[Senate Hearing 109-167]
[From the U.S. Government Publishing Office]
S. Hrg. 109-167
A REVIEW OF THE ANTICORRUPTION STRATEGIES OF THE AFRICAN DEVELOPMENT
BANK, ASIAN DEVELOPMENT BANK, AND EUROPEAN BANK ON RECONSTRUCTION AND
DEVELOPMENT
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINETH CONGRESS
FIRST SESSION
__________
APRIL 21, 2005
__________
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
?
C O N T E N T S
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Page
Devine, Tom, legal director, Government Accountability Project,
Washington, DC................................................. 49
Prepared statement........................................... 50
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Speltz, Hon. Paul, U.S. Executive Director, Asian Development
Bank, Manila, Philippines...................................... 3
Prepared statement........................................... 5
Sullivan, Hon. Mark, III, U.S. Executive Director, European Bank
for Reconstruction and Development, London, United Kingdom..... 9
Prepared statement........................................... 11
Withanage, Hemantha, Convenor, Sri Lankan Working Group on Trade
and International Financial Institutions and Executive
Director, Center for Environmental Justice, Colombo, Sri Lanka. 31
Prepared statement........................................... 33
Photo from Sri Lankan Sunday Leader.......................... 48
Additional Statements and Other Material Submitted for the Record
Hart, Elder Akie, the National President of the Mangrove Forest
Conservation Society of Nigeria, prepared statement............ 68
Perry, Hon. Cynthia S., U.S. Executive Director to the African
Development Bank, prepared statement........................... 63
Minutes of the 659th Session of the Senate of the Italian
Republic, XIV Legislature, September 28, 2004.................. 69
Letters written to and published in the Colombo Daily Mirror:
January 30, 2003............................................. 76
October 6, 2004.............................................. 77
October 18, 2004............................................. 78
(iii)
A REVIEW OF THE ANTICORRUPTION STRATEGIES OF THE AFRICAN DEVELOPMENT
BANK, ASIAN DEVELOPMENT BANK, AND EUROPEAN BANK ON RECONSTRUCTION AND
DEVELOPMENT
----------
THURSDAY, APRIL 21, 2005
U.S. Senate,
Foreign Relations Committee,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m., in
room SD-419, Dirksen Senate Office Building, Hon. Richard G.
Lugar, chairman of the committee, presiding.
Present: Senators Lugar and Martinez.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
INDIANA
The Chairman. This meeting is called to order.
The Foreign Relations Committee meets to continue our
review of U.S. policy toward the multilateral development
banks. This hearing is the fourth in an ongoing series
examining ways that the U.S. Congress and our Government can
contribute to anticorruption and antifraud efforts at the
multilateral development banks. The committee's work aimed at
the MDBs is being conducted on multiple fronts. In addition to
holding hearings, I have directed letters of inquiry on
individual projects and policies to the respective banks.
Committee staff members have visited overseas projects and
conducted interviews with bank employees, nongovernmental
organization representatives, academies, and others.
Building on this oversight effort, at the request of the
Bush administration, I will soon introduce authorization
legislation replenishing funds for the subsidized windows of
the World Bank, Asian Development Bank, and African Development
Bank. This legislation will include reform proposals to bring
about more transparency and accountability in the operations of
all five multilateral development banks.
Today, we are especially pleased to be joined by Ambassador
Paul Speltz, U.S. Executive Director of the Asian Development
Bank, and Mr. Mark Sullivan, U.S. Executive Director of the
European Bank for Reconstruction and Development. We look
forward to their testimony regarding the anticorruption
strategies of the banks to which they are assigned. We also
look forward to the testimony of Hemantha Withanage, Executive
Director of the Center for Environmental Justice in Sri Lanka
and Tom Devine, Legal Director of the Government Accountability
Project.
In addition, the committee invited two other witnesses to
testify--Ambassador Cynthia Perry, the U.S. Executive Director
to the African Development Bank, and Akie Hart, President of
the Mangrove Forest Conservation Society of Nigeria. Both were
unable to be with us due to unavoidable conflicts. They have
provided us with written testimony, which we are very pleased
to include in the record.
The United States has strong national security and
humanitarian interests in alleviating poverty and promoting
development around the world. The MDBs leverage the resources
that we can devote to these goals. Since 1960, the United
States has provided more that $42 billion in direct
contributions to the MDBs. But we must ensure that our
contributions are managed well and that the mission of the MDBs
is not undercut by corruption.
The U.S. Senate is not alone in its inquiry into
development bank financing. The Parliament of the United
Kingdom has undertaken its own inquiry. In addition, the
Italian Senate issued an Order of the Day last September
referencing our committee's MDB hearings and calling for
anticorruption reforms. We will include a copy of the Italian
order in the hearing record.
[Editor's note.--The Italian Order mentioned is included in
the Additional Statements and Other Material Submitted for the
Record section.]
Corruption impedes development efforts in many ways. Bribes
can influence important bank decisions on projects and
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 obligated to repay the development banks. So, not
only are the impoverished cheated out of the development
benefits, they are left to repay the resulting debts to the
banks.
At our May 13, 2004, hearing, we learned that the MDBs have
been taking steps to curb corruption, but much more needs to be
done. Our witnesses provided clear recommendations about how
the MDBs can minimize leakage in development financing. They
recommended changing the incentives at the MDB, so that staff
would have less pressure to lend. Witnesses also recommended
that the MDBs focus more actively on supervision and auditing
of MDB lending. They argued for more transparency in MDB
operations, and an MDB requirement that borrowers improve
transparency within their governments.
In our July 21 hearing, we learned that the United States
Treasury Department does encourage anticorruption efforts at
the MDBs, and reviews all MDB loans. The Treasury, however, has
limited ability to investigate the misuse of MDB funds.
According to Under Secretary John Taylor, and I quote, ``The
first line of attack, if our staff hears about issues like
this, is to work through our Executive Directors at the
institutions.''
During our July hearing, we also learned the government of
Lesotho was strained financially during its prosecution of
corruption relating to a World Bank-financed project.
Unfortunately, there is no mechanism to assist poor countries
that want to prosecute corruption related to their loans. It
was suggested the MDBs harmonize anticorruption policies, and
mutually recognize blacklists. As it now stands, a company that
is debarred from the World Bank can still receive contracts
from the other MDBs.
The testimony that we will hear today will further inform
our efforts to develop reauthorization legislation that I will
introduce shortly. The challenge of preventing waste, fraud,
and corruption at the MDBs must be tackled with vigor. We
welcome our distinguished witnesses, and look forward to their
insights and their counsel.
It is indeed a privilege to have both of you gentlemen in
our first panel. As I have mentioned earlier, we will have a
second panel to follow your testimony. Before that, we will
pose questions to you. At the time the distinguished ranking
member joins our hearing, I will recognize him for an opening
statement. But for the moment we will proceed with testimony in
the order that I introduced you, and that would mean, first of
all, the Honorable Paul Speltz, and then the Honorable Mark
Sullivan.
Mr. Speltz.
STATEMENT OF HON. PAUL SPELTZ, U.S. EXECUTIVE DIRECTOR, ASIAN
DEVELOPMENT BANK, MANILA, PHILIPPINES
Mr. Speltz. Thank you, Mr. Chairman. First of all, a
personal comment. Ambassador Cynthia Perry, who is a close
friend of all of ours, Representative to the African Bank, her
husband is extremely ill, dying, and she was here right up with
us until yesterday, and had to fly down to Houston last night
to be with her husband.
The Chairman. Our thoughts will be with her and we
appreciate the testimony that she has submitted. It will be a
part of our record.
Mr. Speltz. Thank you. I'm also pleased to be here with my
colleague, Mark Sullivan. The last time we were together, we
were going through Senate confirmation hearings, and sitting in
the same chairs, so it's a pleasure to be with him.
With your permission, I'd like to give a short statement,
and provide my full statement for the record.
The Chairman. Your written statement will be published in
full, and that is true also for Mr. Sullivan, so that you may
summarize and utilize the time effectively here.
Mr. Speltz. Thank you.
Mr. Chairman, members of the committee, I thank you for
your invitation to come and speak with the committee today on a
subject that is fundamental to poverty reduction in Asia, and
at the very core of sustainable development. Corruption is
illegal, unethical, and inefficient. The Asian Development Bank
must call corruption by its name, and take steps to prevent it
and punish those who perpetrate it.
In an environment of scarcity, every dollar lost to waste,
fraud, and poor governance, is a dollar not invested in health
care, clean water, education, critical infrastructure, and
other essential services. My goal is to make the Asian
Development Bank a more results-driven and accountable
institution. This means not only rewarding countries for good
performance, but ensuring that the ADB makes the most efficient
possible use of donor resources. This means full transparency,
and protecting the shareholders of this institution, and the
contributions they've made to it.
Since becoming U.S. Executive Director to the ADB in 2002,
I have made internal governance reform, and fighting corruption
top priorities. This committee may recall in my confirmation
testimony here in June 2002, in which, when asked by Senator
Sarbanes, even before I relocated to Manila, I stressed the
importance of anticorruption efforts at the Asian Development
Bank. That effort continues to this day. I have also made
frequent visits to Capitol Hill to meet with congressional
staff on anticorruption issues, and I hope to continue this
dialog for as long as I am in my current position.
I was also pleased to host, at ADB last summer, a senior
staff from this committee who was looking into these issues,
and today, I again extend the invitation to any others who want
to visit the ADB in Manila.
In the past few years, the ADB has made significant
progress in opening its operations to outside scrutiny,
strengthening its anticorruption capability, and promoting good
governance in borrowing countries. Lending for Good Governance
grew 50 percent last year, and the weight given to governance
in the country allocation formula for the Asian Development
Fund was substantially increased. A growing number of bank
projects and country papers specifically address the risk of
corruption and government's ability and willingness to deal
with it. In 2004, the Bank halted disbursement on two loans for
Indonesia because of corruption concerns. But these actions,
while positive, are only the first steps in the right
direction.
My Office has been, and will continue to be, at the
forefront of advancing these reforms. At the institution level,
we hope the ADBs Integrity Division, which was formerly called
the Anti-Corruption Unit, become even more proactive in
addressing allegations of fraud and abuse.
In the next few days, the Bank will begin implementation of
a new, public communication policy that fundamentally changes
the types of information made available about ADB operations,
and how that information is made available and useful to all
stakeholders. The new public communication policy will require
full disclosure of the ADB budget, Board minutes, and Board
schedule, and will continue the practice of publishing an
annual report on corruption investigations. This new policy
also satisfies many other elements of transparency language in
section 581 of the 2004 appropriations legislation, which this
committee crafted.
While this is another step in the right direction, the
United States will continue to press for even greater
transparency in the years ahead. At the project level, we would
like anticorruption safeguards built into more project
documents, stricter sanctions for those who violate them, and
more spot procurement audits out in the field. Projects
recently approved by the Asian Development Bank Board in
response to the tsunami disaster, contain the most sweeping and
most advanced safeguards to date. However, these safeguards
need further integration into all of the Bank's operation.
Internally, the ADB has bolstered the resources and staff
available to its Integrity Division, which investigates
corruption, and has doubled the number of procurement audits.
As a result of U.S. advocacy, the 2005 budget for the Auditor's
General Office was increased by 19 percent. As part of these
efforts, I have served on the Audit Committee of the Board of
Directors for the last 2\1/2\ years, and have helped turn that
Committee into a more effective instrument for oversight. The
Committee meets more frequently--once a month on average--as
opposed to three times per year, when I first arrived, and when
appropriate, without the participation of Bank management.
It reviews the audit report of the Bank's external
auditors, and monitors management's implementations of its
recommendations. The Committee works very closely with the
Office of the Auditor General, of which the Integrity Division
is a part, and it has helped that Office become a more active
agent for promoting internal governance. Recently, the Office
began a review of internal procurement rules, and it has
sponsored regular corruption and fraud awareness workshops for
all new incoming staff at headquarters, and for staff, a
selective resident missions which, for example, in the year
2004, included instructions in Bangladesh, Pakistan, and
Uzbekistan.
All of these elements are critical, but we believe much
more can be done. We would like to see a more proactive and
powerful role for ADB's Integrity Division, including a further
increase in the number of procurement audits. This will require
more resources, but it is an investment that will yield
significant dividends.
Whistleblower protections also need to be strengthened to
encourage staff to continue to report allegations of fraud. ADB
can, and should, establish an important deterrent by publishing
the names of debarred firms and individuals, and by
automatically disqualifying those firms debarred by other
financial institutions. We would like ADB to work with other
MDBs, in the future, on a set of tough, uniform anticorruption
standards.
At the country level, we hope to see assistance for good
governance and anticorruption expanded, and at the project
level, a greater willingness to cancel loans when corruption is
detected.
Mr. Chairman, to reiterate and to close, I am fully
committed to this agenda, and will continue to exercise the
leadership and the influence of the United States to ensure
success. Thank you for your time and consideration this
morning.
[The prepared statement of Hon. Speltz follows:]
Prepared Statement of Paul W. Speltz, U.S. Executive Director, Asian
Development Bank (ADB), Manila, Philippines
INTRODUCTION
Mr. Chairman, Ranking Member Biden, members of the committee, I
thank you for your invitation to come and speak with the committee
today on a subject that is fundamental to poverty reduction in Asia and
is at the very core of sustainable development.
The goal of my office has been, and continues to be, to make the
Asian Development Bank a more results-driven institution. This means
not only rewarding countries for good performance, but ensuring that
the ADB makes the most efficient possible use of its resources. This
means full transparency and protecting the shareholders of this
institution and the investments they have made in it. Corruption is
illegal, unethical, and inefficient. In an environment of scarcity,
every dollar lost to waste, fraud, and misgovernance is a dollar not
invested in health care, clean water, education, critical
infrastructure, and other essential services. This a human tragedy for
the intended recipients in developing countries and a waste of taxpayer
money in shareholder countries.
Since becoming U.S. Executive Director of the ADB in 2002, I have
made internal governance reform and fighting corruption top priorities.
The committee will recall my confirmation testimony here in June 2002
in which, when asked by Senator Sarbanes, even before I relocated to
Manila, I stressed the importance of anticorruption efforts at the ADB.
I have also enjoyed my frequent consultations with congressional staff
on anticorruption issues and hope to continue this dialog for as long
as I am the U.S. Executive Director. A senior staffer from the Senate
Foreign Relations Committee, Jay Branegan, visited my office in August
2004, and I would be happy to extend an invitation to others that might
wish to visit the Bank in Manila.
The ADB has made significant progress in opening its operations to
outside scrutiny, strengthening its anticorruption capability, and
promoting good governance in borrowing countries. But these actions,
while positive, are only first steps. My office has been, and will
continue to be, at the forefront of advancing these reforms. At the
institutional level, we expect that the ADB's Integrity Division
(formerly Anticorruption Unit) will become even more proactive in
addressing allegations of fraud and abuse. The Bank's new public
communications policy is a step in the right direction, and we will
continue to press for even greater transparency. At the project level,
we would like anticorruption safeguards built into more project
documents, stricter sanctions for those who violate them, more ``spot''
procurement audits, and a greater willingness to cancel loans where
corruption is detected. And at the country level, we want to see
lending for good governance expanded.
Let me be more specific.
INSTITUTIONAL EFFORTS
Over the last year, the Bank has made significant strides toward
becoming more open and accountable at the institutional level.
As a result of U.S. encouragement, the Audit Committee of the Board
of Directors is now a more effective instrument for oversight. The
Committee meets more frequently--once a month as opposed to three times
per year--and, when appropriate, without the participation of Bank
management. It reviews audit reports from the Bank's external auditors
and monitors management's implementation of their recommendations. The
United States has led efforts to make the Office of Auditor General a
more active agent for improving internal governance. Recently, the
Office began a review of internal purchasing rules and it has sponsored
regular corruption and fraud awareness workshops for incoming staff at
headquarters and for staff at selected resident missions, which in 2004
included Bangladesh, Pakistan, and Uzbekistan.
To combat corruption and thwart possible misuse of resources, the
ADB recently elevated the status of its Anticorruption Unit to an
independent Integrity Division within the Auditor General's Office. The
Integrity Division serves as the initial point of contact for
allegations of fraud and corruption in ADB-financed projects or ADB
staff. It also conducts training seminars in forensic accounting and
other investigative techniques to ensure ADB-funded activities and
staff adhere to the highest standards of ethical conduct and recently
launched a series of mandatory code of ethics seminars for all staff.
The United States is encouraging the Integrity Division to increase the
number and scope of its procurement audits and corruption
investigations and is working closely with management to ensure that
there are adequate resources for the Integrity Division to carry out
its expanding responsibilities. As a result of U.S. advocacy, the 2005
budget for the Auditor General's Office was increased 19 percent. The
ADB was the first MDB to post on its Web site an annual report
summarizing corruption investigations.
The Bank recently decided to debar corrupt firms from all ADB-
sponsored activities, not just procurement, and we will press for
further enhancements in the months ahead. The ADB should also move
toward publishing a list of debarred firms. We will continue to urge
the ADB to work with other MDBs on a uniform set of ``state-of-the-
art'' standards encompassing ethics, procurement, and anticorruption.
Progress is also being made on creating an institutional culture
that promotes transparency. As a result of strong U.S. advocacy, the
ADB has drafted a new public communications policy that substantially
increases the presumption of disclosure and includes several of the
objectives from the transparency language in section 581 of Division D
of the FY 2004 Consolidated Appropriations Act, which this committee
helped to craft. Among other things, the ADB's new policy will make
public the minutes of Board discussions and summaries of Board
discussions of policy and strategy papers. But it also goes much
further. The public will also have access to a rolling, 3-week schedule
of Board of Directors' meetings, country performance ratings, and a
full version of the ADB budget.
Those affected by ADB policies should have a strong voice in the
policy process. In this light, we are pleased the Bank has taken
significant steps to become more responsive to the concerns of civil
society. In 2004, the ADB established a new inspection mechanism to
address the concerns of persons affected by ADB projects. The new
mechanism consists of a Special Project Facilitator who will focus on
informal problem-solving and a Compliance Review Panel, which will
focus on investigating alleged violations of the ADB's operational
policies and procedures. The Compliance Review Panel reports directly
to the Board of Directors. In 2004, the Compliance Review Panel
initiated new investigations of two projects and monitored
implementation of remedial measures for affected populations on a third
project. The 2005 ADB budget includes a 12-percent increase in funding
for the Compliance Review Panel.
Accountability is also promoted through the Operations Evaluation
Department or OED. The OED evaluates the effectiveness of the Bank's
operations at the project, sector, and country level, and assesses the
contribution of those resources to a country's overall development. As
a result of strong U.S. advocacy, a number of important reforms were
made last year in the operation of the OED. The OED now reports
directly to the Board rather than through the President and the
appointment of the head of the OED is a decision of the board, upon
nomination by the President. The OED's work program is subject to Board
approval and the OED has unfettered access to all information and
individuals it deems necessary to fulfill its work program.
PROJECT-LEVEL EFFORTS
The ADB has a number of tools to reduce the risk of corruption in
project design and implementation.
On the prevention side, we would like staff to take greater
advantage of their consultations with executing agencies and local
contractors to address corruption head-on and recommend improvements in
design that mitigate fraud. An increasing number of projects include
strict anticorruption safeguards including, most recently, the
subregional transport facilitation project in Nepal, the Sri Lanka
tsunami rehabilitation project, and the Bangladesh independent
anticorruption commission project. We would like to see more.
We encourage project staff to be more proactive in reporting
allegations of corruption to the Auditor General. The Bank uses an
array of measures to protect the identity and confidentiality of
whistleblowers including the use of a special telephone line to report
allegations of corruption and secure fax lines and e-mail addresses for
staff from the Integrity Division. These protections are helpful, but
we would like to see ADB management do more to encourage staff to come
forward with claims of fraud and corruption and to guarantee that those
who do will be protected. The Auditor General's Office is revising its
Terms of Reference to further strengthen these protections.
Encouraging ethical behavior in staff also requires the right
incentives. The ADB is increasingly using specific targets in project
documents to measure development outputs and it is our goal that these
be incorporated in every set of project documents as soon as possible.
To ensure that results are actually achieved, the United States and
other major shareholders have pushed strongly for a system that rewards
staff for the quality, not the quantity, of their work. As part of
this, staff should not only be assessed on achievement of development
outcomes, but also on how well they comply with ethical guidelines. We
will press for these standards to be implemented in the new human
resources policy.
Related to this, the ADB has been actively implementing its
administrative sanctions policy. Under this policy, the Bank rejects a
proposal for award of contract where corrupt or fraudulent practices
were used by the bidder, cancels the financing allocated to a contract
if ADB determines that the beneficiary has engaged in corrupt
practices, and debars the individual or firm from doing business with
the ADB in the future. As a result of strong advocacy by my office and
the Treasury Department, the ADB agreed to add two new professional
staff to the Office of Auditor General in 2005 to strengthen its
anticorruption oversight and to double the number of ``spot'' project
procurement audits. In 2004, the Bank halted disbursement on two loans
for Indonesia because of corruption concerns. We hope to see a similar
aggressiveness in investigating allegations of corruption in other
countries.
Finally, ADB resident missions in each borrowing country play a
critical role in providing oversight for project implementation. Our
goal is to ensure they have adequate resources to provide ongoing
project supervision and fiduciary oversight over procurement processes.
COUNTRY-LEVEL EFFORTS
Goverance assessments are an integral part of every ADB Country
Strategy and Program. These assessments measure government performance
against an array of benchmarks including anticorruption efforts,
institutional strength, public administration, government interference
in the economy, and transparency. Recently, there have been greater
efforts to cooperate with and harmonize these assessments with those of
the World Bank. During 2004, new assessments were initiated for
Azerbaijan, Uzbekistan, Nepal, Laos, Afghanistan, India, and Sri Lanka.
The ADB is providing substantial amounts of assistance to help
build accountable public-sector institutions and develop national
anticorruption efforts at the country level. In 2004, lending for good
governance increased 56 percent from $450 million to $700 million, and
we expect further growth this year. Let me elaborate on a few of the
Bank's most notable programs.
An ADB initiative in Balochistan Province, Pakistan, is designed to
reduce corruption by mandating third-party assessment of all projects
and independent audits of district accounts. In Bangladesh, the ADB
helped the national government to establish an independent
Anticorruption Commission to investigate and prosecute cases of
corruption and fraud. The ADB is helping the Government of Vietnam to
develop a grievance mechanism for handling complaints about corruption
and to strengthen the oversight role of the National Assembly.
Technical assistance to Indonesia, Micronesia, Thailand, and Bangladesh
has helped these countries privatize state-owned enterprises, reducing
the corruption that often accompanies such companies.
At the regional level, 23 countries have endorsed and drafted
action plans as part of an ADB-OECD Anticorruption Initiative for Asia
and the Pacific. The ADB and OECD are also working with the United
Nations to help participating countries in Asia and the Pacific to
ratify the U.N. Convention Against Corruption. In November 2004, the
ADB provided $250,000 in technical assistance to help regional
countries comply with the terms of the initiative.
At the 2003 APEC Summit in Bangkok, leaders supported a proposal by
the United States to establish a Cooperation Fund for Regional Trade
and Financial Security Initiative. To date, Australia, Japan, and the
United States have each committed $1 million to the trust fund, which
is run out of the ADB and will support technical assistance for
antimoney laundering, customs modernization, and port security in
developing member countries. Treasury's Office of Technical Assistance
has secunded an expert who is working with the ADB to implement the
trust fund and provide expertise for other Bank programs. These efforts
will reduce the likelihood that public and private funds will be
appropriated for illicit purposes.
Finally, to ensure that countries with good governance are
commensurately rewarded, the United States and other ADB donors agreed
last year to substantially increase the weight given to good
governance--which includes anticorruption--in the performance-based
allocation system for the Asian Development Fund. This system provides
a clear incentive for countries to tackle governance issues in order to
receive greater resources. The ADF allocations that result from the
performance-based allocation system are made public.
CONCLUSION
To conclude, Mr. Chairman, let me say how seriously I take the
threat corruption poses to the effective development of poor countries.
The ADB has undertaken some important initial reforms but the proof of
success is sustained effort. Reform is needed both within the Bank, to
ensure that the ADB establishes a zero tolerance culture for
corruption, and in the Bank's dealings with borrowing countries. The
ADB must be more willing to call corruption by its name, and punish
those who perpetrate it. This will require greater ownership from
borrowing countries and stricter sanctions for those who violate the
public trust, whether they are ADB staff, consultants, or employees of
executing agencies. The United States is fully committed to this agenda
and will continue to exercise our leadership and influence to ensure
its success.
Thank you.
The Chairman. Well, thank you, Mr. Speltz, for your
testimony. I now call upon the Honorable Mark Sullivan.
STATEMENT OF HON. MARK SULLIVAN III, U.S. EXECUTIVE DIRECTOR,
EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT, LONDON,
UNITED KINGDOM
Mr. Sullivan. Thank you, Mr. Chairman. I welcome your
invitation to appear before you today to report on the efforts
of the European Bank for Reconstruction and Development to
combat corruption.
I share your belief in the importance of this issue, and
have made it a priority for the U.S. Executive Director's
Office. Financing for MDBs comes from the taxpayers' of their
shareholder countries, and those taxpayers are entitled to the
assurance that the MDBs will use their money in an appropriate
and efficient manner.
My testimony today will focus on what was accomplished in
2004, and what we are pursuing this year. The EBRD's purpose is
to foster transition of its countries of operation toward open
market-oriented economies. The Bank currently conducts its
investment activities in 27 countries that were formerly either
a part of the Soviet Union, or the Soviet Bloc. Their histories
have left them with a challenge when it comes to addressing and
dealing with corruption.
For reasons set out more extensively in my written
testimony, the EBRD does not have the leverage with the
governments that other multilateral development banks, which
lend directly to governments, have. The major reason is that
the charger of the EBRD provides that at least 60 percent of
the EBRD's investment activities must be in the private sector.
In 2004, 86 percent of all signed projects were in the private
sector.
Now, notwithstanding its relative lack of leverage, the
EBRD actively uses its resources to address the burdens placed
by corruption on the economies of the region. The Bank
maintains an active policy dialog with the governments of its
countries of operations. It publicizes the levels of corruption
in each country by working with the World Bank on surveys,
which assess the quality of the business environment in each of
our countries of operations, and by focusing on that business
environment, in our country's strategies--which are adopted
every other year--and in which we focus on the level of
corruption and on integrity concerns.
The EBRD also seeks to assist the creation of an investor
friendly, transparent, and predictable legal environment
through its legal transition program. In addition, the EBRD
contributed to the establishment in 2003 of the Business
Principles for Countering Bribery, and joined with the other
multilateral development banks last December, on the
anniversary of the U.N. Convention Against Corruption, and
reaffirming their shared commitment to the fight against
corruption.
In the context of its projects, the Bank requires covenants
by all of its borrowers relating to compliance with applicable
laws concerning financial crime and corruption, and the
maintenance of associated records. Failure to comply with the
anticorruption covenants is a material breach which will be
penalized as vigorously as the breach of any financial
covenant. Urged strongly by the United States, the Audit
Committee of the Board of Directors has been increasingly
involved in the process of assessing the systems in place for
ensuring compliance with those covenants. One result of this
effort is now, the EBRD must inform the Board of any waiver of
a material condition of a loan or equity investment agreement
with the borrower or investee.
To promote good governance effectively in its countries of
operation, the EBRD must make sure that its own operations are
consistent with best practices, and we have seen progress on
that front. In April of last year, the Board of Directors
strengthened the Audit Committee with a revised Terms of
Reference that formally established the Committee
responsibilities with respect to the integrity of the EBRD's
financial statements, the soundness of its internal controls,
the status and performance of its internal functions of
compliance, internal audit, project evaluation and risk
management, and the independence, qualifications, and
performance of the Bank's external auditor.
While the independence of the internal functions was
materially enhanced by the new Audit Committee Terms of
Reference, the question of full independence remains to be
resolved. But on a positive note, the EBRD's President now
supports independence of that evaluation function. Where the
Bank's practices lag the other MDBs, we anticipate the Board
will approve a change in 2005. We've had two meetings on that
already, there will be a meeting this Friday, tomorrow.
In my September 20, 2004, letter to you, I wrote that the
EBRD's existing code of conduct is outdated, and that we would
work for the adoption of a new, revised version. The Board is
now in the process of a new code, we anticipate its adoption in
2005.
The EBRD has a new Chief Compliance Officer who has
considerable experience with FATF and anticorruption NGOs, and
she has been engaged in integrating the compliance function
into the every day work of the EBRD. We have proposed, and the
Bank's President supports, increased involvement by the Chief
Compliance Officer in project preparation process, and is
committed to making the necessary resources available to the
CCO.
My Office worked with other Directors to develop an
integrity certification that is required in every project
document that comes to the Board. The EBRD maintains their
telephone hotline, and a compliance inbox on its Web site for
the reporting of allegations of fraud, corruption, and
misconduct in the Bank's activities, or in its projects. To
inform the public of its findings, the EBRD management has
approved, in principle, the publication of an anticorruption
report, the first of which is expected to be published next
fall, I have given copies directly to the President of the
World Banks and the ADBs annual reports, and we would hope that
we will have, using them as a guide, a better reporting than we
have to date on those issues.
The CCO believes the EBRD has in place a viable
whistleblower protection mechanism. She's made recommendations
for improvements, and has posted whistleblower information on
the EBRD's Internet and public Web sites. We've had meetings
before the Audit Committee on this particular matter, and in
the next few months the Board, as a whole, will review the
existing procedures, and will consider areas for improvement.
With respect to efforts to combat money laundering and the
financing of terrorism, the EBRD has enhanced its integrity
procedures by adding checks against the Office of Foreign
Assets Control, and other U.S. Government lists as a part of
its due diligence process, and EBRD now has mandatory training
in this area for Bank staff, and has initiated training for
bankers and regulators in its countries of operations.
Beginning in 2003, we urged the Bank to adopt a COSO system
of internal controls. In May of last year, prior to the annual
meeting, management agreed to do so and has subsequently
delivered on its promise. The internal controls are in effect
for the Bank's 2004 financial statements, and as a part of this
project, the Bank has also completed an operational risk self-
assessment exercise, and established a framework for the
continued development of operational risk identification
measure mitigation and management capacity. I should also note
that reputational risk, Mr. Chairman, is part of the
operational risk review and implementation, and finally, the
Bank is in the process of hiring an operational risk manager.
The EBRD's public sector operations frequently involve the
procurement of goods, civil works, and services by governmental
entities. The EBRD, with the assistance of outside consultants,
has developed training for new staff in the basic principles of
public sector procurement. Last month, the EBRD also took
additional steps to strengthen oversight of its public
procurement through a greater involvement of the Chief
Compliance Officer, and through expanded reviews.
Since my arrival, the U.S. Director's Office has made
improvements in EBRD governance and anticorruption measures the
top priority. In the past year we've seen progress, and we
think there's a foundation in place for further progress this
year. We intend to push for greater independence of the
internal functions, increased resources to enable them to take
on more responsibility, and a continued focus at all levels on
integrity issues.
Mr. Chairman, our goal is, and has been, for the EBRD to
have a corporate culture and environment that features enhanced
corporate governance, internal controls and compliance, and
that promotes good governance in its countries of operations.
My office is committed to continuing our efforts to that end.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Sullivan follows:]
Prepared Statement of Mark Sullivan III, U.S. Executive Director,
European Bank for Reconstruction and Development, London, United
Kingdom
Mr. Chairman, Ranking Member Biden, members of the committee, I
welcome your invitation to appear before you today to report on the
efforts of the European Bank for Reconstruction and Development
(``EBRD'') to combat corruption. I share your belief in the importance
of combating corruption in the international development system and
have made this issue a priority for the Office of the U.S. Executive
Director at the EBRD.
The Under Secretary of the Treasury for International Affairs, John
B. Taylor, testified before this committee on July 21, 2004, that the
administration takes very seriously the fight against corruption and
that we all have an obligation to help ensure that the multilateral
development banks (MDBs) undertake effective anticorruption efforts.
The capital comes from the taxpayers of their shareholder countries,
and those taxpayers are entitled to the assurance that the MDBs will
use those moneys in an appropriate and efficient manner. As Under
Secretary Taylor noted in his testimony, the U.S. Treasury and the U.S.
Director's Office at the EBRD work together to promote anticorruption
measures at the Bank. Our Office is committed to advancing integrity,
anticorruption, and transparency efforts at the EBRD.
The EBRD's President, Jean Lemierre, sent a July 16, 2004, letter
to the committee describing the EBRD's anticorruption initiatives. My
September 20, 2004, letter to the chairman also described some of those
efforts and reaffirmed our continuing support for the EBRD's efforts to
combat corruption. My testimony today will touch upon matters referred
to in my and President Lemierre's letters, focusing on what was
accomplished in this important area in 2004 and what my Office is
pursuing this year.
Our goal is, and has been, for the EBRD to have a corporate culture
and environment that features enhanced corporate governance, internal
controls, and compliance and that promotes good governance in its
countries of operations. While there was progress toward that goal in
2004, it is clear that there is more that we and the EBRD can do.
THE EBRD'S OPERATIONS
The EBRD currently conducts its investment activities in 27
countries that formerly were either a part of the former Soviet Union
or of the Soviet bloc. The Agreement Establishing the European Bank for
Reconstruction and Development requires that it apply sound banking
principles in all its operations, and the Bank makes no concessional
loans. The agreement also requires that at least 60 percent of the
EBRD's investment activities be in the private sector. Over the 14-year
life of the Bank, 72 percent of its signed agreements for debt and
equity financing have been in the private sector, and in 2004, the
figure was 86 percent.
The EBRD's purpose is to foster the transition of its countries of
operation toward open market oriented economies. Eight of the EBRD's
countries have such economies and are now members of the European
Union. An additional two countries with open market oriented economies
are expected to join the EU in 2007, and a third country may join in
2008. Their histories, and those of the 16 other countries of operation
have left all the EBRD's countries of operation with a challenge when
it comes to addressing and dealing with corruption issues.
Unlike those MDBs that lend regularly to governments and that have
the option of extending structural or sectoral adjustment loans, the
EBRD does not have significant leverage with the governments of its
countries of operation. In addition, some of the countries do not
engage in sovereign borrowing at this time because of IMF assessments
of debt sustainability. In other cases, the EBRD's financial operations
have been restricted to private sector projects only as a result of the
countries' lack of commitment to the economic and political principles
set forth in the Agreement Establishing the European Bank for
Reconstruction and Development. And, of course, there is the Bank's
unique approach to transition through private sector investment which
limits direct leverage with the governments of all of the EBRD's
countries of operations.
EBRD Governance and Anticorruption Efforts at the Country Level
Notwithstanding its lack of leverage with the governments of its
countries of operation relative to that of the other IFIs, the EBRD
uses its resources to work with those governments to address the
burdens placed by corruption on their economies and the transition
process. It is the EBRD's view that corruption and fraud cripple
progress and poison the investment climate and that a corrupted
investment climate limits the effectiveness of the EBRD's private
sector focus on transition. Consequently, the EBRD maintains an active
policy dialog on the subject with the governments of its countries of
operation and supports that dialog in a variety of ways.
One method of support comes from publicizing the levels of
corruption in each country. The EBRD and the World Bank created the
Business Environment and Enterprise Performance Survey (``BEEPS''),
which is designed to generate comparative measurements of a range of
interactions between business entities and the state including
corruption political influence, and regulation. The initial BEEPS in
1999 interviewed 4,000 firms in 22 transition countries. By 2002, the
number of firms interviewed was 6,000, and the BEEPS covered all of the
EBRD's countries of operation other than Turkmenistan. In 2005, the
EBRD and the World Bank will conduct a third round of BEEPS that will
include interviews of 8,000 firms in all of the EBRD's countries of
operation. This latest round is intended to focus on the poorest
countries of operation. The results of the BEEPS can be found on the
Web sites of the EBRD and the World Bank. Following the two earlier
reports, the EBRD analyzed the results in its annual Transition Report,
which included a table on the frequency and extent of the ``bribe tax''
in each country of operation.
Additional focus on the problem of corruption resulted from the
2003 establishment of Business Principles for Countering Bribery. The
EBRD, working with Transparency International and Social Accountability
International, other NGOs, business groups and trade unions, led the
effort to establish the Principles. On the anniversary of the United
Nations Convention against Corruption in December of last year, the
EBRD joined with the other MDBs in reaffirming their shared commitment
to the fight against corruption in their respective operations and
projects.
Every other year, the EBRD adopts a Country Strategy for each
country of operation, which contains a business environment section
that describes, among other things, the state of corruption and levels
of governance. The EBRD posts each strategy on the Bank's Web site, and
in 2004 had the strategies translated into the official native language
of 14 countries of operation.
The EBRD continues to operate its Legal Transition Program, which
addresses corruption and good governance issues and which seeks to
assist the creation of an investor-friendly, transparent and
predictable legal environment to improve the investment climate in the
Bank's countries of operations. By advancing improvements in governance
and regulatory frameworks, the EBRD helps its countries of operations
to reduce the opportunities for corruption.
The EBRD developed and has conducted its Corporate Governance
Sector Assessment Project since 1999. It assesses the quality of
corporate governance legislation vis-a-vis the standards set by the
OECD's Principles of Corporate Governance. The assessment is conducted
every other year, and the Bank will conduct its third survey this year
and will publish it in 2006. Country specific reports can be accessed
from the EBRD's Web site. Good legislation is one thing, and
implementation is another. Therefore, since 1995, the Bank has annually
evaluated implementation of these laws in its Legal Indicator Survey.
This information can be accessed on the Web site. The Legal Transition
effort extends to a judicial capacity initiative in the early
transition countries. This year there will be a focus on building
judicial capacity in Georgia.
Program activities in 2004 included:
Hosting a Legal Roundtable on Promoting Fair Competition
during its April 2004 Annual Meeting. The roundtable stressed
the importance of sound competition policies and institutions
to facilitate transition to the market economy and attract
foreign investment;
Publication in April 2004 of the EBRD's annual report, Law
in Transition, which focused on competition law and policy; and
Publication in the autumn of 2004 of an online supplement to
Law in Transition, LiT online, which focused on how to
establish a favorable legal environment in the early transition
countries in the region, namely Azerbaijan, Armenia, Georgia,
Moldova, Kyrgyzstan, Tajikistan, and Uzbekistan.
THE EBRD'S INSTITUTIONAL GOVERNANCE
To promote good governance effectively in its countries of
operation the EBRD must make sure that its own operations are
consistent with best practices, and 2004 saw progress on the governance
and anticorruption fronts. In April, the Board of Directors approved
new terms of reference for the Audit Committee for the first time in a
decade. The effect of this approach was to strengthen Audit Committee
authority and responsibility. The United States took a leading role in
the effort to modernize the terms of reference on the grounds that an
unregulated institution using taxpayer dollars has a special
responsibility to examine the state of its own governance measures on a
regular basis in light of best private sector practices and to adopt
those practices in the conduct of its own affairs.
The Audit Committee Terms of Reference formally set out for the
first time a number of Committee responsibilities relating to:
The integrity of the EBRD's financial statements and its
accounting, financial reporting, and disclosure policies and
practices;
The soundness of its internal controls regarding finance and
accounting measures and their effective implementation;
The status and performance of the Bank's compliance,
internal audit, project evaluation and risk management
functions, and their ability to perform their duties
independently; and
The independence, qualifications, and performance of the
Bank's external auditor.
Today, the Audit Committee has the explicit authority to take a
range of actions with respect to the external auditors, from
participation in the selection process and compensation to the scope of
each year's proposed audit and the review of the accuracy and integrity
of the Bank's financial statements and other key financial disclosures
prior to their release. The Committee is to be a participant in the
discussion and resolution of any disagreements between management and
the external auditors. To date, none have arisen. The Terms of
Reference formally codify the Committee's right to meet with the
external auditor, the Internal Auditor, the Chief Compliance Officer
(``CCO'') and the Director of the Project Evaluation Department without
management being present, and it has exercised that right on a regular
basis.
The Audit Committee must periodically review and evaluate Internal
Audit, Project Evaluation and the Chief Compliance Officer
(collectively, along with Risk Management, the ``Internal Functions'')
to assess whether: Their roles are appropriate for the Bank's purposes
and needs; their policies, procedures, methodologies, budgets, and
staffing resources are adequate for them to perform their roles; and
they are performing to expectations. The Committee must be consulted
prior to the engagement of the heads of the Internal Functions (except
the head of Risk Management), and the Bank's President can remove them
only in accordance with the guidance of the Board of Directors given in
executive session.
INDEPENDENCE AND COORDINATION OF INTERNAL FUNCTIONS
While the independence of the Internal Functions has been enhanced
by the new Audit Committee Terms of Reference, the question of actual
independence remains to be fully resolved. This is especially the case
of the EBRD's evaluation function where the Bank lags behind members of
its peer group which have the function reporting diectly to directors
who make the decisions as to hiring and removal and the function's
budget. Then Deputy Secretary of the Treasury, Samuel W. Bodman,
pointed out in his address to the Governors at the EBRD's 2004 annual
meeting:
The Bank's promotion of improved legal structures and good
corporate governance contributes to improvements in the
business environments of its countries of operation. It seems
logical--and, we would argue, is required--that the EBRD itself
should adhere to the highest standards of corporate governance.
The EBRD, like other international financial institutions, is a
steward of the taxes paid by the citizens of its members and,
as such has significant and serious responsibilities to its
shareholder nations.
And so, we are pleased that the Bank has committed to
establish a strong framework of internal controls and
assessment procedures for the 2004 financial statements and
beyond. This commitment will serve as a powerful example to
other international financial institutions.
Yet our work is not done. More progress is needed,
particularly on the independence of key individuals and the
improvement of transparency and disclosure policies.
My Office has been, and will continue to be, a strong proponent of
the independence of the Internal Functions. The Bank's President now
expresses support for independence of the evaluation function, and we
anticipate the Board will approve a change in 2005. We, and other
members of the Audit Committee, do not believe that management's
initial proposals for guaranteeing the independence of the evaluation
function are sufficient, and we will be working to improve the final
product. We will continue to push this year, in the Audit Committee,
for complete independence for the evaluation function and for further
independence of the other Internal Functions.
Of course, having good policies and procedures in place is only the
first step in a comprehensive corporate governance and anticorruption
program. Coordination of the Internal Functions and making use of their
individual activities are important. For example, the Internal Auditor
reported to the Audit Committee that an examination of compliance by
bankers with the Bank's integrity check requirements found failures to
comply fully. That has led to a number of improvements which the United
States has promoted and supported. These include development by the CCO
of an integrity training program which is required for all directors,
officers, and employees of the EBRD. I participated in the pilot
program and in the final program as well. To date, virtually all
employees, directors, and management have completed the ``Integrity
Matters'' training course, which is mandatory for all new employees.
Code of Conduct
In my September 20, 2004, letter to you, I wrote that I, and my
fellow Audit Committee members, believed that the EBRD's existing Code
of Conduct was outdated and that we would work for adoption of a new,
revised version. The Board is in the process of considering a new Code
of Conduct to replace the existing Code, which was adopted in 1991 and
which has not been formally amended since. We anticipate adoption of a
new Code of Conduct in 2005.
THE EBRD'S COMPLIANCE FUNCTION
The EBRD's Office of the Chief Compliance Officer (``OCCO'') is
charged with promoting good governance and ensuring that the highest
standards of integrity are applied to all activities of the Bank in
accordance with international best practice. It deals with conflicts of
interest, corruption, confidentiality, and money laundering.
The EBRD did not have a compliance officer before 2000, and since
then the Bank has had three CCOs and an Acting CCO. In June 2004, the
Bank hired its third CCO after an extensive search lasting more than a
year from the time the prior incumbent gave notice of his intention to
leave the EBRD. Notwithstanding the Bank's initial record, there are
grounds for optimism that the new CCO will build on the record of
accomplishment of the predecessor Acting CCO and will establish an
efficient and well run compliance function which is part of the EBRD's
everyday operations. She has extensive experience in creating a
compliance function at the OECD where she was head of the Anti-
corruption Division and led the drafting and implementation of a
mechanism to monitor an international treaty on corruption. She brings
a long record of experience with the Financial Action Task Force, or
FATF, and with anticorruption NGOs.
Since her arrival, the CCO has been engaged in bringing on board
staff with which to meet the considerable demands on the Office in
making the compliance function a part of the everyday work of the EBRD.
The OCCO is now responsible not only for handling all matters related
to fraud and corruption, but also for the functioning of the Bank's
Independence Recourse Mechanism which enables individuals outside the
Bank to submit complaints concerning individual projects. In assessing
a complaint, the CCO can recommend a compliance review (i.e., has EBRD
complied with certain policies) or a problem-solving initiative, or
both or neither. Since it was launched in mid-2004, there has been only
one complaint submitted, and the CCO determined that it was not covered
by the IRM procedures.
At the moment, the CCO reviews some, but not all, projects
presented to the Board. This review includes checking the integrity of
the beneficial owners, promoting more transparent ownership structures,
and reviewing corporate governance standards and practices. We have
been promoting further CCO participation in the project approval
process to address any integrity concerns with the persons or entities
involved in projects. At a recent Board meeting, the President
supported increased involvement by the CCO in the project preparation
process. This will require additional resources, and there is general
support within the Audit Committee--the terms of reference of which
require it to review the adequacy of resources for the Internal
Functions--for greater involvement and for providing the necessary
additional resources to the CCO. Our Office will continue to push for
that involvement in every project that is submitted to the Board for
its consideration and will support providing the additional resources
necessary for that complete involvement to be effective. The Bank's
President has committed to us that he will make the necessary resources
available to the CCO, and this commitment was reiterated by the
management before the full Board when it considered the 2005 budget.
The Audit Committee will receive a status report from the CCO in May
and will review the adequacy of OCCO's resources.
Given our concern that each proposed project should have undergone
a thorough integrity review prior to its submission to the Board and
our belief in the importance of accountability, we developed an
integrity certification and worked successfully with other shareholder
offices to require the inclusion of the certification in all project
documents. It says: ``all actions required by applicable EBRD
procedures relevant to the prevention of money laundering, terrorist
financing, and other integrity issues have been taken with respect to
the project, and the project files contain the integrity checklists and
other required documentation which have been properly and accurately
completed to proceed with the project.'' The CCO has determined that
intentionally misleading the Board constitutes misconduct, and a false
certification certainly should have consequences for those responsible.
We have urged the Bank management to compile and publish an annual
anticorruption report and have provided them with copies of the reports
of the Asian Development Bank and the World Bank. We have requested
that statistical summaries and case studies of fraud and corruption
cases pursued by the Bank's investigations unit be part of any such
report. EBRD Management has approved in principle the production and
publication of an anticorruption report, and the CCO is currently
putting together an internal working group which will meet to consider
the report's scope and format. The first EBRD anticorruption report is
now scheduled to be published in late fall. Our goal in 2005 is to have
clear and comprehensive reporting of the Bank's anticorruption efforts
which is easily available to the public.
More broadly, we do not believe that the EBRD's public disclosure
practices meet the test of best practices for MDBs. We voted against
the Public Information Policy in 2003 for that reason and we continue
to press for more information to be made public on a timely basis. For
example, we consistently argue that the Country Strategy Development
process would be enhanced by making drafts available for public comment
and that summaries of minutes of Board meetings should be made public
as well. (U.S. votes on projects are made available on the U.S.
Treasury Web site.) Our support for enhanced public disclosure is not
shared by all directors, and we will likely not be able to effect
material improvements until 2006 when the next scheduled review will
take place.
In sum, while important work remains, the requirement for inclusion
of the integrity certification, directors' support for the new CCO and
discussion of integrity matters in Board and Audit Committee meetings
evidence an increased Board interest in integrity issues.
ALLEGATIONS OF FRAUD AND CORRUPTION WHISTLEBLOWER PROTECTIONS
The EBRD maintains a telephone hotline for reporting of allegations
of fraud, corruption, or other misconduct in Bank activities or
projects. An independent contractor operates the hotline. Access to the
hotline is toll free, and use is confidential. All matters reported to
the hotline are referred to OCCO for followup and investigation. The
EBRD's Web site sets out detailed information about the hotline and
compliance issues at the Bank, including the access codes for toll-free
reporting on a country-by-country basis. Collect calls can be made from
most of the EBRD's countries of operations. The EBRD keeps statistical
records of the use of the hotline. The contractor provides monthly
reports on the use of the hotline. The EBRD's Compliance In-Box, which
can be accessed through the EBRD's Web site, appears to be the
preferred method of making fraud and corruption allegations. In 2004,
there were no reports of corruption or misconduct to the hotline;
however, the In-Box receives about one complaint per month relating to
internal staff misconduct or to procurement.
The EBRD has a whistleblower protection mechanism, which is based
upon three separate, but inter-related, procedures. EBRD employees have
a duty to report suspected misconduct to the CCO, and it is the CCO's
responsibility to assess if such allegations warrant further
investigation. If an investigation into an allegation is warranted, the
CCO commences a fact-finding inquiry and upon its conclusion, makes a
recommendation to the Vice President for Human Resources as to whether
a formal accusation of misconduct should be raised. While EBRD makes
every effort to protect the identity of a whistleblower, it does not
guarantee anonymity because disclosure may, in some cases, be required
in order to proceed with an investigation. Whistleblowers are protected
against retaliation and the CCO will respond to any employee who acts
to retaliate against a whistleblower, which has not been needed so far.
In addition, a whistleblower can pursue an independent course of action
via the EBRD's Administrative Tribunal.
The Board recently met with the CCO to discuss the Bank's
whistleblower protections. The CCO stated that EBRD has in place a
viable whistleblowing protection mechanism. Nevertheless, the CCO has
made recommendations for improvements. The CCO has recommended that
EBRD should be more proactive in making employees aware of their
reporting duties and protections. EBRD has posted a whistleblower
statement with questions and answers on the Intranet with links to the
three relevant procedures and on the Internet. The CCO's view, which we
support, is that the whistleblower mechanism is evolutionary and should
be kept under review to ensure it meets best practice. In the next few
months, the Bank will also review the procedures that form the
whistleblower mechanism. At that time we will consider areas for
improvement.
ANTIMONEY LAUNDERING AND ANTITERRORIST FINANCING EFFORTS
The EBRD applies measures for combating terrorist financing in both
its public and private sector operations. These measures are based on
detailed due diligence procedures and internal training programs. In
addition, the EBRD promotes more effective antimoney laundering and
antiterrorist finance practices with both the banks and national
authorities in the Bank's countries of operation.
The EBRD has ``know your customer'' procedures, and the
responsibility for their implementation falls on the Operation Team for
each of the Bank's investment projects. Operation Teams must perform
extensive due diligence on the integrity of all prospective clients.
Integrity checks undertaken before committing any funds include
verification that no client, or prospective client, is on the United
Nations Security Council lists of entities and individuals suspected of
supporting terrorist activities. The use of the Office of Foreign
Assets Control (OFAC) list is a required part of the due diligence
process, and the CCO has worked with EBRD's Banking and Risk Management
division to revise the current procedures in order to ensure that
several important lists, including OFAC's and those of other U.S.
Government agencies, are included as part of the due diligence process.
Because operations with financial institutions pose additional
risk, the Bank requires additional due diligence before proceeding with
a financial institutions project. Procedures for financial institutions
include an Anti-Money Laundering Red Flag Checklist to assist the
Bank's team to properly assess the client's antimoney laundering
policies and procedures, including counterterrorist financing
activities. Key requirements, such as know your customer, staff
training, reporting suspicious transactions, recordkeeping, and the
role of the antimoney laundering compliance officer, should be in place
and properly implemented by the prospective client before any
disbursement. The nature of the specific requirements for a given
client is tailored to reflect the perceived risks. Some requirements
(e.g., training for all staff members) could be fully achieved at a
later stage of project implementation, such as during the disbursement
phase, if that would not materially affect the soundness of the
client's overall antimoney laundering framework.
Moreover, to address the specific risks emerging in the Bank's
financial institutions portfolio of operations, the Bank's standard
loan agreement includes an affirmative covenant committing the borrower
to institute measures to prevent money laundering/terrorist financing
when using EBRD funds. After the borrower signs this certification
potential money laundering/financing terrorism risks are assessed by
the EBRD at each periodic project review. The Bank typically conducts
project reviews at least semiannually and does so more frequently if a
project is on the EBRD's watch list.
Where there remain unanswered questions after completion of the
EBRD's standard due diligence procedures, the Bank has four
investigative firms on retainer under a framework agreement to conduct
additional investigations. The decision to use an outside firm can be
initiated by the Credit/Transaction Risk Unit in the Risk Management
Vice Presidency, the OCCO, or the Banking Department, which can use
their services not only for AML/ATF purposes, but whenever there are
integrity or reputational risk concerns. In 2004, the Bank commissioned
67 investigations. In exceptional circumstances where an investigative
firm, which is not a party to the framework agreement, has special
expertise or knowledge, the Bank can retain the services of that firm.
The EBRD provides antimoney laundering/counterterrorist financing
(AML/ATF) training for staff as well as for the banks with which it
does business and governmental authorities. In the past, the Bank's
Risk Management section regularly organized AML/ATF seminars for staff
and conducted three seminars in 2004. Responsibility for this education
effort now lies with the CCO, and during 2005, participation in a new
AML/ATF training course will be compulsory for all the staff members
involved in the development of projects.
The EBRD seeks to improve AML/ATF procedures in its countries of
operation through engagement with banks and the national authorities.
The EBRD has two primary objectives. First, the EBRD wants the
authorities to impose realistic obligations on banks instead of
extensive reporting requirements with no followup of the suspicious
transactions reported. Second, it wants bank managements to commit
their organizations to actively pursue AML/ATF measures rather than
passively comply with government regulations.
In late 2003, the EBRD organized three pilot seminars in
Kazakhstan, Macedonia, and Bosnia-Herzegovina to promote better
understanding of sound AML and ATF procedures. These seminars indicated
that training is needed to nurture an almost nonexistent communication
channel between banks and AML/ATF authorities and to provide them with
the benefit of lessons learned from Western banks and financial
intelligence units.
Following the pilot seminars, the EBRD has designed, with EU and
Swiss Government support and financing, a =1 million training
initiative to raise awareness of the importance of a proper AML/ATF
legal framework at the political level and to help banks to design,
review, and improve their policies. The training, involving experts
from large Western banks known for their proactive work on AML/ATF,
will take place in the region to ensure that the people responsible for
AML policies in the banks can attend. The CCO expects to roll out
seminars by July 2005 and will focus on the poorer countries of
operation, where practices are least developed. Attendance at the
seminars will not be confined to EBRD clients.
ADOPTION OF A COSO SYSTEM OF INTERNAL CONTROLS
Beginning in 2003, we urged the Bank to adopt a COSO system \1\ of
internal controls over its financial reporting. In May of last year,
management agreed to do so and committed that the internal controls
would be in effect for the preparation and publication of the Bank's
financial statements for 2004. At the May 2004 annual meeting, Deputy
Secretary Bodman acknowledged management's commitment and said:
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\1\ COSO (Committee of Sponsoring Organizations of the Treadway
Commission) is a voluntary private sector organization dedicated to
improving the quality of financial reporting through business ethics,
effective internal controls, and corporate governance.
. . . we are pleased that the Bank has committed to establish
a strong framework of internal controls and assessment
procedures for the 2004 financial statements and beyond. This
commitment will serve as a powerful example to other
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international financial institutions.
Bank management delivered on its commitment. It identified and
tested 847 financial controls. This process, in which both the Bank's
internal and external auditors were involved, required many hours of
staff and management time, and the EBRD incurred substantial costs.
The EBRD completed successfully the testing of its financial
controls, and its 2004 financial statements, which have been approved
by the Board, contain a Management statement signed by the President
and the Vice President, Finance, and audited by the Bank's external
auditors, PricewaterhouseCoopers, confirming that the Bank maintained
effective internal controls over its financial reporting as contained
in the Annual Financial Report for 2004. This is the first time the
Bank has included such a statement in its Financial Report, and the
EBRD is one of the first organizations to do so outside the United
States where this assertion is mandatory for listed companies.
As part of the COSO project, the Bank also completed an operational
risk self-assessment exercise and established a framework for continued
development of an operational risk identification, measurement,
mitigation, and management capacity. Management, which expresses a low
tolerance for operational risk, refined key risk indicators and
identified 239 controls for dealing with operational risk. These
controls address a variety of risks, including reputational risk. The
Bank is in the process of hiring an operational risk manager. Starting
this year, Management will provide the Board with quarterly reports on
the Bank's exposure to credit, market, and operational risk.
Management has expressed confidence that the COSO system of
internal controls is a sustainable part of the culture of the EBRD. It
believes that the certification process relating to financial controls
is now entrenched, and the operational risk management process is well
underway. To maintain intra-Bank co-ordination and facilitation and to
ensure maintenance of focus and continuity, management has established
a COSO and Operational Risk Management Unit. This unit reports to the
Vice President, Finance, with respect to internal financial controls
certification and to the Vice President, Risk Management, with respect
to the operational risk management process. On a day-to-day basis, the
unit will work with the Controller and the Director of Risk Management.
Moreover, the Certification of Internal Financial Controls Steering
Committee, which was formed to oversee the process of adopting and
implementing the new controls system, will continue its function and
meet several times a year to provide supervision over the certification
process, while the Operational Risk Management Group will continue its
role of providing supervision over the operational risk management
process.
PROCUREMENT
The EBRD's public sector operations frequently involve procurement
of goods, civil works, and services by governmental entities. In 2004,
the EBRD's public sector borrowers signed 157 procurement contracts
with an aggregate contract value of =681 million. EBRD financing of
these contracts was =559 million. The number of contracts signed by
borrowers and the aggregate volume represented declines of 13.3 percent
and 22.5 percent respectively from 2003. In 2004, 77.7 percent of all
contracts and 96.6 percent of total contract value was procured by open
tendering.
The foregoing figures do not include contracts for consultancy
services. The Bank's Consultancy Services Unit (``CSU'') administers.
the majority of these contracts. The Office of the General Counsel, the
Turn Around Management Group, and the Nuclear Safety Department all
have the authority to retain consultants directly. The total value of
the 1,620 consultancy contracts issued by the EBRD in 2004 was =118.76
million. This represented an 8.25-percent increase in value and 1.0
percent increase in number over 2003. CSU issued 730 contracts with an
aggregate value of =65.91 million, and 78.04 percent of these contracts
in terms of the value were awarded following competitive selection
procedures.
In connection with the adoption of the COSO system of internal
controls, the CSU reviewed its controls and procedures with the Bank's
external consultants and the in-house team. CSU's controls and
processes were considered to be appropriate and the audit trail
relating to its compliance functions sufficient to demonstrate the
proper application of the necessary processes and approvals.
The EBRD, with the assistance of an outside consultant, has
developed a course for new staff that provides them with training in
the basic principles of public sector procurement. The course was
finalized in 2004, and one seminar was held. Additional courses will be
held in 2005 for all professionals who have been working at the EBRD
for at least 6 months.
During 2004, the EBRD retained the services of an independent
procurement consultant to review three completed projects to assess
whether the procurement, contracting, and implementation processes,
which had been followed, were consistent with the corresponding loan
agreements and whether the principles of economy and efficiency,
transparency, and accountability as stated in the Bank's Procurement
Policies and Rules (``PP&R'') were satisfied. The report has been
delivered, and the EBRD is assessing which recommendations for followup
action can be implemented this year.
The EBRD's Procurement and Technical Support Unit is charged with
reviewing all proposed contracts above specified levels as an integrity
check before the EBRD's Banking Department registers its ``no
objection'' to a proposed contract. Last year, 38 percent of the
contracts subject to the selective review process were sent back for
completion, clarification, or improvement before a ``no objection''
could be provided. This represents a reduction from the percentage sent
back in 2003, which was 45 percent.
The EBRD addresses the problem of potential fraud and corruption in
these procurements by following the procedures set out in its PP&R. The
EBRD has established its Procurement and Contracting Committee
(``PCC'') to review all allegations of fraud and/or corruption in the
context of the procurement process or when the Bank receives
procurement-related complaints. If the PCC concludes that the
allegations are substantiated, it refers the case, together with its
recommendation, for appropriate measures (e.g., barring firms or
individuals from future participation in the procurement for EBRD-
financed contracts). With respect to firms or individuals, the EBRD
will reject a proposal for an award to such firm or individual and will
declare him or it ineligible, either indefinitely or for a stated
period of time, to be awarded a Bank-financed project. In the event
that a representative of a client or a beneficiary of the Bank's
financing has engaged in fraud or corruption, the Bank will cancel the
portion of the Bank's financing allocated to the contract in question.
The Bank does not limit its actions to its own funded projects, but
has the ability to ``cross bar'' where a client has been found, by a
judicial process in an EBRD country of operation or other official
enquiry, to have engaged in corrupt or fraudulent practices. This would
include enquiries conducted by another MDB. EBRD policy would require
the names of firms or individuals that are debarred to be published on
the Bank's Web site. To date the World Bank is the only other IFI that
requires that names of sanctioned firms and individuals be made public.
The EBRD receives, on a strictly confidential basis, the ADB list of
debarred firms. The EBRD examines both the World Bank and ADB lists to
determine whether any firms or individuals to which the Bank is
considering providing financing, or that it may be transacting
business, with are on the lists.
There were 16 procurement complaints concerning EBRD financed or
administered contracts in 2004 as compared with 24 in 2003 and 14 in
2002. The Bank did not uphold any of the complaints in 2004, but did so
for three complaints in 2003 and two in 2002. Three of last year's
complaints came through the EBRD's Compliance In-Box and alleged fraud
and corruption. The OCCO referred them to the PCC, but no evidence
substantiating the allegations was found. The CSU received one
procurement complaint in 2004, and after review by the PCC, the
complaint was not upheld.
We understand that all allegations of corruption and fraud have
been investigated according to the Bank's procedures, but these
investigations have not resulted in debarment of any firm or individual
or the cancellation of financing in recent years.
We recently questioned why the EBRD has never debarred a firm or
individual when the World Bank, the Asian Development Bank, and the
African Development Bank have. In response to the foregoing question,
Bank staff outlined plans for 2005 to strengthen oversight of public
procurement, including a greater emphasis on upfront work to improve
fiduciary compliance and increased due diligence and monitoring during
contract implementation. Bank management is sensitive to the fact that
there have been no substantiated cases of procurement-related fraud or
corruption in EBRD-financed public procurements in recent years. This
sensitivity follows naturally from the EBRD's awareness, that many of
its projects are implemented in a high-risk environment for fraud and
corruption.
In March 2005, EBRD took additional steps to strengthen oversight
of public procurement. The PCC's membership was expanded to include the
CCO and the Head of COSO and Operational Risk, and the chair of the PCC
will be the Deputy General Counsel to reduce any perception of
potential conflict of interest. In addition, the PCC's terms of
reference were amended to transfer the responsibility for investigating
allegations concerning fraud and corruption to the CCO from the
Director, Procurement and Purchasing Department. The process of
independent procurement reviews will be expanded in 2005. Because the
EBRD recognizes that ensuring a fair and transparent procurement award
process is insufficient to prevent corruption that can occur in the
implementation phase, it will engage in more proactive monitoring with
early identification of possible implementation red flags.
The EBRD expresses confidence that its ex-ante approval process at
various stages of the tendering process is conducive to a fair and
transparent contract award process. Furthermore, tenderers can and do
avail themselves of the Bank's complaint procedure as stipulated in its
PP&R. Third parties can use the hotline or Compliance In-Box to flag
possible problematic cases. There have been relatively few allegations
that have been brought to the attention of the EBRD.
Standard Contractual Provisions
The Bank imposes a number of financial covenants on its borrowers.
For example, banks to which the EBRD makes loans must comply with an
affirmative covenant to ``institute and maintain internal procedures
satisfactory to the Bank for the purpose of preventing the Borrower
from becoming an instrument for money laundering, terrorism financing,
fraud or other corrupt or illegal purposes.'' Similarly, nonbank
borrowers must represent and warrant that they are ``in compliance with
all applicable laws concerning money laundering'' and that neither they
nor any of their officers, directors or authorized employees, agents or
representatives has (i) paid, promised to pay or offered to pay, or
authorized the payment of, any commission, bribe, payoff, or kickback
related to the project that violates any applicable law or entered into
any agreement pursuant to which any such commission, bribe, payoff, or
kickback may, or will, at any time be paid; or (ii) offered or given
any thing of value to influence the action of a public official, or
threatened injury to person, property, or reputation, in connection
with the project in order to obtain or retain business or other
improper advantage in the conduct of business. At each loan drawdown or
interest rate rollover period, each borrower must report that it
continues to be in compliance with its covenants.
As a matter of routine, borrowers must maintain procedures,
records, and accounts adequate to reflect, in accordance with
internationally accepted accounting standards consistently applied, the
operations, resources, and expenditures relating to EBRD-financed
projects. In addition, private sector borrowers must have audited
financial statements prepared in accordance with internationally
accepted auditing principles and standards. Typically, the Bank
requires borrowers to authorize their auditors to communicate directly
with the EBRD at any time concerning their account and operations.
The Bank's Operations Administration Unit, which is a part of the
EBRD's Finance Vice Presidency, monitors compliance with material loan
conditions including covenants. Failure to comply can lead to
acceleration of the loan. Bank management confirmed to the Board that
failure to comply with the Bank's anticorruption covenants is a
material breach which will be enforced as vigorously as the breach of a
financial covenant. Urged strongly by the United States, the Audit
Committee has been increasingly interested in the process of assessing
the systems in place for ensuring compliance with these legal
covenants. As a result, the EBRD now must inform the Board of the
issuance of any waivers of material conditions. The Audit Committee has
directed the Project Evaluation Department to report on the use of
waivers, and this report is due to be delivered in 2005.
CONCLUSION
Since my arrival in 2002, the U.S. Director's Office has made
improvements in EBRD governance and anticorruption measures a priority.
Last year saw progress, and there is a foundation for further progress
this year. We intend to push for greater independence of the Internal
Functions, increased resources to enable them to take on more
responsibility, and a continued focus at all levels on integrity
issues.
Mr. Chairman, as noted earlier in my testimony, our goal is, and
has been, for the EBRD to have a corporate culture and environment that
features enhanced corporate governance, internal controls, and
compliance and that promotes good governance in its countries of
operations. My Office is committed to continuing our efforts to that
end.
The Chairman. Well, thank you very much, Mr. Sullivan, for
your testimony.
I'd like to ask you, Ambassador Speltz, to give a mental
image of what your headquarters looks like. It is located in
Manila, in the Philippines. Is it a separate building, and how
many persons are employed in the whole operation? In other
words, how large of a situation, physically, is this?
Mr. Speltz. Thank you, Mr. Chairman, and as you and I have
talked in the past, I certainly do welcome you to come visit us
sometime, out there in Manila, if you're in Asia.
First of all, I'd like to state why the Asian Development
Bank is in Manila; a lot of people ask that. In 1967, when the
Bank was set up under the period of time under President Lyndon
Johnson and the United Nations. Many of us, who are in this
room, remember that the Philippines was the center of economic
growth in Asia after Japan. Hong Kong was a British colony;
China was closed; Vietnam was a war; Singapore was just
starting; Korea was just beginning. Two other countries
applied--one was Iran--for headquarters, we won't go into that,
and Japan. So, the selection of Manila took place.
I'd like to also state that the reason it's still there
today, people say ``Why is that Bank still in Manila?'' Yes,
the Bank could be moved, but in fact, I think there's a reality
check, you know, the Asian Development Bank, as all these
banks, with your support, are really valuable institutions, if
they're doing their job right, if they're helping to eliminate
poverty and build sustainable growth. And nowadays, very sadly,
the ADB is right smack in the middle of one of the poorest
cities in the poorest countries in the area. So, when I'm in my
Office, I look out the window, Jay Branegan has seen it, you
look out the window, and there's a lot of poverty outside the
window.
The building itself on any particular day, an average of
maybe 4,000 people a day go in and out. We're certainly not as
big as the World Bank, but it's a pretty good size, and that
includes staff, professional staffing, I believe, of over 800,
and the local staff and many consultants, but on an average,
about 4,000 a day move in and out.
We are in two tied-together buildings, similar in fashion,
I think if you could, to the World Bank, on a smaller scale,
with the IMF across the street. We have offices, regional
representation offices around the Asian area, so that is the
physical structure of it. The Board members are housed all
upstairs on one floor, which I think they do in all of these
multilateral development banks. I'm not sure whether that's to
keep us out of the main fire, or whatever, but anyways, we're
all up there together. I think an interesting aspect of that,
Mr. Chairman, is that we all have the same offices, same
furniture, same everything, which is pretty good, because it
keeps us on an equal basis when we're trying to work with our
fellow countries, which is so important in coalition building.
The Chairman. How many countries are there on this floor?
Mr. Speltz. Today--I'm always trying to keep track--there
are 63 country members, and of the 63 there are 12 Board
members. And of the 12 Board members, only China, the United
States, and Japan represent only our constituents. So, the
remaining nine Board members have the responsibility--some on a
fixed basis, and some on a rotation basis, of representing the
other 59 or 60 countries. The Asian Development Bank, in many
regards, is a misnomer, because it really covers everything--as
you know--from the Pacific all the way through to Afghanistan,
and my overlap with Mark with the EBRD and Khazistan, and then
the nonregional members, which are all of the European
countries and Canada, and other areas of that nature.
The Chairman. Right. Thank you very much for that important
history, as well as the physical description. Those who are
working with us in this hearing may have that same impression
that I do, vividly, from what you have mentioned.
Let me just say that last year the committee was informed
that development projects in the Philippines supported by the
Asian Development Bank had a low success rate. When asked about
that report, Mr. Roberto Tan, Assistant Secretary of Finance,
responded, ``The low performance can be attributed to a number
of implementation problems, including poor contract award
performance, cost overruns, and delayed provision of
counterpart funds.'' The logical question I have for you,
Ambassador Speltz is, What is your assessment of the low
success rates of ADB development projects in the Philippines?
Mr. Speltz. Well, it appears that your staff and I have
also been reading the newspapers last night; I saw the Manila
Times late last night. The Philippines is a very difficult
situation. Without getting into all of the details of it here,
because it's a political matter of some sensitivity, when I
first came in to the Philippines I believe it was close to $2
billion in undisbursed loans, of which the Philippines was
paying a small fee for these undisbursed loans. I wanted to
know why. What was happening? And we took it upon ourselves in
our office to begin to activate that question of why? What's
going wrong? And over the next year, including very much the
involvement of the President of the Philippines, Gloria Arroyo,
we began delving into this and found out that, for a variety of
reasons, including lack of disbursal of third-party funds by
the Philippine Government, sometimes concerns about potential
free flow of the appropriate funds, whether or not there was
potential corruption or not, concerns that that might happen,
but essentially that many things were not in place. And, we
advised, up to the President, that they take a look at
canceling some of these loans, taking them off the books, some
of them were 10 years old, and rebuilding them, restructuring
them. And to the credit of the Bank, the Bank worked very
carefully with the administration of the Philippines, and
cancelled, I believe, almost a billion dollars in loans. And
then have been re-structuring.
I noticed in yesterday's paper, Manila Times, last night's
paper, that a comment had come out about this. But in that same
article, it was not criticizing the ADB, it did state that it
was working with the ADB and trying to restructure these loans.
It really, much of this, Mr. Chairman, honestly is in the hands
of the Philippine Government. The Philippine Government must
take certain steps in order to help us help them.
The Chairman. Give me some indication. Procedurally you say
$2 billion of loans were in the hands of the Philippine
Government. The Board of Directors of ADB, at some point in
history, loaned the Philippine Government the $2 billion? Or,
what was the nature of the transaction? How did the $2 billion
come into play?
Mr. Speltz. No, first of all, let me make it clear, Mr.
Chairman, the Philippines don't have $2 billion in their bank
account, ADB had the $2 billion in the bank account. ADB does
not disburse funds if they feel there is a program that is not
going to go ahead on the structure that we've set up, so the
cash is in our bank. Number two, with regard to the $2 billion,
that was made up of many different loans. And almost every one
of them was project loans. It was cleaning up Pasak River, it
was cleaning up environmental issues, it was working on
airports in Mindanao, and some of those areas, especially in
Mindanao, due to the terrorist activities down there, the Bank
and the Philippines could not go forward with because of
danger. So, I would say, and I can come back to you on this,
but clearly, much more than 80 percent of that was specific
project loans which we just did not disburse.
The Chairman. So some governmental units are in the
Philippines. You have mentioned, say, Mindanao. The Bank
initially then, put--at least a hold--on those funds in your
vault. They remain there, but the idea was that although you
had committed to move forward, you haven't disbursed the funds,
apparently because, essentially whoever was wanting to do this
decided they couldn't do it right now. Administration was just
inadequate. I'm just trying to probe all of these projects. Who
mentioned them? And why did the Bank say, ``That's a good idea,
we ought to go ahead with it''?
Mr. Speltz. Your questions are excellent, sir. When I got
into the Bank, of course, my whole education started. One of
the things, of course, that I discovered is that there were
many difficulties of reform which we felt were needed, and we
pushed forward on it. And I'm pleased today that many other
constituents in other countries are working with us on reform.
But I was also pleased to see that there was actually a
great number of hard-working, good people in that Bank who
were, in their own way, working on trying to protect the Bank,
to protect the moneys going out, and I was thunderstruck at the
amount of money that had been committed in loans, but not
disbursed. And I started diving into this; why? Why was this
money not disbursed? And the overriding reason was that those
countries had not met the regulations of the Bank--before I got
in--the regulations of the Bank in meeting the qualifications
which were necessary to proceed with the implementation of the
loans, or we stopped. In certain cases, we began a project, and
we stopped. I thought that was bad news that the money hadn't
been disbursed, but I thought it was good news that the checks
and balances were in place to stop the money going out.
Then I wanted to take it to the next step--don't ignore it,
start working on it--to try to figure out how to either cancel
those loans, or reactivate them and get them out to the people.
The Chairman. And as you just mentioned in that second
examination, you've cancelled about half of the money, $1
billion of the $2 billion or so, so that those loans are not
out there. And so in play are something less than a billion
dollars, apparently, at this point. Is that right?
Mr. Speltz. It went actually down, I believe, to less than
a half of a billion.
The Chairman. Half a billion.
Mr. Speltz. And if I recall, and perhaps your staff can
help here, too, if I recall the statements in this morning,
late last night's Manila Times, a representative from the
Philippine Government acknowledged the fact that they were
restructuring these loans, so that is what's going on.
The Chairman. Good. I appreciate those responses, although
Manila is far away from Washington. Today you are here and
others are there. I would just observe that papers in other
countries, such as The Manila Times, have been interested in
our hearings, interested in your responses and your appearance
before this committee. I am grateful that is so, because this
has brought a sensitivity in the international community on
these problems that may be helpful to an administrator such as
yourself.
Mr. Speltz. Mr. Chairman, if I may, just in closing on
this, if you'll permit it. I think it's important also, as the
Senate Foreign Relations, that the President of the
Philippines, I've met with her on many occasions, and she
personally has taken this into her own area of concern. She
particularly is interested in education, in the education
problems, and the water problems, and the environmental
problems in her nation, and she was also very concerned and
upset when she found out some of the bureaucratic holes that
were not permitting this money to get to her people. And she's
been working very well, not with me, but with the staff at the
Bank, to work on this.
The Chairman. I appreciate that. Let me just say,
anecdotally that 20 years ago, 1985, in this committee, we were
hearing testimony from the then much younger Rich Armitage and
Paul Wolfowitz, with regards to the Philippines. Their
testimony was riveting. The committee was besieged with
dilemmas about the governance of the country. Without
belaboring the history, the fact is that the deliberations of
our committee, in part, led to an appearance on national
television of President Marcos calling for a snap election on
an American Sunday news program, and calling for the world to
witness that he did have authority and that he would be
elected. And from that, a number of things followed. I
especially appreciate your management of the situation, and
your working with President Arroyo.
Mr. Speltz. Two other comments, with your permission. First
of all, I don't think President Arroyo would really appreciate
me very much if she called for a snap election tomorrow, and
number two, I do want to stress very much that Ambassador
Richard Downey, the United States Ambassador to the Philippines
is, number one, a very close personal friend of mine, but he
and his staff have also worked with us intimately with these
problems with the Government of the Philippines, and I very
much appreciate that support by him and the State Department.
The Chairman. Well, I'm pleased to learn of that
relationship. I am not surprised. I commend that support of the
Philippines and that close relationship. At the end of the day,
we're hopeful--and that was the purpose of the question
originally--to inquire if there will be constructive loans and
a higher success rate, and if there would be movement by the
government, as well as the rigor that you have imposed with the
banking regulations.
Let me ask one more question dealing with the metrics of
the situation. Since the regional development banks,
particularly the Asian Development Bank, began implementing
anticorruption practices, has there been a reduction in corrupt
activities? Is there any way to measure declines or increases
in corruption? This is pertaining to the whole portfolio, all
of the countries, and a very general assessment, but I just
want to get some idea as to how things are proceeding, or how
you're able to measure how they're proceeding.
Mr. Speltz. I assume you're asking me, sir?
The Chairman. Yes.
Mr. Speltz. That's hard to measure, and I'd like to answer
this in parts. I really believe in my heart that the efforts
that your committee and also many Members of Congress, the
Hill, the Senate, on both sides, have taken in meeting with me,
and the Asian Development Bank, with my colleague Mark, with
Bob Holland, World Bank, his predecessor and so on, I think
sends a very strong message to those who might consider being
involved in what we clearly call corruption, that they don't
necessarily call corruption in their own minds. It gives them
pause to consider that those days have changed. That's, I
think, very, very important. I think the trends of the banks in
general, and I won't speak for Mark's bank here, but I feel
it's the same way on anticorruption is good, what is needed now
is more restraints, more measures to carry forward on that, and
specifically, I had a couple of things I had that I wanted to
bring up to that.
It's impossible to measure the amount of corruption that's
been out there in the past. I've seen testimony by Mr. Rich and
others, who, I think, are well meaning, in some cases, I
believe out of date. But, the fact is, there is, has been,
corruption in the past, but I want to take the positive side of
it. One of the things that we're dealing with, one of the
problems we're dealing with, is that many of the countries that
we work with, in the Asian Development Bank, do not have
control systems in place for combating corruption, because it's
not that important to them. And if you don't have a control
system in place, then it becomes under the decision of an
individual as to what that individual is going to do. What ADB
is trying to do, and I applaud them, they are really working at
this very, very difficult problem, is to work on the education,
from my opinion, grassroots up. Not the top down, grassroots
up. The education of the negative effects of corruption, and
the fact that those very people who need it most are the ones
that aren't getting the money. They are the ones that are
getting hurt the worst. And so, we're working with them on
educating them, we're working through technical assistance
programs, we're working with government officials, and yes,
many of these governments are trying to work with us in setting
up these control systems. Checks and balances on corruption,
and we're trying to show them how to implement them.
And then, most importantly, they know that we don't
disburse the funds, a very good point that you brought up, sir,
that if we are not satisfied at the Bank that things are not in
place, we simply don't disburse the funds. So, I would say
that, at this time, without knowing anything about the amounts
of money or anything else, the trend has changed, there is very
significant action being taken place, and I think the efforts
are generally there, by many countries to try to clear this up.
The Chairman. I appreciate that testimony, and I appreciate
the questions and possible answers about specifics year by
year. The trend, I think, has clearly changed, and it's in part
because of officers like yourself who have made that change. I
would say, without being hypercritical of anyone, as we began
these hearings, that there was a certain amount of skepticism
as to why we were even involved at all in these issues.
Essentially, it was a challenge of authority, or the fact that
we had some oversight capacity. It was just that members don't
get into this type of thing, and banks take care of the
situations. In part, for a moment or two, we even had with our
own Treasury Department, a feeling that, after all, they simply
don't offer testimony to committees like this, and that they
have their own procedures. Now, in fairness, they have changed,
and they're constructive, and they have been helpful. That has
been true of the World Bank, and that's been true of others
that may have had some skepticism at the outside, because they
understand--perhaps informed by another investigation that our
committee commenced, being the very, very tragic Oil-for-Food
Program, at the United Nations--that the whole credibility of
institutions, and the officers, may come into question when
something is escaping oversight of anyone.
And, so I would simply say that we want to have strength in
the banks. We want to have confidence in the American people,
before we offer the reauthorization legislation. We want to
make sure to them that we can try to say that some due
diligence has been exercised on our part, as well as on yours,
and to give you an opportunity to testify to that effect.
Mr. Speltz. Thank you.
The Chairman. Let me ask you, Mr. Sullivan, as a general
question, do the regional development banks adequately share
information among themselves, and with the World Bank, about
firms and individuals that have been sanctioned for corrupt
violations? In other words, are there lists of firms or
individuals that are made public at the regional development
banks as they are at the World Bank?
Mr. Sullivan. My understanding is that there are other
lists to which the EBRD has access, the Asian Development
Banks, the others I do not believe are public. We do look at
those lists, and I would like to say, generally on the matter
of procurement, that's been a subject of Audit Committee
interest in recent weeks; we had a meeting on the 21st of
March, we will have another. What is clear to me is that there
is an increased effort to deal with procurement issues, which
your question addresses apart, the amount of effort that has
been put into pre-award examination of those who are bidding,
and the amount of effort that will be devoted to post-war
implementation, which will be substantially increased.
I think that you will see, because of institutional
changes, the involvement of the Chief Compliance Officer in
these two areas that I've talked about, that we will have much
better results, and of course, we do take cognizance of the
lists of others, but to my knowledge, I think it's only the
World Bank that publishes one. If we were to have someone
disbarred, that would now be published on our Web site. That's
a new policy, but it is in place.
The Chairman. Well, I raise the question for obvious
commonsense reasons. If there are experiences out there in the
field with any of the regional development banks, as factors
are uncovered, it would certainly be essential information. I
think that the other banks would be so informed, and I
appreciate the whole governance question who does what and
what's the responsibility for this? At the same time, I raise
the question simply because you have some responsibility, as do
Mr. Speltz and others, to make certain that this information is
available, so that mistakes are not made inadvertently. And
that's why I'm curious about the proper spread of information
in a timely way.
Mr. Sullivan. I completely agree with your observation.
They ought to be sharing information. I believe they do share
information, whether or not it can be improved, I'm not
certain. I do know that our Chief Compliance Officer and the
new people who are in charge of procurement at the Bank are
very cognizant of the importance of going ahead and making sure
that people do not take advantage of these systems for the
reasons that Paul has mentioned in terms of the efficiency of
the money provided.
We do have a very active program of supporting open,
public, tenders using standard documentation. I believe last
year over 96 percent of all procurements by the EBRD were
subject to open public procurement, and, of course, using the
standard documentation.
The Chairman. At least on your own, you're making this
open. You could also, I suppose, share your observations with
the other banks.
Mr. Sullivan. I believe they do.
The Chairman. Mr. Speltz.
Mr. Speltz. Mark and I work as a team together. I was
asking permission to help him out here, just on the ADB side of
this, because you are talking about all the banks, again,
you're bringing up a very good point, and somewhat of a
sensitive one from a legal point of view. The World Bank does
publish its, we call, ``black list'' and many of the banks make
a policy of, I believe it's all, of exchanging, at least on a
need-to-know basis, all the lists of both consultants,
individuals, and corporations that they are debarring, or
blacklisting for a period of time, including the ADB. We have
over 230 companies, as of yesterday, that have been debarred,
or blacklisted for potential corruption or illegal activities,
or just that we don't want to do business with them on the
basis of the way they operate. That list we share with the
EBRD, we share that list with the World Bank, with the African
Bank, and the IEDB.
There is, however, a point that's been brought up by your
staff that is of a deep concern to them, and I share that
concern, that is, that within the ADB we do not publish that
list, and that is something that we are working on, that we do
believe that that list should be published. But there are legal
problems within the Philippines, with regard to the publishing
of these companies names, due to very interesting laws there.
With regard to the activities of the Bank, though, every
debarred company is submitted to all the other banks, and very
interestingly, effective November last year, when we receive a
list of debarred companies or other companies that have been
debarred from the World Bank or from EBRD, or others, we look
right into--our Audit Committee looks into it--and if they
believe there's justification for also debarring, they simply
just don't do business with them any more, and they notify
them.
And one other very interesting thing to keep these folks on
their toes--if a company is debarred at the ADB, and
reapproaches through another channel and tries to bid, the Bank
further debars them for a longer period of time.
The Chairman. Well, that's very important information. I
would just observe that clearly you have to follow legal
counsel carefully with regard to the laws of the Philippines or
others. On the other hand, this issue is serious, not just for
the banks, but in terms of our overall public diplomacy in this
country. I would say that if this is an issue with the
Philippine Government, again this is something that probably
needs to be discussed by our Ambassador, or Mr. Zoellick, our
Under Secretary, or Secretary Rice. I'm simply raising the fact
that we, as a country, are determined to make certain that
anticorruption procedures are literally pervasive, that there
is publication, and that there is follow-through in the
Philippines as well as anyplace else. And that the
ramifications of lack of cooperation here could be very
substantial.
The failure to do this is ultimately going to lead to an
undermining of these programs, with our body politic, that is,
with the American people, quite apart from what is occurring
out in banks. The American people have not been that well
informed about what's occurring out there. Now, they're getting
better informed all the time. I don't want it to come as a
terrible shock. I would like it to come through thoughtful
meetings like this one, in which professionals discuss what the
facts are, what you are doing about it. There's a strong record
of recognition, an action that makes a difference, because one
can say, this is the way the world works. But what we're trying
to say in these hearings, and what you're saying as
administrators of these banks, is that the world has got to
work--at least if money is going to be distributed, taxpayer
money from our country and from others--in a way that stops
corruption of the efforts, and does not put extra burdens upon
the poor people of those countries that are the victims of this
type of thing. This is preaching to the choir. You have to face
this out in the field every day. But this reinforces that, and
that is to say, I hope that you might raise these questions in
the proper departments, such as the State Department, the
Treasury Department. And if you do, more power to you. I just
mention to you that I may raise them, too. This is--as a part
of American diplomacy--something that you, Secretary Rice, or
Under Secretary Zoellick need to be cognizant of, because this
is important in our national image and effort.
Well, let me just ask one more question. Let me just
observe, Ambassador Sullivan, that it's our observation that
there are still limited whistleblower protections at EBRD.
There is not very much protection for staff testimony and
independent recourse mechanism proceedings to resolve
complaints by third parties at the EBRD at the behest of the G-
8.
Describe what is being done to strengthen the whistleblower
procedures at the EBRD, and how this general criticism has been
met.
Mr. Sullivan. Thank you, Mr. Chairman.
We have expressed reservations about the current
whistleblower protection scheme at the EBRD. We've raised it in
the policy committees and in the Audit Committee, we will,
we've talked to the Chief Compliance Officer about it. I think
that the whistleblower scheme was hard to follow for people, is
now in the process of being consolidated, made more readily
accessible to people. There are questions and answers now on
the Web site, notwithstanding what has been done to date, it
has been agreed that there's more that needs to be done. There
is concern about not only the protection of whistleblowers
generally, but on the question of anonymity. The counsel to the
EBRD advises that in certain circumstances, because the
European Union Human Rights Convention requires people to be
able to confront their accusers, that there may be times, as a
consequence of an investigation, when that anonymity cannot be
protected. This came up in the Audit Committee twice. The
Board's belief is that we do need to protect whistleblowers.
One member of the Board was actually formerly a whistleblower,
and understands this all very well. I do not believe this
process is at an end. I do believe that we, as an office, the
U.S. Office at the Bank, will continue to pursue it until we
get it right. But your concern is not misplaced. On the other
hand others share your concern, including the Board of the
EBRD, and certainly my Office and obviously I, personally, want
to make sure that it's done correctly. I do think that having
the new Chief Compliance Officer on Board who comes to the EBRD
from the OECD where she built up a very strong compliance
function, is a very positive development for working through
the successful resolution of these issues.
As to the IRM, we have at the EBRD, very little experience
with it. As you know, the United States raised some questions,
and had reservations about it at the time of its adoption. I
regard that, too, as a work in progress. We'll have to see how
it works. There is a report due out later this year on how it's
done in the first full year of its implementation by the EBRD.
The Chairman. Well, thank you very much. I appreciate your
own personal conviction with regard to this, and the steps that
you are taking, and likewise the compliance procedures that
you've instituted and that you're supervising. This is an
important step forward, and we appreciate your being here
personally to give that testimony.
I thank both of you for your testimony, your original
statements as well as the summaries, and the forthcoming
responses to our questions. Obviously, this is of great
interest to our committee and our staff. They have appreciated
your hospitality as they have visited with you, and we are
hopeful those visits will continue. We're grateful to you for
encouraging that.
Mr. Sullivan. Well, thank you Mr. Chairman. We, too,
appreciate the opportunity to be here, the opportunity to work
with your staff, and as you and I have discussed, we were
looking forward to the visit of your staff to the EBRD and I'm
delighted to learn that that visit has been postponed, but not
cancelled, and we will look forward to working with you and the
committee.
I do believe that it's important, for what we're all trying
to accomplish that the countries with which we deal understand
that the United States speaks with one voice on anticorruption
efforts, and it's very helpful to us to be here today to talk
with you. Thank you, sir.
The Chairman. Yes, sir; Mr. Speltz.
Mr. Speltz. Thank you very much, Mr. Chairman.
I think you know from both your staff and yourself,
personally, the passion I have with regard to what you're
trying to do here. I would like to respectfully request one
thing for you to consider as you go forward.
You mentioned at the beginning of this, you're looking at
putting in new legislation. I think on behalf of all of us who
are Executive Directors at the Bank, that we hope that you work
very, very closely with the U.S. Treasury Department with
regard to those, and what aspects of new legislation would help
us, and what might potentially hinder us.
We have a situation which you know very well, sir, in
dealing with foreign relations, of the sensitivity of dealing
with so many other countries that don't necessarily always
share our opinion, and do not necessarily like it if they think
that we're putting something down their throat. I think all of
us have built very good consensus and relationships with our
fellow Board members, and as you look at whatever you're going
to do, I would only personally request that you work closely
with our Treasury people in sorting out which ones you agree,
and Treasury agrees, and we agree will help us, and which ones
could be misinterpreted, where Board members could sit there
and say, ``Don't call Speltz, or Sullivan into this meeting
because we have a document from their Congress that clearly
says they're not open to discussion, they've mandated it.'' I
hope you'll understand that.
The Chairman. I do, and I think that's good counsel. Staff
has been advised to do just as you've suggested. But at the
same time, Senators likewise should take that counsel very
seriously, and we will.
Well, I thank you both, and we will now call upon our
second panel of the morning.
The Chairman. The Chair welcomes Mr. Hemantha Withanage,
and Mr. Tom Devine. I would ask that you testify in the order
that you have been introduced. We are appreciative that you
came. I know both of you have had an opportunity to hear the
testimony of the first panel. You have already prepared
statements, and they will be made part of the record in full.
If you would summarize or proceed in any way you wish, I would
appreciate that, and then we'll have questions.
Mr. Withanage.
STATEMENT OF HEMANTHA WITHANAGE, CONVENOR, SRI LANKAN WORKING
GROUP ON TRADE AND INTERNATIONAL FINANCIAL INSTITUTIONS AND
EXECUTIVE DIRECTOR, CENTER FOR ENVIRONMENTAL JUSTICE, COLOMBO,
SRI LANKA
Mr. Withanage. The Chairman, thank you very much for the
opportunity to testify this morning. I am the President in the
Sri Lankan Working Group of Trade and International Financial
Institutions, and the Center for Environmental Justice which is
based in Sri Lanka.
It's important to note that organizations who focus on
environment and social welfare are also focused on the
promotion of environmentally sustainable lending policies in
the international financial institutions, and on corruption.
My close monitoring on certain Asian Development Bank
projects in Sri Lanka shows that rather than alleviating
poverty, they have often created poverty and corruption. I will
give you just one example. Southern Transport Development
Project involves the construction of 428 km long expressway.
The road crosses through many wetlands, villages, home gardens,
and more than 5,000 households in all categories will be
affected.
About 40 percent of the final roadway is not covered by the
Environmental Impact Assessment. People wanted the Asian
Development Bank and the Road Development Authority to follow
the proper Environmental Impact Assessment process to save
their sustainable home gardens and respect of their lifestyles.
They approached all the legal and administrative forums,
including the Supreme Court of Sri Lanka, and the inspection
mechanism of the Asian Development Bank, to receive justice.
The matter is now with the United Nations Human Rights
Commission, too. The project involves a different type of
corruption, other than the type of corruption that was
mentioned before this committee by Mr. Bruce Rich on the 28th
of September, 2004. Certain people are provided unprecedented
compensation to convince others, but others are not paid the
same.
Three settlement officers asked for bribes to approve
better compensation packages. Those who disagree and who do not
pay, they were given rocky lands. Government officers were told
that if they complete the land acquisition early, they will be
paid an incentive. Certain politicians, and some political
supporters also ask for bribes from the construction company.
After Mr. Rich testified, the contrary presentation of the
Asian Development Bank explained why Kumagai Gumi, the
construction company, was included, and he stated that it's a
slight relaxation. But I wonder, why slight relaxation, only
for this particular company, and why they did not include some
others, too.
There are many bad stories. People who are still fighting
for their rights were told that 25 percent of their
compensation will be deducted if they do not leave the land
early, and in one case, police arrested one woman from a
village in the southern area, and beat her. She was the single
parent of her young child.
In certain plots, one portion was valued for $600, but when
they valued the other portions, it gave less amounts. So this
particular case, he was given a rocky land, he was not able to
buy better land for the compensation he received, and the land
next to his land was owned by another female schoolteacher, and
her land was treated as a low-lying land, and paid only $70 per
perch, which is one of the local units for the land
measurement.
And I have a picture in this newspaper, appeared in the
front page of the newspaper which shows that one woman lived,
until the photo appeared in the newspaper, in this kind of
small hut, and this has been submitted for the record.
When people complained to the Asian Development Bank Anti-
corruption Unit, they wrote back and said, ``We received
allegations, and we did not find any evidence, and we are
closing the case. When people wrote back and asked for a copy
of the report, anticorruption specialists wrote back and asked,
''Would you please provide us more evidence.`` I don't
understand why those high-level officers lie to the lay people.
Since I don't have enough time, I will not go into the
corruption issues related to other projects which are explained
in my statement, Mr. Chairman.
Finally, I want to touch tsunami, which devastated lives of
many coastal communities. It is not my intention to explain the
damage which you all have seen in the media. I thank all of the
people and governments who performed their duty to support
affected people and countries at this unfortunate moment. Sri
Lanka also received a large amount of funds, this is not only
donations, but a major portion of them are loans. Having bad
experience of bad fund management and corruption, I believe,
receive enough large amounts of funds, easily lead to
corruption and mismanagement. We should have better monitoring
on the ground. Asian Development Bank is talking about the
monitoring and better coordination, but unfortunately the
ground situation is not very good. No monitoring and better
compensation among the agencies.
Just one example, fisherman in Batticaloa, which is a city
in the east coast, received boats and fishing nets more than
palatable for the lagoon and for the fishery resources. Some
aid agencies think it will devastate the fishing resources soon
if they put all the boats and nets to the waters. We believe
that tsunami-affected people should have the right to
participate in the decisionmaking, which is not the case on the
ground.
When I complained about the corruption related to the Bank
projects, one senior staff member told me, ``They are not
corruptions,'' but they call them as commissions. But I believe
this was public funds from your government, and we people in
borrowing countries pay them back, therefore, nobody can make
commissions. It's the general notion in Sri Lanka that Asian
Development Bank money involves with corruption one way or
other. I have explained in my statement how large amounts of
money goes for the other purposes which have no direct benefits
to the people.
Mr. Chairman, to conclude, as a person who represents this
hearing from the receiving end of the fund, I believe that the
Asian Development Bank's development effectiveness is highly
eroded due to many types of corruption and fund mismanagement.
They misuse the Bank's immunity to the legal system to escape
from any allegations. It is apparent that because the Asian
Development Bank is not fully committed to accountability or
transparency, it, in effect, enables and encourages corruption,
which in turn delivers unsustainable projects. Therefore, it
would be irresponsible to authorize hundreds of millions of
dollars for this institution without a clear idea how they
combat corruption. In my testimony, I have made a series of
recommendations, I hope it will help you to reconsider the
involvement of the Asian Development Bank in our countries and
combat corruption.
With your permission, I want to propose some other
recommendations. One would be having a better policy, and
policy implementation is very important in this regard.
Stopping the loan disbursement if there is a reasonable
corruption allegation, is very important, and educating people
on how corruption policy works is also very important. And
also, I believe consider the corruption track record of
agencies in project design is also very important. And also
make a corruption risk checklist to understand possible events
and activities which are vulnerable to corruption of the
particular type of project at the design stage, and continuous
monitoring is also important. And also, I believe, sending
independent ADB missions from anticorruption divisions to the
site during the implementation, and consulting the public, also
very important. Thank you very much for this opportunity.
[The prepared statement and photo submitted by Mr.
Withanage follow:]
Prepared Statement of Hemantha Withanage, Convenor, Sri Lankan Working
Group on Trade and International Financial Institutions, and Executive
Director, Centre for Environmental Justice, Colombo, Sri Lanka
1. INTRODUCTION
Mr. Chairman, Senators of the committee, thank you very much for
the opportunity to testify this morning at the hearing on ``Combating
Multilateral Development Bank Corruption: African, Asian and European
Regional Development Banks.'' The chairman and the committee are to be
commended for organizing these hearings, which address one of the most
critical but hidden threats to the proper use of Bank funds that
hinders sustainable development.
As of December 31, 2004, the ADB had approved US$3.476 billion in
loans to Sri Lanka for some 128 projects and programs. However the
development effectiveness of many of these loans and their role in
poverty reduction is highly questionable, even according to the ADB's
own statistics.
A presentation made by Mr. Bruce Murray of the Asian Development
Bank (ADB) Operations Evaluation Department (OED) to the NGO FORUM on
the ADB on March 31, 2005, showed that over half of completed ADB
projects (59 percent) were rated highly successful (HS), generally
successful (GS), or successful (S). Thirty-one percent of completed ADB
projects were rated partly successful and 9 percent were rated
unsuccessful by this internal evaluations unit. For Sri Lanka, OED had
evaluated 36 projects and 47 percent were considered HS/GS/S, 45
percent were rated partly successful, and 8 percent unsuccessful. In
this context, the performance of projects in Sri Lanka ranks third from
the bottom of ADB borrowers, with only Papua New Guinea and Bangladesh
generating lower ratings. The rating of Partly Successful seems to be
generous for many projects, considering that it was given to projects,
such as Lunugamwehera, which are actually dismal failures and creators
of poverty on-the-ground. If we take the ADB's self-evaluation at face
value, more than half of Sri Lanka's ADB debt accumulated over three
and a half decades is from projects the ADB itself considers to be less
than successful.
The World Bank Poverty Reduction Strategy Paper (PRSP) presented to
the Sri Lankan Development Forum in June 2002 says that poverty in Sri
Lanka had not decreased over the last 10 years, and continues to be
around 40 percent of the population. It is admitted that the actual
figure for poverty in Sri Lanka would be higher if the conflict areas
were taken into consideration.\1\ In fact, the poverty level used in
Sri Lanka of Rs 1500/month (equivalent to US$15/month) is much lower
than the internationally recognized poverty level of US$1/day/person.
---------------------------------------------------------------------------
\1\ ``Poverty in South Asia 2003, Civil Society Perspectives,''
SAAPE, October 2003, Katmandu, p. 185.
---------------------------------------------------------------------------
Neither GDP growth nor its distributive effects have been
sufficient to bring about a marked reduction in the poverty level in
Sri Lanka. In other words, the benefits of economic growth have not
automatically trickled down to the poor and the economic strategy
adopted in Sri Lanka has not succeeded.\2\ The PRSP acknowledges this
in relation to the decade of 1990s. But this failure was even more
apparent in the previous one and a half decades.\3\
---------------------------------------------------------------------------
\2\ Sri Lankan Development Forum 2002.
\3\ ``Poverty in South Asia 2003, Civil Society Perspectives,''
SAAPE , October 2003, Katmandu.
---------------------------------------------------------------------------
Mr. Chairman, Senators of the committee, Sri Lanka has been a
client of the Asian Development Bank since 1968. ADB is involved in
project financing as well as in macroeconomic policy development.
Poverty alleviation has been a major focus of ADB-financed projects
since the new mandate of the ADB was established. However, it is very
clear that the ADB and the Sri Lankan Government have failed to realize
their mission to reduce poverty and increase growth.
Contrary to the ADB's mandate, certain ADB-funded projects and
macroeconomic policy changes have actually created poverty. In the next
few pages of my testimony, I will discuss a number of projects that are
controversial due to the destruction of people's sustainable
livelihoods and the related failures of the ADB and local implementing
agencies to control corruption.
2. ASIAN ENVIRONMENTAL ORGANIZATIONS THAT MONITOR THE ADB
The Sri Lankan Working Group on Trade and IFIs (International
Financial Institutions) is a network of civil society organizations
that monitors the impacts of projects and policies of the IFIs on local
communities, their livelihood, natural environment and resources. Its
secretariat is located at the Centre for Environmental Justice in
Colombo, which is a local environmental organization, working toward
good governance and environmental justice.
The Sri Lankan Working Group of Trade and IFIs is an evolution of
the Sri Lankan Working Group on ADB, which was established in 1998.
There are 15 member groups who are concerned about ADB's involvement in
development projects and in promoting macroeconomic policy changes.
Recently we assisted people affected by the Southern Transport
Development Project (STDP), a major road project funded by the ADB, to
bring their inspection claim to the ADB's Special Project Facilitator
and Compliance Review Panel. We have also helped people to develop
their complaints to the ADB regarding the loss of their rights to water
due to water transfers under the ADB-financed Water Supply and
Sanitation projects through the Water Supply and Drainage Board. Our
network member, Green Movement of Sri Lanka, helped affected
communities from the Kirindi Oya Irrigation and Settlement Project
(1986), the Upper Watershed Management Project (2002), and the
Protected Area Management and Wildlife Conservation Project (1999) \4\
to raise their concerns with the ADB and local implementation agencies.
---------------------------------------------------------------------------
\4\ This project is jointly funded by the ADB and the World Bank.
---------------------------------------------------------------------------
I was the elected International Convener for the NGO FORUM on the
ADB for the period of 2001-2003. Recently I accepted the Executive
Director position of the NGO FORUM on the ADB (Forum) and will take up
my new position in May 2005. The NGO Forum on the ADB is a network of
more than 300 civil society organizations based in ADB borrowing
countries and donor countries that monitor the projects, programs, and
policies of the ADB. Its Secretariat is based in Manila, Philippines,
and it is governed by an international committee comprising members
from both borrowing and donor countries.
The Forum was established in 1989 by Philippine NGOs and NGOs from
the United States. Since then it has lobbied the ADB to develop
necessary safeguard policies and address the failures of its projects
and programs to provide benefits to the local communities. The Forum
has been involved in the campaign for accountability at the ADB, which
resulted in the establishment of the first Inspection Mechanism in 1995
and the new Accountability Mechanism in 2004. The Forum has also been
involved in campaigns around gender, environment, involuntary
resettlement, indigenous people, and disclosure at the ADB, many of
which have led to the adoption and/or strengthening of ADB policies.
Forum activities also involve assisting local communities to bring
their concerns to the ADB.
Mr. Chairman, Senators, it is important to know that these
organizations, who are primarily focused on the environment and social
welfare, and are focused on promoting environmentally sustainable
lending policies in the international financial institutions, are also
concerned about corruption. They are very concerned about the negative
impacts on the social, environmental, and economic sectors coming from
projects with ADB involvement They are also concerned that although ADB
is a development bank with anticorruption, social, and environmental
responsibilities, its staff and management often seem to have
relatively little concern for these issues.
3. ADB: SUSTAINABLE DEVELOPMENT OR POVERTY CREATION
As stated by Mr. Bruce Rich in his testimony on September 28, 2004,
at the hearing before this committee
. . . 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.
Close monitoring of some recent ADB projects, such as the Thailand
Samut Prakan Wastewater Management Project, Melamachi Water Project in
Nepal, and the Chashma Right Bank Irrigation Project in Pakistan, shows
that the ADB's stated mission is in trouble.
My close monitoring of certain projects in Sri Lanka, namely the
Kirindi Oya Irrigation and Settlement Project (1977), Sri Lanka
Southern Transport Development Project (1999 to date), Upper Watershed
Management Project (2000 to 2006), and Protected Area Management and
Wildlife Conservation Projects (1998 to date) shows that rather than
alleviating poverty, ADB projects have too often created poverty for
local communities and fostered corruption.
Mr. Chairman, Senators of the committee, I would like to address a
few Sri Lankan case studies to illustrate this point.
4. CASE I
ADB's Poverty Creation at Lunugamwehera in the Southern Dry Zone (1977)
(Kirindi Oya Irrigation and Resettlement Project)
Kirindi Oya is a river that flows to the ocean in the southern
province of Sri Lanka. The Kirindi Oya Irrigation and Settlement
Project (KOISP) was started in 1977 with US$60 million in loans from
the Asian Development Bank. The project involved the construction of a
large earthfill dam and irrigation canals in the dry zone of Sri Lanka.
Nearly 5,000 families were settled in the area as part of the project.
Water distribution in Kirindi Oya began in 1986, but there was not
adequate water for rice paddy cultivation. Many settlers were given
land before irrigation water was provided and then had to be
``sustained by food assistance under the World Food Program for longer
than anticipated.'' \5\ The river was dammed in the wrong place and
more people were resettled in order to satisfy needs of the
politicians. Both the Irrigation Department and the ADB failed to
design the project to cater to the river flow. In most years, not a
single plot is cultivated in the new development area. According to the
ADB's OED report, ``Destruction of livestock land, shrimp lagoons, and
wildlife habitats adversely affected the livelihoods of some groups in
the project area and led to increased conflicts between settlers and
herdsman.'' \6\
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\5\ ADB, Operation Evaluation Office. ``Project Performance Audit
report on the Kirindi Oya Irrigation and Settlement Project in Sri
Lanka.'' December 2000, quoted in ``Asian Development Bank: In Its Own
Words,'' Fried, Lawrence, Gregory, 2002.
\6\ Ibid.
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Mr. Kumarasinghe, Secretary to the Federation of the Integrated
Farmers Organisation-Kirindi Oya, said
We were given only one hope that we will be provided with
water for both ``Yala'' and ``Maha'' seasons. But today it has
become only a dream. Farmers have been indebted day by day and
it has developed to an extent that some farmers commit suicide.
According to the ADB's evaluation report, the Kirindi Oya project
was considered to be politically expedient as the Sri Lankan Government
sought to address civil unrest in the impoverished area and promote
``more balanced development.'' This same political imperative meant
that less expensive project alternatives were not adequately
considered.\7\ Social tensions and inequality increased in the area
because of the project, and ``many settlers brought in from outside the
project area appear to have obtained their allotment by political
influences.'' \8\
---------------------------------------------------------------------------
\7\ Ibid.
\8\ Ibid.
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Kirindi Oya had time overruns of more than 100 percent and, despite
its high cost, was not ``relevant'' to the development needs of the
local population.
The expenditure of close to $100 million to benefit a
relatively small number of settlers can be considered of
limited relevance in the context of overall development needs
and poverty alleviation in the southern dry zone.'' \9\
---------------------------------------------------------------------------
\9\ Ibid.
The Green Movement of Sri Lanka and Oxfam Community Aid Abroad
produced the report ``Too Little Too Late'' in 2001, which addressed
the grave problems in the Kirindi Oya project. This report and a letter
from the Federation were presented to ADB President Chino during the
ADB Annual General Meeting in 2001. Although a response to the letter
was received from ADB, there were no steps taken to correct the
problems.
Although the Federation had hopes that the ADB will provide a new
water source, assistance did not materialize. Mr. Jayaweera says
Newly settled families have now doubled. Since the population
in the project is increasing they have no income for living.
There is no education for the children. Although ADB is
responsible for this poverty creation we have no access to the
ADB.
Furthermore, our information revealed that land allocation in the
Kirindi Oya project was full of corruption. According to villagers,
both politicians in the area and the government officers were involved
in requiring bribes from the people who were not their political
supporters in exchange for their land allocation. This is one reason
more lands were cleared and developed than could be irrigated by the
reservoir. Although we presented documents and evidence to prove the
allegations of corruption in a letter from villagers to the ADB
President in 2001, ADB failed to address these issues. They responded
to the people's letter and sent a consultancy firm to the project area,
but there were no changes on the ground.
While the destruction caused by the Kirindi Oya project, which was
funded more than 25 years ago, still needs to be corrected, ADB
continues to provide funds for new projects. The Southern Transport
Development Project is a recent example of violations of social,
environmental, and human rights and inadequate controls to guard
against corruption.
5. CASE II
ADB's Accountability Experiment through the Southern Transport
Development Project (STDP) 1999
The Southern Transport Development Project (STDP) is one of the
most controversial projects of recent times. But it is a dream for some
politicians. The project has been characterized by mismanagement,
corruption, social unrest, delay, disregard of social and environmental
concerns, and in some cases, police abuse and threats. Sri Lankan
Government bureaucrats as well as the lending institutions (both ADB
and the Japan Bank for International Cooperation [JBIC] in this case)
and consultants are responsible for these injustices.
STDP involves the construction of an Expressway connecting Matara
(a southern city) and the outskirts of Colombo by a 128 km road. The
road crosses through 4 river basins and over 100 small and large
wetlands and paddy fields. It also passes through many villages, home
gardens, and demolishes over 1,300 houses. In total, 8,745 land lots
are planned to be crossed by the Expressway. In 2002, estimates showed
that 5,683 households of all categories will be affected. Resettlement
cost for STDP would be US$29.75 million.\10\ The total project cost is
33 billion rupees or approximately US$230 million. The local
implementing agency is the Road Development Authority (RDA), which
comes under the Ministry of Transport and Highways.
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\10\ Resettlement Implementation Plan, October 2002.
---------------------------------------------------------------------------
ADB's Environmental Policy requires the consideration of
environmental problems since this is an environmental Category A or
high-risk project with significant impacts. The Environmental Impact
Assessment (EIA) was done for a 3-4 kilometer-wide corridor, with
detailed studies for a corridor of 200 meters for housing, but as it
turned out, it did not address the actual impacts of parts of the road
trace that was subsequently chosen. In fact, as described in more
detail below, about 40 percent of the entire final trace of the road
financed by the ADB was not covered by the EIA. As a result, numerous
groups of people and households have had their livelihoods and quality
of life affected without adequate compensation. The EIA was subject to
heavy criticism, as it had not properly addressed these environmental
and social impacts.
The project is guided by the Sri Lankan National Environmental
Policy and the Resettlement Policy as well as the ADB safeguard
policies such as Involuntary Resettlement, Environment, Information
Disclosure and the Inspection Policy. However, these policies are being
breached and the project has serious social, environmental, and legal
issues.
Since 2001, people have been exploring legal redress through the
local judiciary. They went to the Local Human Rights Commission,
Appeals Court, and to the Supreme Court. Although the Supreme Court
decided that human rights have been violated in the STDP project, it
did not make any changes in the project's design, or influence the
attitude of the ADB and the RDA.
Construction in the ADB-financed area started in 2003. Many people
were displaced. Numerous social and environmental issues were created.
The committee has heard testimony of Mr. Bruce Rich last September
28, 2004, on the allegations of corruption in this project concerning
the bidding process and contract award, which I will give an update on.
But the corruption and irregularities in management in this ADB project
permeate down to the level of the poor and displaced, which I will
first describe in the following section.
5.1 Forms of corruption at the local, implementation level
Many people, who have received compensation for their land which
was taken for the project, are not happy. But the Land Acquisition &
Resettlement Committee (LARC) for the project provided unprecedented
compensation for a few individuals. This is one type of local
corruption and abuse of power that happens under the STDP. Many people
thought that they would get the same compensation. But they never did.
Initially people were paid the market price. But now they are given
only the very low government value plus 25 percent.
The affected people do not have access to the Resettlement
Implementation Plan. Displaced people have never seen a copy of the
plan. RDA does not give a copy. Those who have been displaced people
have moved out without proper guidance or knowledge of their
entitlements. They were told to leave before receiving compensation.
Many people were intimidated into removing their roofs, they were told
they would get no compensation if they did not do so immediately. Often
they got only Rs 50,000 (US$500) as a rent allowance and nothing more.
Their neighbors do not even know where they live now.
According to the villagers, Divisional Secretaries (government
officials below the provincial level) were told by the RDA that they
will be given Rs 250,000 (US$2,500) for early clearance of the trace.
Divisional Secretaries instructed Grama Niladhari (Village Officers)
and certain villagers who were provided better resettlement packages to
demonstrate to the ADB officials that there were many satisfied people.
This is the second type of local corruption.
RDA resettlement officers ask for bribes from the affected people
to approve better compensation packages. This includes better land for
the new house. Those who disagree are given rocky lands. This is the
third type of local corruption.
People living in Gelanigama, which is a village located close to
Kalutara, say
. . . we went to all the authorities including the Inspection
Panel of the ADB, but with no success. We were threatened with
arrest by the Parliamentary Member of the area, if we do not
allow the road to be constructed.
They said surveyors came to their village with police officers from
five police stations. They cry for justice.
Affected people in Akmeemana say that road trace was changed to
protect land owned by a rich businessman. They said
. . . our politician took bribes to protect those lands and
change the trace. We now have no faith in them.
They went to all available judicial mechanisms in Sri Lanka. They
also wrote to the Inspection Panel of the ADB with no success. The
first Inspection request in 2001 was denied by the ADB, which
misconstrued facts and pretended that the affected people were all
within a 3 km corridor. This was proved false at that time, but it was
only in 2004 that the ADB admitted this.
The surveying of the road was accompanied by police abuse and
threats in some areas. The surveyors came with police. Gelanigama
people say they came to their village and threatened that they would
arrest them. Police arrested one woman from Akmeemana and detained her.
She was the single parent of a young child.
There are many unresolved issues. The design process is full of
intimidation, bribery and corruption, betrayals and displacements.
5.2 Corrupt contract award--can ADB wash its hands?
The consultants involved in the design are Wilbur Smith Associates
in association with Resource Development Consultants (WSA & RDC). The
EIA report was done by the consultants of the University of Moratuwa.
The EIA process is full of errors. About 48 kilometers (40 percent) in
both JBIC and ADB sections in the Final Trace are not covered by the
EIA. The design was changed to a new trace by the RDA without authority
and without any studies or a new EIA. The Supreme Court ruled that the
process of approval had not been followed.
The construction contract for the Southern 62 km has been awarded
to Kumagai Gumi, a Japanese construction company.
As stated by Bruce Rich in his testimony on September 28, 2004
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 prequalification bidding procedures, based on a number of
considerations, including the financial condition of the
prospective contractors. A Japanese company, Kumagai Gumi, did
not meet the prequalification criteria,\11\ and in fact had a
negative financial worth. Kumagai 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.\12\ 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 Kumagai won the contract.\13\
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.
---------------------------------------------------------------------------
\11\ To prequalify, companies had to score 60 points in an
evaluation framework assessing their financial stability, technical
capacity, etc. The prequalifying companies had scores of 95, 79 and 75.
Kumagi's score was 54.
\12\ 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.
\13\ Ibid.
---------------------------------------------------------------------------
After the prequalification process was complete, the ADB
reportedly sent a letter to the Sri Lankan Treasury requesting
that Kumagai Gumi nevertheless be considered as a bidder on the
project. Three companies, including Kumagai, participated in
the final bidding; only Kumagai was allowed to submit a second
alternative bid. Kumagai 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.\14\ The Attorney General of Sri Lanka, when
asked how Kumagai could have won the contract in violation of
national and ADB tender guidelines, reportedly stated:
``Kumagai 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 prequalifications specifically
provides [in such cases] for ADB approval.''\15\
---------------------------------------------------------------------------
\14\ Ibid.
\15\ 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.\16\ According to ADB staff, they
do not wish to pursue anticorruption claims against a project
where an Inspection Panel claim may be underway or pending.
This is truly a perverse and counterproductive 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.
---------------------------------------------------------------------------
\16\ 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 Kumagai 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.
Responding to this claim, which also appeared in the Sri Lankan
newspaper, the Daily Mirror, on October 2, 2004, Mr. Alessandro Pio,
Country Director of the ADB resident mission in Sri Lanka states that
During the hearing, allegations were made about the Southern
Transport Development Project in Sri Lanka, which were not new.
In fact, ADB had addressed many of the issues relating to the
project, in your own publication in May 2002.
On the prequalification process highlighted in your article,
the objective was to ensure that sufficient and appropriately
experienced and resourced companies were eligible to tender for
the ADB-funded project, thereby achieving a cost and quality
effective outcome.
Three companies were originally prequalified and another--the
fourth company referred to in your article--met the basic
financial, experience, and resource requirements but fell
slightly short of a passing mark when these criteria were
combined.
Since the objective of the process was to maximize
competition, and because the deficiency was of a technical
nature only, the company was permitted to participate in the
tender process. It is important to note that the company became
eligible simply to tender for the work, in competition with the
originally prequalified companies. There was no question of the
company being awarded the contract as a consequence of the
prequalification process.\17\
---------------------------------------------------------------------------
\17\ Alessandro Pio, Country Director, ADB Resident Mission, ``ADB
Clarifies Inaccuracies on Corrupt Project in Lanka,'' Daily Mirror,
October 6, 2004.
Although this response rejects the allegations, it proves that ADB
has interfered with the bidding process which means the process is not
transparent. According to Alessandro Pio, this was a ``slight
relaxation.'' \18\
---------------------------------------------------------------------------
\18\ ``ADB Chief Refutes Charges,'' The Sunday Leader, October 10,
2004.
---------------------------------------------------------------------------
A subsequent article appeared in the Sri Lankan newspaper, the
Sunday Leader, on October 10, 2004, reiterating the ADB's involvement
and stating that
. . . after the prequalification process was complete the ADB
reportedly sent a letter to the Treasury requesting that
Kumagai Gumi nevertheless be considered as a bidder on the
project. 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 prequalifications specifically provides [in such
cases] for ADB approval.''\19\
---------------------------------------------------------------------------
\19\ Federica Jansz, ``Southern Highway--The Access to
Corruption,'' The Sunday Leader, October 10, 2004.
---------------------------------------------------------------------------
This article also states that
Secretary to then Prime Minister Ranil Wickramasinghe,
Bradman Weerakoon articulated similar sentiments stating
Kumagai was awarded the contact after the ADB intervened to
ensure the project went to the Japanese firm.\20\
---------------------------------------------------------------------------
\20\ Ibid.
Responding to Mr. Pio's article, Sarath Athukorala and Heather
Mundy of the Joint Organization of the Affected Communities on Colombo-
---------------------------------------------------------------------------
Matara Highway state that
Mr. Pio says ``There has been a general misunderstanding that
the project cost increased from 11-12 billion rupees to 27
billion rupees, because of the alignment changes. However this
is actually a misleading comparison between the cost of the ADB
financed section and the total project cost, which includes the
section financed by the JBIC.''
This is totally untrue. Mr. Alessandro Pio is either unaware
of what he is commenting on or he is deliberately misleading
the people of Sri Lanka. The major documents of the project
include the cost for the entire road in the range Rs 11-15
billion, not as Mr. Pio indicated for only a section of it.
\21\
---------------------------------------------------------------------------
\21\ Sarath Athukorala, Heather Mundy, ``ADB--The Truth Behind the
Highway,'' Daily Mirror, October 18, 2004.
The response of the affected people also addresses Mr. Pio's
explanation with regard to the prequalification. Affected people state
---------------------------------------------------------------------------
that
With regard to the points allocated at prequalification,
there has been more than enough publicity of the computations,
all recognize that the disqualification was not of a technical
nature. Kumagai Gumi, has financial problems, its Bank had to
write off an enormous amount of debt in 1997 and again in 2000.
More recently its executives have also allegedly been involved
in bribery, illegal political donations, and money laundering.
See Mainichi Newspaper about Imajo in Japan in 2002, and again
in 2003 and Papua New Guinea Post Courier about 1995 to 2000.
So much for Mr. Pio's ``deficiency of a technical nature.''
The ADB's main explanation for its pressing for the involvement of
Kumagai Gumi despite the company's failure to prequalify is not
convincing: ``The objective was to ensure that sufficient and
appropriately experienced and resourced companies were eligible to
tender for the ADB-funded project, thereby achieving a cost and quality
effective outcome.'' If this were the case, why did the ADB intervene,
not to increase the number of prequalifiers, but to urge that one
specific company, and one company only, be included, one indeed that
had failed the prequalification tender because of its risky financial
condition? And after this same company was finally chosen, the
project's cost has increased by over 100 percent.
The ADB's anticorruption unit (the Integrity Division), in response
to the submission from affected communities regarding these corruption
allegations in the STDP, simply replied, ``We have conducted an
investigation on the concerns that were raised. We did not find
evidence of fraud or corruption, as defined by ADB, or that ADB's funds
were misused. Thus, we are closing the case.'' When the affected
communities requested more information on the investigation, they were
told that no report was produced. The ADB's Integrity Specialist then
asked that the communities provide evidence of ``who received the
payment, how much was paid, when the payment was made, how the payment
was made, which contract were you referring to, any corroborating
evidence to indicate the allegation, any information that you may have
that would help us to determine if further investigation is warranted,
etc.'' \22\
---------------------------------------------------------------------------
\22\ E-mail from ADB Integrity Specialist to Joint Organisation of
the Affected Communities on Colombo Matara Highway, March 2005.
---------------------------------------------------------------------------
The ADB cannot wash their hands of the corruption either because of
the involvement of its own staff and due to the failure of its own
policy implementation. Since this project is a joint-funded project of
the ADB and the JBIC, the selection of a Japanese construction
contractor could have been a prerequisite or a factor leading to undue
influence and pressures to choose a Japanese company.
We have seen similar pressure from the Japanese Government during
the selection of the construction company for the Upper Kotmale Hydro
Power project, which is a very controversial project funded by JBIC.
This project will have negative impacts on six beautiful waterfalls
located in the hill country of Sri Lanka.
5.3 STDP destroys environment and sustainable livelihoods,
too
The STDP Expressway crosses four major rivers in the southwestern-
southern part of Sri Lanka, viz KaIu Ganga, Bentara Ganga, Gin Ganga,
and Polwatta Ganga.\23\ The Expressway traverses through 60 percent
high ground and 40 percent wetlands. Due to its undulating nature and
for easy filling material, the road will be constructed by cut and
fill. This will create some major environmental problems.
---------------------------------------------------------------------------
\23\ These four rivers create severe flooding in the southwest
monsoon annually.
---------------------------------------------------------------------------
It has many negative social and environmental impacts as it crosses
through many rural villages where people still have sustainable
livelihoods. Villagers say
We don't need many inputs from the cities. The villages are
surrounded by paddy fields owned by us, which gives rice in two
seasons. Jak, bread fruit, green vegetables come from our home
gardens. We have plenty of water and fertile lands. Our cattle
are grazing in the nearby field. The temple is in the vicinity.
Our relatives are living around us. What else do we want? Who
wants to leave such a heaven? This is a sustainable life.
When the road is constructed it will destroy this natural
environment. The agriculture will be destroyed. The paddy field will be
filled with soil. Stagnant water will destroy the remaining fields. No
more good soil or lands for agriculture will be available. There will
be no more home gardens or lands for grazing. Flooding will increase.
Wetlands will be destroyed.
The compensation is not sufficient to complete the replacement
houses they have started constructing. They were not given enough
compensation to maintain, let alone improve, their living standards as
the project promised. No one has been given the market value of their
land or assets.
Rice is the staple food of the Sri Lankans, but it seems all major
and minor development projects destroy paddy fields day by day.
Agriculture is the main economic activity of the affected people and
the affected area of STDP. Paddy is one of the main crops. However,
299.9 hectares of paddy lands will be acquired for this project. This
is about 31.53 percent of the total land acquisition for the STDP.
While these plots are directly affected, hundreds of acres of other
paddy lands will be destroyed due to soil erosion, water clogging, etc.
No paddy lands will be developed under this project. Therefore those
farmers will lose their employment.
It was estimated that 265 people would lose employment in paddy
sector for the combined road trace which the ADB loan was originally
granted for. The area this road trace would cross had large tracts of
abandoned paddy fields. For the combined trace, the total annual
estimated economic loss in terms of paddy cultivation is Rs 5,990,484.
For large parts of the current trace, which traverses through villages
and cultivated paddy lands, there are no studies to estimate the total
value of lost paddy lands. Isn't this a destruction of sustainable
livelihood?
Yes, the road will give access to major cities. It may increase
industrial development, too. There will be benefits to the general
public. It will give more jobs to some people who now depend on
agriculture. But this all could be achieved at much less cost and
without needlessly impoverishing hundreds of households, if corruption
and mismanagement did not permeate this ADB project.
Although those who are engaged in agriculture will be temporary
laborers for the road construction when their fields are destroyed,
what will happen to them afterward? The temple and the school will be
separated from the people by an Expressway. Relations will be
separated. Community will be dispersed. There will be no village
anymore. Sustainable livelihood will be destroyed.
5.4 ADB's accountability mechanism failed
In 2002, four cases concerning the project were filed in the Sri
Lanka Court of Appeal. The Court appointed a Judicial Committee of
Retired Supreme Court Judges to investigate the position. Their Report
stated ``the alterations are of a significant nature and should be
approved afresh.''
Instead of ordering an EIA and Social Impact Assessment (SIA), the
ADB did just the opposite. It declared the loan effective on a
Resettlement Implementation Plan which said there were only 31
objectors when there were actually 51 petitioners still in the Court of
Appeal. At the same time, the ADB acknowledged receiving over 150
letters objecting to the unstudied change of road trace.
Nevertheless they pressurized the Sri Lankan Government to sign the
contract with Kumagai 2 months later, 5 months prior to the verdict in
the Court of Appeal. These very signatories to the letters continue to
protest, causing delay to the project which is costing the Sri Lankan
Government.
In 2004, 2 years after the contract had been awarded to their
favoured contractor, Kumagai, and work had progressed, affected people
approached the ADB's new accountability or inspection mechanism through
its ADB's Special Projects Facilitator (SPF) process and Compliance
Review Panel (CRP). The Special Projects Facilitator has recently been
added to the ADB accountability mechanism as an initial step to promote
consultation or mediation between the affected people, the government
implementing agency, and the ADB's operations department. The
Compliance Review Panel investigates the affected people's claims of
ADB policy violations that have caused them harm.
Belatedly, the ADB SPF admitted that the 3 km argument which was
used by the ADB to deny the first inspection request in 2002 was not
valid. The SPF acknowledged that indeed neither an EIA or an SIA exist
for the final road trace.
However, subsequent delays by ADB in carrying out its own
accountability process had the effect of buying time for the contractor
and RDA to advance their activities to a point of no return. The SFP's
investigation of the complaint was delayed from the required 49 days to
over 100 days. The pretext was to allow the report of a committee
appointed by the Prime Minister and an ADB Safeguards Review Report to
be published. Neither of these reasons are in line with the ADB's own
Accountability Mechanism Procedures. The complainants have not been
allowed access to either of these reports to date.
In December 2004, the SPF appointed an international mediator who
spent half a day with the complainants. Without further discussion, he
and the SPF suddenly closed the mediation process in January 2005,
claiming that he could not reach consensus on the dispute that had been
going on for over 3 years. The refusal of the implementing agency
(RDA), with the backing of ADB, to study their road trace changes was
allowed to block the facilitation.
Whilst the CRP is still investigating ADB policy violations, the
SPF decided to close the mediation or consultation process.
The ADB thought fit to hasten the signing of a contract with
Kumagai when it was patently obvious that strong protests would
continue, as, in fact, they are. The ADB continued to ignore the
protests of the people from 2001 onward, and made every effort to
hasten the commencement of the project which violated its
environmental, social, and economic policies. During this entire
period, the project was under a growing cloud of corruption and bidding
irregularities widely publicized in all of Sri Lanka.
One can define corruption in various ways. In the view of many Sri
Lankan civil society groups, there is institutional corruption when ADB
management uses--or rather misuses--ADB accountability processes like
the Inspection Panel, the SPF and CRP, and the Safeguards Review Report
to allow loans which violate ADB policies and covenants to continue.
This may be because money is changing hands or because, as Mr. Rich has
pointed out, the ethic at ADB is loan disbursement, not development
effectiveness.
The ADB is the largest multilateral lender to Asia; there is a real
threat of some Asian countries becoming another economic burden like
Africa if institutions like ADB are not forced to become more
transparent and accountable and made to remember that they are not
responsible and accountable only to themselves.
As ADB is increasingly using cofinancing in projects, it is even
more important that they work strictly within policies and guidelines,
since the ADB through cofinancing leverages multiples of its own
financial contribution often based on confidence in the integrity of
its procedures and financial management.
5.5 What is questionable?
Corruption is manifest throughout the Southern Transport
Development Project (STDP). It is not limited to the transactions
described in the testimony to the Senate Foreign Relations Committee by
Mr. Bruce Rich on September 28, 2004. It is underpinning and
contaminating the whole project.
Why is it that the Implementing Agency--RDA--has worked so hard to
avoid any sort of study of the changes to the road trace they have
made? Why have they sought to proceed with a plan that harms more than
double the families that were on the recommended trace for the
Expressway? Why has the cost more than doubled? Why did they choose
some of the most difficult places for construction to build the
Expressway?
Why is it that the ADB has sought to block any investigation? Why
is it happy to ignore breaches of Loan Covenants? Why is ADB happy to
ignore the many breaches of its Safeguard Policies?
We think the most plausible answer can be found in the gains to
individuals throughout the process. For ADB personnel, possibly it is
to keep their record clean and increase their portfolio, though one of
the individuals involved did so much to substantially alter the project
from its original concept that one cannot help but question whether
there was not some personal gain somewhere.
Corruption does not mean that only money is passed from hand to
hand, it means ignoring major safeguard policies that are designed to
protect local communities. It also means a lack of transparency and
accountability. It means using Accountability Mechanisms that are
supposed to solve problems to buy time so that projects with gross
irregularities proceed past the point of no return and foreclose the
benefit of correction.
6. CASE III
Upper Watershed Management Project: Another Example for Corruption and
Irregularities
Upper watersheds for the main rivers in Sri Lanka (Kalu ganga, Uma-
oya, and Kirindi-oya) are badly affected by soil erosion that has taken
place due to the cash-crop plantations started in the British period,
subsequent population growth and land use for new agricultural
development. As there are many adverse changes in the waterways and the
surroundings in the area at present, the ADB with the assistance of the
Government of Sri Lanka has inaugurated a project under the Ministry of
Forestry and Environment to conserve the upper watersheds of above-
mentioned rivers.
The ADB-funded Upper Watershed Management Project of Ministry of
Forestry and Natural Resources has an estimated total cost of US$23.7
million, which consists of 70 percent from the ADB, 25 percent from the
Government of Sri Lanka and 5 percent from the beneficiaries. The
project started on May 5, 1998 and was to be completed by December 31,
2004.
The investigation done by the Green Movement of Sri Lanka, a local
environmental organization, shows that the project has many
irregularities, including slow project performance, the absence of a
consultative process for affected people, failure to implement the
participatory fire prevention plan developed by the Provincial
Secretariat, failure to integrate the involvement of the village-level
government officers (Grama Sewakas) and village-level officers of the
government poverty alleviation program (Samudri), field and provincial
officers, in the Project even after their request, failure to take
action on the reported irregularities that have taken place in the
replanting process by officers. There are a number of financial
irregularities relating to purchases of the rubberized coir pots, plant
material, etc., that is necessary for the project.\24\
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\24\ Forest in Trouble, Green Movement of Sri Lanka, 2003.
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The Project failed to address soil conservation measures. The
project failed to reach some important areas but carried out work in
areas that are not that important. Some of the findings and
observations on financial management and policies in the project are
also cause for concern. All the above-mentioned activities of the Upper
Watershed Management Project have led to financial and administrative
irregularities. The Project money was used for printing religious books
for certain politicians in the area, and constructing roads across the
forests to satisfy local politicians. The Project had deviated from its
original basic concept and objectives. The rest of the Project staff
made a complaint to the authorities about the irregularities, but no
action was taken.\25\
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\25\ Ibid.
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The money loaned from the ADB is being utilized haphazardly in an
irresponsible way under this Project. The Project Management has
grossly violated the institutional fundamentals and ethics of the ADB.
The citizens of this country are paying this loan and will be paying in
the future, too.
The Green Movement of Sri Lanka requested the ADB to evaluate the
present situation by an independent body, and to take appropriate
action to control these financial misappropriations under the Project
before it is too late. The report prepared by the Green Movement was
sent to the ADB Resident Mission, Government agencies, and the relevant
Minister. This was also raised with the ADB mission who visited to
study the performance of the project in late 2004. According to the
Green Movement no action to date has been taken to solve the problems.
7. LACK OF ACCOUNTABILITY AND CORRUPTION
The above three cases show that ADB-financed projects are facing
serious accountability problems. The projects can go wrong in (a)
design stage, (b) contracting stage, and (c) implementation stage. The
problems in the Kirindi Oya Project and STDP are at the design,
contracting, and implementation stages. The problems in the Upper
Watershed Management Project is at the implementation stage.
Although the ADB has a number of safeguard and accountability
policies, it exercises inadequate scrutiny over the implementing
agencies for its loans in Developing Member Countries (DMCs). While
some irregularities may be unavoidable, the problems in the bidding
processes have, in some cases, been caused by the ADB itself, such as
in the STDP project detailed above.
According to Mr. Jak Jabes, the Director of ADB's Governance and
Regional Cooperation Division, corruption in Asia can cost up to one-
sixth of a country's GDP. He also states that governments pay between
20 percent and 100 percent more for goods and services due to corrupt
procurement practices.\26\ The ADB is aware of the corruption in its
borrowing members.
---------------------------------------------------------------------------
\26\ Daily Mirror, May 25, 2000.
---------------------------------------------------------------------------
The above three cases show that the corruption in ADB-financed
projects is on several levels. At the first level, government officers
involved at the local implementation level may ask for bribes in
exchange for compensation for villagers' lands or assets which are
taken for the project. The second level involves the local politicians
and their supporters who ask for bribes to allow for construction or
project implementation. They also ask for subcontracts and jobs for
their supporters. This includes misuse of project assets. The third
level of corruption is related to big companies, which can involve
high-level Government Officers, Project Designers, and possibly ADB
officials.
For example, hiring of Government Officers for ADB projects and
paying them multiples of their normal salary is a practice which
encourages corruption. Furthermore, employing foreign experts and
paying them salaries more than 50 times the amount paid to the equally
qualified and experienced local employees is also a practice that
encourages irregularities and corruption in ADB projects.
Mr. R. Dissanayake of Kotte, Sri Lanka stated
I was appalled to read in the newspapers recently that an
enormous amount of money is to be spent on a water resources
management project with a loan obtained from the ADB. A
breakdown of the Rs 1400 million project budget indicates that
Rs 62 million is to be spent for import of vehicles, Rs 182
million for purchase of equipment, Rs 248 million for employing
foreign specialists, and Rs 492 million for training. I venture
to predict that this project will also end up with very limited
benefits to the people of this country but will bestow ample
benefits to the lender, the politicians and state official's
associated with the project.\27\
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\27\ R. Dissanayke, Kotte, Foreign funded project rackets, Opinion
page, The Island, January 30, 2003.
It is the general perception among the public in Sri Lanka that
ADB-funded projects are often involved with some kind of corruption.
There is a wide belief that these projects somehow give fewer benefits
to the people while significant amount of funds seep to corrupted
officials and politicians. There is also a popular perception that
senior government officers design projects to earn very high income
before they retire.
There has been, for example, serious fights between officers for
the project manager post for the ADB Upper Watershed Management Project
and the Protected Area Management and Wildlife Conservation Project.
The result is the implementing agencies divide and one group does not
allow other groups to implement the project.
Mr. Chairman, Senators of the committee, the ADB is not accountable
to the people in the borrowing countries or in the donor countries.
They are only dealing with the governments. ADB is also immune to any
legal action. ADB management and the staff take this as a freedom to
design and fmance projects that may destroy local communities, their
livelihood, environment, and natural resources. ADB's lending target
(culture of loan approval) approach and the internal evaluation of
performance based on how much money has been released through the ADB
is a killing approach.
This is one reason for the staff to approve destructive projects
that destroy the sustainable livelihoods of local communities. But also
many ADB staff strongly believe that they will not be punished for any
of their wrong actions. The only penalty is that they will be
transferred to another division. I strongly believe that this approach
should be changed.
The people forcibly resettled under Lunugamwehera are still
suffering after more than 25 years for the wrongs done by the ADB,
local staff, and politicians. In the STDP, resettled people are
suffering because of the wrong actions of ADB and the Sri Lankan RDA.
Those who complain or seek justice through local courts and the
Inspection Mechanism of the Asian Development Bank are threatened with
reduction of compensation or delay of compensation. The case of the
Upper Watershed Management Project shows that the country suffers from
the many irregularities of the project managers and the ADB staff. We
strongly believe that this culture of the Bank and the attitude of its
implementation partners need to change very quickly. The above case
studies show that the Bank often exercises no control or monitoring
over the local implementation agency after the loan agreement is
signed.
If loan covenants are violated, the ADB has to stop disbursements.
The STDP case shows that RDA continues to violate loan covenants but no
action has been taken by the ADB.
I strongly believe any measure to address the institutional
problems relating to corruption at the ADB would also improve overall
project quality with respect to environmental and social impacts as
well as enhance overall economic performance.
8. TSUNAMI RECONSTRUCTION
Mr. Chairman, Senators of the committee, I would also like to
address one more issue at this hearing. It is none other than the
tsunami which affected several Indian Ocean nations including Sri
Lanka.
8.1 Consequences of the tsunami
In Sri Lanka, the tsunami killed approximately 30,740 people; 3,858
people are still missing. About 15,683 are injured; 833,780 people
belonging to 178,886 families have been displaced. According to UNICEF,
about 30 percent or 12,000 of the dead and missing people are children.
More than 800 children in Sri Lanka are left with no mother or father.
About 88,022 houses have been completely destroyed and 25,737 have been
half destroyed; 200 schools have been seriously damaged.
Several beach hotels, houses, and other commercial buildings
vanished. Vehicles with passengers were also washed out to sea. The
railway line and roads were also damaged. A train with eight coaches
was totally destroyed, adding 1,800 lives to the death toll; 65 percent
of the fishing fleet has been destroyed. Ten out of twelve fishery
harbors located in these areas have been destroyed. Sea waves destroyed
a 200-meter to 5 km wide zone. In places such as Mulativue Sea, waves
went more than 5 km inland. It has destroyed the biodiversity in the
area. The Coast Conservation Department states that more than 600
million Rupees (US$6 million) damage has been done to the coastal
revetments which were constructed using boulders to block the waves.
The natural environment was also destroyed by the tsunami.
Environmental experts are now studying the affected coasts in tsunami-
hit countries to assess the damage caused to the environment. The scale
of the tsunami's environmental damage is readily apparent, as the
coastline has changed almost beyond recognition.
The damage to the marine environment is equally devastating. The
debris that flowed into the sea from the land smashed coral reefs. Some
initial research shows that 50 percent of the coral has been damaged
due to the harbor waves and debris. The natural environment of many
marine organisms changed in a just a few hours. Toxic materials
including PCBs would have entered the sea at many points, further
affecting marine life. The amount of silt, sand, and organic matter
mixed with the water will also smother them. On land, wells and
freshwater streams have been contaminated with seawater, posing more
problems.
According to the Central Bank of Sri Lanka, the total loss for the
country is about 150 billion Rupees (US$1.5 billion). This does not
include the human losses and the environmental damage. According to the
Central Bank, Sri Lanka needs 550 billion Rupees (US$5.5 billion) for
reconstruction of the infrastructure damaged by the tsunami.
There are many reasons for the high level of damage. These include
a lack of awareness and information, the high population density in the
coastal zone which is about 4.88 million people within only 4 percent
of the land area, as well as a disrespect for the law such as the Coast
Conservation Act No. 57 of 1981, as amended, No. 64 of 1988, a lack of
a relevant authority and expertise, and destruction of natural barriers
such as coastal sand dunes, mangroves, green belts, etc.
Sri Lanka is now aiming for a shoreline conservation zone of 100
meters in all areas and 200 meters in the Eastern province. But this
needs proper and equal examination under the law. A proper
environmental restoration plan is an urgent exercise. The Sri Larikan
Government needs support for an accelerated environmental restoration
plan. Civil society awareness and participation must be brought into
this restoration. Civil society organizations, especially environmental
organizations, can play a major role in this exercise.
8.2 Scale of proposed donor support and need for greatly
improved monitoring and coordination of use of
funds
After a Needs Assessment, the ADB, JBIC, and the World Bank
announced that Sri Lanka needs US$1.5 billion for Tsunami Recovery and
Reconstruction.\28\ The Donor Needs Assessment further states
---------------------------------------------------------------------------
\28\ Joint Press Release ADB, JBIC, World Bank, February 2, 2005.
. . . the assessment, prepared in close cooperation with the
Government of Sri Lanka, sets out clear guiding principles for
the reconstruction strategy, with an important emphasis on the
inclusion of affected communities in the planning and process
of rebuilding. It estimates the overall damage to Sri Lanka at
US$1 billion with a large proportion of losses concentrated in
housing, tourism, fisheries and transportation. Total losses
are estimated to equal 4.4 percent of GDP with about US$500
million in external financing required in the short term for
---------------------------------------------------------------------------
2005.
Alessandro Pio, Country Director of the ADB, said
The human impact has been even more staggering than the
damage to infrastructure. In some coastal communities, entire
families, livelihoods, and social networks have simply
disappeared. Reconstruction efforts must be very sensitive to
this human dimension, and do everything possible to help
restore communities, mitigate the psychological, emotional and
economic loss and restore hope, while working to rebuild
shelter and physical infrastructure.
The Donor report stressed the need for strong monitoring,
transparency, and accountability to ensure that the millions of dollars
of external assistance reach their intended sources and are utilized
efficiently. Also, the monitoring of the sustainability of the
reconstruction work and plans is very important. Civil society
movements have to monitor this. Otherwise transparency, participation,
and accountability will be neglected when the country receives foreign
aid.
The three Donor Country Directors emphasized that nothing is more
demoralizing for the people in need, and for those trying to help them,
than to hear that funds are being siphoned off or wasted. It was,
therefore, imperative that all key stakeholders in this--the
government, the International Community, Civil Society, and the
Liberation Front for Tamil Elam (LTTE)--agree upon a transparent
monitoring and accounting system for all the resources that will be
deployed in the reconstruction effort.
The Needs Assessment identified the guiding principles for the
recovery and reconstruction strategy as:
The allocation of resources, both domestic and
international, should be strictly guided by the identified
needs and local priorities, without discrimination on the basis
of political, religious, ethnic, or gender considerations;
Reconstruction activities are carried out by the appropriate
level of government, with an emphasis on decentralization where
feasible;
Communities are empowered to make their own decisions during
recovery;
Communication and transparency are present in decisionmaking
and implementation;
Reconstruction avoids rebuilding existing vulnerability to
natural hazards; and
A coordinated approach is used to prevent duplication in
activities.
To translate the principles into reality, the assessment
team recommended a vigorous process of public consultation, a
communications program, and development of district-based
reconstruction plans for the affected areas.\29\
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\29\ ``Sri Lanka 2005 Post-Tsunami Recovery Program: Preliminary
Damage and Needs Assessment,'' Asian Development Bank, World Bank,
JBIC, January 2005.
However these principles are too often not being carried out on the
ground. The biggest challenge is better coordination among the relief
agencies. In certain areas, the number of boats donated by the agencies
is a few times higher than the actual number required. This is the
situation with fishing nets as well. Many fisherman and experts think
that the fish will soon be depleted if all the boats engage in fishing.
This is only one example.
The construction of housing is the biggest challenge. With the 100
m no-construction zone, a severe land problem was created. Due to the
unavailability of lands, the housing development designs have been
delayed and still most of the people who live in relief camps have no
hope that they will be given a house in the near future.
Although the ADB, the World Bank, and JBIC state the importance of
empowering communities to make their own decisions during recovery, as
well as the importance of communication and transparency in
decisionmaking and implementation, this is not a reality on the ground.
People are not aware of the plans of the government.
The slow reconstruction process leads to uncertainties about their
future among affected people.
Mr. Haruhiko Kuroda, ADB President said
Given the scale of the recovery, even with our best efforts
at coordination, the potential for gaps, overlaps and
duplications is significant We need to develop tools that can
assist us in identifying gaps, and avoiding duplications.
It is largely for this purpose that a draft tracking
mechanism has been developed for your consideration at today's
meeting. Adoption of the tracking mechanism will allow us to
coordinate, monitor and manage the overall rebuilding effort.
But it is so meaningful, it must be ``owned'' by the countries
involved.\30\
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\30\ Harmonization and partnerships for Effective Recovery ADB
Press Release, March 18, 2005.
It is too early to understand whether the ADB's monitoring tool is
effective. But we don't see either coordination or monitoring on the
ground.
The large amount of funds that will be quickly disbursed by the ADB
and World Bank for tsunami relief also underscores the need for
immediate reforms of performance incentives for ADB and World Bank
staff, and greatly improved anticorruption measures at the Banks.
9. CONCLUSION
In the final analysis, it is apparent that because the ADB is not
fully committed to accountability or transparency, it in effect enables
and encourages corruption, which in turn delivers unsustainable
projects. It is our experience in Sri Lanka that the ADB is not
concerned whether its safeguard policies are complied with, nor is it
even interested whether its loan covenants are met.
Whilst it is not possible for me to show that ADB personnel are
corrupt in receiving money or benefits personally, what is clear is
that the corruption in our country and of the overseas contractors is
in practice assisted and empowered by the ADB's practices and lack of
priority in addressing this issue. The ADB currently has only very weak
tools or mechanisms to control this corruption.
Our experience in the STDP case is that the ADB Accountability
Mechanism consultation phase listens only to the Government and the
Executing Agency and does not try to stop the breaches of safeguard
policies or corruption.
Mr. Chairman, Senators of the committee on behalf of the 19 million
citizens of the teardrop in the Indian Ocean which is Sri Lanka whose
lives are affected by such careless lenders, we appeal to you to use
your hold over the purse strings of ADB to pressurize them to care
about development and respect the sustainable livelihoods, to care
about the affected people, to stop the ADB feeding corruption.
As Mr. Bruce Rich of Environmental Defense stated before this
committee last September 28, we also 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 without
a clearer idea as to the steps ADB is taking to implement reforms that
will effectively address corruption.
In this regard I would like to make the following recommendations.
The ADB should strongly implement its Anti-Corruption
Operational Procedures to explicitly assess corruption risk in
its country strategy programs, project appraisal, and project
performance evaluation reports.
The ADB should improve transparency and information
disclosure. We are very unhappy about the present draft version
of the ADB's Public Communication Policy which says ADB also
understands that full disclosure of information is not always
possible for legal and practical reasons. It also says that ADB
must safeguard the privacy of its staff and protect
confidential business information of private projects sponsors
and clients.
The ADB should halt loan disbursements when government
borrowers are not addressing corruption.
There should be a mechanism to control borrowing government
implementing agencies when they violate the ADB's safeguard
policies.
The ADB should get serious about enforcing its loan
covenants.
We also ask for a proper investigation on the corruption
charges in the STDP and the Upper Watershed Management Project.
Finally, we ask ADB involvement in finally correcting the
problems to help the affected people in the Kirindi Oya
Irrigation and Settlement Project.
Thank you very much for this opportunity.
______
From the Sunday Leader, Sri Lanka, October 24, 2004
The Chairman. Thank you very much for that testimony. I
would simply observe, as you've pointed out, that you have
submitted for the record an extensive statement with a number
of case histories, at least from your observation, that
certainly beg investigation, as well as the conclusions that
you have reached. We'll raise some more of that during our
question period, but I'd like to call now on Mr. Devine for his
testimony before we get into questioning both of the witnesses.
STATEMENT OF TOM DEVINE, LEGAL DIRECTOR, GOVERNMENT
ACCOUNTABILITY PROJECT, WASHINGTON, DC
Mr. Devine. Thank you, Mr. Chairman. Thank you for this
invitation, and also thank you for this forum. It just doesn't
get any more responsible than this committee's preparation.
The Chairman. Thank you.
Mr. Devine. Whistleblowing is the human foundation of
transparency reforms against corruption, and other betrayals of
MDB institutional issues. What we can contribute comes from 27
years of experience in this field. In particular, last summer
the Ford Foundation sponsored an in-depth research assessment
of the whistleblower policies at multilateral development
banks. We published the first four assessments of Changing the
Culture of Secrecy, coauthored by our first International
Director, John Fitzgerald, to assess those institutions. We
held off from the African Development Bank, because they said
release of the whistleblowing policy was imminent there, so we
thought we'd give them a chance. That's what they said this
year also, some time after we sought to finalize an assessment
included as an attachment to my testimony.
The bottom line was that we could not responsibly recommend
the policies of any institution as safe channels to make the
difference. That's very unfortunate, because it deprives
whistleblowers of the opportunity to work within the system if
they don't want to be silent observers. That just can't be
healthy for the checks and balances of these institutions.
Since then we've heard from numerous whistleblowers responding
to our report, and the actual practices are far worse than the
paper policies.
The policies and practices of these banks must reflect the
values of transparency and the respect for human rights that
they expect for the rest of the world. As the first witness
pointed out, there are severe consequences. I can second his
experiences from a One World Trust Conference last fall, where
there was dramatic visual evidence of how corruption in the
Asian Development Bank turned irrigation projects into
basically a desert, in the area they were supposed to be
benefiting.
Communities that are supposed to benefit from venture
capitalism see their water supplies poisoned when the funds are
diverted to large corporations that are constructing gold
mines. There are very serious grounds, in terms of the human
consequences, as well as the fiscal.
There are also real grounds for hope. We have not seen
grounds for optimism, but we're excited that there are grounds
for hope. The dynamic at every institution, except the Inter-
American Development Bank has shifted from stagnant to dynamic
in terms of their environment, their rhetoric.
For example, at a One World Trust Conference last fall, the
EBRD's Deputy Compliance Chief teamed up with us at GAP to
recommend consensus principles for reform. But so far there has
been no action. And in response to this morning's testimony we
could say that one thing they could do right away is give
witness protection rights to people who testify at their
Institutional Review Mechanism. That would be a good sign of
good faith. And with respect to their concerns about the
European Union, they're not insurmountable. The EU has their
own whistleblower protection system, and those could be
coordinated.
In particular, there's a potential for great spillover
effect from a project at the World Bank, which has commissioned
highly respected professor Robert Vaughn of American University
Law School to prepare a report recommending an overhaul of its
whistleblower policies. We're hoping this can be a precedent
for the regional banks as well. And we feel that this
committee's oversight vigilance will make a major difference,
whether Professor Vaughn's work is a foundation for
whistleblower reforms with widespread application, or becomes
another example of objective professional expertise that
gathers dust.
Quite clearly, the magic formula for results will be
persistence, persistence, persistence. This is the time to
intensify our efforts, because we're seeing some cracks in the
wall. It is particularly true for the Treasury Department,
which is responsible to monitor implementation of the
McConnell-Leahy amendments to last year's appropriations law.
They have to issue progress reports on whether the banks were
implementing whistleblower rights, external audits, publication
of loan agreements and other reforms for transparency. Last
September's report was little more than a rubber stamp of the
status quo. The March report was a far more serious effort.
Treasury started to use its assignment as a bully pulpit to
press the banks. That's very encouraging, but they need to go
farther.
For example, at two banks without whistleblower policies
they credited reforms that seem to be getting stale because
they haven't been implemented. They failed to disclose or
assess the empirical track records of any MDB policies, and
they didn't offer specific recommendations.
We have four areas of specific recommendations in our
testimony. I'm glad to discuss them in response to any
questions. But we do want to commend you for your work.
Yesterday, Secretary Snow testified that the United States can
give increased funding to these banks because of institutional
commitments to reform. Our experience indicates that in terms
of empirical results, those assertions are largely a bluff.
Stepped up vigilance will make the difference between bridging
the gap from rhetoric to reality.
[The prepared statement of Mr. Devine follows:]
Prepared Statement of Thomas Devine, Government Accountability
Project Washington, DC
Mr. Chairman, thank you for this invitation to speak before the
committee. My name is Tom Devine and I am the legal director of the
Government Accountability Project (GAP). I commend Chairman Lugar and
the other members of the committee for your serious commitment to
congressional oversight of the multilateral development banks (MDBs).
It just does not get any more responsible or thorough than this
committee staff's broad-based, indepth research as a foundation for
reform.
Whistleblowing is the human foundation for transparency reforms
against corruption or other betrayals of the MDB's institutional
missions. What we can contribute comes from our own oversight of
whistleblower policies at the regional development banks and the World
Bank. Our credentials to assess whistleblower policies are grounded in
some 27 years of experience. GAP is a nonprofit, public interest
organization dedicated to helping whistleblowers exercise free-speech
rights to challenge abuses of power that betray the public trust. Our
mission is to advance governmental and corporate accountability by
promoting whistleblower rights, investigating their claims, litigating
their cases, sharing our expertise through publications, and developing
legislative and regulatory reforms. We have led the campaigns to enact,
or defend, virtually all national whistleblower laws in the United
States. On the international front, GAP works with national
governmental bodies. With colleagues from American University Law
School we coauthored a model whistleblower law approved by the
Organization of American States (OAS). Although as GAP's legal director
I am presenting this testimony, it is a composite work product from our
international team that also includes its leader, director Melanie Beth
Oliviero, and coordinator Sophia Sahaf.
Citizens in countries around the world aspire to the same freedom
of expression and the right to know information that will protect them
from unsafe and wasteful practices by government and private companies,
as do the American people. The multilateral development banks are
critical agents for other governments to meet these rights of their
citizens. We wholeheartedly support these organizations' development
missions but are acutely aware they are under threat from corruption,
waste, and abuse of power. We also remain mindful that the United
States has contributed billions of taxpayer dollars as donations and in
the form of private investor funds to these institutions. We have a
right to know if our money is being used to advance the welfare of poor
people worldwide in a responsible, accountable manner. This committee's
pioneering oversight work has demonstrated that conclusion would be a
fantasy.
We also know, because GAP has been investigating policies and
practices of the African Development Bank, the Asian Development Bank,
the European Bank for Reconstruction and Development, the Inter-
American Development Bank, and the World Bank regarding whistleblower
protection. In 2003 the Ford Foundation sponsored our indepth research
to assess the procedures on which MDB whistleblower policies are based.
Last summer we released the first four volumes for ``Challenging the
Culture of Secrecy,'' our assessments of those institutions. We held
off on the African Development Bank, because their leaders said a
whistleblower policy was in the final stages of preparation. That is
what they told the Treasury Department this year. So far, nothing has
happened. As a result, we are finalizing a report on the current
reality faced by African Development Bank whistleblowers. Unless there
is dramatic improvement soon, a summary of our anticipated findings is
enclosed as exhibit 1.
The results of our audit of paper procedures were summarized in
written testimony last July 26. It is enclosed as exhibit 2. The bottom
line was that we could not responsibly recommend the policies at any
institution as safe channels to make a difference, instead of bypassing
the institutions with leaks. Since then we have learned from over two
dozen whistleblowers, that as practiced, actual practices are far worse
than paper policies. Their anticorruption claims are more rhetorical
than real. While there is no doubt that some light has been shone on
corrupt practices, the banks are too eager to direct that light on
client countries.
It is imperative that the policies and practices of the banks
themselves reflect the values of transparency and respect for human
rights that they expect by the rest of the world. That is because these
practices can have life and death consequences. For example, at a One
World Trust conference last fall on organizational accountability, we
saw dramatic visual evidence how corruption in Asian Development Bank
irrigation projects functionally have turned the area they are supposed
to benefit into a desert. Whistleblowers have told us how pipeline
projects are severely undermining the lives of beneficiaries supposedly
helped by increased energy access. Communities supposed to benefit from
venture capitalism see their water supply poisoned, when the funds are
diverted to large corporations that spend it on gold mines.
GROUNDS FOR HOPE
We have not yet seen grounds for optimism, but we are excited that
there are grounds for hope. Particularly with respect to whistleblower
rights, the dynamic at every institution, except the Inter-American
Development Bank, has shifted from stagnant to dynamic. At the One
World Trust conference last fall, the new leader for EBRD whistleblower
investigations teamed with GAP to recommend consensus principles for
whistleblower reforms. But so far there has been no action at that
Bank, which still does not have a specific policy. It is not credible
for the Bank to continue asserting that protection can be inferred from
composite procedures.
In particular, the World Bank has commissioned highly respected
Professor Robert Vaughn of American University Law School, a coauthor
of the OAS Model Law, to prepare a report recommending an overhaul of
its whistleblower policy. Unfortunately, the Bank so far has declined
to release his work, creating the procedural equivalent of another
oxymoron--secret transparency reforms. This committee's oversight
vigilance will make a major difference whether Professor Vaughn's work
is the foundation for whistleblower reforms that could be applicable to
all MDB's, or becomes another example of objective professional
expertise gathering dust.
The magic formula for results will be persistence, persistence,
persistence. We have come this far largely due to this committee's
steadily increasing vigilance. Now is the time for all of us to
intensify our efforts.
That is particularly the case for the U.S. Treasury Department,
responsible to monitor implementation of the ``McConnell-Leahy''
amendment to last year's appropriations law. That provision requires
the United States to use its voice and vote to implement transparency
reforms by this coming June 1, including whistleblower policies
consistent with U.S. and international norms. The law required Treasury
to issue September 1 and March 1 progress reports to Congress. Last
September's Treasury report was little more than a rubber stamp of the
status quo that could have been written by the Banks, and actually may
have been to some degree. The March report was a far more serious
effort, and Treasury used its assignment as a bully pulpit to press the
banks. However, at two banks without whistleblower policies, the AfDB
and EBRD, Treasury credited promised reforms that have been pending
long enough to become stale, failed to disclose or assess empirical
track records, or offer specific recommendations. There is a long way
to go before Treasury's optimism is grounded in reality. GAP's comments
on the September and March Treasury reports are enclosed as exhibits 3
and 4.
RECOMMENDATIONS
Last summer we made a series of reform recommendations, which below
have been further refined and expanded from the lessons whistleblowers
have taught us since.
Create a baseline for protected speech based on dissent
against misconduct that threatens the institutional mission,
rather than institutional self-interest.
Protect direct disclosures to external authorities such as
the U.S. Congress, Treasury Inspector General or other law
enforcement agencies when necessary to avoid a significant
threat to public health and safety, damage to the bank's
mission or criminal violations of national or international
law.
Protect participation in the citizen complaint mechanisms
for addressing harm caused by MDB-financed activities.
Safeguards could be included to prevent public release of
proprietary information.
Provide a flow of information from secure hotlines to each
Bank's Boards of Directors.
Break through the conflict of interest in internal appeals
adjudications. This can be accomplished by offering alleged
reprisal victims the opportunity to seek justice through third-
party, independent, binding arbitration by a decisionmaker
selected through mutual consent.
Institutionalize the legal burdens of proof from the U.S.
Whistleblower Protection Act to judge whether a whistleblower's
rights have been violated, as the World Bank does for reprisal
investigations.
Provide prevailing whistleblowers full make-whole relief
from confirmed retaliation, including provision of attorney
fees and the right to reinstatement as necessary to maintain
national residency rights.
Establish independent autonomy and performance standards
consistent with the U.S. Inspector General Act of 1978 for bank
investigative agencies, to eliminate the conflicts-of-interest
that too often have turned those offices into legalized
retaliation units instead of credible institutional checks and
balances for accountability.
The conceptual basis for these recommendations is summarized below:
1. Align all personnel, lending, and project policies--staff rules,
environmental and social safeguards, policy review strategy papers
(PRSPs), country assessment strategies (CAS), and the like--with pre-
existing universal standards embodied in U.S. and international law,
starting with whistleblower protection.
U.S. constitutional and statutory law, and international human
rights norms all confer fundamental rights to freedom of expression,
the right to receive and impart information and the right to due
process before a fair and impartial tribunal. Within the United States,
the Sarbanes-Oxley standards for whistleblowers at public corporations
now set the international pace for whistleblower rights. Within the
last few years the United Nations, Organization of American States
(OAS), and Council of Europe all have reinforced a mandate for
whistleblower protection through their anticorruption treaties. The OAS
has approved a detailed model law that is a composite of international
and U.S. norms.
There also is a long-established body of universal standards
enshrined in enforceable international instruments such as the
International Labor Standards of the International Labor Organization
(ILO), and the protocols and conventions that enable enforcement of the
Universal Declaration of Human Rights.
Witnesses to misconduct and abuse at the Banks live in fear of
coming forward. Our evidence demonstrates that their fears are well
founded. The Banks routinely victimize the messenger rather than hold
accountable those who defraud donor countries and recipient countries
alike. For any MDB to be accountable it must provide safe channels for
reporting corruption, fraud, and harassment.
When senior staff such as public health specialist, Dr. Sunil
Chacko, challenged MIGA (the Multilateral Investment Guarantee Agency)
policies that result in dislocation of communities, and environmental
degradation that undermine sustainable economic development, he found
himself harassed. His duties were diminished and then his job
terminated. Despite winning an appeal that validated his contention of
reprisal and the written assurances of World Bank President James D.
Wolfensohn that he would be reinstated, Dr. Chacko has never been
offered a contract.
2. Adopt and enforce modern rules of procedures for the systems of
justice and conflict resolution within the MDBs. The various appeals
and tribunal mechanisms can only ensure due process if they are free
from conflicts of interest, if all parties have access to legal
representation (not just the Bank) and genuine relief, and if
resolution includes recourse to third party alternative dispute
resolution.
All of the Banks' appeals processes and administrative tribunals
are tainted by conflicts of interest that render them no better than
suspect grievance procedures. Quite simply, they lack independence. At
most, the systems are thinly camouflaged procedures where a reprisal
victim can ask an institutional bully to change its mind. They could do
that without a whistleblower policy. In the EBRD, for example, the Bank
president has discretionary authority to terminate employees. Since it
is the Bank's president who also selects the Tribunal president, this
``justice'' mechanism is fatally flawed. In the case of the AfDB, the
Appeals Committee makeup has seven members chosen by the president,
including the Chair and Alternate Chair, versus five members chosen by
the Staff Council.
Further, the adjudicators in these justice mechanisms are not
professionally equipped, and recordkeeping is inconsistent. Often there
are no transcripts of proceedings. Even worse, in other instances
transcripts and hearings are secret. Secret trials and justice are
oxymorons. Petitioners have no rights to face their accusers and are
generally not entitled to bring a lawyer with them to their hearings.
Nor do rules permit the recovery of legal fees when the findings uphold
their cases.
Persons seeking to challenge retaliation for reporting wrongdoing
endure further abuse and institutionalized defamation for exercising
their rights. For example, Dr. Yang-Ro Yoon, a senior World Bank
economist, reported a 40-percent overrun ($15 million) in a 1996 loan
for schools in that nation. In return for her service to the Bank's
mission in reporting misappropriation of project funds, she has been
harassed, humiliated, had her duties diminished, her office
``downsized,'' been terminated, and when she finally won reinstatement,
it was to a lesser assignment.
Dr. Yoon's attempts to resist this reprisal have led her through a
3-year nightmare of the Bank's conflict resolution system. Despite
``winning'' her case, she lost salary, benefits, and adjustments, such
as not factoring in inflation, She has been compensated for only one-
third of her legal costs, burdening her with $30,000 in personal
expenses and placed in a position beneath her capabilities and
credentials. She has been exiled from her former work and her
expertise, to new duties irrelevant to her background. When she filed
new appeals to enforce her initial ruling, the same Administrative
Tribunal turned on her with decisions published on the Bank's Web site
that most graciously could be called judicial defamation. She has been
warned that it is misconduct for her to continue seeking enforcement of
her paper victory.
In order for the MDBs to provide the right to a fair hearing, new
procedures must be adopted that provide equal access to legal
representation, witnesses, and documentation. There must be
independence for decisionmakers, at least from the supervisory chain of
command and more preferably from the institution, which can be
accomplished through independent, mutual strike arbitration.
Adjudicators must be selected in a fair and objective manner. Genuine
``make whole'' relief in the form of compensation for lost income,
benefits, and reimbursement of legal fees is required.
3. Extend requirements for independent external auditing of
managerial and financial controls, and the range of appropriate
authorities to which staff may report wrongdoing.
All the MDBs operate within a closed loop of responsibility. Staff
are not permitted to report corruption directly to Board members.
Management can and has misrepresented information to Boards. In cases
we have investigated this amounts to hundreds of millions of dollars.
Only external oversight can assure accountability. External audits of
both managerial and financial controls, such as are currently contained
in the Sarbanes-Oxley legislation in the United States for all publicly
held companies, should be applied to the MDBs.
Similarly, the Banks' current policies deny free-speech rights to
whistleblowers by limiting disclosures through prior restraint.
Although whistleblower protection is supposed to further freedom of
speech, the Bank policies could not be more Orwellian. Every Bank
whistleblower policy is an Official Secrets Act, gagging employees from
disclosing anything outside institutional walls that could undermine
the interest of the relevant Bank, regardless of the impact relevant
misconduct could have for the Bank's mission. All the regional MDBs ban
external whistleblowing, even to national and international law
enforcement agencies, Ministries of Finance and legislative bodies,
including the U.S. Congress. Their own inspection panels for redress by
aggrieved ``beneficiaries'' of Bank loans are treated as external
bodies. Amazingly, employees are vulnerable to discipline for
testifying at a relevant Bank inspection panel with the same evidence
that would be officially protected when disclosed to a supervisor or
in-house investigator. In recent years we have seen enough scandal
resulting in massive waste and betrayal of the pubic trust to recognize
that external oversight is a fundamental prerequisite for
accountability.
4. Create truly independent investigative units with modern legal
burdens of proof.
The existing investigative units to which allegations of corruption
are referred--such as the Inter-American Development Bank's Office of
Institutional Integrity (OII) are handicapped at best, and at worst,
abused as tools of reprisal. It is not surprising that they do not have
a significant track record of accomplishments from working with
whistleblowers. We have seen evidence of investigations being
instigated against whistleblowers in retaliation for their disclosures
to these bodies. We have even seen investigations initiated as a tool
for mass intimidation of whole office staffs. Requiring these units to
report to external oversight bodies could significantly improve
legitimacy. This would be consistent with the model of departmental
inspectors general in the United States. One option would be for them
to report directly to Bank Boards of Directors. The committee's own
series of oversight hearings on the MDBs and the recently launched JEC
study of MDB accountability are testament to the need for this systemic
reform.
Beyond independence of these investigative units, there also is a
demonstrable need for standard, modern investigative procedures to
ensure fair, impartial, and replicable treatment of all credible
allegations. Employees working with these units, voluntarily or
involuntarily, have no rights against investigators who turn on them,
which is frequently the case from our review. Hotline procedures and
standards vary drastically. Confidentiality procedures are
inconsistent.
CONCLUSION
Yesterday Treasury Secretary Snow testified that the United States
can justify increased MDB funding based on their institutional
commitments to reform. Our experience indicates that in terms of
empirical results, these assertions are largely a bluff. Whistleblower
policies are in a time of transition, but so far those commitments
largely have been a bluff with little positive impact. This committee's
stepped-up vigilance will be extremely significant in bridging the gap
between the rhetoric and reality of accountability through transparency
reforms like whistleblower protection.
The Chairman. Thank you very much, Mr. Devine.
Let me begin, Mr. Withanage, by just observing that on page
three of your written testimony, you mentioned that Asian
Development Bank, ADB, had approved over $3.4 billion in loans
for 128 projects and programs over the years, and you charged
that many of these loans and their role in poverty reduction
are highly questionable. In fact, you offer illustrations in
which the results led to negative setbacks, quite apart from
progress in Sri Lanka.
If we take ADB's staff evaluation at face value, more than
half of Sri Lanka's ADB debt now, accumulated over three and a
half decades, is from projects the ADB itself considers ``less
than successful.'' This makes the point that I was trying to
make in my opening statement, that the consequences, sometimes,
for developing nations, of maladministration of these loans is
not only disappointment that things did not occur for the
benefit of people, but worse still, that debt ensures for the
people--in this case, quite a bit of debt in Sri Lanka, left
over from unsuccessful efforts. And therefore, when we're
talking about history--and that's important in reviewing why
what we're doing now is urgent--we must seek ways to reverse
that history.
The question still will remain, how strenuous are those
efforts? How comprehensive? As we just heard from Mr. Devine,
not all the returns are in even from the African Development
Bank, as to what they're going to do, quite apart from
evaluating how well it is going. That's somewhat discouraging,
at least if you were an African country and potential recipient
of one of those loans, and particularly if you were a rather
powerless, defenseless citizen of one of those situations,
depending upon the integrity of those in power--not only in the
government--but also those dispensing funds who have some
authority. They have revenues that can make a difference in
this.
Both of you have stressed transparency, and the ability for
the people in the country, and for the world, and for everybody
else who may be interested, such as the U.S. Treasury, our
State Department, and so forth, to peer in and see what is
going on. At the same time, there are different cultures,
different traditions and so forth. We understand from previous
hearings, as well as this one, that people in the opposition
would say, in quotes, ``this is not the way the world works,
this is the American view, and who are you, as Americans, to
assert that there ought to be this degree of openness?'' The
world press, as well as the local press, have the opportunity
to raise questions on the scene. I wonder, where are there
enough study commissions out there in the world to take a look
at all of these projects, to come up with some evaluation that
might make some difference for us as we have some chance to
look at all of this today? You, sir, have looked at some
projects in detail. Will you take this opportunity to describe
in more detail some of what you found, and why this is
important, and what the bank that was involved in making the
loans might have done differently, so that the results would
have been more constructive?
Mr. Withanage. Thank you, Mr. Chairman.
I think one of the big problems is people who are living on
the grounds; they are not part of any decisionmaking with
regard to the projects. In most of the cases, people know best,
not the consultants and not the government officers who come
from other places, they don't have any idea about the local
situations. Now one of the examples which I explain in this
one, which happened in 1977 which is a dam project, a
construction of a dam, across one of the big rivers, and all
the local scientists and the local people, they said, ``Okay,
if you construct this dam in a--it's a short dam, but it's a
small reservoir--it will be more sustainable.'' But because of
the political reasons, the Asian Development Bank and the local
agencies, which is the irrigation department, they constructed
the bigger dam, and they cleared more lands and brought so many
people. So, if they heard the people and the local scientists,
they would not have had this kind of end results. So, this is
one of the major problems.
The Chairman. Why did the dam construction result in
difficulty? Could you make a case that it would help more
people if you build a larger dam?
Mr. Withanage. The issue is there is not enough water for a
larger reservoir.
The Chairman. I see.
Mr. Withanage. So, the river, it should be dependent on the
river attachment, if the attachment is not adequate enough,
then having the big reservoir is just a waste of funding, and
also they cleared a lot of lands to allow more people to come
to this site, and that also devastates the whole habitats.
The Chairman. So there's less water, there are more people,
and there is a misalignment between the amount of water and the
size of the dam. Your testimony, therefore, is that if you had
been having local town meetings or some sort of hearings on the
site and so forth, and people had indicated what the situation
was, the decision might have been better than back at
headquarters with whoever was planning this project.
Mr. Withanage. I think the biggest problem here is now
there's no adequate water and the people are suffering there,
and the Asian Development Bank has a right to do something to
correct this problem. So, this is my message, bringing this
case to this forum.
The Chairman. So, you're saying now, in addition to the
fact that after the ADB evaluates the thing and says, ``Well,
this is partially successful, or unsuccessful,'' what have you,
still this is 1977 you're talking about, that's now 28 years
ago. There ought to be some mechanism for correction of these
errors, as opposed to simply chalking them up and indicating,
``Sorry it all turned out badly for these thousands of
people.''
Mr. Withanage. Yes, Mr. Chairman, because we are still
paying this money back to the Asian Development Bank, so still
we have a right to ask for them to correct this project,
because the people in the field, they don't have water, and for
the last several years, they didn't cultivate a single acre of
paddy in that area, and people are suffering and because of the
Asian Development Bank should spend their money and they have
the funds to correct this problem, and give a better life for
these people.
The Chairman. Now, this occurred in Sri Lanka, is that
correct? This dam that you're discussing? This project occurred
in the country of Sri Lanka?
Mr. Withanage. Yes.
The Chairman. You know, sometimes, let's take a case in the
United States. If such a thing occurred here, and there were
material losses for lots of people, my quess is that a class
action suit of some sort might have occurred. Specific farmers
or landowners who were dispossessed and so forth might have
filed lawsuits. What happens in Sri Lanka? Is there any
recourse to people who believe that they have been either
dispossessed, or badly damaged, or continue to be damaged? How
does the legal system work at that point?
Mr. Withanage. With regard to this project, there was no
lawsuit, but Southern Transport Development Corridor, which I
explained earlier, it's a case that went to the Appeal Courts,
it's a case that went to the Supreme Court also, and the
Supreme Court decided human rights have been violated, but it
did not change the rule. So, the people are still fighting to
change the rule, because the Supreme Court decision did not
change the whole trade, so certain--in several other issues,
there is a lot of public interest litigation in Sri Lanka with
regard to mining cases--but in this particular case there was
no such a case. But, it's happening, in Sri Lanka, that's one
of the best case holders came because of the public interest
litigation.
The Chairman. That was 1977. This is now. What is your
observation currently about the ADB as it takes a look at civil
society efforts to bring about better results, as well as to
combat corruption? In other words, did you note improvement? Is
there, out there in the field, a sense that times are changing?
Mr. Withanage. In my opinion, in 1977 there was no policy
for the Bank.
The Chairman. No.
Mr. Withanage. Now, since 1995, Asian Development Bank has
a lot of policy safeguards, policies accountability mechanism
and access to information, various policies. But the two cases
I want to state in this statement, because that's the same
situation after having so much of policies within the Bank. We
have the public affected people, so they have gone to the ADB
asking justice from the inspection mechanism, and they wrote
several letters with regard to the safeguard policies, but the
Bank's response is the same, that they don't find any evidence.
In one other case, with regard to the corruption, people got
the same response after sending all of this information, they
say they haven't got enough evidence, and at first they
reacted, and later they say, ``Send us more evidence.'' So, why
are we having all of these policies, if they are not
implementing at the ground? So, this is the question today that
we have.
The Chairman. I thank you for that response. We've been
joined by the distinguished Senator from Florida, Senator
Martinez, who is the chairman of our African Subcommittee.
Senator, I'd like to give you the opportunity to make a comment
or raise questions of our witnesses.
Senator Martinez. Thank you, Mr. Chairman. I really would
just want to, first of all, say thank you to you for holding
this important hearing, I think that some of the things that
have been going on in this exchange--in a very different way--
but I think in also a very common way, remind me of some of the
work I did at HUD, and how difficult it was, and as you know,
as a former mayor, we share that in common, how difficult it is
to be in a department of government whose purpose it is to
encourage and promote better housing for America, and then see
that some of those very-needed funds are diverted for purposes
that are not appropriate, and so fighting that very thing here
in our country with domestic funds through well-intended
entities that are formed for that very purpose. I always felt
that it was really not taking from government, but it was
really taking from a family that might be wanting to improve
their housing, or a single mom with a couple of young children
who's trying to give them a nice, stable place in which to
live. And so, in a way I also feel the frustration and the
sense of loss when projects like you've been discussing occur
in the international arena, well-intended funds that, and in
this instance, not only--as you so well pointed out--that are
not only diverted from the purpose to which they were intended,
but that now create a tremendous burden on the country with
debt. And so, I think this is a very important topic and a very
important hearing, and I want to commend the witnesses for
being here.
And I very much would like for the record to reflect,
unfortunately because of another hearing, I missed the
testimony of Director Sullivan who is a dear and wonderful
friend, and a great public servant, and I know he, I saw him
outside as we were coming in, and I'm very sorry I missed his
testimony, but I know he's doing a great job of serving our
country in an interesting place, and doing a great job with the
European Bank of Reconstruction and Development.
So, Mr. Chairman, I just simply want to thank you for
holding the hearing, and wanted to come by to, at least, glean
a little bit of the import of this moment, and encourage those
that are working in this international institution to continue
to do the good work not only of the financial transactions that
provide wherewithal for international development, but also to
be vigilant about the appropriate usage of funds, the
appropriate usage of projects, and as we see, so much need
around the world. It is unfathomable that some of the misuses
of the money would only add to the misery that we often, too
often see, for lack of development. So, thank you, Mr.
Chairman.
The Chairman. I thank the Senator, and particularly given
your long experience in government and the responsibilities you
have mentioned, as a Cabinet member and as a mayor, you have
seen at the local level, as well as the macroeconomic level,
the effects of what we're talking about today. I appreciate
your endorsement of our efforts.
I'd like to ask you, Mr. Devine, you come as Legal Director
of the Government Accountability Project, and you have been
studying these situations in that role as well as during the
totality of your career. What advice can you give to the U.S.
Treasury or to the Congress, to us, in these areas of fraud and
corruption related to development banks? You have made some
recommendations in your testimony, but amplify these a bit
more, in your own words. As a veteran of the trail of auditing
these responsible officials, what do you think should be the
priorities if you were in our situation?
Mr. Devine. Thank you, Mr. Chairman. I think with respect
to Congress, one of the first things I could suggest is to do a
lot more of what you're doing with my colleague this morning,
making a record of the human consequences from the corruption.
Groups like ours go to international conferences with NGOs and
we hear the victims talking to each other, and it's very
powerful testimony. It needs to be funneled into the oversight
and legislative permanent record as a foundation for reform.
Even if it's just written statements that are collected.
The second is following through with the temporary
legislative mandate last year from the McConnell-Leahy
amendments, and that's why our group is so appreciative and so
available to help with your legislative initiative.
The third is to try and restore GAO's mandate for oversight
within the institutions. They've been getting the whistleblower
treatment since their hard-hitting reports at the end of the
1990s.
The Chairman. What do you mean by that? What sort of
resistance is GAO getting?
Mr. Devine. Well, we've been understanding from talking
with them that there are severe obstacles, procedural obstacles
to releasing information to them.
The Chairman. From the banks?
Mr. Devine. From the banks. Yes, sir. The GAO contributions
have been very thorough, sound, good faith, they might as well
be working with your staff, the work that they do, and they
deserve to be re-enfranchised, in our opinion.
The Chairman. What grounds do the banks have for resisting
GAO? What are the arguments that lead to this resistance?
Mr. Devine. My understanding is that it's, we'd need to go
into more specifics, but it's a clearance process that was
established after the 1999 audit that GAO made of the World
Bank. This has been spreading to some of the other
institutions, and the clearance process has functionally
resulted in their denial of timely information necessary to
keep doing follow up, to find out what progress has been made
since their earlier hard-hitting audits.
As far as the Department of Treasury, the first thing we
think that they need to do is set some standards for these
institutions, tell them what's expected. That was referred to
briefly in my testimony. They're supposed to be making specific
recommendations, and they skip that step in the McConnell-Leahy
amendments. To illustrate, we had a very inspiring meeting with
the Assistant Secretary of the Treasury, where he was calling
for the NGOs to rally behind U.S.-led reform efforts and help
get grassroots support. But then when we contacted his office
to find out what reform efforts we should be recruiting people
to rally behind, we couldn't get our phone call returned. They
need to set down some standards that they're pressing for.
A second thing would be to unleash their Office of
Inspector General. They have a ``hands-off'' policy there. But
these are U.S. taxpayer funds which are at risk, it should be
part of their work. That's an example of what we think the
Treasury could do.
Another way they could do this is by calling the rhetorical
bluffs at the bank. For example, if the IG can't go in and
gather information then demand that the banks provide proof of
results behind their rhetoric. It seems like too many things
are just taken at face value. If there's a good meeting, the
problem gets credit for being solved. And we need proof. I
think for all of us, there's a few steps that could really
help. And the first is to pin down the track records of these
institutions in terms of actions, not just program
descriptions. What we're learning is, despite all of the
reports and procedures, nobody's been helped by the
whistleblower systems, or almost no one has been helped, or no
one in this millennium. That's really the point of all of this.
A second would be to support the pioneering work of
Professor Vaughn at American University Law School. This has
the potential to be a beachhead for transparency reform.
The Chairman. What is he doing?
Mr. Devine. He was commissioned by the World Bank to
recommend an overhaul of their whistleblower system, and what
we've learned over and over is that they're setting the pace
for the regional development banks. And Professor Vaughn was a
coauthor of the model whistleblower law to implement the OAS
Inter-American Convention against Corruption, and he's state of
the art in terms of academic expertise for standards.
I think another thing that we might consider doing, all of
us, is encouraging Mr. Wolfowitz, the new World Bank leader, to
adopt whistleblower rights as a flagship issue there in the
hope that that can be contagious at the regional institutions.
The Chairman. Well, that's an excellent suggestion. Mr.
Wolfowitz is starting out in that new responsibility and has
had a very strong organizational track record. And in fairness,
Mr. Wolfensohn, whom he is replacing, and with whom I visited
personally, and has offered assurances and some evidence, just
as you're suggesting, of additional steps that the World Bank
has been taking, and the seriousness that they have with this.
So there seems to be some momentum there. I add just to offer
an encouraging word in light of otherwise rather dispiriting
evidence elsewhere.
But, it's a new phase. Let me just be very candid. Most of
the international development banks are not used to questions
such as the ones that we're raising today, certainly not in
public forums. There is almost a feeling of temerity, with
people raising these questions. After all, there's a big world
out there and it's all very interesting for parochial people to
be raising these questions esoterically, but I think bit by bit
people understand the point that I'm making without being
repetitious, and that is that there are American taxpayer funds
involved in these banks. Revenues don't just simply come out of
the blue, and there's going to be responsibility for those
funds, whether the banks like it or not.
So, as a result, as I suggested to the first panel, if our
American officers of these banks are running into some
resistance from others, whoever they may be, our Secretary of
State needs to know that, our Under Secretary needs to know
that, maybe I and members of this committee need to know that,
because there will be consequences from that. And I think,
without being tedious, that needs to be understood. What you
are saying today is a serious matter.
Now, the fact that they have not been explored very
extensively in a public forum for a while is too bad, but
nevertheless, they are being explored here, now. This is the
fourth hearing we've had in a series in which, it seems to me,
things are beginning to happen. I cited a few in my opening
statement. Other countries are taking more seriously their role
as legislators, because they have funds, too, they have
taxpayers, and they have press and open democracies. You wonder
who is blowing the whistle, who has accountability for all of
this?
Now, finally, at the end of the day, there can be honest
differences on projects. That is why I get back to more
scholarly research, as you were pointing out, Mr. Withanage.
Out in Sri Lanka, you have 128 projects. Some studies have been
made. You've made some yourself. You have made some assertions
about whether they work, whether they don't. In fairness, the
Asian Development Bank made evaluations. They can be questioned
as to whether they were too sanguine about what they saw. You
allege that in some cases we were really not very successful at
all. There was a failure in costs, including debt for Sri
Lanka, but at the same time, there have been some efforts. This
will be something that our committee will want to explore even
more. What kind of scholarly effort is there with these large
sums of money involved? Just for Sri Lanka alone, $3.4 billion
is a lot of money. And the ramifications for that country have
been substantial, for better or for ill. But this is just one
part of a very large number of countries and people that are
involved here. This is the reason I ask you the question, Mr.
Devine, because your group has attempted to get into this.
Now, what kind of funding or support do you have? Who is
behind you? Why would they be interested in all of these
issues?
Mr. Devine. I think the only funding we've had so far, and
I might be wrong on this, is from the Ford Foundation.
The Chairman. The Ford Foundation hasn't been a grantee to
you.
Mr. Devine. Yes, sir; they've made a commitment to this
issue as one of their cornerstones for their civil society
initiatives. I just second so much the statement that you made
about the taxpayer funds. Our usual work is trying to have
taxpayer accountability. And one of the things that got us into
this was that Treasury, for so long, had been giving a free
lunch to the banks and they were using that funding to buy junk
food that might as well have been contaminated with E coli and
Salmonella. It was putting good money after bad, and we can say
that this is a time when, maybe, the stagnation is ending.
Just from personal experience, about a year ago our group
went to the EBRD to follow through on our research and they
told us that they only talk to governments, and we weren't, so
goodbye and nice of you to drop in. Last fall, the EBRD's new
Deputy Compliance Chief teamed up for a consensus whistleblower
principles. We feel that now is the time to really step up our
efforts, because they're starting to get results.
The Chairman. Well, this is good news, and we are grateful
for your recognition and that the Ford Foundation grants and
perhaps other foundations in our society outside of government
will be seized with this issue, too. It is a humanitarian issue
of great proportion, as you gentlemen are illustrating today.
Because debt occurs for countries, and we're concerned about
that, sometimes, when we're seized with the problem we forgive
debts, wholesale, debts that were created in the same process.
Ultimately our committee is enthusiastic about international
relationships. We are proponents of that, advocates of that
situation. Some Americans have less enthusiasm for that. Our
country goes through periods of protectionism and isolationism,
and I don't stress those sad times, but we've been through some
of that, and frequently there's attention as to what we should
be concerned about.
We're, prospectively, trying to raise in this committee,
the courage, the will, maybe the wherewithal, for people to do
better who want to do better in our international banks. Those
include very fine American administrators who were confirmed by
this committee, and by this Senate as a whole, and have
responsibility, frequently, for these situations. So, this is a
long editorial, but it is to reinforce some of the efforts that
you are making, and a recognition of the time and effort you
have given to preparing your testimony.
Now, it's an encouragement to do more. So, before we have
any more hearings, and in the interim period, as you might
accumulate additional information, and you might have studies
that would be relevant and helpful for the committee and the
American people, please be forthcoming. Because that, I think,
will help the people who are out there in the world to
understand that these banks are attempting to help, and that a
large majority of all the civil servants of all the countries
involved are attempting to help, but they may need our help in
order for this transparency, these checks and balances, this
thoughtfulness to occur.
Let me ask the two of you if you have any final comments
before we conclude the hearing.
Mr. Withanage. Thank you very much. It's the public funds
going from these funds to do something, do development in my
country, or any other third world country, it's the name of the
Asian Development Bank, which means the development. Why the
money from the public funds goes in the name of the development
in my country to destroy the existing resources, to destroy the
sustainable life of the people. So, this is the question we had
when we were starting all our advocacies with the international
financial institutions. That is why we got together, and that
is why we are raising these questions, together with the donor
agencies, the private foundations in the United States and
other countries, and with the Civil Society Organization in
these countries to bring this voice to the relevant agencies,
the decisionmakers of the international financial institutions.
So, this is the very basic issue, and the people living out
there in the villages, in the communities served, they are
suffering day by day because of various ill-effects of the
nonproperly planned, nonproperly designed projects.
Although we have these various new policies, safeguard
policies, that doesn't affect, or that doesn't give any support
or protection to the people living there. So, this is, we are
expecting something from this particular committee that if you
are able to change the views of these visions, and the
implementation procedures of these international financial
institutions, we hope, at least, that will give some more
benefits to the people. So this is what we are asking, and the
corruption should be totally, really removed from all of these
efforts, so the corruption has various different level which is
from the local agencies up to the big companies, and the big,
maybe the international financial institutions, although I
cannot pinpoint these other particular people, but this is
there, and we need to somehow remove all of these corruption
issues, which hinders the real development in our countries.
Thank you very much for giving this opportunity.
The Chairman. I appreciate that. Mr. Devine, do you have a
final thought?
Mr. Devine. Yes, Mr. Chairman, I have two. One is the
cornerstone for legitimacy of the whistleblower policy at any
of these banks, and that is to end the underlying premise of
all of them currently, which is, they're serving as official
secret sects. In reality the policies all are institutionalized
gag orders that theoretically protect free speech within
institutional walls, but make that a firing offense if
employees commit the truth outside of the banks. For example,
if a bank employee who is protected for making a disclosure
internally, bears witness with the same evidence before this
committee or before the inspection panels that are responsible
to redress citizen grievances, that would be a firing offense.
There is a very significant precedent that the United Nations
just adopted with the active participation of this committee.
That's the first time in my experience there's been a
breakthrough on public free speech rights, and we hope that
beachhead can be expanded.
My second comment is to say, thank you for your leadership.
Without it, we'd all be on the road to nowhere, and you can
count on us to do our share on the follow through.
The Chairman. Well, thank you very much for your testimony,
both the written statements and your forthcoming responses. We
are grateful to you. My invitation to give us some more is
ongoing. We thank you and the organizations that support you.
Having said that, the hearing is adjourned.
[Whereupon, at 11:32 a.m., the hearing was adjourned.]
----------
Additional Statements and Other Material Submitted for the Record
Prepared Statement by Ambassador Cynthia S. Perry, U.S. Executive
Director to the African Development Bank
Mr. Chairman, Ranking Member Biden, members of the Foreign
Relations Committee, thank you for inviting me to discuss the efforts
of the African Development Bank Group (the Bank) to combat corruption.
Let me at the outset emphasize that corruption on the African
Continent remains a major impediment to economic growth and poverty
reduction. Far-reaching changes are required to reduce it dramatically.
As the premier development institution in Africa, the Bank is at the
center of our efforts to combat corruption and improve aid
effectiveness in African countries.
The United States has advocated and pressed strongly for greater
transparency and improved governance at all levels of the Bank's
operations and management, and we will continue to do so. While the
Bank has made significant progress in terms of institutional
accountability, transparency, and operational controls, further efforts
are needed. I would like to focus my statement, today, on the Bank's
efforts to combat corruption and strengthen governance in three related
areas: At the institutional level, the project level, and the country
level.
The Bank's anticorruption efforts aim to reduce the risk of
corruption in its operations and increase the amount and quality of
assistance to its regional member countries in support of good
governance. The Bank is also actively promoting good governance through
a number of partnerships with regional and international organizations,
which I will highlight for you.
INSTITUTIONAL EFFORTS
At the institutional level, the Bank has made good progress toward
mainstreaming anticorruption efforts into its functions as a
development finance institution. The Bank's Policy on Good Governance,
approved in 1999, emphasizes combating corruption as one of the pillars
of the Bank's mandate to promote good governance in member countries.
The Bank's Strategic Plan for 2003-2007 also underscores the linkages
between good governance, including combating corruption, and the Bank's
poverty reduction mandate. To strengthen these linkages, the Bank has
put in place effective internal controls and procedures intended to
deter, detect, and punish corrupt practices.
The most important institutional reform that the Bank is currently
undertaking is to establish a Anti-Corruption and Fraud Division
alongside the existing Internal Audit Division, both of which will
report to a new Office of the Auditor General. The Anti-Corruption and
Fraud Division will be the focal point for investigating allegations of
fraud and corruption with respect to the Bank's operations and staff. A
high-level Oversight Committee on Corruption and Fraud will provide
oversight on policy compliance. The proposal to establish the new
institutional structures is working its way through the Board's audit
committee, and we are hopeful that the Board will approve it shortly
after the Annual Meetings in May. My office is focusing on this
initiative as its current number one priority.
Once it is established, the Anti-Corruption and Fraud Investigative
Division will also manage the implementation of a formal whistleblower
protection program designed to protect the identity of those disclosing
information or reporting allegations concerning fraud or corruption.
In the past year, the Bank has developed a Code of Conduct for Bank
staff, Guidelines for Preventing and Combating Corruption and an
Information Disclosure Policy, all designed to increase transparency,
enhance the professionalism of Bank staff, and standardize the Bank's
interactions with its clients.
The Code of Conduct for staff is a statement of basic
ethical principles to guide Bank staff in the fulfillment of
their duties. Failure to abide by the Code of Conduct results
in sanctions, as specified in the Bank Staff Rules. As with any
large organization, not all staff abide by the rules and laws.
In recent years, the Bank has disciplined, and in some
instances terminated the services of staff after determining
their involvement in corrupt or unethical practices related to
Bank operations.
At the insistence of the United States, we are in the
process of reviewing the Financial Disclosure policies of the
Bank for its staff and management so that we can improve
information collection and dissemination in order to avoid any
conflicts of interest with Bank operations. Currently, all
staff are required to submit a disclosure to Bank management
and update it annually.
Building on the Bank's good governance policy, the
Guidelines for Preventing and Combating Corruption outline
where and how corruption and fraud may occur in the Bank's
operations, modalities for its prevention, and procedures for
Bank staff to follow in responding to incidents of corruption
and fraud in Bank operations. One of the key features of the
Guidelines is the Bank's zero tolerance position with regard to
fraud and corruption. In line with the Code of Conduct for
staff, the zero tolerance position means that staff proven to
have engaged in corrupt or fraudulent practice will be
disciplined in accordance with Bank Staff Rules.
With regard to transparency, the Board of Directors, with
our strong support, approved a new Information Disclosure
Policy last year, which will significantly enhance the
transparency of the Bank's operations by making a wide range of
Bank documents publicly available. As the U.S. Executive
Director, I have been the strongest advocate in the Board for
greater transparency, and will continue to lead this effort in
order to achieve the goals specified in section 581 of Division
D of the FY 2004 Consolidated Appropriations Act.
At our urging, the Bank maintains strict recruitment
procedures and is strengthening its capacity to combat
corruption and promote good governance through staff training
programs. In addition, the Bank continues to take steps to
build its institutional capacity.
In the area of recruitment, the Bank's procedures explicitly
forbid nepotism or favoritism on the basis of nationality or
group identification. Staff members who fail to comply with
these rules are subject to reprimand, dismissal, or legal
sanction.
Internal staff training has been organized to promote the
Bank's good governance policy and to familiarize operations
staff with new diagnostic assessments such as the Country
Governance Profile and new instruments such as Policy-Based
Loans for Governance. Enforcement of the Bank's zero tolerance
position will require strengthening the Bank staff's capacity
to deter, investigate, and penalize corrupt activities. The
Bank intends to increase the number of staff experts assigned
to anticorruption activities, and enhance the technical skills
of Bank staff through specialized training in areas such as
forensic auditing, detection of money laundering, and financial
investigation techniques. For example, in 2004 the U.S.
Treasury Office of Technical Assistance conducted a training
seminar for Bank staff on antimoney laundering and intends to
continue its cooperation with the Bank in this field. Last year
the Bank also conducted a very well attended two-day training
workshop for Bank staff on the implementation of Country
Governance Profiles and Policy-based Loans for Governance. In
the Board of Directors and in dialog with Bank management, I
will continue to stress the need for strengthening the capacity
of staff working on governance and anticorruption activities in
the Bank.
PROJECT-LEVEL EFFORTS
The Bank has instituted a range of controls to help mitigate the
risk of corruption in its projects. These controls include auditing,
supervision, the use of special accounts for higher risk lending, due
diligence on private sector borrowers and cofinancers, and strict
procurement procedures. The Bank requires annual audits of its projects
and enforces contractual audit provisions in its loan and grant
agreements. Through active participation in the discussions of the
Bank's Audit and Finance Committee, my office reviews internal audit
reports of Bank projects.
The Bank's Internal Audit Department safeguards the Bank's assets
by certifying compliance with its policies and ensuring that auditing
standards are met. A critical function of the Internal Audit Department
is to assess the strength of internal controls and institutional
arrangements in regional member countries and to assist national audit
institutions with outsourcing audit functions until adequate national
audit capacity can be developed. The Bank's Operations and Internal
Audit departments evaluate the quality of independent audits of Bank
projects, and implement the Bank's audit policy, which may include
suspension of disbursements to some projects. Two projects (in Mali and
Kenya) were investigated for fraud and corruption in 2004 and one (in
Mozambique) is currently being investigated for fraud and corruption.
Last year, the Bank terminated its involvement in four projects because
of concerns about corruption. So far this year, the Bank has canceled
one project due to similar concerns. Preliminary assessments have
revealed some improvements in the submission of annual audit reports of
Bank-funded projects, but the Bank needs to remain vigilant in its
oversight to ensure project audit reports are completed consistently
across projects in a timely manner.
Supervision missions focus on good financial management of projects
as a way to eliminate opportunities for corruption. When compliance
with financial management standards is lacking, the Bank proposes
corrective measures and may impose sanctions. The Bank's ability to
conduct supervision missions was significantly impaired by the
temporary relocation of the Bank's operations to Tunis in 2003. The
Bank is now fully operational at the temporary relocation site, and
more frequent supervision missions have resumed. This year, in response
to efforts by my office to implement the provision of section 581 of
Division D of the FY 2004 Consolidated Appropriations Act pertaining to
internal controls, the Operations Evaluation Department of the Bank
will undertake an independent evaluation of the Bank's supervision and
monitoring systems.
The Bank's procurement regulations were last modified in January
2000, to be more explicit in their treatment of fraud and corruption.
As a result, the Bank will now cancel at least part, if not all, of a
loan or grant for a project if the procurement process for the project
was tainted by acts of fraud or corruption. Firms proven to engage in
corrupt or fraudulent practices can be declared ineligible from
participating in future Bank-funded activities indefinitely or for a
period determined by the Bank. Over the past few years, about 30
tenders have been cancelled--4 last year alone and 1 so far this year.
The Bank maintains a list of sanctioned or debarred firms and the
United States believes it should publish this list. The Bank also
shares information on sanctioned firms regularly with other MDBs
through a network of senior officials responsible for procurement and
anticorruption. The Bank is currently revising its procurement policies
to bring them into line with the MDB harmonization agenda. The revised
policies should be presented to the Board of Directors by the end of
the year.
The Bank's Procurement Review Committee of senior managers and
operations directors appointed by the President receives and
investigates complaints from bidders who are not satisfied that their
bid was handled in accordance with established Bank procurement rules.
The committee is an independent body whose decisions, which can include
cancellation of a procurement process, are final and binding.
To help improve corporate governance, particularly in private
sector projects, the Bank has prepared a Corporate Governance Strategy,
which will be discussed by the Board in the coming months. The Bank
conducts due diligence assessments on potential borrowers to ensure
full compliance with corporate governance principles for Bank-supported
projects. The Bank also provides direct assistance to private sector
investors to endorse and implement corporate governance principles as a
precondition for Bank financing.
Within the overall framework of promoting good governance, the
Board of Directors has approved the establishment of an Inspection
Function, a combined compliance and problem-solving mechanism. Prior to
its approval, the proposal was posted on the Bank's Web site for
several months to invite comments from interested stakeholders.
Recruitment for the Director of the Compliance Review and Mediation
Unit is underway, and the Bank expects the mechanism will become fully
operational by the end of the year. My Office has been at the forefront
of the effort to establish this inspection mechanism at the AfDB, which
will reinforce the Bank's accountability for the impact of its project
operations.
COUNTRY-LEVEL EFFORTS
The Bank provides financial and technical assistance to regional
member countries in their fight against corruption. Requests for
assistance are determined on a case-by-case basis and subject to a
clear and credible demonstration of commitment to principles of good
governance and combating corruption.
Since 2001, the Bank has approved more than $1.5 billion in loans
and grants for governance-related activities in over 35 regional member
countries. Following the successful completion of the Tenth
Replenishment of the African Development Fund (ADF), the concessional
window of the Bank Group, in December 2004, we expect this trend to
continue.
Good governance is a key factor in determining country allocations
of ADF resources during a given replenishment cycle. The Country
Performance and Institutional Assessment (CPIA) is based on formulas
that place nearly 60 percent effective weight upon the quality of
governance in ADF-eligible countries. With the prospect of greater
allocation of concessional resources, countries are encouraged and
rewarded for making progress toward good governance.
Policy-based loans for governance (PBLGs) are an instrument that
the Bank will use to support institutional reforms to consolidate
macroeconomic stability and a favorable environment for sustained
growth in its regional member countries. PBLGs will be used to support
governance-related reforms in areas such as judicial and legal
frameworks, trade policy, public finance, fiscal and monetary policy,
public sector management, financial sector policy, and competition
policy. The United States provided substantial input into the PBLG
Guidelines, approved in 2004, to ensure that this instrument would be
used only in appropriate policy environments. Since the approval of the
guidelines by the Board, two PBLGs, for Malawi and Tanzania, have been
approved. My Office will continue to monitor the Bank's use of this
instrument very closely.
The Bank collaborates closely with the World Bank in conducting
various diagnostic assessments of public financial management systems
and recommends actions for implementation. To date, this collaboration
has produced 12 Country Financial Accountability Assessments (CFAAs),
in Burkina Faso, Chad, Gambia, Malawi, Mali, Madagascar, Mauritania,
Senegal, Tanzania, Uganda, Togo, and Zanzibar. Since 2002, the Bank has
also collaborated with the World Bank to carry out six Country
Procurement Assessment Reviews (CPARs), in Benin, Senegal, Cote
d'Ivoire, Angola, Togo, and Guinea. It is my hope that these
collaborations will continue and strengthen in the years to come so
that the two institutions can leverage off of each other's comparative
advantages.
The Bank also conducts Financial Management Reviews of its
projects. The Financial Management Review is an AfDB innovation
designed to improve the financial management and audit functions of
specific projects. The Bank has successfully carried out Financial
Management Reviews in five countries (Cameroon, Madagascar, Malawi,
Uganda, and Zambia), covering four key sectors (agriculture, transport,
public utilities, and the social sector).
Another important and innovative diagnostic tool, employed by the
Bank since 2002, is the Country Governance Profile. Country Governance
Profiles are used to identify key governance issues in regional member
countries, including corruption, and to develop a common understanding
of the strengths and weaknesses of country governance arrangements.
These profiles allow the Bank to better assess risks to Bank funds and
to help countries develop governance reform and capacity building
programs. The Country Governance Profile is the key instrument for
mainstreaming governance priorities into Bank operations. The new cycle
of Country Strategy Papers for 2005-2007 will address governance issues
based on the governance profiles. To date 14 Country Governance
Profiles have been completed (in Nigeria, Ghana, Mauritania, Malawi,
Zambia, Chad, Cameroon, Benin, Kenya, Tanzania, Burkina-Faso,
Swaziland, Senegal, and Gabon), and an additional 5 Country Governance
Profiles are scheduled for completion in 2005.
Institutional capacity in regional member countries is critical for
effectively combating corruption and complying with the anticorruption
safeguards in loan agreements with the Bank. For countries ranked low
in the CPIA governance factors and where the risk for corruption is
deemed high, the Bank will undertake more rigorous assessments through
Country Governance Profiles, CFAAs, and CPARs, and propose corrective
measures. Government officials from regional member countries will
benefit from selective and specialized governance- and corruption-
related training organized through the Joint Africa Institute, housed
at the AfDB, in partnership with the World Bank and International
Monetary Fund. Such training will be country specific and based on
areas of weakness identified through assessments.
PARTNERSHIPS
The AfDB is actively engaged in partnerships with a number of
institutions, to combat corruption on the continent. The Bank is an
active member of the MDB Working Groups on Financial Management,
Procurement, and Environment. The Bank is also collaborating on good
governance promotion activities with the Economic Commission for
Africa, and has conducted a series of workshops on developing national
strategies and action plans for combating corruption in collaboration
with Transparency International (TI), the World Bank Institute, and the
Global Coalition for Africa. In 2005 the Bank hosted delegations from
two specialized agencies mandated to combat corruption: The United
Nations Office on Drug Control (UNODC)--the arm of the United Nations
responsible for fighting corruption, and TI. The purpose of these
visits was to explore possible modalities for cooperation with the Bank
on combating corruption at the country level. Through ongoing
discussions with such institutions, the Bank will endeavor to develop
joint strategies and programs to complement its anticorruption efforts.
The Bank was the lead institution involved in developing the
standards and benchmarks for banking, financial regulations, and
corporate governance for the New Partnership for Africa's Development
(NEPAD) initiative. It is providing technical assistance to the African
Peer Review Mechanism (PRM) component of the NEPAD and will also
participate in the first PRM scheduled for Ghana this year. The AfDB
was also a key partner of the African Union in finalizing the Africa
Convention on Combating Corruption. More specifically, Bank sector
experts are participating in the peer review exercise in the areas of
economic and political governance, banking regulations and standards,
and corporate governance.
Responding to the call to tighten antimoney laundering controls
after September 11, 2001, the Bank is actively supporting existing
institutions such as the Financial Action Task Force (FATF), African
regional FATF-style bodies, and specialized subregional antimoney
laundering taskforces. The Bank cross references its development
partners with the United Nations list of entities designated as
terrorist organizations, and we are working with Bank management to use
Treasury's Office of Foreign Assets Control (OFAC) list so that no Bank
funds are abused by terrorists or money launderers. There has been, and
will continue to be, very close cooperation between the Bank and the
U.S. Treasury on finding solutions to end financial abuse. In addition,
an internal Bank working group is exploring how the Bank can work with
member countries to develop appropriate legal and regulatory systems
and regimes to address the problem of financial abuse.
The Bank's participation as an observer in FATF meetings has
allowed it to get acquainted with FATF rules, and to present updates on
the Bank's efforts on a number of issues concerning financial controls
in Africa. The Bank is also working with a number of African financial
sector regulatory boards to inform its AML/CTF strategy, now under
preparation. The Bank has secured financing from France to fund the
development of this strategy on AML/CTF, which will include Guidelines
and a Plan of Action and is expected to be completed this year. The
Bank is also working to build a network with regulators, experts,
bilateral partners, and IMF and World Bank specialists to strengthen
its institutional capacity in the AML/CTF field.
CONCLUSION
Despite these significant and ongoing efforts to combat corruption
and improve governance at the institutional, project, and country
levels, the African Development Bank itself recognizes that additional
efforts are required, particularly with regard to implementation and
enforcement of existing policies and procedures, and strengthening the
Bank's internal capacity to fight corruption. As the Bank works to
build and strengthen the appropriate skills mix to carry out its good
governance promotion initiatives, I will continue to press the Bank to
review periodically its organizational arrangements, procedures, and
policies to ensure an appropriate enabling environment and strategy for
combating corruption.
The Office of the U.S. Executive Director will continue to
challenge and support the Bank to further strengthen its anticorruption
efforts, enhance the transparency of its operations, and realize its
objective of becoming the lead institution on good governance in
Africa.
Thank you.
______
Prepared Statement of Elder Akie Hart, the National President of the
Mangrove Forest Conservation Society of Nigeria
The highly respected and distinguished chairman, Senate Foreign
Relations Committee of the United States of America, other
distinguished Senators, and NGO Committees of the United States, here
present.
We, the Civil Society Community of Nigeria (CSCN) hereby commend
the United States Senate for its active oversight role of multilateral
development Bank in the collective mission of fighting poverty and to
improve the living conditions of the developing countries.
The issue of ``Combating Multi-Lateral Development Bank
Corruption,'' in Africa, Asia, and European Regional Development Bank,
today is another milestone of the democratic dividends of America to
the developing world.
The African Development Bank is one of the sponsors of the 4th and
5th train of the NLNG (Nigeria Liquefied Natural Gas) project called
NLNG PLUS, and this project as well as previously related trains 1, 2,
and 3 have impacted negatively on the physical and human environment,
development, and progress of Bonny Island, Rumuji, Soku, Ogba, Ayambo,
Oguede, Peterside, Iwoma, Kalaibiama, etc.
It is an accepted practice for operating companies to set aside 2.5
percent to 3 percent of their total project costs for community
development but in the case of Bonny, the whole companies budget, NLNG
and others is not up to 1 percent and this has led to several reactions
that has resulted to the death of those Bonny people, protesting for
their rights.
The last communal uprising led to the intervention of Rivers State
and Federal Government, to bring about peace in the areas. It is
imperative to the State that before a project like NLNG is to be
executed, the Environmental Impact Assessment (EIA) must be conducted
to evaluate the effect of the project on the environment, but in this
regard, nothing was done, which is a negation of the rule.
The Mangrove Forest Conservation Society of Nigeria (MFCSN)
protested loudly, and a haphazard attempt was done. As at today, what
NLNG/AFDB have is a conditional permit, with a list of several
conditions that must be met before their conditional approval will be
confirmed and certificate issued. AFDB was contacted earlier enough by
MFCSN on 31/10/02 and 14/11/03 respectively to carry out the standards/
compliance to National and International Environmental Conditions: In
their response, we observed that there was no transparency. This is
because a genuine public hearing ought to have been done in Bonny
Island--host community of NLNG or any of the project communities. We
feel the host communities are the ``proximate sufferers'' and cannot
afford N50,000 to N100,000 to go to Abuja for such public hearing. This
means that the few members of the host communities who went to Abuja
were handpicked, friends/stooges of NLNG, the common people were not
there and not even informed, too.
It is also worthy of note that NLNG/AFDB, acknowledged the fact
that the project did not meet the due diligence standard of AFDB/World
Bank, as their consultant of that of NCM--report bank said so in their
report. Surprisingly, AFDB granted the loan without addressing the
issues raised which we believe was not ordinary in view of the millions
of dollars paid to consultants/company officials by TSKJ--the
consortium handling the project.
Today, Bonny, Rumuji, Soku, etc., bear the scars of the AFDB
corrupt influence of unfulfilled promises. It is also painful to state
here that Bonny community was not the only community that lost lives to
such wicked marginalization and repeated brutality, oppression, and
suppression of the people by the police, sent by Government on the
request of NLNG.
Bin Tolo in Malaysia cannot be compared to Ilioma in Bonny where
NLNG has altered its geographical location with AFDB funding, to the
extent that access to the community is difficult due to pipe lines
crisscrossing and pipe laying havocs.
The impacts of NLNG/AFDB's funded activities in Bonny
1. Destruction of forestry;
2. Housing crisis due to unplanned population explosion;
3. Reduction of fisheries on the sea;
4. Deterioration of road due to heavy-duty vehicles and
unanticipated increased usage;
5. Educational pressure, in terms of more students for schools and
no new schools, no teachers, as the few prefer the casual work at the
sites;
6. Increased traffic accident/crime;
7. Inflation and loss of income;
8. Overstretching of public utilities like water, electricity;
9. Transportation hardship--more people using fewer roads.
AFDB in other parts of Nigeria
From the interactions of the NGOs/CBOs movement, we discovered that
AFDB-funded projects are full of deceit and corruption, such as the
Bonny project, the Edo state water project, etc., funded by AFDB to the
tune of $300 million led to the importation of rusty and obsolete pipes
now lying waste with no water. While Edo/Delta States are now saddled
with the deduction of several millions as interest payments, not even
the principal. This has led to deepening poverty, money that could have
been used for other developmental projects, is now used to pay fake
debts and Edo cannot even pay salaries of its workforce due to these
dubious debts.
Edo/Delta State landed in this trouble because AFDB did not follow
its internal control in granting such loans. Its officials were
corrupted to look the other way and the Vice President of AFDB
confirmed that they (AFDB) did not do what it is supposed to do which
has confirmed that the process was irregular.
African issue
On further investigation, we discovered that the same corrupt
influences occurred in AFDB-funded projects in Lesotho and Uganda which
means that urgent and radical solution is needed, if AFDB activities
must impact positively on the people and we see U.S.A.
Commendation/recommendation
1. We commend the U.S.A. Senate for its interest in the true
development of Africa through its support to AFDB and its further
interest to see that intended goals are met.
2. We appreciate the Anti-Corruption Crusade of His Excellency, the
President of the Federal Republic of Nigeria, Chief Olusegun Obasanjo.
He needs international support in his antibribery crusade. His
Excellency is tackling both the giver and receiver at the domestic
level. We, therefore, suggest that the international community should
be ready to tackle the Multi-National Companies like Halliburton that
involved in NLNG/AFDB bribe/stealing of radio-active materials in
Nigeria that led to its ban and it did the same in Iraq, too. The
question is that what is the position of the American Congress to curb
this menace, especially as this is an American Company. The Secretary
of U.S.A. blew the lid off the bribe.
3. Transparency International should also beam its categorization
of not only corrupt countries but also the countries of origin of bribe
paying Multi-National companies, so that we would know their corruption
index, too.
4. It is very important for American Government to play more roles
in AFDB's activity. It should go beyond broad policymaking to active
participation as one of its financiers as the social and economic
impacts of its operations are impoverishing the people, leads to human
rights abuses and giving loans not used for productive activities.
Summary
AFDB activities have impacted negatively on Africans, instead of
the positive and purposeful ways it was designed, because of its
involvement in corruption.
Therefore, current strategies to curb this ugly trend are welcomed.
It should be strengthened and new policies made to eliminate it with
U.S.A. playing more active role that is beyond policymaking.
The U.S.A. should also investigate and solve the issue of bribe--
giving in the form of P.R. or Lobby by Western Multi-National
Companies.
______
Minutes of the 659th Session of the Senate of the Italian Republic, XIV
Legislature, September 28, 2004
I hope the Assembly will understand and appreciate this commitment,
approve it and sustain it with actions suitable to guide it and promote
it.
PRESIDENT. I postpone continuation of the debate on the above-
mentioned Bill to another session.
Continuation of the debate on the following Bill: (2667) Italy's
financial contribution to replenish the resources of
international funds
PRESIDENT. The item on the agenda is the continuation of the debate
on Bill No. 2667.
I remind everyone that the general debate on the topic began in the
September 23 morning session.
Senator Martone is scheduled to speak. During his remarks he will
also address agenda item G1.
Senator Martone has the floor.
MARTONE (Green Federation/The Union). Mr. President, honorable
colleagues, Mr. Under Secretary, the acronyms that fill the Bill being
debated distract us from some of the great challenges that the
international community has been facing for decades: from the fight
against poverty to a sustainable development, from the reduction of the
foreign debt to the fight against hunger and underdevelopment in
Africa.
The GEF [Global Environmental Facility], an organization
established before the 1992 Rio de Janeiro Conference by the UNEP, the
UNDP, and the World Bank for the purpose of protecting the world's
public resources (water, biological diversity, climate, the ozone
layer), is a case in point. Its efforts, however, are often jeopardized
and counteracted by destructive development projects financed both by
public funds and private banks, including the World Bank. Another case
in point is the Trust Fund to support the HIPC initiative, whose launch
was unduly delayed, and which is struggling to effectively attack the
foreign debt problem of the developing countries, cornered as it is
between the lack of political will on the part of the creditor
governments, and access criteria that are based primarily on
macroeconomic concerns rather than on those that promote human
development.
In these remarks, however, I want to focus on the IDA
(International Development Association), an agency of the World Bank
Group that is dedicated primarily to lending to developing countries--
to the poorest countries among them.
The most recent negotiations for the thirteenth IDA replenishment,
which ended in 2002 and which is under discussion today, centered
around several crucial issues, the most important of which referred to
the percentage of IDA funds to be used as donations and the percentage
to be used as repayable loans, albeit at zero percent interest.
The issue at hand, ultimately, is whether we should increase the
yearly percentage of donations, which is now 34 percent of IDA's annual
budget, to 50 percent or more. While such an increase would undoubtedly
entail, on the one hand, a lowering of the debt owed by the
impoverished countries over the long term, it would, on the other hand,
gradually deprive the World Bank of financial revenue resulting from
repayment of the loans.
This American strategy (the United States is a leading supporter of
this shift from loans to donations) is being met with opposition, now
as in the past, by the European countries because it masks a desire to
see the IDA's budget gradually shrivel up, whereupon the aid from the
World Bank would be progressively and easily replaced by bilateral aid
that would be more open to political control and influence. Such a
change would in effect bypass the governments. It would constitute, by
and large, a privileged source of financing for the leading private
United States charity organizations that are often willing partners in
the U.S. Government's foreign policy, and, as such, apply selection
criteria driven exclusively by political and strategic convenience.
The ``grants versus loans'' issue is also being debated at the non-
governmental level. In fact, many observers believe that the gradual
replacement of loans with donations would make the IDA simply another
agency in competition with the UNDP, a United Nations specialized
agency that already distributes donations, in effect making the latter
superfluous.
Hence there is a contradiction in mandates, in the roles assigned
to the World Bank on the one hand, and to some specialized United
Nations agencies on the other. This contradiction is currently
jeopardizing many of the United Nations efforts to fight poverty and to
promote sustainable development.
The 2002 Monterrey Conference on ``Financing for Development''
tried to address this contradiction. One of its recommendations was to
strengthen the role of the ECOSOC (United Nations Economic and Social
Council). However, the Conference took no position on what we see as
the fundamental factor (especially today, with respect to the
possibility of reforming the United Nations), i.e., the proposal, put
forward by many parties, of creating an Economic and Social Security
Council to address and resolve the root causes of these contradictions.
Other issues surrounding the IDA are also under discussion. One
concerns specifically the basic philosophy and the intervention
criteria that underlie aid for development and international
cooperation. Among these issues, I would like to recall the discussion
being held within the IDA about the role of the private sector and the
possible use of these public funds (which are earmarked to fight
poverty), to expand the private sector's direct foreign investments or
to expand privatization programs that in fact would entail, among other
implications, the introduction of fees for the use of basic social
services.
The effectiveness of the private sector is one of several crucial
issues being discussed in the debate over strategies to fight poverty.
However, this discussion is based on purely ideological assumptions
that we believe could subvert the very meaning of international
cooperation, for example, through the introduction of user fees.
We believe that an approach that seeks to attach a monetary value
to the fundamental rights of citizens, such as the right of access to
welfare, to basic services such as health and education--which, quite
to the contrary, should be removed from the marketplace and guaranteed
public access--is unacceptable.
The second crucial issue in the fight against poverty, and
therefore also in the context of IDA discussions, relates to the
principle of aid selectivity. This concept has been defined by World
Bank economists. According to this definition, the Bank's meager
resources should increasingly be given more and more to ``best
performer'' countries, i.e., to those governments that decide to open
up their economy, removing barriers to private foreign capital and
making the free market and privatization cornerstones of their
development strategies.
We believe that this possibility constitutes a serious attack on
the sovereign rights of governments, on the very principle of economic
sovereignty of each nation, which is enshrined in the United Nations
Charter. Aid selectivity is one of the most devious tools for creating
a global market and for imposing in an unchecked, undemocratic way, the
Washington Consensus.
However, today's debate also allows us the opportunity of
discussing more contingent issues.
In the next few days--tomorrow or the day after--the World Bank and
the International Monetary Fund will hold their annual meetings in
Washington. Our government is under pressure to pass the finance bill
and go to Washington with our house in order.
I wish to remind my esteemed colleagues that this financing also is
extremely late with respect to the original schedule. In any case, the
fundamental issues that will be debated at the sixtieth annual meeting
of the World Bank and the International Monetary Fund revolve, first of
all, around the need to inject innovative and radical ideas into
possible solutions for the foreign debt problem of developing
countries.
Two important proposals are being put forward on this issue. The
U.S. Government wants to write off 100 percent of the multilateral
debts held by the World Bank and the International Monetary Fund. The
British Government also has a similar proposal for next year's G-8
Summit.
Apart from the two above proposals, we believe that there is still
an urgent need to craft truly participatory processes, whereby the
debtor governments may participate in the same degree as the creditor
governments, and thus moving beyond the confines of exclusive bodies,
such as the London and Paris Clubs. We also envision the participation
of the civil society groups and communities that suffer the most from
the burden of foreign debt, through the use of international
arbitration rules. Governments and community action groups around the
world--and even the United Nations--have already put forward such ideas
with regard to Argentina.
On this issue, we believe that the last G-8 Summit meeting held in
Sea Island offered some encouragement, since it voted to continue
support of the HIPC initiative (criticized by many observers as being
``too little, too late'') extending it for two additional years.
However, it did not review the access guidelines, hence preserving an
exclusively economist-oriented approach instead, of a development-
oriented approach. It also failed to recognize that in its eight years
of existence, the HIPC has yielded only partial results, having
cancelled only one third of the foreign debt of the poorest countries--
countries that today still groan under an overall debt of US$90
billion.
This is the fundamental contradiction: the G-8 countries did not
hesitate to discuss the need to completely cancel Iraq's debt, using
the foreign debt issue simply as another tool of foreign policy, in a
purely discretionary and opportunistic manner.
Even James Wolfensohn, the President of the World Bank, in a recent
interview with the Financial Times, denounced this inconsistency: more
and more funds are being set aside for war and weapons, and the
attention that the international community concentrates on the fight
against terrorism detracts from the priority of fighting poverty, of
reaching sustainable development and of writing off the debt.
I would like to remind you that according to the most recent UNDP
report on human development, the amount of money that the countries of
the Southern Hemisphere send to our cash registers in the form of debt
repayment, lack of market access, and so on continues to be enormous: a
total of about US$200 billion.
Contrast this to the fact that (as reported by Wolfensohn in the
Financial Times interview), the world spends US$900 billion on weapons
every year, a figure that is 20 times the total amount of public funds
distributed for development purposes world-wide. This inconsistency is
proof that not even the international community was able to profit from
the peace dividend that many of us hoped would be generated from
nuclear disarmament and the end of the rivalry between the Eastern and
Western blocs.
In addition to these commitments that were not followed through,
there are other issues that we believe our government should support,
with greater effort, issues that worry not only us, the community
action groups and NGO's of Italy and the rich countries, but also, and
especially, the civil society organizations that are active in the
developing countries.
Important, worthy initiatives supported even by the World Bank such
as the Commission on Large Dams [sic] or the extractive industries
review have fallen on deaf ears. The moratorium on the construction of
large dams, the principle of prior informed consent, the principle of
compensation to the local communities for the damage sustained as a
result of destructive projects, the moratorium and support of the
extractive industry (which could also help in starting to reduce the
dependence of our development models on oil by promoting renewable,
small-scale energy sources and the principle of sovereignty with
respect to energy), have thus far come to naught. As a matter of fact,
the commitments of the World Bank are in contradiction with its own
recommendations.
For the above reasons, we believe that the Italian Government
should have a more decisive voice on the World Bank Board, to ensure
that these recommendations and requests are finally accepted and
implemented, since they result from a process of bilateral cooperation
that has involved governments, international financial institutions and
civil societies working together to formulate suggestions.
Finally, I would like to add that the World Bank Group has a
leadership role in strengthening approaches and methods with regard to
development aid. Accordingly, the correct application of internal
safeguard standards in the assessment of social and environmental
impact, public consultation, participation, access to information, and
third-party objective evaluation of its projects and plans constitute
some of the best guarantees for an independent check on the work
performed by these entities and on the use of the public funds that
Italy gives to them (in the case of IDA, every three years).
Notwithstanding the above, and notwithstanding the encouraging
position that President Wolfensohn took early in his term in office, we
continue to watch the World Bank and its management as they endeavor to
weaken and loosen the above-mentioned safeguard measures, by granting
to the governments of the countries that receive the loans, greater
discretionary power in defining the social and environmental standards
by which they must abide.
In our opinion, this could cause further serious damage to the
quality and effectiveness of the actions of the World Bank and the use
of public funds. Damage would also be inflicted on the functionality
and mandate of independent evaluation mechanisms, which Italy supports
as well, such as the Inspection Panel.
The effects of this change in direction--which is being discussed
right now by the International Finance Corporation (the World Bank
agency in charge of the private sector, among other duties), could be
very serious indeed. On this matter, I would like to mention my
personal experience. A few months ago I attended the Americas Social
Forum in Quito, Ecuador. On that occasion, a sort of ``people's court''
on the World Bank and on food sovereignty was set up, with the
participation of campesino leaders, union leaders and activists from
Latin America who work in the area of food sovereignty, the right to
water and the right to food.
According to the above testimonies and in keeping with factual
evidence, in Latin America the World Bank has a policy of supporting
the expansion of intensive, single-crop farming and of GMOs
(genetically modified organisms) as well as the privatization of water.
This is an encroachment upon a country's sovereignty in terms of food
supply; it also creates a condition whereby our countries and the aid
agencies begin to build a real ecological and social debt toward the
indebted countries (who in this case become creditors).
Last but not least, I want to call your attention to the
investigation that is being conducted by the United States Senate
Committee on Foreign Relations about reports of corrupt practices with
respect to World Bank development projects, some of which, such as the
Yacyreta Hydroelectric Project (between Argentina and Paraguay) and the
Lesotho Highlands Water Project (in Lesotho) are also using Italian
companies and Italian public funds through bilateral cooperation and
export credit mechanisms (SACE--Society for Alternative Culture and
Education, an NGO).
To give you an idea of the magnitude of the problem, I wish to
remind you that detailed, independent and reliable analyses that are
included in internal World Bank documents, show that in the case of
Indonesia, at least US$8 billion of World Bank funds were allegedly
lost due to the corruption of those governments and even of World Bank
officials.
In addition, according to a report by Richard Lugar, Chairman of
the U.S. Senate Committee on Foreign Relations and a Republican
(therefore someone who undoubtedly does not have great support for the
views of my political group, but whose own views must be mentioned, in
deference to fair political reporting), since 1946, because of
corruption, at least US$130 billion in World Bank funds were diverted
from their institutional targets.
We believe that this sort of situation can cause great harm to the
very institutional mandate of the World Bank, its credibility, and its
effectiveness, further increasing the foreign debt of the developing
countries.
Therefore, it is imperative that the Italian Government commit
itself to support reform initiatives to make these institutions more
accountable for their activities and to tackle the main cause of
corruption, strengthening the oversight and transparency mechanisms in
contract-awarding procedures and public access to information, and
proposing, among other solutions, the creation of an independent
oversight body to serve as watchdog and prevent the embezzlement of
funds earmarked to fight poverty.
Given the above considerations, it is compellingly clear that the
Parliaments themselves must exercise more control. We are sorry to see
that this room is almost empty precisely when we are discussing vast
amounts, such as the =500 million or more that will be earmarked for
this institution, which, as I have tried to explain, is often all too
happy to act in ways that contradict its very reason for being, outside
of any parliamentary oversight.
We therefore believe it is important that we continue to insist, in
all venues, that these entities become more transparent. The agenda
item and the amendment that I submitted with some of my colleagues
address this issue, and I trust that the government and the sponsor
will accept them.
In an old confidential World Bank document that was leaked and
created a lot of scandal (starting with the fact that it was leaked),
some evaluators of the World Bank's activities stated that
institutional loss of memory goes hand in hand with institutional
optimism.
What they meant was that the World Bank is often all too willing to
forget the damage it inflicts, while continuing to offer an optimistic
view of its work. As far as institutional policy is concerned, the
World Bank tries to give more importance to the amount of funds it
disburses rather than the quality of the disbursements, since it is
incapable of learning from its past mistakes, mistakes that are
highlighted in its own original documents.
I believe that this Parliament, together with the civil society and
community action groups, can and must treat this lack of memory not
with a homeopathic cure, but with a radical treatment, by better
monitoring the political orientation of the World Bank's activities,
thus contributing, albeit modestly, to a renewed focus on politics and
democracy rather than on market and laissez-faire imperatives.
We are convinced that an ideology centered on neo-liberalism and
the Washington Consensus has already shown so many limitations and
incompatibilities. So much so, in fact, that our first imperative is
now to rethink, immediately and radically, the very reason for being of
institutions such as the World Bank and the International Monetary
Fund--institutions that have continued to champion a laissez-faire
ideology and have relentlessly carried that ideology out.
PRESIDENT. The general debate is ended. The sponsor has the floor.
CASTAGNETTI, acting sponsor. Mr. President, I waive my right to
speak.
PRESIDENT. The government representative has the floor.
MAGRI, State Under Secretary for Economy and Finance. Mr.
President, as mentioned, Bill No. 2667 authorizes Italy's participation
in replenishing the resources of several International Funds such as
IDA-XIII; the Special Fund of the Caribbean Development Bank-V; GEF-
III; the African Development Fund-IX; IFAD-VI and the replenishment of
the HIPC Trust Fund. The Italian Government took on these commitments
in 2001-2002.
The Senate Bill No. 2667 was duly approved by the Foreign Relations
Committee on March 3rd, and was also approved by the Budget Committee.
It is important that Parliament approve this bill before the end of
the year in order not to lose the corresponding financial allocation
for the 2004-2006 three-year period. Failure to approve this bill would
also have a heavy negative impact upon Italy's image in the context of
international financial relations on public aid to development, since
it would postpone indefinitely the payments that our country owes, thus
increasing the already long delay that has accumulated up to now.
Unfortunately, we agree with Senator Martone that these all-
important measures are not receiving the attention they deserve.
To give you an example, I briefly recall that the International
Development Association, part of the World Bank Group, is the leading
source of financing for the 79 poorest countries of the world, those
countries whose per capita income, in the year 2000, was at or below
US$885.
The Special Fund of the Caribbean Development Bank is the fund-
disbursing arm of the Bank--Italy has been a member since 1988. Said
agency grants low-interest loans to countries in the Caribbean area. It
is financed with contributions from its member countries and its
leading goal is to reduce poverty and increase social development.
The Global Environment Facility is a multilateral fund managed by
the World Bank and composed of 173 member countries, to which 32 donor
countries contribute financially. Its projects, approved by a specially
appointed Committee, are carried out by three implementing agencies,
i.e., the World Bank, UNDP and UNEP.
With respect to replenishing the financial resources of the African
Development Fund, I recall that this Fund is the loan-disbursing arm of
the African Development Bank. Through low-interest loans it finances
projects and plans in the poorest countries that would otherwise be
ineligible to receive bank loans.
At present 38 countries, mostly from Sub-Saharan Africa, have
access to the funds of this agency. This area is definitely among the
poorest in the world, hence the African Development Fund represents one
of the most important resources for these countries.
The IFAD, the International Fund for Agricultural Development, is
especially dear to us. With its headquarters in Rome, it was
established in 1978 as the thirteenth specialized United Nations
agency, the result of a decision taken at the 1974 World Food
Conference.
The IFAD's main goal is to supply direct funds and mobilize
additional resources for programs promoting the economic development of
the poorest populations in rural areas, mainly by improving the
productivity of agricultural projects.
Most of IFAD's resources are made available to low-income countries
in the form of loans on highly facilitated terms, such as a 40-year
period for repayment of the principal with a 10-year, no-interest grace
period (but with a yearly service fee of 0.75 percent). Any State that
is a member of the United Nations or a U.N. specialized agency may
participate to the Fund.
The Fund has designed and carried out several different
environmental, socio-economic and cultural projects, financing more
than 600 projects and programs in 114 countries. It has also funded
donations for technical research and assistance amounting to about
US$420 million.
For each dollar invested on behalf of the poorest among the rural
populations, IFAD has mobilized US$2.9 from the donor countries, for a
total of about US$22 billion. Therefore, considering the scarcity of
available resources, resource mobilization has always been one of the
leading roles of this entity.
Finally, there is the replenishment of the HIPC (Heavily Indebted
Poor Countries) Trust Fund. The HIPC initiative was launched in the
fall of 1996 by the World Bank and the International Monetary Fund, at
the urging of the G-7 countries. Its goal is to promote the
cancellation of the debt of the poorest countries that have the largest
debts (mostly Sub-Saharan African countries).
In fact, a large debt is one of the major reasons that stymies the
economic development of these countries. Most of the people who subsist
on less than one dollar a day live in the 40 poorest, most heavily
indebted countries.
In view of the above reasons, Mr. President, I request that this
Bill be approved quickly. The Bill's humanitarian inspiration and,
above all, our government's fulfillment of the obligations it has
committed itself to, merit the most serious attention.
I acknowledge the care and attention that Senator's Martone has
given to working and cooperating with us in the Committee to finalize
this Bill, whose approval is imperative.
PRESIDENT. I adjourn the debate on this Bill to a future session.
announcement about interpellations and interrogations
PRESIDENT. This is a notice that this Office has received one
interpellation and several interrogations; they are published in
Attachment B to the Minutes of today's session.
I remind you that the Senate will reconvene in a public session
today at 4:30 p.m. with the same agenda, as amended.
The session is closed. (11:39 a.m.)
ATTACHMENT A
bill
Italy's financial contribution to replenish the resources of
international funds (2667)
item on the agenda
G1
MARTONE, BRUNALE, SALVI, Paolo BRUTTI, MARINO, FLAMMIA, DI SIENA,
PAGLIARULO, BEDIN, DE ZULUETA, RIPAMONTI, FALOMI, DE PETRIS, CORTIANA,
DONATI, PETERLINI, LONGHI, ZANCAN, TURRONI, MANZIONE, ACCIARINI,
MALABARBA, BOCO, GIARETTA, Franco DANIELI.
The Senate:
Whereas Bill No. 2667 on ``Italy's financial contribution to
replenish the resources of international funds'' includes Italy's
contribution to the thirteenth replenishment of capital of the
International Development Fund (IDA-13), a World Bank agency dedicated
to granting loans to the poorest countries for the purpose of fighting
poverty;
Taking into account the investigation currently under way in the
United States Senate on cases of corruption involving the alleged
participation of World Bank officials in infrastructure projects, some
of which, such as the Yacyreta Hydroelectric Project (Argentina-
Paraguay) and the Lesotho Highlands Water Project (Lesotho) also
involved Italy's contribution, by way of SACE bilateral cooperation and
export credits;
Recalling that according to detailed analyses that are part of
several internal World Bank documents, at least in the case of
Indonesia, at least US$8 billion in World Bank funds were allegedly
lost due to corruption, and that according to a report by Senator
Richard Lugar, Chairman of the U.S. Senate Committee on Foreign
Relations, at least US$130 billion in World Bank funds have been
diverted from their institutional goals as a result of corruption,
starting in 1946;
Underscoring that corruption can cause great harm to the
institutional mandate of the above-mentioned institution, and to its
credibility and effectiveness, thereby increasing the foreign debt
burden of the countries receiving aid, and jeopardizing efforts in the
fight against poverty;
Considering that the World Bank Group plays an active leadership
role in strengthening approaches and methods with regard to promoting
development, and that the correct application of internal safeguard
policies for the assessment of social and environmental impact,
consultation, and evaluation of projects and programs are the best
guarantees for an independent, democratic control of said institutions
and for the highest degree of effectiveness in the work they carry out;
Recognizing the steps forward that the World Bank has taken in this
respect, for example, by setting up independent appeal and verification
mechanisms, such as the Inspection Panel;
Acknowledging however, the World Bank's intention to revise these
safeguard mechanisms to made them more flexible, thereby assigning
greater discretionality to the governments of the loan-recipient
countries in defining social and environmental standards, with serious
prejudice to the quality and effectiveness of the World Bank's
intervention and the use of public funds, such as those that Italy is
earmarking for the replenishment of the IDA,
Commits the government:
(a) To support initiatives to reform the activities of the World
Bank, with a view to remedying the main causes of corruption and to
strengthening transparency and oversight mechanisms for contract
bidding and awarding, as well as public access to information;
(b) To propose the establishment of an independent oversight body
to watch over and prevent the embezzlement of funds earmarked to fight
poverty;
(c) To support the strengthening of independent evaluation and
review structures, such as the Inspection Panel, and to ensure a
greater commitment on the part of World Bank personnel to following and
carrying out existing policies, instead of proposing a greater degree
of discretionality;
(d) To report to Parliament about these initiatives, and about the
position that the Executive Director for Italy at the World Bank has
expressed on these matters.
______
Letter to the Colombo Daily Mirror, January 30, 2003
FOREIGN FUNDED PROJECT RACKETS
I was appalled to read in the newspapers recently that an enormous
amount of money is to be spent on a water resources management project
with a loan obtained from the Asian Development Bank. A breakdown of
the Rs. 1400 million project budget indicates that Rs. 62 million is to
be spent for import of vehicles, Rs. 182 million for purchase of
equipment, Rs. 248 million for employing foreign specialists and Rs.
492 million for training.
I venture to predict that this project will also end up with very
limited benefits to the people of this country but will bestow ample
benefits to the lender, the politicians and state officials associated
with the project just like the fifteen or more similar projects related
to water that were completed during the last two decades with loans
from the World Bank and the Asian Development Bank.
From what I have seen and continue to hear I can predict how a good
portion of these loan funds will be used. As far as vehicles are
concerned, a few luxury jeeps each costing over 30,000 U.S. dollars
will be imported by the project in addition to a large number of
utility vehicles. The Minister, Deputy Ministers and high ranking
officers will requisition the luxury vehicles for their use if they are
even a little superior to what they are using at present, and some of
the less expensive vehicles will be allocated to their Coordinating
Secretaries while the rest will be distributed among the officers
working in the project.
It will be a very common practice for even second level and third
level officers working in the project to travel daily from their homes
in these vehicles as far as from Nittambuwa to Colombo and from
Kurunegala to Anuradhapura in flagrant violation of government
regulations.
Spending Rs. 246 million on foreign specialists will be an
unpardonable waste of public funds, especially in a field such as water
resources management when there is an abundance of local talent. The
engineering faculties of the Sri Lankan universities have produced
thousands of very competent engineers, many of whom have obtained MScs
and PhDs from reputed universities and are presently employed in the
Irrigation Department, Water Resources Board, Mahaweli Authority, the
universities and other local institutions.
There is little justification for employing foreign engineers and
paying them salaries more than fifty times the amounts paid to the
equally qualified and experienced local engineers.
Much of the 492-rupee-million budgeted for training will be wasted.
The Minister and Deputy Minister, Secretary of the Ministry, Head of
the Department, officers of the Treasury and even few of the
Coordinating Secretaries of politicians will undertake study tours in
developed countries.
An ongoing water related project in the state sector can be cited
as an example of such waste. The Minister, Deputy Ministers, Secretary
of the Ministry, Director General and Directors were among those who
visited the Tennesse Valley Authority in the U.S., numerous Australian
water resource institutions and attended international seminars on
river basin management in U.S.A. and Europe utilizing project funds.
Of the above who undertook foreign travel utilizing loan funds, the
Minister and Deputy Ministers do not hold office any more, the
Secretary was transferred to the Ministry of Health, the Director
General moved to the Ministry of Highways and the Director of Technical
Services who went to Europe and several other countries attending
seminars is positioned in the Ministry of Defence.
What then was the gain to the country from these foreign tours?
The tragedy of our country is that hardly any one is bothered about
such waste.
Has the Department of External Resources ever gone back to an
institution which has completed a project, thoroughly evaluated it and
ascertained whether project objectives have been met and monies spent
frugally and justifiably?
If not, what action has been taken against those responsible for
inefficiency and waste? The lukewarm attitude to project supervision by
the Department of External Resources is well known and clearly shown by
the lackadaisical attitude of their staff at quarterly monitoring
meetings of projects. They hardly utter a word, eat the cadju nuts,
drink the tea, collect the honorarium and depart in peace.
The public should be made aware of the craft and the techniques
adopted by the lenders. They plan their activities with meticulous care
and thoroughness seven or eight years in advance. One strategy they
adopt is to identify a small short term project that has great
potential for expansion and lending, and to offer a grant of about half
a million dollars for its implementation. The government gleefully
accepts this and the lenders quickly set up the project, get a
foothold, establish themselves and take the opportunity to prepare a
project expansion proposal for a tidy sum of 20 to 30 million dollars,
but this time as a loan. The locals readily agree to this too. This is
how projects flourish in this country and how the public debt keeps on
increasing.
In my view, most of the World Bank and Asian Development Bank
projects are big rackets with the beneficiaries being the lenders,
politicians and corrupt state officials. Somebody has to take a quick
and hard look at these projects funded by loans and the manner in which
the funds are used.
How long is the country going to allow the importation and use of
luxury jeeps, or costly junkets overseas by politicians and bureaucrats
using taxpayers' money?
These are the parasites of the country sucking the blood of our
people with impunity. I suppose it is only the Prime Minister who can
stop this utter waste of public funds and more importantly, arrest the
spread of this corrupt culture. May the Prime Minister pay attention to
this matter.
R. Dissanayake,
Kotte.
______
Letter to the Colombo Daily Mirror, October 6, 2004
ADB CLARIFIES INACCURACIES ON CORRUPT PROJECT IN LANKA
We refer to the recent article entitled ``U.S. Senate Highlights
Corrupt Projects in Sri Lanka,'' published on October 2, 2004. We have
always regarded the Daily Mirror to be a well-researched and respected
publication. In this case, however, the article contained a number of
inaccuracies which we wish to clarify.
First, the statements attributed to U.S. Senator Richard G. Lugar,
Chairman to the Senate Foreign Relations Committee appear to be those
of Bruce Rich, Senior Attorney with the NGO Environmental Defence who
testified before the committee. As you know, the Senate Foreign
Relations Committee is looking into combating corruption in the
multilateral banks and has been holding a series of meetings of which
the Asian Development Bank, African Development Bank and European Bank
for Reconstruction and Development were the focus of last week.
During the hearing, allegations were made about the Southern
Transport Development Project (STDP) in Sri Lanka, which were not new.
In fact, ADB had addressed many of the issues relating to the project,
in your own publication in May 2002.
On the pre-qualification process highlighted in your article, the
objective was to ensure that sufficient and appropriately experienced
and resourced companies were eligible to tender for the ADB-funded
project, thereby achieving a cost and quality effective outcome.
Three companies were originally pre-qualified, and another--the
fourth company referred to in your article--met the basic financial,
experience, and resource requirements but fell slightly short of a
passing mark when these criteria were combined.
Since the objective of the process was to maximize competition, and
because the deficiency was of a technical nature only, the company was
permitted to participate in the tender process. It is important to note
that the company became eligible simply to tender for the work, in
competition with the originally pre-qualified companies. There was no
question of the company being awarded the contract as a consequence of
this pre-qualification process.
The article also claims that the road is being realigned and that
this realignment will result in an almost 100% increase in cost. This
is not correct. The project will experience some cost overruns as a
consequence of design and other issues but these are not a consequence
of the change of alignment. There has been a general misunderstanding
that the project cost increased from 11-12 billion rupees to 27 billion
rupees because of the alignment changes. However, this is actually a
misleading comparison between the cost of the ADB-financed section and
the total project cost, which includes the section financed by the
Japan Bank for International Cooperation.
Finally, the article states that the company that was awarded the
contract was able to submit a second bid, once the bid prices of the
other companies were known.
This is also not correct. Perhaps the misunderstanding has arisen
because the bidding documents permitted all bidders to submit
alternative technical and financial offers reflecting different design
options.
Only one company, the one eventually awarded the contract, did so
but this alternative bid was submitted concurrently with all other
bids, prior to the date fixed for bid opening, not afterwards. This was
completely in accordance with the bidding documents and procedures
agreed to by the Government and ADB.
Regardless of all the above considerations, given the interest this
issue has generated, ADB will review this process to ensure that it
meets the highest standards of transparency and accountability.
The claim that ADB does not seriously address the issue of
corruption in its projects is without foundation and misleading.
Indeed, ADB has had an anticorruption policy since 1998.
In conclusion, we are concerned that such serious errors of fact
are being reported as accepted truth. We hope that our clarification
reassures you and your readers that the article to which we have
responded contains factually incorrect information or is based on a
misunderstanding of the process that led to the selection of the
contractor.
Alessandro Pio,
Country Director, ADB Sri Lanka,
Resident Mission.
______
Letter to the Colombo Daily Mirror, October 18, 2004
ADB--THE TRUTH BEHIND THE HIGHWAY
In the Daily Mirror of October 6, titled ``ADB Clarifies
Inaccuracies on Corrupt Project in Lanka.'' Mr. Alessandro Pio, Country
Director, ADB, made statements which were not true. All the citizens of
Sri Lanka are clients of the Asian Development Bank and need to be
informed of the truth.
To quote the ADB's own words indeed there are many
``inaccuracies'', but they are in their letter, not in the Daily Mirror
article. We highlight below the most blatant of the inaccuracies in
their letter.
Mr. Pio says, ``There has been a general misunderstanding that the
project cost increased from 11-12 billion rupees to 27 billion rupees,
because of the alignment changes. However this is actually a misleading
comparison between the cost of the ADB financed section and the total
project cost, which includes the section financed by the Japan Bank for
International Cooperation.''
This is totally untrue. Mr. Alessandro Pio is either unaware of
what he is commenting on or he is deliberately misleading the people of
Sri Lanka. The major documents of the project include the cost for the
entire road in the range Rs. 11-15 billion not as Mr. Pio indicates for
only a section of it.
The following are extracted from project documents of the
Government's and those of ADB. The documents show costs as follows:
The Environmental Impact Assessment for this project done in
1999 shows the cost as Rs. 12.8 billion for the Combined Trace
and Rs. 13.3 billion for the Original Trace. (Combined Trace
Rs. 12,765.476 million, Original Trace Rs. 13,285.316 million.)
The Feasibility Study done by WSA Engineering for the
Government and paid for by ADB gives costs for the whole length
from Kottawa to Matara as between Rs. 9.3 billion and Rs. 15.2
billon depending on whether the Expressway will be 2 or 4 lanes
and on the junction type. (Section 3.3 Table ES1 Financial
Construction Costs.)
Asian Development Bank Report and Recommendation of the
President (RRP). This is the document on which Board of the ADB
grants its loan. The report covers the whole Expressway
including the JBIC section and shows the cost of construction
as Rs. 12.1 billion. (Economic Internal Rate of Return
Construction cost--Total of costs to be incurred Rs. 12,123
million.)
With regard to the points allocated at pre-qualification, there has
been more than enough publicity of the computations, all recognise that
the disqualification was not of a technical nature. Kumagai Gumi, has
financial problems, its Bank had to write off an enormous amount of
debt in 1997 and again in 2000. More recently its executives have also
allegedly been involved in bribery, illegal political donations and
money laundering. See Mainichi Newspaper about Imajo in Japan in 2002,
and again in 2003 and Papua New Guinea Post Courier about 1995 to 2000.
So much for Mr. Pio's ``Deficiency of a technical nature.''
Let us now address the issue of alignment changes. Three cases went
to the Supreme Court, where the petitioners from the Bandaragama and
Akmeemana areas specifically complained about alignment changes which
did not comply with the laws of Sri Lanka. The Supreme Court agreed
with them, saying that ``. . . the deviations proposed by the RDA were
alterations requiring CEA approval after compliance with the prescribed
procedures and the principles of natural justice . . .'' This confirms
that the traces described in the EIA were changed and these changes
required approval in line with the National Environmental Act.
ADB insisted that an EIA be done as part of their loan
requirements. The traces studied by the EIA were as mentioned above
quoting table 9.1. The costs were 12.7 billion for the Recommended
trace, they are now 27 Bn. Mr. Pio's figure. ( Ministry figure at a
meeting with the Prime Minister and Affected People 29 Bn.)
If the increase from Rs. 12.7 Bn. to Rs. 27.0 or 29.0 was not due
to trace changes which have been proved to exist, where did the money
go? If Mr. Pio knows the answer he owes the public a duty to share his
information with us.
We strongly advise those who have access to the Internet to read
the full text of the U.S. Senate testimony by Mr. Bruce Rich. It draws
many parallels with another ADB project in Thailand where the project
cost overrun was huge, the location was altered the public were
protesting and ADB turned a blind eye to the corruption, disbursing the
loan regardless. Eventually the ADB Inspection forced by the affected
people with great difficulty said they were not at fault, and carried
on. Hon. Mr. Takshin came to power, investigated the corruption and
stopped the project. Court cases are proceeding against the Contractor
and Government Officials. JBIC who also ignored the peoples voice and
let the project carry on, asked for its money back and is probably
laughing all the way back to their Vaults!
These episodes show the ADB as irresponsible lenders and more
dangerously, are not truthful in their statements.
Sarath Athukorale and Heather Mundy,
Joint Organization of the Affected
Communities on Colombo/Matara Highway.