------------------------------------------------------------------
        \1\ Meeting in Khartoum, Sudan, in August of 1963, a majority of
    African finance ministers approved the agreement establishing the
    African Development Bank and opened subscription to the Bank's capital.
    The agreement entered into force in September of 1964 when 65 percent
    of the Bank's authorized capital was subscribed by twenty African
    nations. (Today there are 53 African members and 24 non-African members
    for a total of 77.) The management and staff moved into its present day
    headquarters (Abidjan, Ivory Coast) in March of 1965 and in April of
    1967 it approved its first two operations: an equity participation in
    the National Development Bank of Sierra Leone and a transport loan to
    Kenya.
    ---------------------------------------------------------------------------
                          III. PAN-AFRICAN EXCLUSIVITY

        Seen from today's vantage point one could be forgiven for failing
    to grasp the intensity of newly independent Africa's insistence on
    autonomy. But with leaders such as Nkruma, Toure and Nasser fervently
    advocating ``nationalism'' as the correct course for post-colonial
    Africa, the mood of the times clearly was one of ``stand alone
    independence''. In the words of one of the Bank's early presidents,
    Kwame Fordwar ``The bank was an expression of African determination to
    help itself and to demonstrate that it was free of its colonial-period
    dependence on non-African and largely imperialistic economic
    influences. For those of this view, to open up the bank (and admit non-
    African states) was precisely to admit that it was impossible to give
    concrete expression to this determination in economic terms. For them
    it was a total negation of a passionately held ideology which had
    inspired and sustained many of them through several years of often
    violent anti-colonial conflict.'' \2\
    ---------------------------------------------------------------------------
        \2\ Kwame Fordwar, 1981, The African Development Bank: Problems of
    International Cooperation, New York, Pergamon Press, p. 116. Quoted in
    Karen A. Mingst, 1990, Politics and the African Development Bank,
    University Press of Kentucky, Lexington, Kentucky.
    ---------------------------------------------------------------------------
        From the very beginning there were a few African nations who
    predicted that pan-African exclusiveness for the new Bank would mean
    severely limited resources and probably a more ideological bank than
    would be the case had the industrial north been invited to join as was
    the case for the Asian and Inter-American Development Banks. But these
    countries, notably Ghana, Uganda and the Ivory Coast, were no match for
    the powerful oil-rich countries of Nigeria, Libya and Algeria and the
    die was cast. When the Bank's capital was finally opened to non-
    regional members nearly two decades later (1982) Libya and Algeria
    maintained their strong opposition but Nigeria changed its vote
    allowing the motion to finally pass. The three countries were able,
    however, to influence the terms and conditions that would be applied to
    the non-African states when they did finally join the Bank. (See ``The
    Opening of the Bank'' in Section V.)

                              IV. THE EARLY YEARS:

        Of the three regional development banks the African Development
    Bank was capitalized by the smallest amount: $250 million as compared
    to $1 billion for the IDB and the AsDB. By 1968 initial AfDB
    subscriptions took up $218 million of which 50 percent was to have been
    paid up front in convertible currencies. However, given the financial
    shape of most African states, this turned out to be unrealistic and the
    AfDB ended up with 25 percent of the subscribed capital actually paid
    in. The Bank's limited initial capitalization significantly crimped its
    early lending potential. The Bankconsequently got of to a very slow
    start. Disbursements through the end of 1969 totaled less than $1
    million. And for the period 1970 to 1972 AfDB loan approvals were
    averaging only $21 million compared with $685 million for the IDB and
    $272 million for the AsDB.\3\
    ---------------------------------------------------------------------------
        \3\ AFDB lending data obtained from English and Mule, The African
    Development Bank, 1996, The North-South Institute, p. 20.
    ---------------------------------------------------------------------------
        AfDB lending continued to grow slowly in its early years. From 1967
    through 1972 cumulative loan approvals totaled only 74 million Units of
    Account.\4\ And over its first ten years of operations (1967-1976) the
    AfDB Group approved only 153 loans for a aggregate commitment total of
    roughly $327 million, (slightly more than 1.1 percent of the World Bank
    Group's 1999 lending level) an average of $2.14 million per loan. AfDB
    Group lending didn't really begin to reach significant levels until the
    Bank's third five-year operations period, 1977-1982, when total
    commitments for the period reached $952 million, nearly three times
    lending in the first ten years of Bank operations.
    ---------------------------------------------------------------------------
        \4\ From its inception the Bank chose to denominate its loans in
    the Bank Units of Account. Since 1971 a ``BUA'' has been the equivalent
    of one SDR.
    ---------------------------------------------------------------------------
        The Bank's early lending was concentrated in transport,
    telecommunication and power projects accounting for over 60 percent of
    disbursements to all sectors for the years 1967-1976. By the mid-
    seventies lending to agriculture had taken over as the principal
    lending sector for the Bank. Over its entire history (1967-1998)
    agriculture has remained its leading sector accounting for 23.1 percent
    of cumulative Bank Group\5\ loan approvals against 21 percent for
    public utilities, 16.3 percent for transport and 15.8 percent for
    industry.
    ---------------------------------------------------------------------------
        \5\ With the launching of the African Development Fund (AfDF) and
    the Nigerian Trust Fund (NTF) in 1973 and 1976 respectively, the AfDB
    was referred to as the AfDB Group.
    ---------------------------------------------------------------------------
        The early years of the AfDB clearly set the Bank apart from the
    other MDBs. Many of the Bank's early loans were co-financed operations
    where the AfDB was called on to serve primarily as a financier. In
    other cases the Bank financed projects already identified and pre-
    appraised by other international agencies such as the FAO, ILO and
    UNESCO. This allowed the Bank to compensate for its still limited staff
    and limited project experience. There was no ``country programming'' to
    speak of, macro-economic reviews of individual countries were
    practically non-existent and sector studies were rare as well. An
    allocation formula was employed to ensure that the Bank was not seen as
    favoring one African region over another.
        The importance of an even distribution of lending across the
    continent is instructive. In an institution in which the President is
    democratically elected (i.e. not the exclusive choice of one country
    ala the World Bank and the Asian Development Bank), being seen as
    discriminating against one region or another could have severe
    political consequences. The ``right'' to borrow from Africa's Bank was
    seen by the AfDB's regional members as one of the distinguishing
    features between the AfDB and other MDBs. It is also true that once the
    non-regional members of the Bank took on a more influential role and
    called for the employment of performance standards in the allocation
    process (especially the case with respect to the AfDF) this proposal
    was opposed by most African members as being somehow ``un-African''.

                           V. NON-AFRICAN MEMBERSHIP

        A number of factors contributed to the erosion of African sentiment
    for remaining an ``African-only'' Bank. First, those African oil-
    exporting nations indicated their unwillingness to fund substantially
    higher levels of lending activity. Second the development model that
    had enamored most of Africa in the Sixties--import substitution, state
    enterprise, foreign investment controls and an anti-private sector
    bias--began to be examined more critically. Finally, the proven success
    of the IDB and the AsDB in being able to increase substantially
    resource transfers to their respective regions without necessarily
    ``selling out'' their institutions to the industrial northern countries
    conveyed a practical lesson to many African shareholders.
        It was therefore no great surprise to find the AfDB beginning to
    tentatively explore the possibility of tapping the financial resources
    of the OECD countries to establish a concessional fund. As early as
    1968 the Bank contacted a number of donor countries including the
    United States to solicit support for such a fund. The Soviet Union and
    a number of eastern-bloc countries were also approached. Initially
    these approaches failed to generate much enthusiasm from either side.
    However the mood, at least on the part of the OECD countries, soon
    changed and more positive signals were received.
        After nearly three years of discussions and negotiations, both
    outside and within the Bank, a draft agreement was produced calling for
    the establishment of an African Development Fund (AfDF) The final AfDF
    agreement was signed by the AfDB and 13 non-regional ``State
    Participants'' in Abidjan in November, 1972. Total initial
    contributions to the Fund came to only $83 million including a token $5
    million contribution from the AfDB.
        Fund operations began in 1973 patterned after the World Bank's soft
    loan window, IDA. The terms established for AfDF loans were much like
    IDA terms, fifty-year maturities with ten years grace and a service
    charge of 0.75 percent. The funds raised in the initial round of
    contributions, $83 million, were to be used over the years 1973-1975.
    This limited funding was justified by some as an amount that would
    allow the donors to become familiar with the AfDB but was not enough to
    make more than a small dent in Africa's growing appetite for
    concessional funds. Consequently for the first replenishment of the new
    AfDF the Bank asked its donors for the amount of $300 million. Two new
    donors joined the original 13 and the Bank was able to raise $295
    million for the years 1976-1978. The second replenishment of the AfDF
    saw another doubling reaching $667 million raised from 21 donor
    countries.
        To run the AfDF, a separate board of directors was established with
    50 percent of the vote allocated to the contributing non-African
    countries and 50 percent allocated to the AFDB proper, allowing the
    regional members to be involved in Fund operations via their position
    in the Bank. The non-African AfDF board members were only given
    authority in dealing with AfDF matters and thus the Bank itself
    remained a fully African institution. The new AfDF board was composed
    of six non-regional directors and six regional directors representing
    the AfDB, for a total Fund board of twelve.

    The Opening of the Bank
        Between the establishment of the African Development Fund in 1973
    and the official opening of the Bank's capital to non-African nations
    in 1982, the subject of non-African membership was rarely off the
    Bank's radar screen. Beginning with the Bank's seventh Annual Meeting
    held in Kampala, Uganda in 1971 and carrying right through the 1978
    annual meeting held in Libreville, Gabon, the subject was constantly
    intruding on Bank business. On five separate occasions a vote to admit
    non-African states into the AfDB was taken, and on five separate
    occasions it was defeated. However, the vote against opening the Bank's
    capital to non-regionals was dwindling with each subsequent vote.
    Finally Nigeria broke ranks with the opposition and the opening was
    approved.

    ``African Character of the Bank''
        When agreement was finally reached it carried a very important
    proviso, to wit: non-African membership was approved as long as the
    ``African Character of the Bank'' was maintained. It would take four
    and a half more years before full agreement was reached and the opening
    of the Bank's capital became effective in December of 1982. Much of
    this time was occupied in the often-heated debate over exactly what was
    meant by the ``African character'' of the Bank and how to maintain it.
    What the African character is, and what it is not remains a subject
    still very much with us today.\6\
    ---------------------------------------------------------------------------
        \6\ For one of the best descriptions of the exhausting negotiations
    over the issue of non-African membership in the AfDB please see: Mr.
    I.K.N.E. Peprah, ``The African Development Bank: Taking Stock and
    Preparing for the 21st Century,'' C.C. Consulting Ltd. Ottawa, Canada,
    1994.
    ---------------------------------------------------------------------------
        The precise terms of entry were laboriously crafted involving
    numerous compromises on each side. AfDB management sought to assure
    African members that the introduction of non-African states into the
    Bank could be done in such a way as to allow the control of the Bank,
    for all practical purposes, to remain in African hands. These
    assurances were build upon changes in the Articles of Agreement that
    would limit the kinds and types of influence the non-regionals would
    have. These changes included the following points:

              (1) The President would always be a national from a regional
            state;

              (2) The Bank's lending operations would be confined to
            Africa;

              (3) The Bank's headquarters would always be located in
            Africa;

              (4) Regional members were guaranteed a majority of 66.66% of
            the votes;

              (5) The Board of Directors would be composed of 18 members,
            12 of whom would represent regional member countries;

              (6) Recruitment policy will be formulated to preserve the
            regional character of the organization (i.e. the vast majority
            of the AfDB staff was to be African with staff coming from the
            non-regional states to be limited to a token representation;\7\
    ---------------------------------------------------------------------------
        \7\ As of December 1998 there were 978 staff members of the AfDB
    Group. Of this number 869 were from regional member countries and 109
    from 24 non-regional countries or 11.15 percent, or roughly 4.5
    nonregional staff members per non-regional countries. AfDB 1998 Annual
    Report, p. 56.

              (7) Non-regional membership should not result in reduced
    ---------------------------------------------------------------------------
            contributions to the AfDF;

              (8) Non-regional membership should not entail modification in
            the Bank's established policy of using only economic criteria
            in its loan decisions;\8\ and
    ---------------------------------------------------------------------------
        \8\ See Peprah, op. cit. pp. 18-21.

              (9) The AfDB's annual meeting should always be held in a
    ---------------------------------------------------------------------------
            regional member country.

        A non-African can appreciate the nervousness and uncertainty that
    greeted the brand-new non-regional executive directors when the newly
    opened AfDB held its first board meeting in January of 1983. In spite
    of the specificity of the above amendments, much remained unclear. When
    was the African character placed in jeopardy? What types of decisions,
    what types of activities and what types of loan conditionality might
    threaten this elusive concept? \9\ As in any new organization, both
    sides had to feel the other side out and become comfortable in their
    collective decision-making responsibility.
    ---------------------------------------------------------------------------
        \9\ The author served as only the second U.S. executive director
    after the opening of the Bank's capital to non-regional members. The
    years were from 1985 to 1989. Even after the initial two years of
    working together as a board for the full Bank Group, there were
    numerous examples of splits along regional/nonregional lines
    accompanied by charges and counter-charges concerning the ``African
    Character'' of the Bank. These differences would become completely
    overshadowed by a major political crisis hitting the AfDB in 1994
    involving some regional board members and the President. Following the
    election of a new President in 1995 and the departure of all of the
    long-serving regional board members there now does seem to be a new
    constructive spirit of partnership among both regional and non-regional
    directors.
    ---------------------------------------------------------------------------
        Joining AfDB as a ``minority shareholder'' was especially hard for
    the United States. The U.S. ranked as the lead or co-equal shareholder
    in all the other MDBs: The World Bank, the Inter-American Development
    Bank, the Asian Development Bank and the European Bank for
    Reconstruction and Development. Although the U.S. couldn't dictate
    policies and procedures in these multilateral institutions, it was able
    to exercise considerably more influence on the Banks than other
    shareholders. This was not true in the African Development Bank.
        Because the United States, under the terms of the 1982 agreement,
    was required to share 33 \1/3\ percent of the AfDB share capital with
    twenty-three other non-African states, it was limited to 5.8 percent of
    the capital. This placed the U.S. second to Nigeria in terms of voting
    strength. Subsequently Egypt acquired additional shares under the
    Bank's share transfer rules and moved from third to second place behind
    Nigeria. Consequently today, the U.S. is the third leading shareholder
    with 5.6 percent of the Bank's capital. The top ten shareholders of the
    AfDB presents a unique mixture bearing on the subject to be considered
    next: influence and the AfDB.

                           Leading AfDB Shareholders*
    ------------------------------------------------------------------------
                 Country                    Percentage of  Total Shares
    ------------------------------------------------------------------------
           (1) Nigeria...............                                   9.7
           (2) Egypt.................                                   5.8
           (3) USA...................                                   5.6
           (4) Ivory Coast...........                                   5.0
           (5) Japan.................                                   4.6
           (6) Algeria...............                                   4.0
           (7) Morocco...............                                   3.7
           (8) Libya.................                                   3.6
           (9) Germany...............                                   3.5
          (10) France................                                 3.2**
    ------------------------------------------------------------------------
    * 1998 AfDB Annual Report, African Development Bank, Abidjan, Cote
      d'Ivoire, 1999, p. 30.
    ** Tied with Canada.

    The AfDB in Flux
        The most obvious change non-regional countries made in their first
    few years as members of the African Development Bank was in the level
    of resources. Non-African membership in the AfDB brought significantly
    larger soft-fund replenishments and dramatically improved access to the
    major capital markets of the World. With the callable capital of the
    industrial OECD countries now available to serve as a funding
    guarantee, the AfDB could approach the capital markets on terms not
    significantly dissimilar to those given to the AsDB and the IDB.\10\
    ---------------------------------------------------------------------------
        \10\ The key investment rating firms acknowledged the importance of
    non-African participation in the AfDB by rating their debt. In January
    and February of 1984 first Fitch Investor's Services, Inc. and then
    Moody's Investor's Services, Inc. rating AfDB senior debt as Triple A.
    Standard and Poors, the other leading investment rating firm, rated
    AfDB senior debt as Double A plus. However, in 1990 S&P upgraded the
    AfDB rating to Triple A matching the Bank's other ratings. Then in
    1995, reflecting the Bank's arrears situation and its governance
    problems, S&P reverted to the Double A+ rating for the Bank's senior
    debt.
    ---------------------------------------------------------------------------
        With a substantial fourth replenishment of the African Development
    Fund amounting to $1.45 billion agreed to in May of 1984 to cover the
    period 1985-1987 the AfDF was able to expand its lending significantly.
    Then in November of 1986 an AD HOC Committee on the Forth General
    Capital Increase, appointed by the Bank's Board of Governors, approved
    a 200 percent increase in the Bank's capital.\11\ This raised the
    authorized capital of the AfDB from $6.3 billion to about $23 billion.
    ---------------------------------------------------------------------------
        \11\ This ``AD HOC Committee'' was established by the AfDB
    Governors at the 1986 Annual Meeting in Harare, Zimbabwe, May, 1986.
    The capital increase was approved by the Governors' vote at the 1987
    Annual meeting in Cairo, Egypt, June 1987.
    ---------------------------------------------------------------------------
        AfDB Group lending grew dramatically in the last half of the 1980s,
    from $1 billion in annual commitments in 1985 to a record of $3.3
    billion in 1990. Much of this expanded lending came about through the
    advent of ``policy-based lending'' that allowed the Bank to engage in
    fast disbursing structural and sectoral adjustment loans. At the
    insistence of the AfDB board of directors, most of this type of lending
    was expected to be directed toward co-financed projects in cooperation
    with the World Bank. Another indication of the rapidity by which the
    AfDB Group expanded it lending in the late 1980s can be seen from the
    fact that from 1986 to 1990 AfDB Group lending increased by a total of
    $12 billion. Lending for the period 1967 to 1985 resulted in cumulative
    lending of a little more than half that amount at $6.8 billion.
        The period 1983 to 1990 might be correctly referred to as the
    Bank's ``honeymoon'' period. The ``marriage'' between the regionals and
    non-regionals went relatively smoothly. There were, from time to time,
    differences that surfaced between how the Bank could best promote
    African development. Regional executive directors (E.D.s) expressed
    frustration with the approach taken by some of the non-regional
    directors over how detailed the loan approval process should be.
    Regional E.D.s saw the primary purpose of the Bank being the transfer
    of resources to the African countries. Non-regional E.D.s saw their
    responsibility as being the detailed examination and evaluation of each
    individual loan that the Bank's management proposed. Regional E.D.s
    thought that the function of project ``post-evaluation'' was of
    marginal value absorbing too large a share of AfDB staff and budget
    resources. Non-regional E.D.s wanted the post-evaluation function
    elevated in importance and advocated that the director of post-
    evaluation report directly to the Board and not the Bank's President.
    One particular loan intended for the Bank's host country, the Ivory
    Coast, was seen as inadequate in several respects. When it appeared
    that the Board might be intending to reject the project, an appeal to
    African solidarity reaching the level of heads of state resulted in a
    majority vote in favor of the project over the unanimous objection of
    the non-regional directors.\12\ However, such clear divisions of
    position were rare. But when they did occur, there was no question
    which side would win as long as the voting structure remained two-
    thirds to one-third.
    ---------------------------------------------------------------------------
        \12\ Normally votes on individual loans were rare, with the
    President seeking ``consensus'' prior to a final decision. In the case
    cited above a recorded vote was called for by an executive director.
    ---------------------------------------------------------------------------
        Undoubtedly the Bank Group in its eagerness to expand lending
    commitments to record levels let some loans slip by that should have
    been cancelled or substantially redesigned. Non-regional E.D.s in their
    desire to appear as good junior partners in a unique multilateral
    institution, often went along with loans and programs they might have
    resisted more strongly in another institution.
        A more serious problem was the credit policy employed by the Bank
    in the l980s. The management of the Bank adopted a policy that allowed
    African countries with low levels of per-capita income to borrow on
    Bank terms when the resources in the Fund were considered inadequate.
    As a result, some of the extremely poor African countries, countries
    that would be considered only ``IDA eligible'' by World Bank standards,
    took on AfDB debt with the corresponding higher interest rates and
    shorter maturities. The Bank board changed the credit policy to that
    employed by the World Bank in 1995 but it was too late and the Bank's
    arrears problem was intensified more than it needed to have been.
        Still few saw the AfDB's problems as fundamental. A tightening of
    the lending process with some improvements in the Bank's operational
    procedures were thought all that was necessary. And with the plentiful
    resources provided by substantial AfDF replenishments and by the record
    200% capital increase, there was sufficient reason for the non-regional
    and regional executive directors to cooperate and get along. All this
    changed with the publication of the ``Knox Report.'' \13\
    ---------------------------------------------------------------------------
        \13\ The Knox Report is the shorthand reference for ``The Quest For
    Quality: Report of the Task Force on Project Quality for the African
    Development Bank, April 1994. The Chairman of the task force was David
    Knox, formerly World Development Bank Vice President.
    ---------------------------------------------------------------------------
    The Knox Report
        From 1992 through 1994 the three regional development banks
    followed the lead of the World Bank in assembling expert teams to
    review their own lending portfolios. The World Bank's report was known
    as the Wapenhans Report after the former World Bank Vice President,
    Willi Wapenhans. The report caused a sensation as it found a serious
    deterioration in project quality at the World Bank. Coming from staff
    from within the World Bank its conclusion that the Bank was more
    interested in quantity of new lending than in quality of its individual
    loans was seen as confirmation of the concerns of many observers
    outside the Bank.\14\
    ---------------------------------------------------------------------------
        \14\ The World Bank, Effective Implementation: Key to Development
    Impact, Oct. 2, 1992.
    ---------------------------------------------------------------------------
        Because of the widespread concern generated by the Wapenhans
    Report, the Asian Development Bank, the Inter-American Development Bank
    and the African Development Bank all launched in short order their own
    portfolio reviews. Although the findings in each of these reports were
    roughly similar, the Knox Report on the AfDB was the most critical and
    hard hitting.\15\ After reviewing the Bank's internal systems and
    procedures, conducting numerous interviews with staff and with client
    country officials and reviewing available documentation on project
    evaluation, the Knox Committee began its report with the following
    direct statement: ``The African Development Bank is facing serious
    problems of quality of lending.'' In the report's prologue it
    identifies three main problems needing to be addressed urgently:
    ``First, the Bank is pulled in all directions by conflicting goals and
    attitudes of its shareholders. This is perhaps the most important cause
    of the Bank's inability to deliver quality sustainable project support
    to Africa. . . . Second, the gap between the Bank's lending policies
    and procedures and its practice. There are areas where policies and
    procedures could be strengthened. But, broadly speaking, they are
    sound. The problem is that they are not applied or not applied
    consistently . . .. Third, the Bank has a great asset in the trust of
    its borrowers who look to it as an African institution to help overcome
    their problems. But, as borrower after borrower complains, the Bank is
    absent when it should be present.'' \16\
    ---------------------------------------------------------------------------
        \15\ The Knox Report has received considerable praise for its
    forthright statement on AfDB weaknesses. For example in English and
    Mule's book entitled: The African Development Bank, the North-South
    Institute, Ottawa, Canada, one finds the following statement: ``Only
    thirty-five pages long, it is probably the most complete critique of
    the ADB Group to date, and certainly the most credible.'' p. 34.
        \16\ The Knox Report, pp. 1-2.
    ---------------------------------------------------------------------------
        The AfDB took the report's findings to heart and immediately began
    to reform its operational procedures along the lines of the report's
    recommendations. An action plan was established and the Bank began to
    issue six monthly reports on the progress in implementing the called-
    for reforms.\17\ Particular attention was given to the role of post-
    evaluation in helping the Bank avoid problems identified with earlier
    funded projects. Also, because the Knox report made much over the
    inadequate project supervision, the following year's administrative
    budget devoted significantly greater resources to this function than
    heretofore. Other areas of concern highlighted in the Bank's response
    to the Knox Report, entitled ``The Action Plan for Improving the
    Quality of Bank's Operations'' are portfolio review, lending policies
    and practices, resources and organization, and the Bank's operational
    culture.\18\
    ---------------------------------------------------------------------------
        \17\ The AIDB 's response to the findings and recommendations of
    the Knox Report was contained in ``The Action Plan for Improving the
    Quality of Bank's Operations.'' (AfDB, May 11, 1995)
        \18\ Action Plan, Ibid. p. 2.
    ---------------------------------------------------------------------------
        A complicating factor for the Bank in the immediate follow-up to
    the 1994 Knox Report was the emergence of a political crisis, having
    little if anything to do with the presence of non-regional members,
    impacting on the Bank's governance structure. Here a dispute between
    the Bank's former President and certain long-serving regional executive
    directors tended to immobilize the Bank precisely at the time that
    shareholder countries were looking to the Bank's board and management
    for evidence of reform. Was the Bank moving seriously to address the
    weaknesses outlined in the Knox Report? To get their message across,
    the principal AfDF donor nations postponed funding the AfDF for one
    year effectively stopping concessional lending in 1994/1995. As a
    consequence AfDB Group lending for 1995 plunged to 46 percent from its
    1994 level (UA 450 million) continuing the sharp downward trend
    starting in 1992.\19\
    ---------------------------------------------------------------------------
        \19\ The sixth replenishment of the AfDF was originally scheduled
    to amount to $3.42 billion but shortfalls in contributions resulted in
    an amount significantly lower at $2.96 billion. These AfDF resources
    provided concessional funding for the years 1991-1993. Funding for AfDF
    VII to cover the years 1994-1996 was delayed considerably beyond its
    intended start time and wasn't approved until mid-1995 at a much
    reduced level of approximately $1.5 billion. As a result concessional
    fund lending dropped from $894 million in 1993 to $45 million in 1994
    and $128 million in 1995. It was not until 1997 that concessional
    lending would rebound to earlier levels when AfDF VII resources became
    fully available. As a sign that the AfDF deputies were satisfied with
    the reform efforts undertaken by President Kabbaj, agreement was
    reached in January 1999, to replenish the AfDF by an amount of
    approximately $3.1 billion.
    ---------------------------------------------------------------------------
        The Bank got back on track in late 1995 with the appointment of a
    new President, Omar Kabbaj from Morocco, and the departure from the
    board of several long serving executive directors. The AfDB's Board of
    Governors subsequently instituted a two-term limit for board members
    and for senior management. Other significant changes of note under the
    Bank's Action Plan included the separation of approximately twenty
    percent of the staff (225), the appointment of 54 new managers and a
    major reorganization of the Bank. In April of 1995 the Governors of the
    AfDB adopted a new credit policy for the AfDF putting the fund on the
    same footing as IDA. This policy has substantially reduced the number
    of countries eligible to borrow from the Bank, limiting them to the
    smaller AfDF resource pool.

                       VI. AMERICAN INFLUENCE IN THE AFDB

        How can the results of sixteen years (1983-1999) of participation
    in the African Development Bank be summed up? On balance the Bank is a
    much more professional institution today than when the U.S. joined.\20\
    The Bank has adopted poverty alleviation as its ``central goal''. It
    has incorporated into its project design processes gender
    considerations, environmental review, private sector support, and civil
    society participation in its country assistance planning. In addition
    the Bank has committed itself to promoting ``good governance'' to
    include respect for the rule of law, accountability, financial
    transparency and ``fighting corruption.'' \21\ This mandate and its
    components have been strongly promoted by the U.S. and its G-7 allies.
    Changes in Bank policies and practices reflecting these goals have all
    been adopted over the course of the last several years. For a
    ``minority'' shareholder this is not a bad record.
    ---------------------------------------------------------------------------
        \20\ A sampling of World Bank staff who have had dealings with the
    AfDB will bear this out.
        \21\ AfDB, ``The Vision of the African Development Bank'', 1999,
    Abidjan, Ivory Coast.
    ---------------------------------------------------------------------------
        But there is a risk that the U.S. sometimes attempts to overloan
    the influence ``circuits'' by trying to obtain too many changes and not
    allow the new policies to make themselves part of the Bank's permanent
    landscape. Two appendixes to this paper are meant to convey how
    influence can be either effectively utilized or squandered. The primary
    methods of influencing any multilateral institution are listed in
    Appendix A. Appendix B lists the sort of goals or changes the U.S. has
    sought in all the multilateral development banks going back to the late
    Seventies. The goals listed range significantly from the petty to the
    major themes of development policy. If influence of any member of a
    multilateral organization can be thought of as a finite asset, then
    clearly the more ``noneconomic'' goals sought the less likely a country
    can employ its influence to achieve institution changes that reflect on
    the major development issues of our time.\22\
    ---------------------------------------------------------------------------
        \22\ Most OECD members of the multilateral development banks
    believe the United States pursues far too many objectives in its
    dealings with MDB managements. Combine this with a record of rarely
    contributing its pledged amounts to soft fund replenishments of capital
    increases on time and the message becomes clear. The United States
    risks losing its recognized influential voice in the most important
    multilateral development finance institutions in the world.
    ---------------------------------------------------------------------------
        Moreover, if the focus is on U.S. participation in a regional
    multilateral development institution such as the African Development
    Bank, the question has to be asked, what is the trade-off between
    institutional uniqueness and achieving changes in the policies and
    practices of that institution. With 5.8 percent of the vote in the
    AfDB, the U.S. has made this relatively small voting share accomplish a
    very respectable record. But a line does exist where the voting
    strength will begin to decrease in effectiveness as the goals sought
    are seen as more and more peripheral.
        Through its membership in the African Development Bank the U.S. is
    buying participation in what is seen to be the most respected
    multilateral development institution in Africa. In the words of the
    Bank: ``This pan-African ownership, governance structure and staffing
    have made it possible for the Bank to accumulate unique experience and
    institutional memory of development possibilities, and constraints in
    Africa . . . In the area of governance the Bank is generally accepted
    as a trusted partner on politically sensitive issues of governance and
    thus has a special role to play.'' \23\
    ---------------------------------------------------------------------------
        \23\ AfDB, Vision Statement, op. cit. p. 3.
    ---------------------------------------------------------------------------
        Is this important to the United States? Is an institution such as
    the AfDB capable of assisting Africa move toward sustainable
    development, working for the elimination of conflict situations that
    seriously erode the strength of involved countries, helping deal with
    the widespread AIDs crisis, and a host of other challenges confronting
    the continent in the 21st century? I think the answer to both is an
    unequivocal yes. There is an added benefit that in the United States is
    often overlooked. Learning to operate effectively in an international,
    uniquely African, institution as a minority shareholder is not
    inconsequential. It is a skill that will serve the nation well in the
    years to come and it needs to be strengthened.

                                   APPENDIX A

    Shareholder Influence on the MDBs
         (1) Meetings With MDB President and Senior Management

         (2) Annual Meeting Speech

         (3) Initiation and/or Review of MDB Policy Papers

         (4) Proposing Select Nationals for Key Staff Positions

         (5) Visits to MDB Headquarters:

             (A) Governmental

             (B) Private Sector

             (C) NGOs

             (D) Misc.

         (6) Replenishment Negotiations (Linking Specific Demands to
    Potential Contribution Levels, a la IDA 12 and AfDF 8)

         (7) Consensus Building With Like-Minded Shareholders (i.e. G-7
    Meetings or Nordic Bloc)

         (8) Co-Financing Partner Influences (Bilateral Donors/Private
    Sector)

         (9) Board Controlled Review Committees/Functions: Evaluation,
    Audit, Inspection panel, etc.

        (10) Overseas Networks: Diplomatic Posts, Aid Missions, Private
    Sector

        (11) Capital Market Entry (Authorization to Enter)

        (12) Instructions to Executive Directors (Abstentions/No Votes,
    Comments)

        (13) Meeting Payment Commitments (IDA Tranches, etc.)

                                     ______

                                   appendix b
    Shareholder Influence Objectives (What Shareholder Influence Gets
            ``Spent'' On)

         (1) Gender Issues

         (2) Appropriate Technology

         (3) Micro-Credit Designs

         (4) Basic Human Needs (BHN)

         (5) Poverty Alleviation

         (6) Environmental Policies

         (7) Environmental Projects

         (8) Private Sector Promotion

         (9) Recurrent Cost Coverage

        (10) Country Assistance Strategies (CAS)

        (11) Local Currency Financing

        (12) Project Implementation Units (PIUs)

        (13) Lines of Credit

        (14) National Development Banks

        (15) Local vs. Foreign Consultants

        (16) Rural Health Projects

        (17) Primary vs. Secondary Education

        (18) Post Evaluation

        (19) Capacity Building

        (20) Renewable Energy Projects

        (21) Regional Integration

        (22) Corruption

        (23) Auditing/Accountability

        (25) Ownership

        (26) Civil Society

        (27) Performance Standards

        (28) Post-Conflict Policy

        (29) NGOs

        (30) Structure Adjustment Loans (SALs)

        (31) Sector Adjustment Loans (SECALs)

        (32) Local Offices

        (33) Transparency

        (34) National Sovereignty

        (35) Program Lending

        (36) Staff Quotas

        (37) Integrated Rural Development

        (38) Financial Sector Reform

        (39) Maintenance Systems

        (40) Debt Profile Management

        (41) Southern NGOs

        (42) Poverty Profiles

        (43) Privatization

        (44) Institutional Reform

        (45) Conditionality

        (46) Impact Studies

        (47) Social Safety Nets

        (48) Graduation

        (49) Exchange Rate Regime

        (50) Trade Policy

        (51) Rule of Law

        (52) Project Supervision

        (53) Partnership

        (54) Staff Benefits

        (55) Travel Policy

      Summary of Trip Report: Peru and Paraguay, March 26 to April 6, 2004

           SUBMITTED BY NILMINI RUBIN, SFRC PROFESSIONAL STAFF MEMBER

        From March 26 to April 6, 2004, an SFRC staff delegation consisting
    of Nilmini Rubin visited Peru and Paraguay as part of the committee's
    ongoing inquiry into corruption at the Multi-lateral Development Banks.
    I spent 4 days in Peru meeting with individuals from the Inter-American
    Development Bank, the government of Peru, and civil society while
    looking at numerous projects including the Inter-American Development
    Bank-financed Camisea pipeline, Inter-American Development Bank-
    financed microlending projects and a World Bank-financed land titling
    project. I also spent 7 days in Paraguay focusing on the World Bank and
    Inter-American Development Bank-financed Yacyreta dam. There, I met
    with management of the Yacyreta dam, government staff, civil society
    and people affected by the dam to gain their perspective on the
    effectiveness of the World Bank and Inter-American Development Bank as
    participants in the project.

    Summary
        In Peru, I visited the controversial private-sector Camisea natural
    gas project (pipeline shown right) that the IDB decided to fund in
    2003. The IDB will fund up to $135 million of the estimated total $1.4
    billion Camisea project cost. While the government of Peru stresses the
    financial benefits of Camisea (1% increase to GDP growth per year, $3.9
    billion increase in GDP over 30 years, and $5.1 billion in energy
    savings to Peru over 30 years), many NGOs are raising social and
    environmental concerns with the project. Currently, compensation
    packages for local communities for the environmental impacts (mainly
    erosion and deforestation) are being solely determined by the Camisea
    gas consortium. Though this compensation structure is permitted by the
    IDB, it could invite a downward bias in the size of compensation
    packages and is not transparent.
        Most of pipeline consortium's contentious decisions about placement
    in natural resources and indigenous reserves were made before the IDB
    became a financial contributor to the private-sector Camisea project.
    Currently, IDB staff argue that it is acceptable for the IDB to join
    private sector projects after key decisions were made--even if the IDB
    would not have approved of those decisions if it had been a party to
    them. The IDB is now requiring environmental guidelines be met but
    those requirements do not reconsider pipeline placement. NGO
    representatives argued that IDB should not fund any projects that do
    not completely conform to IDB environmental guidelines. The private
    sector, once made aware of a shift in demands by the IDB, would then
    structure projects to conform to IDB guidelines early-on if there is a
    small chance that they will eventually request IDB financing. This is a
    particularly important issue as the USG is encouraging the IDB to do
    more private-sector lending.
        Transparent financial structures have not been developed to ensure
    that Camisea-generated funds are not misused by the companies, the
    Government of Peru, local governments or local communities. Currently,
    this does not appear to be under consideration.
        In Paraguay, I visited the World Bank and IDB funded Yacyreta dam
    project which was built on the Argentine border in order to provide
    Paraguay with revenues and Argentina with electricity. When Yacyreta
    began in 1973, it was initially budgeted to cost $2 billion of which
    $1.7 billion was provided by the World Bank and IDB. The project cost
    and debt has skyrocketed to $12.6 billion and still needs an estimated
    $800 million to reach completion. Though World Bank and IDB inspection
    panels continue to investigate social and environmental problems with
    Yacyreta, no forensic audit has been done to determine if funds were
    misused. Despite allegation of corruptions, it is not clear if an
    investigation has been conducted by the development banks. No companies
    have been debarred by the World Bank as a result of the Yacyreta
    project.
        The initial decision to locate the dam (See Figures 2 and 3,
    below.) in a shallow, populated area is shrouded in corruption
    allegations. In addition, many Paraguayans believe that the dam
    maximized flooding area so that former President Stroessner and his
    friends who bought land in the flood plan could receive lucrative
    buyouts from the dam management. The Yacyreta dam is 43 miles long--
    alternative dam sites on the Argentine-Paraguay border that are
    currently under consideration only require a 5 mile long dam across an
    unpopulated canyon. (For reference, the Hoover Dam is 0.24 miles long).
    The dam placement decision was apparently made before World Bank and
    IDB involvement and was not changed by the banks.

                                    Figure 1

                                    Figure 2

                                    Figure 3

        It is important to note that Lahmeyer International, a German
    company convicted last year by the Lesotho High Court of bribery
    related to a World Bank-funded water project, was involved in the
    Yacyreta project.
        Compensation packages for those flooded out of their homes and
    business by the Yacyreta dam were (and still are) solely determined and
    implemented by dam management. No outside body was involved in
    establishing compensation criteria nor did an outside body serve as a
    tribunal for compensation disputes.
        The other eight World Bank and IDB projects that I visited in Peru
    and Paraguay were smaller-scale and had clearly identifiable benefits.
    These projects included microenterprises, small and medium enterprises,
    land-titling, elementary education, pre-schools (See Figure 4, below.),
    roads, watershed development, as well as sanitation and water delivery
    (See Figure 5, below.). In addition to project visits, I attended the
    IDB annual meeting in Peru where I met with IDB Executive Directors and
    staff, U.S. Treasury Officials, consultants, as well as local and
    international NGOs.

                                    Figure 4

                                    Figure 5

        One overall concern with the development banks is that project
    success or failure is not incorporated into development bank staff
    performance appraisals. Staffers responsible for project design and
    implementation are not impacted if their projects do not meet
    performance benchmarks or are found to not be successful. Linkage, as
    is done with USAID performance appraisals, may be helpful to ensure
    that development projects meet project goals, do not repeat previous
    mistakes, and do not leak funds.

        The following persons met with me during my 4 days in Peru:
    U.S. Government Personnel
        David Lippeatt, Deputy Economic Counselor, U.S. Embassy in Peru
    Inter-American Development Bank Personnel
        John Ferriter, External Affairs, Inter-American Development Bank

        Robert Montgomery, Private Sector Department, Inter-American
    Development Bank
    Business Community
        Fernando Duestua, Institutional Relations, Transportadora de Gas de
    Peru S.A. (TGP)

        Gonzalo Morant, Gerente Medio Ambiente, Transportadora de Gas de
    Peru S.A. (TGP)

        Sandra Martinez, Native Communities Affairs, Pluspetrol

        Alberto Moons, Vice President, Pluspetrol

        Vincent McElhinny, Program Manger, InterAction
    Civil Society
        Aaron Goldzimer, Social Scientist, Environmental Defense

        Abigail Parish, Latin American Program, Bank Information Center

        Adam Mendolsohn, Latin American Program, Bank Information Center

        Nadia Martinez, Sustainable Energy and Economy Network, Institute
    for Policy Studies

        Oscar Rivas, Sobrevivencia, Friends of the Earth Paraguay

        Haroldo Salazar Rossi, Vice President, Association Interetnica de
    Desarrollo de la Selva Peruana (AIDESEP)

        Rover Rivas Korinti, Consejo Machiguenga del Rio Urubanba (COMARU)

        Carlos Soria, Environmental Lawyer, Foro Ecologico del Peru

        Atossa Soltari, Amazon Watch

        Elizabeth Vetura Egoavil, Executive President, Entitad de
    Desarrollo para la Pequena y Microempresa (CONFIANZA)

        Gerardo Porras Dolorier, Legal Asesor, Entitad de Desarrollo para
    la Pequena y Microempresa (CONFIANZA)

        The following persons met with me during my 7 days in Paraguay:

    U.S. Government Personnel
        Kevin Johnson, Charge d'Affairs, U.S. Embassy in Paraguay

        James Perez, Acting Deputy Chief of Mission, U.S. Embassy in
    Paraguay

        Wayne Nilsestuen, USAID Director in Paraguay

        Steve Marma, Democracy Programs, USAID
    Inter-American Development Bank Personnel
        John Ferriter, External Affairs, Inter-American Development Bank

        Alvaro Cubillos, Representative, Inter-American Development Bank

        Alberto C. Passos, Sectoral Specialist, Inter-American Development
    Bank

        Fernando Orduz, Sectoral Specialist, Inter-American Development
    Bank

        Carlos Antonia Arze, Social Development Specialist, Inter-American
    Development Bank
    World Bank Personnel
        Peter Hansen, World Bank Representative in Paraguay
    Paraguay Public Sector Personnel
        Eduardo Petta, District Attorney, Public Ministry, Encarnacion,
    Paraguay
    Civil Society
        Alvaro Caballero, Administrative Manager, Centro de Informacion y
    Recursos para el Desarrollo

        Sheila Abed de Zavala, Instituto de Derecho y Economica Ambiental
    (IDEA)

                                   __________

               Summary of Trip Report: Lesotho and South Africa,
                         August 24 to September 2, 2004

           SUBMITTED BY NILMINI RUBIN, SFRC PROFESSIONAL STAFF MEMBER

        From August 24 to September 2, 2004, an SFRC staff delegation
    consisting of Nilmini Rubin visited Lesotho and South Africa as part of
    the committee's ongoing inquiry into corruption at the Multi-lateral
    Development Banks. I spent six days in Lesotho meeting with individuals
    from the World Bank, the government of Lesotho, civil society and the
    business community while looking at numerous projects including the
    World Bank-funded Lesotho Highlands Water Project, a World-Bank
    financed child development center and an African Development Bank-
    financed secondary school. I also spent three days in South Africa
    meeting with Development Bank of South Africa officials, business-
    people, and other experts, for their perspective on the effectiveness
    of the World Bank's actions in Lesotho and their experiences with the
    African Development Bank.

    Summary
        The World Bank, in addition to providing more than $150 million in
    financing to the Lesotho Highlands Water project (LHWP), is actively
    engaged with the LHDA in providing social and environmental
    protections. The Bank provided a panel of experts, regular assessment
    missions and consistent engagement with the governments of Lesotho and
    South Africa.
        Many individuals in Lesotho felt that the World Bank's response to
    corruption related to the LHWP was inadequate. The World Bank debarred
    one company, Acres International, for three years as well as one
    individual, Max Cohen, and his businesses. However, the World Bank has
    not debarred the other international companies that were convicted of
    bribery in Lesotho.
        Several members of civil society and government officials were
    dissatisfied with the length of the Acres International debarment. They
    were concerned that the World Bank mitigated the debarment because
    ``Acres had already been ordered to pay a criminal fine by the Lesotho
    courts and that the relevant persons involved in Acres' work on the
    LHWP are no longer in positions of responsibility in the company.''
    They noted that Acres was the only convicted company that had not yet
    paid its complete fine.
        While the World Bank allowed the companies convicted of bribery to
    attend their Sanctions Committee hearing, they did not allow the
    government of Lesotho to send a representative or prosecutor to attend
    the hearing and summarize the volumes of evidence that were presented
    at trial according to the Chief Justice of Lesotho, the Attorney
    General of Lesotho, and the chief prosecutor in the LHWP bribery cases.
        Lesotho spent a significant amount to prosecute a number of
    companies for bribery related to the LHWP. However, despite an earlier
    assertion by World Bank staff that the World Bank could contribute to
    the cost of prosecution because the ``bank has deep pockets,'' the
    World Bank did not provide any funding to assist the government address
    the bribery allegations. The World Bank did not provide funding because
    it did not have a mechanism to loan or grant money to pay for a
    prosecution, according to World Bank staff.
        The U.S. Embassy was praised by the Chief Justice of Lesotho for
    its assistance during the period of the trials for providing funding
    for internet access and Lexis-Nexis (a web-based legal research tool)
    so that the judiciary could access the most recent and relevant legal
    research. This information tool was not biased towards or against a
    conviction, it simply allowed the government of Lesotho access to
    important international legal information.
        When visiting the Katse Dam (See Figure 6, below.), I met with a
    number of villagers that were not satisfied with the compensation they
    received for the impact of the dam on their livelihood. Compensation
    packages are determined by the implementing agency in a country and are
    designed to meet World Bank safeguard policies. In addition to
    involuntary resettlement safeguard policies, the World Bank applies
    safeguards policies on indigenous peoples, cultural property, dam
    safety, the pest management, environment, forests, natural habitat,
    waterways and disputed areas to project lending. However, policy-based
    lending (also called budget support or adjustment lending), does not
    incur safeguards.
        If an affected person is not satisfied with the compensation
    package they are assigned, there must appeal to the implementing
    agency. If the implementing agency does not act, the affected people do
    not have recourse through the project. An instrument for recourse is
    not a requirement of the World Bank safeguards. The implementing agency
    suggested that affected people can appeal to the Ombudsman. The Office
    of the Ombudsman did not receive funds or additional staffing through
    the LHWP project. The Ombudsman said that a project tribunal to hear
    the complaints of affected people would have been helpful.
        Near the Katse Dam, I visited a number of villages that were
    impacted by the Lesotho Highlands Water project. The agreement between
    Lesotho and South Africa stipulates that no person be made worse off by
    the Lesotho Highlands Water Project. However, there are a number of
    impacts on the villagers (See Figure 7, below.) that are difficult to
    address. Reportedly, the HIV/AIDS rate in the project area is higher
    than the 29% HIV/AIDS rate in the rest of Lesotho because the disease
    was transmitted by dam construction workers to the villagers.

                                    Figure 6

                                    Figure 7

        The dam created a barrier that hampers access of villages like
    Mapeleng to Katse town where there are medical, social and economic
    resources. Affected villagers said that they must now either pay to
    cross the dam, pay for a taxi or walk for many hours to reach Katse.
    Villagers expressed concern about a Lesotho Highlands Development
    Authority-imposed licensing fee now imposing on people who want to fish
    on the Katse dam. As many villagers are subsistence farmers, raising
    cash to fish or for transportation is a significant challenge. Finally,
    some villagers complained that the springs that they used to depend on
    dried up after the construction and filling of the Katse dam. They
    noted with irony that they had a view of clean mountain water destined
    for South African taps but that they lost their access to safe water.
    Figure 8, below, is a picture of Mapeleng village next to the Katse
    dam. The LHWP includes the development of water systems but a
    significant portion of the systems have not yet been built.

                                    Figure 8

        The Lesotho Highlands Water Project was developed during a period
    when sanctions applied to South Africa. Members of civil society
    accused the bank of ``sanctions busting'' in developing the loan for
    this two-country project through a trust in Europe. Whether or not this
    is true, there is a conception that the project was born in a secrecy
    that impacted the adequacy of project design in Katse.
        The resettled people that I visited from the Mohale Dam area seemed
    less distressed and generally satisfied with their current situation.
    Shown below (Figure 9) is a resettled woman who is renting out rooms in
    the house built for her. Generally, government officials, civil society
    and World Bank staff felt that lessons learned in the resettlement of
    people in Katse were applied later when people were resettled from
    Mohale.

                                    Figure 9

        Lesotho Ministry of Education staff traveled with me to visit a
    metal, wood and handicraft workshop at a secondary school that was
    financed by an African Development Bank loan (See Figures 10 and 11,
    below). We found an unused workshop that had been ready for two years.
    Though the building and the teaching supplies had been purchased with
    the loan, the government had not yet provided a teacher. This was
    discouraging because though the government of Lesotho is paying
    interest on the secondary school loan, there is no current benefit to
    the children of Lesotho.
        A teacher said that the biggest problem faced by the secondary
    school was the impact of HIV/AIDS. He said that many of the children
    stop coming to school after a parent dies or falls ill. Above is a
    picture of students at the secondary school.
        The economic impact of HIV/AIDS was highlighted in a garment
    factory that I visited, Shinning Century Limited. The factory
    reportedly suffers from productivity loss due to absenteeism and low
    morale of sick workers, workers that must care for sick family member
    and workers that must attend funerals. To address the needs of sick
    workers and to keep others from contracting HIV/AIDS, the factory hires
    health educators to support HIV/AIDS prevention, voluntary testing,
    counseling and treatment for its workers. The factory, owned by
    investors from Taiwan, credited the U.S. Africa Growth and Opportunity
    Act for its locating in Lesotho.
        In South Africa, I visited infrastructure funded by the Development
    Bank of South Africa through an African Development Bank line of
    credit. The infrastructure included a road, stand-pipe water sources
    (See Figure 12, below.) and street lights (See Figure 13, below.) in a
    poverty stricken area outside of Johannesburg.

                                   Figure 10

                                   Figure 11

                                   Figure 12

                                   Figure 13

        The following persons met with me during my six days in Lesotho:
    World Bank Personnel
        Katherine Ferrey, Country Counselor, External Relations

        Andrew Macoun, Bank African Water Team
    Lesotho Public Sector
        Liphapang Potloane, Chief Executive, Lesotho Highlands Development
    Authority

        Mahlape Mothepu, Deputy General Manager, Lesotho Highlands
    Development Authority

        Tsotang Moeketsi, Lesotho Highlands Development Authority

        Richard Ramoeletsi, Field Operations Manager

        Peete Molapo, Chief Executive, Lesotho National Development
    Corporation

        Mahapela Lehohla, Chief Justice

        Lisebo Chaka-Makhooane, Registrar of the High Court

        Lebohang Maema, Attorney General

        Guido Penzhorn, Prosecutor

        Sekara Mafisa, Ombudsman

        Borotho Matsoso, Director General, Directorate on Corruption and
    Economic Offences

        Dominique Makara, Deputy Principle Secretary for Education

        Mr. Phamotse, Ministry of Education

        Mr. Mahloka, Ministry of Education

        Satchy Sivam, Contracts Advisor, Ministry of Education

        Puseletso Ntiisa-Letuka, Financial Controller, Ministry of
    Education

        Rafito Mosala, Health Worker
    Civil Society & Business Community
        Seabata Motsamai, Executive Secretary, Lesotho Council of NGOs

        Mothusi Seqhee, Community Worker, Transformation Resource Center

        Mr. Momosatale, Transformation Resource Center

        Mr. Mamaywe, Transformation Resource Center

        Peter Lahann, Transformation Resource Center

        Fiona Darroch, Barrister (UK)

        Thaba Bosiu, Former Principal Chief, a village near Mohale Dam

        Majoalane Modekele, woman resettled in phase 1B of the Mohale Dam

        Moea Ramokoatsi, former Community Liason Assistant, phase 1A of the
    Katse Dam

        Benedict Lueta, villager affected by Katse Dam, Ha Nkokana

        Lehlohlondo Thaethe, orphan resettled in phase 1A of the Katse Dam

        Khethang Khethan, Chief of Mapeleng village

        Ray Haakenson, Beautiful Gate

        Laura Robertson, Beautiful Gate

        Rafito Mosata, Health Clinic Director

        Susan Malefane, Personnel Manager, Shinning Century Limited

        Mpho Mohaleroe, Shinning Century Limited

        Palesa Motsoeneng, Health Education, Shinning Century Limited
    U.S. Government Personnel
        Karl Albrecht, Charge d'Affaires
        Moroesi Akhionbare, Economics and Commercial Affairs Assistant

        The following persons met with me during my three days in South
    Africa:
    Lesotho Public Sector
        R.M. Tekateka, Chief Delegate, Lesotho Highlands Water Commission
    South Africa Public Sector
        Mike Muller, Director General, Department of Water Affairs and
    Forestry

        Willie Croucamp, Chief Director, Department of Water Affairs and
    Forestry

        Martie Van Rensburg, CEO, Trans-Caledon Tunnel Authority

        Johan Claassens, Head of Projects, Trans-Caledon Tunnel Authority

        Hanri van Loggerenberg, African Development Bank Relationship
    Manager, Development Bank of South Africa

        Irene Baumbach, Project Manager, Development Bank of South Africa

        PN Basson, Project Manager, Development Bank of South Africa

        Serame M. Tsomele, Project Accountant, Development Bank of South
    Africa

        Chris Viljoen, Manager, Water Quality and Environment, Rand Water

        Karl Lubout, Manager, Water Quality and Environment, Rand Water
    Civil Society & Business Community
        Patrick Bond, Professor, Faculty of Management, University of the
    Witwatersrand

        Jean Roux, Partner, PriceWaterhouseCoopers

        Patricia Ntongolo, runs informal day care in a shack on the
    outskirts of Johannseburg
    U.S. Government Personnel
        Jendayi Frazer, U.S. Ambassador

        Jeff Hartly, Economic Minister Counselor

        Jill Derderian, Economic Affairs Officer