[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


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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

                                 
