THE INTERNATIONAL FINANCIAL INSTITUTIONS: A CALL FOR CHANGE

[Senate Prints 111-43]
[From the U.S. Government Publishing Office]

111th Congress } { S. Prt.
2d Session } COMMITTEE PRINT { 111-43
_______________________________________________________________________

THE INTERNATIONAL

FINANCIAL INSTITUTIONS:

A CALL FOR CHANGE

__________

A REPORT

TO THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

One Hundred Eleventh Congress

Second Session

MARCH 10, 2010

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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COMMITTEE ON FOREIGN RELATIONS

JOHN F. KERRY, Massachusetts, Chairman
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin BOB CORKER, Tennessee
BARBARA BOXER, California JOHNNY ISAKSON, Georgia
ROBERT MENENDEZ, New Jersey JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania JOHN BARRASSO, Wyoming
JIM WEBB, Virginia ROGER F. WICKER, Mississippi
JEANNE SHAHEEN, New Hampshire JAMES M. INHOFE, Oklahoma
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
David McKean, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director

(ii)

C O N T E N T S

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Page
Letter of Transmittal............................................ v

Introduction..................................................... 1

Executive Summary................................................ 1

Recommendations.................................................. 5

Discussion....................................................... 12

Senator Lugar's Ongoing Oversight Effort..................... 13

United States Benefits From Involvement...................... 18

More Money for the Development Banks?........................ 19

United States in Arrears to the Development Banks............ 21

Linkage Between Corruption and Debt.......................... 22

Monitoring and Evaluations Vary.............................. 23

Need More Focus on Transparency.............................. 23

Coordination Could Be Improved............................... 24

Questions Around Budget Support.............................. 25

Focus on Low-Income Countries................................ 26

Ability To Do Independent Investigations Uneven.............. 26

Case Studies..................................................... 27

Chile and the Inter-American Development Bank: Lessons from
the Transantiago........................................... 27

India and the World Bank: The Detailed Implementation Review
Fallout.................................................... 28

The International Monetary Fund in Indonesia................. 29

Development Banks in Kenya: Monitoring and Procurement
Challenges................................................. 31

Lebanon: Manipulation of Crises.............................. 32

Lesotho: Demonstrating the Need to Support Investigations and
Prosecutions............................................... 33

The Asian Development Bank's Lack of Success in the
Philippines................................................ 35

The European Bank for Reconstruction and Development's
Overexposure to Russia..................................... 36

Sri Lanka: The Need for Concerted Conflict Sensitivity.......
...............................................

The Asian Development Bank's Inspection Panels............... 42

Yemen: Empowering Reform From Within......................... 44

Transparency and the European Bank for Reconstruction and
Development................................................ 46

The Inter-American Development Bank's Need to Strengthen
Financial Management....................................... 47

Appendixes

Appendix I.--U.S. Engagement..................................... 51

Appendix II.--The International Financial Institutions........... 53

International Monetary Fund.................................. 53

World Bank................................................... 54

Inter-American Development Bank.............................. 55

African Development Bank..................................... 56

Asian Development Bank....................................... 57

European Bank for Reconstruction and Development............. 58

Appendix III.--World Bank Lending and Parliamentary Approval..... 61

Appendix IV.--Inter-American Development Bank List of Countries
that Require Legislative Authorization or Ratification of IDB
Loan Contracts................................................. 63

Appendix V.--Tables.............................................. 65

Table 7.--U.S. Contribution and Voting Shares in the
Multilateral Development Banks............................. 65

Table 8.--Development Bank Management's General Capital
Increase (GCI) Requests as of January 13, 2010............. 66

Table 10.--Regional MDB Commitments.......................... 66

Appendix VI.--Senate Foreign Relations Committee Hearings Chaired
by Senator Lugar............................................... 67

Appendix VII.--Acronyms and Abbreviations........................ 69

References................................................... 71

LETTER OF TRANSMITTAL

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United States Senate,
Committee on Foreign Relations,
Washington, DC, March 10, 2010.
Dear colleague: The International Monetary Fund, World
Bank, African Development Bank, Asian Development Bank,
European Bank for Reconstruction and Development, and Inter-
American Development Bank are foreign policy tools that allow
the United States to leverage the contributions of other
countries to promote our national security and humanitarian
interests in alleviating poverty and promoting progress around
the world. For this reason, the U.S. Congress regularly
supports appropriations for subsidized loan and grant programs
through the multilateral development banks and recently
provided a loan to the IMF. As one of the largest shareholders
in these institutions, the United States enjoys an opportunity
to influence their policies and programs. We must be cautious
about forfeiting our leadership positions at these
institutions.
Seven years ago, I began an oversight project on the
multilateral development banks, focused on ensuring that their
financing reached the intended people and projects. I chaired
six Senate Foreign Relations Committee hearings that included
reviews of individual projects and policies of the respective
development banks. I met with international financial
institution leaders and my staff examined projects in many
countries. The attached report provides fifty recommendations
for eight different organizations to improve the
accountability, transparency and effectiveness of the World
Bank, the IMF and the other development banks. The American
people must have confidence that our funds will be managed
effectively, efficiently, and transparently. Given our domestic
budget and employment situation, it is all the more critical
that we ensure that our contributions successfully promote
United States interests.
The United States and the G-20 are evaluating changes to
the relative power countries wield at the international
financial institutions while considering requesting billions in
additional funds for the multilateral development banks this
spring. This report suggests that contributions to the
development banks should be a consequence of, not a precursor
to, needed reforms given that financial flows to development
countries are rebounding sharply from their 2009 lows.

(v)

This Senate Foreign Relations Committee report, written by
Nilmini Gunaratne Rubin with significant contributions from Jay
Branegan, Shellie Bressler, Keith Luse, Kezia McKeague, Carl
Meacham, Michael Phelan, and Dorothy Shea, as well as
assistance from Erin Baggott, Cory Gill, Katie Lee, Marik
String, and Alexandra Utsey, synthesizes important
recommendations to transform the international financial
institutions. I hope it will inform a vital debate about these
institutions before we make agreements on how to reallocate
leadership power and decide whether to provide them with
additional funding.
Sincerely,
Richard G. Lugar,
Ranking Member.

THE INTERNATIONAL
FINANCIAL INSTITUTIONS:
A CALL FOR CHANGE

----------

Introduction

Beginning in 2003, Senator Richard Lugar directed his staff
on the Senate Foreign Relations Committee to undertake an
examination of the international financial institutions\1\ to
determine how they could better serve American interests and
more effectively achieve their missions of alleviating poverty,
hunger and disease in poor countries, promoting sustainable
development, economic growth, and good governance, and ensuring
financial stability. This staff report brings together the
results of much of the oversight since that time. As detailed
in the pages that follow, key conclusions emerge:
---------------------------------------------------------------------------
\1\ The International Monetary Fund, the World Bank, the African
Development Bank, the Asian Development Bank, the European Bank for
Reconstruction and Development, and the Inter-American Development
Bank.

The international financial institutions too often focus on
issuing loans rather than on achieving concrete
---------------------------------------------------------------------------
development results within a finite period of time;

They should concentrate more clearly on ``putting
themselves out of business'' by creating stable, self-
sustaining economic growth in their client countries;

For the institutions that are currently seeking major
capital increases, the Administration and the other
donor countries of the G-20 should be firm in demanding
that needed reforms are secured before committing
additional funds; and

The international financial institutions should redouble
their efforts, including increasing resources for
internal controls, to battle the invidious corruption
that has thwarted so many development projects.

Executive Summary

The international financial institutions (IFIs) have
traditionally been an important element of U.S. foreign policy.
They support the broad U.S. foreign policy goals of promoting
stability and development and ending poverty; they leverage
U.S. taxpayer dollars and support a large corps of development
experts and international economists to supplement the U.S.
government's own expertise; they provide fora where the U.S.
can cooperate with friends and allies; they are emblems of U.S.
economic and diplomatic leadership; and owing to the United
States' position as the largest, or one of the largest, donors
in each institution, they are able to help influence specific
regions and countries in ways that are favorable to U.S.
interests.
But, they are also international bureaucracies, answerable
to no one government or constituency, yet subject to influence
and suasion by many, including donors, borrowers, and other
political actors. They often operate with little public
scrutiny, and many times in challenging environments, where
bureaucratic obstacles, corruption, civil or military strife,
and governmental incapacity can harm the success of their work.
Most significantly, the two largest and most important IFIs,
the World Bank and the International Monetary Fund (IMF), were
created more than fifty years ago, in the aftermath of World
War II, when one country, the United States, towered over the
rest financially, global exchange rates were fixed,
international financial flows were tiny, trade was burdened
with steep tariffs and quotas, private sector investment and
lending in developing countries were negligible, and the
principle of free-market capitalism was not widely accepted.
All that has changed, but have the IFIs kept pace?
As the world struggles to emerge from the worst economic
crisis since World War II, it is an appropriate time to ask
whether the IFIs are performing optimally and doing the jobs
they should be doing. Does the world really need the IMF, World
Bank, African Development Bank, Asian Development Bank,
European Bank for Reconstruction and Development, and Inter-
American Development Bank today? Can they be changed to better
address our needs? How should we re-design them? What could the
international financial institutions have done to keep the
crisis from occurring in the first place? What can they do now
to best mitigate the fallout from the crisis? Do they achieve
their various missions of promoting stability, fighting
poverty, encouraging growth, and promoting democracy?
Such questions are particularly timely because nearly all
the IFIs have sought, or will soon seek, major new infusions of
money from their donors, including the taxpayers of the United
States. Congress will have to approve the amount and the form
of these new contributions. Congress must be able to assure
taxpayers that the money is needed, and that it will be used
efficiently. It must ask whether the new money is being
requested primarily to respond to the financial crisis, and if
so, whether it should be advanced on a temporary basis. The
crisis should not be used as an excuse to win increases that
could not otherwise be justified. As the requests for capital
are negotiated with the international donor community, there is
a window of opportunity for significant reform. Given a 2009
signing statement from the administration, indicating that the
President did not recognize an obligation to pursue
Congressionally mandated reforms at the IMF contained in
authorizing legislation, Congress may have an interest in
securing the reforms before authorizing funds for the capital
increases.\2\
---------------------------------------------------------------------------
\2\ http://www.whitehouse.gov/the_press_office/Statement-from-the-
President-upon-signing-HR-2346
---------------------------------------------------------------------------
Soon after he became Chairman of the Senate Foreign
Relations Committee (SFRC) in 2003, Senator Richard Lugar
launched a multi-faceted project designed to answer many of the
questions cited above. Under his chairmanship, the SFRC held
six hearings into the operations of the World Bank and the
other multilateral development banks (MDBs), his staff
conducted numerous oversight trips to the various banks'
headquarters and to bank-funded projects, and Sen. Lugar met
personally with the head of each MDB. The committee produced a
major piece of legislation, which was enacted into law in 2005.
The oversight activity continued as Sen. Lugar assumed the role
of ranking member of the committee and as staff continued to
make site visits, hold briefings with IFI personnel and others,
attend MDB annual meetings, and conduct inquiries regarding
various IFI issues.
This project, initially focused on the IFIs' efforts to
battle corruption, has expanded to include other issues of
institutional management, personnel, and aid effectiveness.
During the period of the project, improvement occurred in
certain areas that have come under intense staff scrutiny or
Congressional mandate, but most IFI operations and thinking
continue to be characterized by inertia and a reluctance to
reform. In particular, the regional MDBs look to the World Bank
to set the standard of practice, failing to move if the World
Bank does not, even though significant problems may be evident.
And even once the World Bank does change, the regional MDBs are
often slow, in some cases extremely slow, to adopt
corresponding policies of their own. One of the key
recommendations of the report is that the IFIs work much more
closely together to share experience and information and to
collaborate on policies.
In general, staff found that the IFIs still serve U.S.
policy interests and leverage American taxpayer dollars.
Therefore, the U.S. should retain a leadership role in the
institutions. However, in the current fiscal environment, the
institutions themselves and the Obama administration will have
to make a strong and compelling case if further U.S. tax
dollars from an already-overstretched federal budget are to be
made available. Any new capital increase should be approved
only after the relevant institution has formally agreed to a
reform agenda and begun to implement it. The Obama
administration should conduct an authoritative review of the
IFIs' practices and policies leading up to the financial crisis
to learn what, if anything, they could have done to prevent it.
Steps should be taken to integrate lessons learned into future
IMF and development bank activities. In normal times, the World
Bank and the regional banks focus on long-term development and
not, for instance, on disaster relief and other short-term
events. The review should examine whether the MDBs need, or
should have, new authorities to deal with financial crises.
Further, to garner public support, the Treasury Secretary
should consult closely with Congress as talks on new funding
proceed, and he should strive to ensure that any funding
required for the crisis should be temporary in nature, while
the institutions themselves should conduct a rigorous review to
find costs savings in their own operations. The institutions
should commit to rigorous budgetary discipline to make sure
that as many resources as possible are being used to fight
poverty and maintain financial stability. The IFIs will only
succeed if they are seen as part of the solution to the crisis,
not part of the problem.
Regarding the politically fraught issues of governance,
voting rights, and citizenship directives, U.S. voting shares
and veto authority should be maintained, and that having an
American as head of the World Bank helps maintain domestic
public support for the institution. Any changes to these
arrangements should be considered on a system-wide basis,
including the IMF, the World Bank, and the regional MDBs. Staff
does not underestimate the difficulty in achieving such
changes. Throughout the course of this project, staff has
repeatedly encountered evidence that U.S. citizens are
discouraged from working at the regional MDBs because of U.S.
tax law burdens which nationals of other countries do not face.
Because the presence of U.S. citizens materially improves the
performance and accountability of the institutions, staff
recommends that Congress fix the tax disincentives that
penalize Americans working abroad.
The IFIs suffer from a lack of transparency regarding loan
decisions, environmental impact, inspection panels, project
assessment, etc., which hurt both public perceptions and their
effectiveness. The most recently issued public disclosure
policies of the World Bank and the European Bank for
Reconstruction and Development (EBRD), for instance, improved
somewhat on the previous versions but fell far short of what
was optimal. The report makes a number of recommendations for
improved public disclosure of policies and decisions, at both
the board and management level, and for more parliamentary
consultation in borrowing countries.
Nearly all the IFIs suffer from a ``pressure-to-lend''
culture that places more emphasis on signing project agreements
and getting loans out the door than on actually improving the
development level of the borrowing country. There must be a
systemic re-orientation to focus on outcomes instead of
outputs. That will require putting in new incentive structures
within the banks and new evaluation mechanisms. The banks
should focus more clearly on the effort to ``put themselves out
of business'' by graduating countries from their ``soft loan''
windows and, eventually, out of borrowing completely. When the
World Bank reaches the milestone of being in a country for
fifty years, it should not be a cause for celebration.
Specifically, the executive boards of the development banks
should require presentation of projects and programs at their
completion to put an emphasis on results and to incentivize
development bank professionals to focus on the results of
projects rather than the amounts. Currently, board review of
projects and programs is only done at the approval stage. In
addition, the development banks need to install meaningful
staff evaluation systems so that professionals are rewarded for
good project design and implementation rather than for
promoting large projects in important countries. To that end,
the banks should develop a common evaluations framework so that
results of the different development banks can be compared
across the board and within countries. Projects should be
designed with clear indicators so that results can be measured,
and the indicators should be published so civil society can
track the projects' progress. Also, the development banks
should sell advisory services to interested countries rather
than requiring that countries borrow in order to receive advice
from the development banks.
Regarding lending to resource-rich developing countries,
which has been of particular interest to the SFRC, banks should
focus on Extractive Industry Transparency Initiative (EITI)
principles of revenue transparency and fighting corruption,
with an emphasis on acting before resource revenues start
flowing in large amounts. Relatively small amounts of aid money
could thus help channel large amounts of countries' own funds
toward poverty reduction. Because corruption has been shown to
be a decisive factor in hobbling development, all the banks
should embed oversight funds into project and program financing
so that an adequate percentage of the funds can be used by
borrowing countries to support monitoring, investigations,
prosecutions, and technical assistance for oversight.
Prior to the global economic crisis that struck in 2008,
many had begun to question the need and rationale for the IMF.
Lending was down sharply, very few countries were enrolled in
IMF programs, its credibility and popularity were badly damaged
by both the Russian financial collapse and the Asian financial
crisis, and the organization was forced to institute a 20
percent cut in personnel. However, early in 2009 as the
financial crisis swept the globe, it was evident that the IMF
was best-suited for crisis management, and the G-20 voted to
triple IMF resources. This abrupt reversal of fortune could be
oversimplified into the question, ``What do you do with the
firemen when there is no fire?,'' as one IMF official put it.
Congressional debate over the Obama administration's request
for Congress to authorize the U.S. portion of the new funds
would have been a good opportunity to explore the role and
function of the IMF in crisis and non-crisis situations.
Unfortunately, that debate did not happen. The process for
authorization of the IMF funds did not follow the usual
procedures and proved unnecessarily partisan. As U.S.
legislative action was critical for many of the issues related
to IMF reform and enhanced funding, the rushed legislative
process, as described in more detail in the report, denied
Congress the opportunity to thoughtfully promote needed changes
at the IMF. In the meantime, there are a number of obvious
reforms the IMF should undertake, many of them related to
improved transparency and consultations with the parliaments of
borrowing countries, providing the significant requirements for
reform that come with IMF programs. The IMF should also develop
guidelines to ensure that its financing will not exacerbate
conflict or underlying hostilities when lending to a post-
conflict or current conflict country, and it should explicitly
judge a country's appropriate level of military spending as an
indicator of financial health.
Staff have visited the headquarters of each IFI, and
repeatedly interviewed Treasury and IFI officials about the
policies and operations of each bank. A number of
recommendations have emerged related to IFIs in general and to
specific institutions. They are detailed in the following
section.

Recommendations

Committee staff developed specific recommendations for the
administration, Congress, and the international community to
reform the international financial institutions and help them
adjust to the changing needs and evolving standards of a post-
economic crisis world.
The Obama administration should:
1) Focus on the ultimate goal of the international financial
institutions succeeding in their development and
economic missions and thereby putting them out of
business. Push the institutions to pay closer attention
to the steps needed for governments to generate their
own revenue and access capital markets on a favorable
basis. Encourage the institutions to set up clear
graduation guidelines for a country to move from being
a borrower to becoming a donor.

2) Undertake a review to determine what, if anything, the
international financial institutions could have done to
prevent the recent global financial crisis. Steps
should be taken to integrate lessons learned into
future IMF and development bank activities.

3) Consider delaying a G-20 commitment for capital increases
for the multilateral development banks until it is
clear that capital infusions are necessary, needed
reforms are underway, and upcoming elections of
leadership positions at some development banks are
completed.

4) To the extent possible, the administration should pursue
temporary capital increases given that the impact of
the global financial crisis will eventually wane.

5) Commission a review of potential cost savings at the
international financial institutions. Opportunities to
reduce spending at these organizations must be examined
and the institutions should commit to rigorous
budgetary discipline to make sure that as many
resources as possible are being used to fight poverty
and maintain financial stability.

6) Preserve United States leadership of the World Bank and
senior level positions at the other IFIs. Having an
American at the helm of the World Bank helps ensure
continued U.S. support for the institution and
facilitates communication with the World Bank.
Historically, the President of the World Bank has been
a United States citizen, the Managing Director of the
IMF has been European, the President of the European
Bank for Reconstruction and Development has been
European, the President of the African Development Bank
has been African, the President of the Asian
Development Bank has been Japanese and the President of
the Inter-American Development Bank has been from
Central or South America. Should the administration
choose not to follow this recommendation, any deal to
loosen the citizenship directives on leadership at the
IMF or World Bank should include loosening the
citizenship directives at the regional development
banks.

7) Maintain United States voting shares and veto rights at the
international financial institutions. As talks
continue at the G-20 on reallocating shares at the
IFIs, the administration should not agree to a deal
where the United States' voting share declines or where
the United States loses its veto over certain policies,
given the size of the United States economy and the
importance of the IFIs to United States policy
interests.

8) Clearly post summaries of U.S. votes on international
financial institution projects and programs on the
International page of the Treasury Department website.
The Bush administration began posting whether it
abstained from voting, voted no or voted yes on
development bank projects, but it is very difficult to
find the web page.

9) Reveal additional U.S. Executive Director positions that
are delivered at the international financial
institutions. Current United States statute calls on
the U.S. Directors to share their statements with
Congress on inspection panel cases, operational
policies, and projects with significant environmental
impacts. The administration should voluntarily release
the detailed U.S. positions on projects in countries of
specific foreign policy interest such as Iraq and
Afghanistan and on projects in areas of particular
sensitivity such as energy and post-conflict
reconstruction.

10) Press the international financial institutions to work
together. Close collaboration is critical because the
mandates of the development banks and the IMF,
development, and financial stability are inherently
connected and impact each other. For example, when
development banks provide budget support loans to
countries, they should work with the IMF and obtain an
assessment letter. The IMF should utilize development
bank tools such as conflict filters when lending to
post-war countries.

11) Encourage the international financial institutions to
systematically factor in the role of conflict to ensure
that their financing does not inadvertently exacerbate
conflict. The World Bank developed a conflict filter
for Sri Lanka, a series of questions to be asked at
each stage of project development, which should be
expanded for use in other countries and by the other
international financial institutions.

12) Promote parliamentary approval of international financial
institution projects and programs. The executive
branches of few developing countries are required to
seek parliamentary approval of international financial
institution loans or grants. Few developing countries
have parliaments that set a ceiling within which the
executive branch can conclude individual agreements
with the international financial institutions.

13) Review any connection between the misuse of funds and debt
relief. Debt relief has been provided to countries that
cannot afford to pay back their loans, it has not been
provided for loans made knowingly to countries with
corrupt leaders who misused or stole the funds.

14) Designate an Ambassador-at-Large for Global Transparency to
promote disclosure at the international financial
institutions that is consistent with efforts within the
United States government and at other international
organizations including the United Nations.

15) Actively recruit U.S. citizens for positions at the
international financial institutions and help
applicants navigate the hiring process.
Congress should:

16) Consider supporting capital increases for multilateral
development banks that have successfully implemented
needed reforms.

17) Consider providing funds to clear United States' current
arrears (unmet commitments) to the development banks,
the existence of which undermines United States
influence at these entities.

18) Fix tax disincentives which penalize Americans working
abroad.
The International Monetary Fund should:

19) When providing loans to resource rich countries, take steps
to account for the billions in revenues that are
streaming into the country. Specifically, the IMF
should implement the recommendations from its own Guide
to Resource Revenue Transparency; obtain a commitment
to not censor individuals who raise concerns about oil
revenue management; require disclosure of public
official conflicts of interest in companies bidding for
oil and gas rights; and call for an independent audit
of the Ministry of Finance and Petroleum. Macroeconomic
reform, economic development, and participatory
governance all rely upon dissemination of information
in order for the government to be more effective and to
enable civil society to play a productive role in
increasing accountability of government officials.

20) Require countries to take anti-corruption measures, reveal
their budgets, and implement public financial
management guidelines on budget transparency for loans
to the government's budget, such as the flexible credit
line\3\ that was created in 2009.
---------------------------------------------------------------------------
\3\ http://www.imf.org/external/np/sec/pr/2009/pr0985.htm

21) Provide grants rather than loans to countries that clearly
cannot repay their loans, such as Haiti after the
---------------------------------------------------------------------------
January 2010 earthquake.

22) Utilize proceeds in excess of projections from gold sales
to fund grants and debt relief for the poorest
countries.

23) Engage with Parliaments in the course of developing an IMF
program. While IMF programs include significant
reforms, sometimes requiring legislative action,
parliaments are rarely consulted by the IMF.

24) Develop guidelines to ensure that IMF financing will not
exacerbate the conflict or underlying hostilities when
lending to a post-conflict or current conflict country.

25) Not shy away from making recommendations on the appropriate
level of military expenditures as they can be a
significant determinant of a country's financial
health.
The multilateral development banks (the World Bank, African Development
Bank, Asian Development Bank, European Bank for Reconstruction
and Development, and the Inter-American Development Bank)
should:

26) Plan for the future, not just the present. Projects should
be designed with a long-term view. For example,
agricultural projects should be designed to withstand
climate change and roads projects should be developed
to accommodate pedestrians in areas projected to become
densely populated.

27) Strengthen anti-corruption efforts. Increase resources for
internal controls and anti-corruption efforts. Embed
oversight funds into project and program financing so
that a small percentage of the funds can be used by
borrowing countries to support monitoring,
investigations, prosecutions, technical assistance to
Parliamentarians, government audit agencies, and
ombudspeople, promoting better oversight.

28) Refocus attention on the impact, rather than the size and
goals, of development bank projects and programs.
Executive boards of the development banks should
require presentation of projects and programs at their
completion to put an emphasis on results and to
incentivize staff to focus on the results of projects
rather than the amounts. Currently, board review of
projects and programs is only done at the approval
stage. In addition, the development banks need to
install meaningful staff evaluation systems so that
staff are rewarded for good project design and
implementation rather than for promoting large projects
in important countries.

29) Design a common evaluations framework that includes the
collection of shared baseline data to save money and
avoid repetition. Baseline data is important in
determining whether or not the development bank project
made an impact.

a) Produce comparable indicators and data dissemination
standards so that results of the different
development banks can be compared across the board
and within countries.

b) Projects should be designed with clear indicators so that
results can be measured.

c) Publish indicators so civil society can track the
projects progress.

d) Evaluate all projects and publish evaluations of all
projects.

e) Integrate lessons learned into project design.

30) Better coordinate activities, particularly food security
assistance, starting with agreements on development
principles and working with host governments to adhere
to national development plans.

31) Increase grants and subsidized loans for the poorest
countries and create a predictable system to transfer
profits to their grant-making and subsidized lending
windows for poor countries from the development banks'
lending operations.
32) Integrate the principles of the Extractive Industries
Transparency Initiative into extractive industry
project design. All the MDBs now endorse the EITI, but
when providing financing to resource rich countries,
the development banks should focus their efforts on
improving revenue management and fighting corruption,
conditioning loans on revenue disclosure and contract
transparency, and promoting transparency before the
revenues actually start flowing from extractive
industries. Relatively small amounts of aid money could
thus help channel large amounts of countries' own funds
toward poverty reduction.

33) Revamp inspection panels and other inspection mechanisms so
that people and communities negatively affected by
development bank projects have clear access to redress.
Current mechanisms allow complaints to be made about
failures to follow development bank policy but the only
beneficiary is the bank itself, which learns of its
mistakes. The affected people simply remain affected
and are rarely compensated or made whole.

34) Lending to the private sector should be focused on regions
and sectors that truly need additional funding to allow
for the best use of scarce resources and to not crowd
out the commercial lenders.

35) When lending money directly to a country's budget, require
publication of the budget and implementation of
adequate public financial management standards. Consult
with the IMF on major budget support loans.

36) Since some emerging market countries are more interested in
receiving advice than money from the development banks,
consider charging for advisory services. Currently,
most development banks only provide advisory services
as part of a financing package.

37) Minimize the environmental impact of projects, including
increasing awareness of greenhouse gas emissions.
Develop and implement a strategy to lower greenhouse
gas emissions trajectories while enhancing access to
affordable energy services. Develop a best practice
protocol for greenhouse gas accounting.
The World Bank should:

38) Allow the Government Accountability Office to commence the
two reviews requested by Senator Lugar, Senator Bayh,
Senator Leahy, and then-Senator Biden. One review would
examine the goals, criteria for success, and ability to
fight corruption and implement procurement procedures
of the World Bank's subsidized loan and grant window,
the International Development Association. The other
review would scrutinize the World Bank's process for
conducting environmental assessments, the impact of
environmental assessments on project design, and the
process for assessing environmental impact after a
project is completed.
39) Revise its public information policy to allow Executive
Directors to release their Executive Board statements
to their constituencies and to the public. The World
Bank's new public information policy makes significant
strides towards transparency and presumes disclosure.
However, the Executive Directors who are
representatives of country members are not allowed to
release their statements to the Board on policies and
projects.
The African Development Bank should:

40) Revamp its website to disclose what the African Development
Bank is doing in each recipient country, noting how
much is going to what project, linking relevant
documents and providing information on inspection panel
cases. The current website provides limited information
about the Bank's activities.

41) Increase pursuit of misconduct by staff, contractors, and
procuring companies and publish the list of debarred
individuals and companies. Compared to the other
development banks, the African Development Bank has far
fewer cases under investigation.
The Asian Development Bank should:

42) Publish the names of the companies that it debars due to
fraud or other misconduct.

43) Reform its human resources system, including the selection
of staff on the basis of transparent recruiting process
and external recruiting at all levels.

44) Ensure that lending to middle-income countries is focused
on poverty alleviation.
The European Bank for Reconstruction and Development should:

45) Spread its lending across the region and not continue
concentrating its portfolio in one country. Currently,
41 percent of its lending goes to one borrower, Russia.
The bank's limited resources clearly should be directed
at countries with fewer of their own resources. A
corollary, the Nunn-Lugar program initially invested
heavily in Russia, but over time has shifted to other
countries and Russia's contributions have increased. As
Sen. Lugar noted in an August 2009, letter to the Wall
Street Journal, ``the Russian share of total Nunn-Lugar
spending has dropped from 88 percent in 2001 to 37
percent as construction projects conclude and Moscow
assumes more of the cost.'' No such weaning process is
evident for the EBRD and Russia-instead, the trend has
been going in the opposite direction.

46) Focus lending to sectors and projects that lack access to
market financing. Currently, some loans are reportedly
going to Russian oligarchs and projects that could
obtain private capital, including the oil sector.

47) Make additionality criteria more transparent and more
explicit, both as a statement of policy and on
individual investments.

48) Develop local currency lending and local capital markets.
The Inter-American Development Bank should:

49) Fully implement financial management reforms. The Inter-
American Development Bank is taking initial steps to
reform its investment strategy, credit risk management,
capital adequacy policy, and operational risk framework
following an unrealized loss of $1.9 billion from its
liquid portfolio of cash management instruments.

50) Provide more grants and subsidized loans for the poorest
countries in the Western Hemisphere, including Haiti.

Discussion

The world has changed drastically since the international
financial institutions were created. Private capital flows to
developing countries dwarf official donor assistance to those
countries. Most exchange rates float under market pressures
while they were previously fixed under the gold standard.
Markets for goods, services, and finance are connected. We have
seen the growth of sovereign wealth funds, fluctuations in
energy prices, and multiple financial crises.
The recent financial crisis, which began in industrialized
countries, quickly spread to emerging market and developing
economies.\4\ Most industrialized countries (except for
Iceland) have been able to finance their own rescue packages,
but many poor countries have insufficient sources of capital
and have turned to help from the international financial
institutions.
---------------------------------------------------------------------------
\4\ ``The Global Financial Crisis: Analysis and Policy
Implications,'' Dick K. Nanto, Coordinator, Specialist in Industry and
Trade, Congressional Research Service, September 18, 2009 (RL34742)
---------------------------------------------------------------------------
As we emerge from the worst economic crisis since the Great
Depression, we must ask ourselves if we are content with the
structure of the international financial institutions. Does the
world really need the IMF, World Bank, African Development
Bank, Asian Development Bank, European Bank for Reconstruction
and Development, and Inter-American Development Bank today? How
should we design them? Can they be changed to address our
needs? What could the international financial institutions have
done better to keep the crisis from occurring in the first
place? What can they do now to best mitigate the fallout from
the crisis? Do they achieve their various missions of promoting
stability, fighting poverty, encouraging growth, and promoting
democracy?
Some of these questions are being addressed by the
international community. In November 2009, G-20 Finance
Ministers said that ``the International Financial Institutions
will play an important role in supporting our work to secure
sustainable growth, stability, job creation, development, and
poverty reduction. It is therefore critical that we continue to
increase their relevance, responsiveness, effectiveness, and
legitimacy.'' \5\
---------------------------------------------------------------------------
\5\ Communique Meeting of Finance Ministers and Central Bank
Governors, United Kingdom, November 7, 2009 http://www.g20.org/
Documents/2009_communique_standrews.pdf
---------------------------------------------------------------------------
The G-20 is examining changes to the allocation of voting
power at the World Bank Executive Board, which ``primarily
reflects countries' evolving economic weight and the World
Bank's development mission.'' \6\
---------------------------------------------------------------------------
\6\ G-20 Leaders' Statement, The Pittsburgh Summit, September 24-
25, 2009 http://www.g20.org/Documents/
pittsburgh_summit_leaders_statement_250909.pdf
---------------------------------------------------------------------------
In addition, the G-20 called for a review of World Bank and
regional development bank capital to ``ensure they have
sufficient resources'' \7\ to be completed by the first half of
2010. The G-20 \8\ asked ``the World Bank to play a leading
role in responding to problems whose nature requires globally
coordinated action, such as climate change and food security,
and agreed that the World Bank and the regional development
banks should have sufficient resources to address these
challenges and fulfill their mandates.'' \9\
---------------------------------------------------------------------------
\7\ Communique Meeting of Finance Ministers and Central Bank
Governors, United Kingdom, November 7, 2009 http://www.g20.org/
Documents/2009_communique_standrews.pdf
\8\ The G-20 includes: Argentina, Australia, Brazil, Canada, China,
France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi
Arabia, South Africa, Republic of Korea, Turkey, the United Kingdom and
the United States.
\9\ G-20 Leaders' Statement, The Pittsburgh Summit, September 24-
25, 2009 http://www.g20.org/Documents/
pittsburgh_summit_leaders_statement_250909.pdf
---------------------------------------------------------------------------

senator lugar's ongoing oversight effort

At the direction of then-Chairman Richard G. Lugar, the
Republican staff of the Senate Foreign Relations Committee in
2003 began a study of the international financial institutions,
following whistleblower reports of corruption related to the
development banks. Staff tested the viability of policy
recommendations through meetings, document reviews, and site
visits to projects in Africa, Asia, Europe and Central Asia,
Latin America, and the Middle East. Staff asked if the
international financial institutions were the tools needed to
solve the problems of today's world, were the IFIs capable of
needed changes, and what those changes would be.
As Chairman of the Senate Foreign Relations Committee,
Senator Lugar held six hearings in the 108th and 109th Congress
to probe how the banks could become more effective,
accountable, and efficient. As Senator Lugar noted, ``We are
living in an era when threats posed by terrorism, weapons
proliferation, international communicable diseases, increasing
competition for energy supplies, and other factors have
enlightened many of the world's people to the need to ensure
that poor nations are not left behind. But these same threats
also place competing demands on national budgets. If
development projects are transparent, productive, and
efficiently run, I believe that they will enjoy broad support.
If they are not, they are likely to fare poorly when placed in
competition with domestic priorities or more tangible security
related expenditures.'' \10\
---------------------------------------------------------------------------
\10\ ``Multilateral Development Banks: Promoting Effectiveness and
Fighting Corruption,'' Senate Foreign Relations Committee hearing,
Opening Statement by Senator Lugar, Tuesday, March 28, 2006, http://
lugar.senate.gov/press/record.cfm?id=253172
---------------------------------------------------------------------------
Numerous reforms were implemented following Senator Lugar's
advocacy, particularly improvements to MDB anti-corruption
efforts. These reforms include: creation of a joint MDB
framework for combating fraud and corruption in their
activities and operations; movement towards cross-debarment by
barring companies that violate one development bank's policies
from contracts with the other development banks; a new anti-
corruption and governance strategy at the World Bank; two new
codes of conduct at the European Bank for Reconstruction and
Development, replacing codes adopted in 1991; an amended Public
Communications Policy at the Asian Development Bank to allow
the Integrity Division discretion to publicly disclose project
procurement-related audit reports; a strong and comprehensive
Whistle-blowing and Complaints Handling Policy approved by the
African Development Bank in 2007; and a new Code of Ethics and
ethics training for all staff implemented by the Inter-American
Development Bank (IADB). However, much more needs to be done.
Hearings
With the intent of strengthening reforms at the
multilateral development banks (MDBs), particularly reforms
related to corruption, Senator Lugar chaired six Senate Foreign
Relations Committee hearings in the 108th and 109th Congress on
September 28, 2004, July 21, 2004, May 13, 2004, April 21,
2005, March 28, 2006, and July 12, 2006. The hearings heard
testimony by representatives from the Treasury Department, the
United States Executive Directors to the MDBs, academics, non-
governmental organizations, and members of civil society. These
hearings contributed to the committee's understanding of both
the value of the MDBs' work and problems with their operations.
The hearings before the Foreign Relations Committee
demonstrated that:

Significant multilateral development bank funding has been
lost to corruption and it is difficult to ascertain
such amount precisely, in part because the multilateral
development banks have not implemented procedures to
calculate such amounts, either in the aggregate or on a
country basis;

The multilateral development banks are taking action to
address fraud and corruption but additional measures
remain to be carried out;

The capability of anticorruption mechanisms, including
investigations, reporting, and disposition, are not
consistent among the multilateral development banks and
divergences in anticorruption policies exist that may
hinder coordination on fighting corruption;

Weaknesses in whistleblower and reporting policy and
practice exist at the multilateral development banks,
to varying degree, that impede antifraud and
anticorruption efforts;

Greater transparency and investigative independence is
necessary to provide effective development aid;

The Secretary of the Treasury encourages anticorruption
efforts at the multilateral development banks and
reviews loans made by such banks, however, the United
States has limited ability to investigate the misuse of
funds from such banks; and

In some cases, the countries bearing the cost of
prosecuting corruption related to the multilateral
development banks are the countries that can least
afford such costs, for example, the Government of
Lesotho incurred considerable expense, despite
competing priorities, such as those arising from an
HIV/AIDS rate of more than 25 percent in that country,
to investigate and prosecute fraud and corruption
related to a project that received funding from the
World Bank and the World Bank did not contribute money
towards the prosecution or investigation.\11\
---------------------------------------------------------------------------
\11\ These points were enumerated in the Findings section of S.
1129 the Multilateral Development Bank Reform Act of 2005. The full
text of S. 1129 may be found at: http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=109 _cong_bills&docid=f:s1129rs.txt.pdf

A number of recommendations arose from the testimony of
---------------------------------------------------------------------------
over 20 witnesses. These include:

Establish an international auditing body responsible for
rooting out corruption and waste at all MDBs

Reform the ``pressure to lend'' incentive system in the
MDBs that emphasizes lending volume, not effectiveness

Re-examine legal immunity for employees of international
organizations

Develop best practice procurement procedures for use by all
the MDBs

Strengthen whistle-blower protections

Automatically disclose bank-imposed sanctions of
contractors and individuals

Establish mutual recognition of blacklists across all MDBs
Legislation
S. 1129. The hearings also formed the basis for the
Development Bank Reform and Authorization Act of 2005, which
was approved unanimously by the Senate Foreign Relations
Committee. The full text of the bill is in Appendix VII. The
bill was introduced by Senator Lugar and had eleven co-sponsors
(Senators Alexander, Biden, Clinton, Cochran, Coleman, Hagel,
Isakson, Martinez, Obama, Stevens, and Thune). Significant
portions of the bill became law in November 2005 in H.R.3057.
With passage of this legislation, Congress made a strong
statement that it recognizes the critical role of the MDBs in
achieving development goals around the world, but also that the
operations of these banks must be transparent, efficient, and
free of corruption. The legislation contained many reforms
aimed at achieving more transparency and accountability in the
banks' operations. It requires the Secretary of the Treasury
and the United States Executive Directors to the MDBs to
support clear and public anti-corruption procedures that are
coordinated across all the MDBs. It promotes staff financial
disclosure procedures, whistleblower protections, and the
establishment of independent ethics and auditing offices. It
also encourages transparent budget processes for countries that
receive budget support from the MDBs and additional disclosure
requirements for natural resource extraction projects.
Since the introduction of S. 1129, many of the measures it
promoted have made progress. For example, the MDBs have now
developed common definitions of fraud and corruption and are
working to create consisted debarment policies so that a person
that is debarred by one multilateral development bank is
ineligible to conduct business with the other multilateral
development banks during the specified ineligibility period.
Many of the MDBs have strengthened their auditing, accounting
and evaluations processes. They have also made some embraced
the need for extractive industry project transparency. While
much more still needs to be done, it is important to recognize
that positive changes have been made since the 2005
introduction of the Development Bank Reform and Authorization
Act was introduced.

S. 954. The World Bank International Development
Association Replenishment Act of 2009, which was introduced
with Senator Kerry and co-sponsored by Senator Kaufman, passed
out of Committee on July 16, 2009, and directs the Secretary of
the Treasury to seek to ensure that multilateral development
banks: (1) implement greenhouse gas accounting in analyzing the
benefits and costs of individual projects; and (2) expand their
climate change mitigation activities.

S. 955. The African Development Fund Replenishment Act of
2009, which was introduced with Senator Kerry and co-sponsored
by Senator Kaufman, passed out of Committee on July 16, 2009,
and directs the Secretary of the Treasury to: (1) seek to
ensure that each multilateral development bank discloses to
member countries the banks' operating budget, including
expenses for staff, consultants, travel, and facilities; (2)
require that the U.S. Executive Director of each multilateral
development bank use U.S. influence to ensure that the bank
endorses and integrates the principles of the Extractive
Industry Transparency Initiative; (3) submit related reports to
Congress.

Amendments to H.R. 2346 and H.R. 1105. Provisions suggested
by Senator Lugar that were included in H.R. 2346 require the
Secretary of the Treasury to ensure that the multilateral
development banks make timely, public disclosure of their
operating budgets including expenses for staff, consultants,
travel, and facilities.
Senator Lugar offered an amendment to H.R. 2346, which was
included in H.R. 1105 and co-sponsored by Senators Leahy and
Kerry, that would require standard public disclosure of
documents of the IMF presented to the Executive Board of the
Fund and summaries of the minutes from Board meetings, as
recommended by the Independent Evaluation Office, not later
than two years after the document was presented or meeting
occurred. It also directs the U.S. Executive Director at the
IMF to promote: 1) transparency and accountability in the
policymaking and budgetary procedures of governments of members
of the Fund; 2) the participation of citizens and
nongovernmental organizations in the economic policy choices of
those governments; and 3) the adoption by those governments of
loans, agreements, or other programs of the Fund through a
parliamentary process or another participatory and transparent
process, as appropriate.

S. 2961. The Haiti Recovery Act of 2010, which was
introduced with Senator Dodd and co-sponsored by Senators
Durbin and Kerry, urges the Secretary of the Treasury to direct
the U.S. Executive Director to each international financial
institution to advocate the cancellation of all remaining debt
obligations of Haiti and the treatment of any debt service
payments as well as the use of some of the realized windfall
profits that exceed the required contribution to the Poverty
Reduction and Growth Trust (as referenced in the IMF Reforms
Financial Facilities for Low-Income Countries Public
Information Notice (PIN) No. 09/94) from the ongoing sale of
12,965,649 ounces of gold acquired since the second Amendment
of the Fund's Article of Agreement, to provide debt stock
relief, debt service relief, loan subsidies, and grants for
Haiti.
Investigations and Reports
Site Visits. Between 2005 and 2009, Senate Foreign
Relations Committee staff observed development bank financed
projects or met with development bank officials in a range of
countries including Bangladesh; Cambodia; Chile; China; Ghana;
India; Indonesia; Lebanon; Lesotho; Paraguay; Peru; the
Philippines; Rwanda, Senegal; South Africa; Sri Lanka;
Tanzania; Tunisia; and Yemen.

SFRC Food Security Report. In the February 2009 staff
report entitled ``Global Food Insecurity: Perspectives from the
Field,'' Senate Foreign Relations Committee staff asserted that
``the international donor community must come together at the
country level to better coordinate aid activities, starting
with agreements on development principles and working with host
governments to adhere to national development plans.''

SFRC Extractive Industries Report. In the October 2008
Senate Foreign Relations Committee report entitled ``The
Petroleum and Poverty Paradox: Assessing U.S. and International
Community Efforts to Fight the Resource Curse,'' staff
recommended that ``international donors who give aid to
resource-rich countries should focus their efforts on improving
revenue management and fighting corruption. Relatively small
amounts of aid money could thus help channel large amounts of
countries' own funds toward poverty reduction.'' Specific
recommendations included:

The World Bank and the IMF, which make regular assessments
of countries' performance, should be consistent in the
assessment of countries' progress on transparency
compared to their own professed benchmarks. They also
should ensure that their staffing at key posts reflects
commitments made to those governments in technical
assistance on improved financial governance.

The regional development banks should integrate EITI into
their operations, now that all of the regional
development banks have endorsed EITI principles in
their projects. (The IDB was the last to do so.) The
regional development banks should condition loans on
revenue disclosure and contract transparency.

Multilateral development banks should condition loans on
progress in implementing transparency measures and they
should promote transparency before the resource
revenues actually start flowing from extractive
industries.

Commissioned GAO Report on the World Bank. On May 14,
2008, Senators Lugar, Bayh, and Leahy, citing the importance of
good stewardship of U.S. taxpayer dollars, called on the
Government Accountability Office to study whether the World
Bank has taken adequate steps to combat corruption and
effectively govern programs designed to fight global poverty.
In their letter, the Senators stated that ``the use of public
funds to help improve the lives of the world's poor carries
with it a responsibility to ensure that the Bank is effectively
run and its efforts produce tangible results.'' \12\
---------------------------------------------------------------------------
\12\ The letter is available at http://lugar.senate.gov/sfrc/pdf/
GAO_world_bank.pdf

The Lugar-Bayh study would examine whether the World Bank
---------------------------------------------------------------------------
is:

Establishing clear goals for projects financed by the
International Development Association;

Establishing clear criteria for measuring the success of
IDA projects;

Working effectively to reduce corruption within governments
that receive IDA funding; and

Effectively implementing procedures for procurement of IDA
goods and services.

In March 2009, GAO staff stated that ``we cannot begin this
work because of challenges we recently faced in gaining access
to World Bank officials to discuss these types of questions. We
are continuing to negotiate access with World Bank officials
but this process is likely to take at least several months.''
Senator Lugar's staff continues to press the World Bank and GAO
to begin this report during the first half of 2010.

united states benefits from involvement

The international financial institutions present the United
States with an opportunity to maintain its influence, address
national security issues, and provide global leadership in an
era when the American economy may not be the overwhelming
source of power it once was. The Treasury Department's recent
justification for appropriations asserts that ``our funding
through the MDBs leverages substantial amounts of additional
money both directly, through co-financing, guarantees, and
insurance of investment projects, and indirectly, through pro-
investment infrastructure improvements and policy reforms.''
\13\
---------------------------------------------------------------------------
\13\ http://www.treas.gov/offices/international-affairs/intl/
fy2010/budget-FY2010.pdf ``The U.S. and the G-20: Remaking the
International Economic Architecture,'' Senate Foreign Relations
Committee hearing, Response from Secretary Geithner to Senator Casey's
Question for the Record, November 17, 2009.
---------------------------------------------------------------------------
Each dollar that the United States contributes to the World
Bank's concessional window (International Development
Association) yields $11 of grants or low-interest loans to
developing countries and each dollar contributed to the World
Bank's regular lending window (International Bank for
Reconstruction and Development) yields over $26 of lending to
developing countries.\14\ Our bilateral assistance, through the
United States Agency for International Development, the State
Department, and other agencies, allows the United States to
maintain direct control over its funding. While U.S. funding
through the international financial institutions forces us to
relinquish some control, it does allow us to influence how
collective donors address large scale issues.
---------------------------------------------------------------------------
\14\ ``The U.S. and the G-20: Remaking the International Economic
Architecture'' Senate Foreign Relations Committee hearing, Response
from Secretary Geithner to Senator Casey's Question for the Record,
November 17, 2009.
---------------------------------------------------------------------------
As the largest contributor to most of the multilateral
development banks, the United States has the largest voting
shares at the World Bank, Inter-American Development Bank, and
European Bank for Reconstruction and Development. The United
States ties with Japan as the largest shareholder at the Asian
Development Bank, while Nigeria and Egypt have subscribed
larger shares in the African Development Bank.\15\
---------------------------------------------------------------------------
\15\ ``Multilateral Development Banks: U.S. Contributions FY1998-
2009,'' Jonathan E. Sanford, Specialist in International Trade and
Finance, Congressional Research Service, January 27, 2009 (RS20792).
---------------------------------------------------------------------------
Table 1 in Appendix V shows the U.S. contribution share and
voting share for all MDB programs.\16\ In most banks, countries
get a few votes because they are members, regardless of the
size of their capital subscription. Thus, for banks with a
large number of small members, the voting share of large
subscribers such as the United States may be a little smaller
than their share in providing the banks' resources. Voting
shares are the same for both market-based and concessional
loans in the AsDB and IDB.
---------------------------------------------------------------------------
\16\ ``Multilateral Development Banks: U.S. Contributions FY1998-
2009'' Jonathan E. Sanford, Specialist in International Trade and
Finance, Congressional Research Service, January 27, 2009 (RS20792).
---------------------------------------------------------------------------
The American people must have confidence that our
contributions to the international financial institutions will
be managed effectively, efficiently, and transparently. Given
our domestic budget and employment situation, it is all the
more critical that we ensure that our contributions promote
U.S. interests.

more money for the development banks? \17\
---------------------------------------------------------------------------

\17\ ``The U.S. and the G-20: Remaking the International Economic
Architecture,'' Senate Foreign Relations Committee hearing, Opening
Statement by Senator Lugar, November 17, 2009.
---------------------------------------------------------------------------
The international financial institutions, namely the
IMF,\18\ the World Bank,\19\ the African Development Bank,\20\
the European Bank for Reconstruction and Development,\21\ and
the Inter-American Development Bank\22\ are asking the United
States and other donor countries for billions of dollars to be
used for additional capital. The Obama administration has
already agreed to the Asian Development Bank's proposal to
request more than $500 million from Congress for a 200 percent
capital increase. Negotiations continue on the requests from
the other development banks. From the United States alone, the
Inter-American Development Bank is seeking $2.4 billion, the
World Bank is seeking $1.1 billion, the African Development
Bank is seeking $270 million, and the European Bank for
Reconstruction and Development Bank is seeking $150
million.\23\
---------------------------------------------------------------------------
\18\ ``Straus-Kahn calls for further IMF resource increase,''
Reuters, October 2, 2009, http://uk.reuters.com/article/
idUSTRE5912DK20091002
\19\ http://online.wsj.com/article/BT-CO-20091005-706072.html
\20\ ``AfDB Will Need a Capital Increase by 2011 to Address the
Financial Crisis and its Development Mandate, says AfDB President,''
African Development Bank Group, December 3, 2009, http://www.afdb.org/
en/news-events/article/afdb-will-need-a-capital-increase-by-2011-to-
address-the-financial-crisis-and-its-development-mandate-says-afdb-
president-4386/
\21\ Joe Parkinson, ``EBRD to Seek Funding Increase,'' The Wall
Street Journal, September 30, 2009, http://online.wsj.com/article/
SB125425896193950481.html
\22\ ``Ninth Capital Increase,'' Inter-American Development Bank,
http://www.iadb.org/CapitalIncrease/index.cfm
\23\ Table 8.--Development Bank Management General Capital Increase
(GCI) Requests as of January 13, 2010.
---------------------------------------------------------------------------
Secretary Geithner indicated that the Treasury Department
is ``currently reviewing requests for capital increases at a
number of the MDBs and will move forward only on commitments
where we are confident that they represent the best use of U.S.
taxpayer funds within the context of our overall global
development goals.\24\ For example, we need to be satisfied
that each MDB is fully employing its available resources
efficiently and effectively and that each is committed to
implementing needed reforms that will focus their missions and
improve their effectiveness in accordance with the core
principles . . . including an increased commitment to
transparency, accountability, and good corporate governance; an
increased capacity to innovate and achieve demonstrable
results; and greater attention to the needs of the poorest
populations.'' Since the fall of 2009, Treasury staff has
regularly updated staff of the Senate Foreign Relations
Committee on their review of capital increase requests.
---------------------------------------------------------------------------
\24\ ``The U.S. and the G-20: Remaking the International Economic
Architecture," Senate Foreign Relations Committee hearing, Response
from Secretary Geithner to Senator Lugar's Question for the Record,
November 17, 2009.`
---------------------------------------------------------------------------
As the requests for capital are negotiated with the
international donor community, there is a window of opportunity
for significant reform. Given the administration's signing
statement that accompanied last year's supplemental
appropriations bill, indicating that the administration may not
pursue legislatively-mandated reforms at the IMF, Congress may
have an interest in securing the reforms before authorizing
funds for the capital increases.\25\ Of serious concern is the
speed at which the international community is moving forward
with the capital increases--the G-20 expects to finalize
decisions on the capital commitments this spring.
---------------------------------------------------------------------------
\25\ Excerpt from President Obama`s signing statement (http://
www.whitehouse.gov/the_press_office/Statement-from-the-President-upon-
signing-HR-2346):--``It [the Act] also expands the resources available
to the International Monetary Fund (IMF) by allowing it to boost its
lending ability. Many developing countries are experiencing severe
economic decline and a massive withdrawal of capital, and the IMF needs
to make sure it has the resources necessary to effectively respond to
the current financial crisis. However, provisions of this bill within
sections 1110 to 1112 of title XI, and sections 1403 and 1404 of title
XIV, would interfere with my constitutional authority to conduct
foreign relations by directing the Executive to take certain positions
in negotiations or discussions with international organizations and
foreign governments, or by requiring consultation with the Congress
prior to such negotiations or discussions. I will not treat these
provisions as limiting my ability to engage in foreign diplomacy or
negotiations.''
---------------------------------------------------------------------------
Before committing to providing additional funds to the
multilateral development banks, the United States and the G-20
must rethink the role of the international financial
institutions that provide crisis support and assistance to
developing countries and emerging markets.
It also is imperative that our government examine the
capital increases for each bank as a unique request. Each
financial institution has distinct management challenges. For
example, capital increases for the European Bank for
Reconstruction and Development must be accompanied by much more
information concerning whether wealthy Russian business
interests are benefiting from the 41 percent of bank funds that
flow to that country. Similarly, capital increases for the
Inter-American Development Bank must address how that Bank is
reforming its practices after its unrealized loss of $1.9
billion in 2008 from its liquid portfolio of cash management
instruments. The World Bank, for its part, has been a leader in
addressing concerns about corruption and governance. Among
other steps, it regularly publishes the names of contracting
companies and individuals that have violated World Bank
policies.
The United States and other major donor countries have
unwisely and unnecessarily linked the timing for general
capital increase decisions to each individual Bank's annual or
spring meeting, beginning with the Inter-American Development
Bank in March 2010, the World Bank in April 2010, and the
African Development Bank and European Bank for Reconstruction
and Development in May 2010. This is an artificial deadline.
The G-20 communique links the general capital increases to: (1)
a review of capital needs, given the four lending priorities
articulated in the communique; and (2) key institutional
reforms. Rather than applying an arbitrary deadline,
fulfillment of the G-20 criteria should be the guide to timing.
The development banks must not just commit to a reform agenda--
ideally, those reforms should be underway before donors pledge
millions, if not billions, in funds.
Many of the general capital increase requests were
initiated on an emergency basis at the height of the global
financial crisis under the direction of the G-20 in early 2009.
Now private capital flows are returning to many developing
markets and varying levels of economic recovery are emerging in
the regions serviced by the MDBs. It is therefore appropriate
to take a measured and thoughtful approach to General Capital
Increase (GCI) decisions that can take into account the real
lending demands and longer-term strategies of the relevant MDBs
before permanently increasing their operations (Table 9).
Delay is particularly appropriate in cases where the
current leadership of a bank is about to end its term and a new
leader is to be chosen. The U.S. will want to make sure that
the newly elected leadership is committed to a reform agenda.
The granting of a new GCI should be a consequence, not a
precondition, of new bank management accepting and beginning to
implement the important changes sought by the U.S. and other
donors. Gaining buy-in at the most senior level of the MDBs is
essential to ensure that implementation of reforms takes place.
With no clarity about who will be leading several of these MDBs
moving forward, a commitment of substantial sums in capital
immediately prior to elections would be an unnecessary leap of
faith.

united states in arrears to the development banks

Over the years, Congress has not funded the
administration's requests to fulfill commitments made to the
multilateral development banks during the course of
international negotiations through which the United States has
extracted numerous reforms. The arrears status of the United
States has already reduced slightly the U.S. shares at the
African Development Bank, for example, undermining the ability
of the United States to leverage the development banks for our
foreign policy interests.
As noted by Secretary Geithner, the United States has over
$1 billion in unmet commitments to the multilateral development
banks. The bulk of the unmet commitments are to the
concessional windows, which provide grants and subsidized loans
to the poorest countries.\26\ The large arrears weaken U.S.
leadership at these institutions, due to significant skepticism
of the willingness of the United States to deliver on any
initiatives that require significant funding.
---------------------------------------------------------------------------
\26\ ``The U.S. and the G-20: Remaking the International Economic
Architecture,'' Senate Foreign Relations Committee hearing, Response
from Secretary Geithner to Senator Lugar's Question for the Record,
November 17, 2009.
---------------------------------------------------------------------------
In particular, the United States' pledges for debt relief
through the development banks have not been fully funded by
Congress. Because the United States has fallen far behind in
fully funding for World Bank IDA replenishments, the United
States will not be able to earn sufficient credits to meet
current international debt relief commitments under the
Multilateral Debt Relief Initiative (MDRI). Without full
funding for arrears to the Inter-American Investment
Corporation (IIC) at the Inter-American Development Bank as
scheduled, the United States will fail to clear longstanding
arrears and will permanently lose capital shares in the
institution.

linkage between corruption and debt

World Bank economists Craig Burnside and David Dollar
asserted in the American Economic Review that ``in the presence
of poor policies. . . . aid has no positive effect on growth.''
Similarly, the World Bank website identifies corruption as
``the single greatest obstacle to economic and social
development.'' Corruption associated with MDB loans not only
squanders development funds and enriches dishonest officials
and contractors, it leaves impoverished nations with the burden
of the resulting debts.\27\
---------------------------------------------------------------------------
\27\ ``Building on International Debt Relief Initiatives'' Senate
Foreign Relations Committee hearing, Opening Statement by Senator
Lugar, Thursday, April 24, 2008, http://lugar.senate.gov/press/
record.cfm?id=296717; ``Multilateral Development Banks: Promoting
Effectiveness and Fighting Corruption,'' Senate Foreign Relations
Committee hearing, Opening Statement by Senator Lugar, Tuesday, March
28, 2006, http://foreign.senate.gov/testimony/2006/Lugar
Statement060328.pdf
---------------------------------------------------------------------------
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 still obligated to repay the development banks.
``When projects intended to boost economic development are
derailed by corruption, the poorest suffer and are cheated of
projected benefits in quality health care, clean water, and
education,'' Senator Lugar said.\28\
---------------------------------------------------------------------------
\28\ ``Review of the Anti-Corruption Strategies of the Regional
Development Banks,'' Senate Foreign Relations Committee hearing,
Opening Statement by Senator Lugar, Thursday, April 21, 2005, http://
foreign.senate.gov/testimony/2005/LugarStatement050421.pdf;
``Multilateral Development Banks: Promoting Effectiveness and Fighting
Corruption,'' Senate Foreign Relations Committee hearing, Opening
Statement by Senator Lugar, Tuesday, March 28, 2006, http://
foreign.senate.gov/testimony/2006/LugarStatement060328.pdf
---------------------------------------------------------------------------
In 1999, the United States and other industrialized nations
established the Highly Indebted Poor Countries Initiative in
response to crippling levels of debt combined with anemic
economic growth in dozens of developing countries. This was
followed several years later by the more comprehensive
Multilateral Debt Relief Initiative. These initiatives allowed
poor countries with unsustainable debt levels to receive debt
relief in exchange for adopting economic policy reforms and
channeling their debt savings to poverty reduction activities.
However, countries that were managing their debts but had their
development bank funds siphoned off by corrupt officials did
not benefit from these rounds of debt relief. These debts
remain.
The most important way to combat the need for future debt
relief is to ensure that development loans are implemented
effectively and ethically.

monitoring and evaluations vary

Currently, the development banks vary in their evaluations
processes and findings, and it is important that each project
and program be evaluated. For example, the World Bank is
developing outcome and output indicators, the Asian Development
Bank has created operational effectiveness and efficiency
indicators and the Inter-American Development Bank is creating
indicators covering the effectiveness of its priorities. They
should share project and program effectiveness data throughout
their banks and the other banks.
Moreover, the findings from those evaluations must be
incorporated in future programming. To paraphrase Professor
David Levine of the University of California at Berkeley--
project evaluations have a cost but it is much costlier to fund
ineffective projects over and over again.
The development banks rarely develop baseline data so that
they can demonstrate the impact of their projects and programs.
In contrast, the United States' Millennium Challenge Account
has procured baseline data for some of its projects. Where
appropriate, the development banks should establish baseline
data and share that data with other donors to avoid unnecessary
overlap.
The IMF's Independent Evaluation Office (IEO) has been
heralded not only for its autonomous findings but because its
recommendations are often included in the development of new
IMF programs. The IEO was formed after most of the evaluation
offices of the other international financial institutions, and
some argue that its later development has been an advantage.
The African Development Bank is taking steps to evaluate
all projects--currently less than one-quarter of projects were
evaluated according to interviews held in May 2009. AfDB staff
has determined that the success of development programs is most
highly correlated with (1) the commitment of the borrowing
country to fully implement the program; and (2) the quality of
the project design. AfDB staff noted that if a project is
designed poorly, it cannot be fixed during implementation and
that it was imperative to get it right at the beginning. The
AfDB is committing to posting its project ratings. Officials
talked about the need for ``virtuous circles'' to be developed
so that evaluations lead to accountability which leads to
better projects which are then evaluated.

need more focus on transparency

Most pressing international issues are spearheaded by
specific offices in specific agencies. However, the
responsibility for promoting transparency is not delegated to a
particular part of the U.S. government. Some argue that all
parts of our government are responsible for transparency but
without a clear office responsible for promoting transparency
with international organizations and development financing,
these issues do not receive the consistent attention that they
deserve. The creation of an Ambassador at Large for Global
Transparency would allow for the full vetting of transparency
issues and press for consistent transparency measures at the
international financial institutions and other international
organizations with which the United States works.
Across the board, the international financial institutions
have a tradition of secrecy and opacity that may be typical of
certain private sector financial institutions and politically
sensitive international organizations. It is not, however,
appropriate for public sector institutions that are funded by
the taxpayers of democratic countries and that make decisions
affecting the lives of millions in the developing world. Steps
toward greater transparency that have been undertaken by the
development banks in recent years make for better
accountability, greater effectiveness, and ultimately stronger
public support. But much more needs to be done.
The World Bank instituted a new information disclosure
policy which significantly improves the ability of the
institution to disclose information to the public.
Nevertheless, it does not allow World Bank Board Executive
Directors to release their statements on projects and policies.
Disclosure of U.S. Executive Director votes and statements at
the development banks would help enable Americans to understand
what policies the United States is promoting at the development
banks. Should a development bank preclude an Executive Director
from releasing his or her statements, a summary of the U.S.
position on the policy or project should be revealed.
During the Bush administration, the Treasury Department did
begin posting on its website how the U.S. executive directors
voted on a project or policy. However, on the current version
of the website it is difficult to locate the voting records.
In 2004, Senator Lugar sent then-President Kabbaj a letter
about the AfDB's website. Staff discussed the need for an
improved AfDB website with multiple AfDB officials. It is
important for the public to know what projects the AfDB is
funding in each country. All officials agreed but stated that
the AfDB did not have the staff or the capacity to produce such
a website soon. They noted that the World Bank's communications
staff was substantially larger than the AfDB's communications
staff.

coordination could be improved

As the Report of the External View Committee on Bank-Fund
Collaboration asserts, ``close collaboration is vital because,
while the Bank and the Fund have separate mandates, they are
inherently linked. For instance, macroeconomic stability (a
major Fund concern) will not be sustained unless linked to
supply side measures and improved quality of public spending (a
major Bank concern). Similarly, global monetary stability (a
Fund concern) will have a direct bearing on overall development
prospects (a Bank concern).'' \29\
---------------------------------------------------------------------------
\29\ Pedro Malan, et al. ``Report of the External View Committee on
Bank-Fund Collaboration,'' February 2007 https://www.imf.org/external/
np/pp/eng/2007/022307.pdf
---------------------------------------------------------------------------
While the development banks have recently agreed on a
shared definition of fraud and corruption and are considering
cross-debarment, they do not share a policy on investigation.
When development banks provide budget support loans to
countries, they should work with the IMF and obtain an
assessment letter to ensure that the economic policy conditions
are appropriate for such a loan. In Argentina and Botswana, the
Inter-American Development Bank and African Development Bank
respectively did not obtain IMF letters prior to lending
significant loans to those governments' budgets.
Similarly, the IMF should utilize development bank tools
such as conflict filters when lending to post-conflict
countries. In Sri Lanka, the IMF provided a large loan without
utilizing the conflict filter that had been developed by the
World Bank for that country.

questions around budget support

Following the global financial crisis, international
financial institutions have been increasing their provision of
budget support or loans that go directly to the government's
budget and are not targeted to a specific project. In May 2009,
the IMF announced a new flexible credit line, to lend directly
to a government's budget rather than solely to a country's
central bank, the normal recipient of IMF loans.\30\
---------------------------------------------------------------------------
\30\ ``IMF implements major lending policy improvements,''
International Monetary Fund, March 24, 2009, http://www.imf.org/
external/np/pdr/fac/2009/032409.htm
---------------------------------------------------------------------------
Some are concerned that the international financial
institutions are lending large amounts as budget support
without a corresponding budget management and fiscal
transparency framework to ensure that the funds are not
misused. For example, the AfDB has issued sizeable loans that
do not appear to be fully coordinated with the other
international financial institutions such as the IMF. Usually,
it is the IMF that provides short and medium-term support while
the development banks, such as the AfDB, provide long-term
support.
In June 2009 the AfDB approved a large $1.5 billion loan
for Botswana, an amount more than 13 percent of the country's
GDP. The AfDB website noted that Botswana is ``one of the best
managed economies in Africa.'' The AfDB's press release noted
the following:

The loan falls within the framework of the recently approved
strategy by the Bank to provide support to member countries
affected by the financial crisis and is the largest such
facility ever granted by the Bank. The Budget Support Loan is
designed to fill part of the gap in the government's 2009/2010
budget deficit currently estimated at 13.5 percent of GDP
caused by falling commodity prices, particularly diamonds.

``The case of Botswana illustrates the impact that the
financial crisis is having on even the best managed economies
in Africa. I am delighted that the Bank has been able to
respond quickly and flexibly in this `unique case' within the
Bank's framework of response to the financial crisis,'' said
Donald Kaberuka, the President of the Bank.

The crisis which is affecting African countries through
different channels is increasing demands for support from the
international financial institutions including the Bank.

This is the first such borrowing from the Bank by Botswana in
17 years. Previously Botswana had in fact several times
contributed to the replenishment of the African Development
Fund (AfDF), the soft window of the Bank Group. \31\
---------------------------------------------------------------------------
\31\ ``AfDB Approves US$ 1.5 Billion Budget Support for Botswana to
Help Country Cope with the Financial Crisis,'' African Development Bank
Group, February 6, 2009, http://www.afdb.org/en/news-events/article/
afdb-approves-us-1-5-billion-budget-support-for-botswana-to-help-
country-cope-with-the-financial-crisis-4724/
---------------------------------------------------------------------------

FOCUS ON LOW-INCOME COUNTRIES

The international financial institutions vary in their
focus on serving the poorest countries and the poorest
communities in middle income countries. The World Bank has a
formal system to transfer profits from loans to middle-income
countries made by the International Bank for Reconstruction and
Development into a grant and subsidized lending window for low-
income countries through the International Development
Association. Going forward, it will be important for the
African Development Bank and the Inter-American Development
Bank to increase transfers to their respective grant and
subsidized lending windows.
The IMF has made significant efforts to address the needs
of low income countries through debt relief and to increase its
subsidization of low-income country borrowing. In July 2009,
the IMF Executive Board agreed to lower concessional interest
rates to zero for at least the next two years. One tool that
the IMF does not employ is to provide direct grants. While some
would argue that IMF is not well suited to provide grant
financing, it is something that should be considered when
lending to countries with a history of debt relief and dire
economic conditions. For example, when the IMF provided Haiti
with a $114 million emergency loan in January 2010, Managing
Director Dominique Strauss-Kahn stated that ``if we succeed--
and I'm sure we will succeed--even this loan will turn out to
be finally a grant, because all the debt will have been
deleted. And that's the very important thing for Haiti now.''
It would appear that, in these cases, offering grants would be
more efficient and provide more policy clarity.
The IMF has been selling gold to fund its new income model
to pay for staff salaries and ongoing operations as well as to
subsidize borrowing for low-income countries. It appears that
the earnings on the sale of gold are significantly higher than
initially expected. The IMF has not determined how to use these
excess proceeds. Given the demand by low-income countries, it
would be helpful if the excess proceeds were directed to a fund
for those low-income countries to be used for grants,
subsidization of loans, and technical assistance.

ABILITY TO DO INDEPENDENT INVESTIGATIONS UNEVEN

Each development bank has an independent investigation
mechanism to ``address the concerns of the people who may be
affected by Bank projects and to ensure that the Bank adheres
to its operational policies and procedures during design,
preparation and implementation phases of projects.'' \32\ The
level of independence enjoyed by each mechanism varies, as does
the quality of their investigations. The IDB recently approved
a new independent investigation policy, following assertions
that its mechanism was cumbersome and ineffective. Going
forward, it will be in line with the World Bank, AsDB and AfDB
in its level of independence.
---------------------------------------------------------------------------
\32\ http://web.worldbank.org/WBSITE/EXTERNAL/EXTINSPECTIONPANEL/
0,,menuPK:6412
9249pagePK:64132081piPK:64132052theSitePK:380794,00.html
---------------------------------------------------------------------------

Case Studies

CHILE AND THE INTER-AMERICAN DEVELOPMENT BANK:
LESSONS FROM THE TRANSANTIAGO

In February 2006, Santiago, Chile, replaced its previous
transportation network of competing, privately-owned buses with
what was proclaimed as a new state-of-the-art public
transportation system, Transantiago. The purpose of the costly
project was to shorten passenger waiting and travel time and
reduce levels of vehicle emissions. Instead, the public heavily
criticized Transantiago for increasing congestion and commuting
delays for Santiago's population of six million people,
although these problems have been diminishing consistently as
operational performance has improved.
Regulated by the Ministry of Transportation, the new public
transit system has also been plagued by financing problems. As
of August 2009, its total deficit reached $1.42 billion, with a
monthly average of $49 million. The Chilean Congress refused to
include the Bachelet administration's request for a subsidy to
Transantiago in the 2008 Budget Law due to the system's
implementation problems. This denial of funding led the
administration to seek two loans in 2008: $400 million from the
Inter-American Development Bank (IDB) and $10 million from the
state-owned Banco Estado.
The IDB loan became the subject of contentious debate in
Chile because the funding was requested by the Chilean
government to support the system, which is privately operated
and financially managed by the Transantiago Financial
Administrator (AFT). For the IDB, it was unusual to provide a
private sector loan with a negative cash flow; Transantiago had
already been operating on a deficit for over a year. The
purpose of the loan was to ensure the system's operations while
a new sustainable financial framework was implemented,
including a permanent subsidy established by law.
A group of legislators challenged the decrees authorizing
the IDB loan before Chile's Constitutional Court, claiming that
the administration did not have the authority to request and
guarantee a loan between the IDB and the AFT without
appropriate legislation. In September 2008, the Court declared
the decrees authorizing the IDB loan unconstitutional. As Chile
entered a period of technical default on the IDB loan, the
administration attempted to negotiate a solution to
Transantiago's funding, as well as the outstanding IDB debt,
with the Chilean Congress. In August 2009, the Congress
approved repayment of the IDB loan as well as a subsidy for
public transport throughout Chile, which would also cover
Transantiago's operating deficit.
In many countries, IFI loans require legislative approval
or ratification. Though each country will develop the
appropriate procedure to include broad input, this case study
exemplifies what can happen without meaningful consultation
between the IFIs and the legislative branches of government. In
a March 2009 report on the IDB loan, an Investigative
Commission established by the Chilean House of Representatives
not only criticized the Chilean executive branch for bypassing
the legislature, but also judged the performance of the IDB to
be ``careless and irresponsible'' in granting a loan that
violated Chile's constitution. \33\ While IDB officials
defended the decision by detailing the feasibility and
environmental impact studies that preceded the granting of the
loan, it is clear that opposition to the project should have
been recognized.
---------------------------------------------------------------------------
\33\ Comision Investigadora respecto al Credito BID-Transantiago,
p. 86. http: //www. camara. cl/pdf. aspx? prmID = 95&prmTIPO =
INVESTIGAFIN http://www.camara. cl/pdf.aspx? prm ID=95 & prm TIPO=
INVESTIGAFIN
---------------------------------------------------------------------------

INDIA AND THE WORLD BANK: THE DETAILED
IMPLEMENTATION REVIEW (DIR) FALLOUT

After a 2005 World Bank investigation revealed systematic
fraud and corruption in the Indian health sector, the World
Bank and the Government of India agreed to conduct a Detailed
Implementation Review (DIR). A DIR is not a traditional audit
of specific allegations; the DIR raises ``red flags'' on how
fraud and corruption could affect the outcome and the
effectiveness of the project. Disconcertingly, the DIR strained
relationships between the World Bank and the Government of
India (GOI)--not only due to the findings of the report, but
also because of the nature in which the report was conducted
and released.
The GOI was disappointed with several aspects of the
report. The DIR was released publicly at the same time the
Minister of Finance was given a copy to review. Prior to public
release, the GoI was given no opportunity to respond. The GOI
felt that the DIR did not seek participation of program
divisions within the Ministry of Health & Family Welfare while
finalizing the report, which ``resulted in an avoidable lop-
sidedness and occasional erroneous interpretation of data.''
\34\ The GOI also contended that fraud and corruption were
terms too broadly used, for example, to inaccurately describe
certain instances of inadequate supervision or maintenance.
---------------------------------------------------------------------------
\34\ http://siteresources.worldbank.org/NEWS/Resources/goi_resp.pdf
---------------------------------------------------------------------------
The report, though, included many legitimate concerns
regarding fraud, corruption and the effectiveness of programs
that the GOI and the World Bank have subsequently sought to
address through a joint action plan. The World Bank
acknowledged feedback from the GOI regarding concerns about the
DIR process and has made revisions to internal policies. The
World Bank plans to address detailed comments from the GOI
during the implementation of the joint action plan to ensure
that future reports are reviewed by host countries prior to
being released publicly and that names of people or companies
are not published until indicators of fraud and corruption are
confirmed.
This case study reveals the challenges that IFIs face in
terms of how they interact with national governments. When
conducting reviews and audits of development projects within a
certain country, many times these institutions must
simultaneously cooperate and preserve a good relationship with
the government while maintaining an independent and responsible
evaluation. To protect this balance, IFIs must develop a
framework in which to conduct reviews like the DIR. As
evidenced by this case study, the lack of a framework can lead
to a deteriorating relationship with the national government
and the potential for a less successful review and subsequent
implementation of necessary reforms.

THE INTERNATIONAL MONETARY FUND IN INDONESIA

International Monetary Fund-Indonesia relations had a
difficult beginning in the 1950s and 1960s. While the IMF
offered assistance to Indonesia under President Sukarno, he
rejected the offer as contrary to communism.\35\ In 1963, the
government devalued the Rupiah in an effort to gain IMF support
for its overdue foreign debt payments.\36\ IMF, World Bank and
American loans soon followed.\37\ However, Britain established
the Malaysian Federation the same year, which Sukarno strongly
opposed and countered by nationalizing British firms in
Indonesia. Consequently IMF loans in Indonesia were cancelled,
ending cooperation.\38\ In 1965, Sukarno formally severed
relations with the IMF and the World Bank, choosing to instead
ally with communist Asian countries.\39\
---------------------------------------------------------------------------
\35\ Indonesia: A Global Studies Handbook, Florence Lamoreux,
(Santa Barbara: ABC-CLIO) 2003, p. 62
\36\ Ibi.d
\37\ ``Indonesia: History of a Bankruptcy Orchestrated by IMF and
the World Bank,'' Eric Toussaint and Damien Millet, Committee for the
Abolition of Third World Debt, July 10, 2005.
\38\ Ibid.
\39\ Indonesia: A Global Studies Handbook, Lamoreux, pp. 63-64.
---------------------------------------------------------------------------
In 1966 after the 1965 military coup, new Indonesian
President Suharto requested the IMF to return to Indonesia. In
1967, Indonesia formally joined the IMF.\40\ Suharto
implemented IMF recommended policies including budget deficit
reduction and movement towards an export economy.\41\ The 1960s
were characterized by ``a very close relationship.between the
staff of the Bank and the Fund and their interlocutors in the
Indonesia government--a group of young U.S.-trained economists
. . . who were brought into government by General Suharto.''
\42\
---------------------------------------------------------------------------
\40\ The International Monetary Fund Under Constraint: Legitimacy
of its Crisis Management, Eva Riesenhuber, The Hague: Kluwer Law
International, 2001, p. 140.
\41\ The Globalizers: The IMF, the World Bank and Their Borrowers,
Ngaire Woods, (New York: Cornell University Press, 2006), p. 75.
\42\ Ibid.
---------------------------------------------------------------------------
While scholars concluded that ``The relationship between
Indonesia's `New Order' government and the IMF over the last 30
years was excellent,'' serious strains appeared during the
IMF's management of the 1997-1999 Asian Financial Crisis.\43\
(Prior to the crisis, both the IMF and the World Bank had
issued reports that were positive about the Indonesian
economy.) \44\
---------------------------------------------------------------------------
\43\ The International Monetary Fund Under Constraint: Legitimacy
of its Crisis Management, Riesenhuber, p. 141.
\44\ Ibid.
---------------------------------------------------------------------------
Although controversial and considered by some to be
incessantly meddling, the IMF package, in the short-term, had
successful results. The rupiah strengthened and market
confidence returned.\45\ From late 1997 into January 1998, the
economy took a turn for the worse and political events began to
move quickly. Facing economic chaos, President Suharto relented
to IMF pressure and moved to cut government spending by
postponing several subsidized projects. A new IMF-Indonesia
program was announced to restore confidence in the rupiah
through tight monetary policy and structural reforms such as
eliminating monopolies and state subsidies. The photograph from
the signing ceremony of this agreement, with IMF Managing
Director Michel Camdessus standing over President Suharto,
became an infamous and inflammatory symbol of Indonesia's
subjugation to the West. Ongoing turmoil led to President
Suharto's resignation.
---------------------------------------------------------------------------
\45\ IMF-Supported Programs in Indonesia, Korea and Thailand: A
Preliminary Assessment, Timothy Lane, Atish Ghosh, Javier Hamann,
Steven Phillips, Marianne Schulze-Ghattas and Tsidi Tsikata,
(Washington, D.C., IMF. 1999).
---------------------------------------------------------------------------
Indonesia has largely graduated from the IMF program. The
beginning of the post-crisis era was marked by lingering and
considerable resentment of the IMF in Indonesia and a desire to
move the country away from IMF advice by quickly repaying
debts. In 2003, the Indonesian government, ``under pressure
from its legislators, declared that it wanted to break free of
its commitments to the IMF,'' and Chief Economics Minister
Dorodjatun Kuntjoro-Jakti said that ``the government did not
wish to extend the existing $4.8 billion loan package with the
Fund.''\46\ By October 2006, Indonesia had announced its
intention to pay all of its outstanding $3.2 billion IMF debts
early.
---------------------------------------------------------------------------
\46\ Indonesia's Battle of Will with the IMF.'' Smitha Francis,
International Development Economics Associates, February 25, 2003.
---------------------------------------------------------------------------
There has been significant criticism of IMF policy in
Indonesia from a range of economists including Jeffrey Sachs,
Martin Feldstein and Robert Rubin. In the ultimate analysis,
Indonesia was the country hardest hit by the 1997-1999 Asian
Financial Crisis. Its GDP fell by 13 percent in 1998, compared
to 11 percent in Thailand, 7 percent in the Republic of Korea
and Malaysia and 1 percent in the Philippines. These losses
were worse on a per capita basis: Indonesia's per capita GDP
fell by 34 percent over 1997-1999, Thailand's by 13 percent and
the rest of the region in single digits.\47\
---------------------------------------------------------------------------
\47\ ``Economic Recovery and Reform'' John Bresnan, in John
Bresnan, ed., ``Indonesia: The Great Transition,'' Lanham, MD, Rowman &
Littlefield Publishers, Inc., 2005, p. 191.
---------------------------------------------------------------------------
The IMF-Indonesia recently reported to the Senate Foreign
Relations Committee that ``since there has not been a formal
IMF-supported program for several years, IMF policy advice and
recommendations for Indonesia are formulated in the context of
bilateral surveillance. In this context, IMF economists visit
member countries regularly to discuss with the authorities the
risks to domestic and external stability that may argue for
adjustments in economic or financial policies. During their
mission, the IMF staff often meet with stakeholders
(parliamentarians and representatives of business, labor unions
and civil society) to help evaluate the country's economic
policies and direction. Upon its return to headquarters, the
mission submits a report to the IMF's Executive Board for
discussion. The comments and recommendations of the Board are
communicated to the authorities and form the basis for follow
up discussions.''
Based on this statement from the IMF, it appears officials
of the institution discuss economic policy with Indonesian
officials and provide nonbinding recommendations, a very
different role from its active and interventionist
participation of the past with Indonesia. The IMF and its
activities in Indonesia have evolved with the emergence of
democracy and the ongoing battle for strengthened institutions
intended to support a growing economy.

DEVELOPMENT BANKS IN KENYA:
MONITORING AND PROCUREMENT CHALLENGES

The first loan by the World Bank to Kenya was in 1960 for
an agriculture project. Since then there have been close to one
hundred credits and grants by the International Development
Association (IDA) with a total net commitment of about US$ 4.5
billion. The assistance provided over the years has been
interrupted at regular intervals due to financial scandal,
gross corruption, and political and social instability.
Invariably, progress is halting and gains are easily reversed.
The Bank has determined that the 2008-2009 political
instability and additional concurrent economic and
environmental crises have increased the poverty headcount by 22
percent and severe poverty has increased by 38 percent, thus
reversing the gains made over the past five years.
The Bank's own reviews over the years have offered
blistering assessments of the effectiveness of its loans and
monitoring as well as that of Kenya's own partnership in
achieving program goals. According to the World Bank Country
Assistance Evaluation for Kenya of November 20, 2000, ``Kenya
qualified for nearly $3 billion in assistance from 1980 to 1996
but was unable to meet conditionality in implementation and
reforms, . . . and that OED overall satisfactory outcome ratio
of 57 percent for Kenya was lower than that for the Africa
region (63 percent) and Bank-wide (75 percent). Sustainability
was likely in 21 percent, and institutional development was
substantial in only 6 percent of commitments.''
In an effort to explain some of the deficiencies in the
Kenya program, auditors said that ``some of the factors
adversely affecting outcomes at the sectoral level were
deficient Bank monitoring and evaluation systems, inadequate
ministerial financial systems, reluctance of the Government to
consult widely with the potential target communities, and
difficulties in observing IDA guidelines on procurement.''
Further, ``high Bank managerial turnover, particularly for
human resource development projects, and barely acceptable
quality at entry of two infrastructure projects approved in
FY96 were also noteworthy.'' The review identified the
necessity for greater emphasis on governance, income
distribution, and gender opportunities while elevating the
Bank's own comparative advantage to other donors. The role of
the resident representative was also deemed as too limited, a
concern some Kenyan officials reject and claim far too
political an involvement This self-critical evaluation by the
Bank placed part of the blame for the failure upon its own
institutional shortcomings.
Kenya opened its portfolio with the African Development
Bank Group in 1964. An AfDB official indicated that poverty
reduction was the chief priority for the organization.
According to this official, the bulk of current AfDB loans,
approximately 75 percent, are dedicated to infrastructure
projects, especially highways, international transport routes,
and energy infrastructure. The AfDB also provides resources for
agriculture and social sector investments. A limited amount of
some five percent is dedicated to institutional support such as
public finance management. Approximately 95 percent of loans
are concessional, 40 year loans. The total portfolio currently
allocated for Kenya is $600 million.
The African Development Bank is considered the lender of
last resort by some observers in Kenya. Its reputation is that
of a lender with more lenient rules for its financing
arrangements. According to the Bank Information Center, the
AfDB group operates with a degree of opacity that has raised
the concern of observers in civil society. Staff also heard
from donors that the AfDB, although an important donor in Kenya
and the region, is the least constrained in its programming
with the Kenyan government. Officials at the Kenyan Ministry of
Finance lauded the AfDB as having an advantage in dealing with
the government given its regional knowledge and ease of
cooperation. AfDB officials indicate that their Bank is closer
to the ground and its funding is ``more flexible and
consistent, so its predictability provides incentives as each
three-year commitment is made clear at least a year ahead of
time.''
Although it brings considerable resources to Kenya, its
staffing size naturally limits the degree to which it is able
to conduct regular monitoring and oversight. The World Bank is
much bigger and brings considerable technical assistance and
knowledge to its headquarters in Nairobi, while the AfDB has a
much smaller footprint. Nonetheless, the AfDB indicated that
the organization's Country Policy and Institutional Assessment
(CPIA), is done annuallyand informs a final measure of
eligibility for funding.
An area in which the AfDB seeks to mitigate risk is also an
area of significant fraud and misappropriation in Kenya--the
procurement agencies. AfDB's insistence on the use of its
procurement process may well relieve considerable risk from the
Kenyan equation. Nonetheless, the Mars Group indicated that
significant inconsistencies existed in the procurement of
materials and services surrounding the transport sector in
which the AfDB was engaged. There is also the AfDB requirement
that Kenya must perform audits on its programs even as the Bank
does them itself based on internally selected risk factors.
Finally, AfDB officials indicated that their resources were
provided and listed in the government budget but were ring-
fenced until the project task manager clears their
disbursement.
As it is, the AfDB official in Nairobi claimed that there
were few if any problems with any of their projects--``there
have been no major corruption events.'' This seemed remarkable
given the extent of confirmed corruption throughout the
government and especially across donor project finance.

LEBANON: MANIPULATION OF CRISES\48\
---------------------------------------------------------------------------

\48\ Excerpted from ``Following the Money in Yemen and Lebanon:
Maximizing the Effectiveness of U.S. Security Assistance and
International Financial Institution Lending,'' January 2010, Senate
Foreign Relations Committee http://foreign.senate.gov/imo/media/doc/
54245.pdf
---------------------------------------------------------------------------
Lebanon is still recovering from the 2006 war between
Israel and Hezbollah, which left much of southern Lebanon and
other parts of the country in ruins. The 2007 fighting between
Lebanese Armed Forces and Fatah al-Islam at the Nahr al-Barid
Palestinian refugee camp led to further casualties and damage.
According to the State Department, over $3.7 billion in
civilian infrastructure was destroyed in both conflicts and
thousands were displaced.
In 2009, a lengthy period of negotiations to form a
national unity government followed the June 7th elections and
resulted in five months of inertia, as the caretaker government
was not empowered to make any significant decisions, including
on security assistance and international financial institution
lending. Further complicating matters, the Parliament has not
passed a budget for the past five years. Official guidance
allows Ministries to spend 1/12 of the previous year's
expenditures each month, but a widening deficit suggests that
more is being spent. Moreover, the substantial off-budget aid
that the Government of Lebanon (GOL) is believed to receive is
not accounted for, contributing to a general lack of fiscal
accountability.
The problem of official corruption was a recurring theme
during a recent staff visit, with several interlocutors
pointing to an overall lack of transparency, fueled by a lack
of accountability in the official budget process, as well as
off-budget revenues and expenditures. Many observers also
perceive an unhealthy influence of the country's confessional
political system on the apportionment of state resources.
Speaking to the specific problems of corruption in the
management of international donor assistance, one official
charged that, ``The entire system is corrupt and inefficient.''
He attributed some of the problems to a ``shopping list
approach'' to foreign aid, and the absence of national
priorities or a commitment to exploiting synergies.
Another interlocutor with whom staff met opined that, in
the face of a succession of crises, the GOL has become a master
at manipulating international donors, relying on hand-outs
rather than taking on much-needed structural reforms. ``The
whole international community has been blackmailed for ages. We
don't need more money. We need to change the rules of the game.
We need to change the structure. We need to break our
dependence on foreign aid.''
Without minimizing the seriousness of the crises that
Lebanon has confronted in recent years, IFIs should guard
against missing opportunities for change that crises present.
While crises can be used as an excuse for inaction, they can
also be catalysts for addressing difficult issues. Against the
backdrop of Lebanon's recent political and economic
difficulties, the IFIs should press for reforms that address
Lebanon's current economic development challenges and help
prevent future crises. In addition, as in any post-conflict or
current conflict country, the IFIs should utilize a conflict
screen to ensure that their financing will not exacerbate the
conflict or underlying hostilities.

LESOTHO: DEMONSTRATING THE NEED TO SUPPORT
INVESTIGATIONS AND PROSECUTIONS

Many in Lesotho felt that the World Bank gave an inadequate
response to corruption related to the Lesotho Highlands Water
project (LHWP), to which the World Bank provided more than $150
million. In 2004, the World Bank debarred one company, Acres
International, for three years as well as one individual. Two
years later the World Bank debarred Lahmeyer International, for
up to seven years, after the Senate Foreign Relations Committee
invited Guido Penzhorn to testify about his conviction of
companies and individuals for bribing the head of LHWP.
Several members of civil society and government officials
were dissatisfied with the length of the Acres International
debarment. They were concerned that the World Bank mitigated
the debarment because ``Acres had already been ordered to pay a
criminal fine by the Lesotho courts and that the relevant
persons involved in Acres' work on the LHWP are no longer in
positions of responsibility in the company.'' They noted that
Acres was the only convicted company that had not yet paid its
complete fine.
While the World Bank allowed the companies convicted of
bribery to attend their Sanctions Committee hearing, they did
not allow the government of Lesotho to send a representative or
prosecutor to attend the hearing and summarize the volumes of
evidence that were presented at trial according to the Chief
Justice of Lesotho, the Attorney General of Lesotho, and the
chief prosecutor in the LHWP bribery cases.
Lesotho spent a significant amount of money to prosecute a
number of companies for bribery related to the LHWP. However,
despite an earlier assertion by World Bank staff that the World
Bank could contribute to the cost of prosecution because the
``bank has deep pockets,'' the World Bank did not provide any
funding to assist the government in addressing the bribery
allegations. The World Bank did not provide funding because it
did not have a mechanism to loan or grant money to pay for a
prosecution, according to World Bank staff.
The U.S. Embassy was praised by the Chief Justice of
Lesotho for its assistance during the period of the trials for
providing funding for internet access and Lexis-Nexis (a web-
based legal research tool) so that the judiciary could access
the most recent and relevant legal research. This information
tool was not biased towards or against a conviction, it simply
allowed the government of Lesotho access to important
international legal information.
When visiting the Katse Dam in Lesotho in August 2004,
Committee staff met with a number of villagers that were not
satisfied with the compensation they received for the impact of
the dam on their livelihood. Compensation packages are
determined by the implementing agency in a country and are
designed to meet World Bank safeguard policies. In addition to
involuntary resettlement safeguard policies, the World Bank
applies safeguards policies regarding indigenous peoples,
cultural property, dam safety, pest management, environment,
forests, natural habitat, waterways and disputed areas to
project lending. However, policy-based lending (also called
budget support or adjustment lending), does not incur
safeguards.
If an affected person is not satisfied with the
compensation package they are assigned, they must appeal to the
implementing agency. If the implementing agency does not act,
the affected people do not have recourse through the project.
An instrument for recourse is not a requirement of the World
Bank safeguards. The implementing agency suggested that
affected people can appeal to the Ombudsman. The Office of the
Ombudsman did not receive funds or additional staffing through
the LHWP project. The Ombudsman said that a project tribunal to
hear the complaints of affected people would have been helpful.
Near the Katse Dam, Committee staff visited a number of
villages that were impacted by the Lesotho Highlands Water
project. The agreement between Lesotho and South Africa
stipulates that no person be made worse off by the Lesotho
Highlands Water Project. Nevertheless, there are a number of
impacts on the villagers that are difficult to address.
Reportedly, the HIV/AIDS rate in the project area is higher
than the 29 percent HIV/AIDS rate in the rest of Lesotho
because the disease was transmitted by dam construction workers
to the villagers.
The dam created a barrier that hampers access of villages
like Mapeleng to Katse town where there are medical, social and
economic resources. Affected villagers said that they must now
either pay to cross the dam, pay for a taxi or walk for many
hours to reach Katse. Villagers expressed concern about a
Lesotho Highlands Development Authority-imposed licensing fee
for people who want to fish on the Katse dam. As many villagers
are subsistence farmers, raising cash to fish or for
transportation is a significant challenge. Finally, some
villagers complained that the springs that they used to depend
on dried up after the construction and filling of the Katse
dam. They noted with irony that they had a view of clean
mountain water destined for South African taps but that they
lost their access to safe water.

THE ASIAN DEVELOPMENT BANK'S LACK
OF SUCCESS IN THE PHILIPPINES

The AsDB did a review of its portfolio in the Philippines,
a country with, by many accounts, a major corruption problem,
and found that of projects begun since 1986, following the fall
of dictator Ferdinand Marcos, fewer than one-third had been
judged successful, one of the worst success rates of the AsDB.
The report enumerated a number of causes for this poor
performance, but corruption was not explicitly or even
implicitly cited. When asked if this was because the bank
didn't want to offend the Philippines or if it was indeed the
fact that no corruption was involved in any of the 36 cases,
officials said they were convinced it was the latter. They said
that while there is corruption in AsDB projects in other
countries, there was none in the Philippines. Said one, ``Has
the effectiveness been affected by corruption? Yes. Has the
money leaked out? No.''
He contended that corruption, inefficiency, lack of
capacity, etc., in various Philippine government institutions,
at the national and local level, might delay or impede
projects, and there might be losses of Philippine government
counterpart funds, which are not as well protected. ``It's not
our funds, it's the other players','' he said. (The problems in
the portfolio, which has subsequently been cleaned up, were
caused by a rush of money to support the post-Marcos democracy,
resulting in the AsDB attempting ``too many projects, which
were too complicated, too quickly,'' officials said. In a
letter to the SFRC, the Philippine government likewise listed a
number of reasons other than open corruption for the poor
performance of the projects. Both sides outlined steps that
have been taken to improve the situation, one of which is to be
much more careful about approving projects. The AsDB says it
now starts only about one new project per year in the
Philippines.)
It may well be that the AsDB is correct and there was no
corruption involving AsDB funds in any of the failed programs,
or it may be that by taking an overly restrictive view of what
constitutes corruption, ignoring the great difficulty in
detecting it, the AsDB is able to claim a better record on
corruption than is warranted.

THE EUROPEAN BANK FOR RECONSTRUCTION AND
DEVELOPMENT'S OVEREXPOSURE TO RUSSIA

Russia receives by far the largest amount of money from the
EBRD. As part of the 2006 Capital Resources Review (CRR), the
EBRD's five year strategy said Russia should get up to 41
percent of its business volume by the end of the period (up
from 31 percent at the start). The advanced countries' share
would drop from 15 per cent to 6 percent, reflecting the intent
to graduate most of them, and the share for the others (Central
Asia, the Balkans) would be largely unchanged at about 53
percent. It is generally understood that this large share for
Russia (which was set before the 2007-08 spike in energy prices
greatly enriched Russian coffers) was accepted by the Americans
in the CRR, at the behest of the Europeans, because the
Americans chose to concentrate their efforts on obtaining
graduation of the EU-8. In 2008, the EBRD's business volume in
Russia was 36 percent, and by the end of 2009 it was expected
to be in a similar range, although at the end of August 2009
the figure was 28 percent.
As Russia's commodity-based economy surged in recent years
and its large conglomerates, often dominated by persons with
apparent political connections, consolidated and expanded their
operations, the office of the U.S. Executive Director (USED)
began to express growing concern about volume of lending to
Russia and the appropriateness of some of the EBRD's clients
there. Senator Lugar, upon returning from an ``energy tour'' of
several Central Asian countries, wrote to the EBRD in early
2008 asking if the large volume of lending to prospering Russia
was shortchanging the former Soviet republics in Central Asia
that were far less developed, and whether the bank was devoting
sufficient staff resources to generating projects in these more
difficult environments. Outsiders, too, were raising questions
about the need for so much lending to Russia, the world's
largest energy exporter and holder of the third largest foreign
exchange reserves. A November 2007, Wall Street Journal op-ed
noted, ``With a significant chunk of the EBRD's funds now
directed toward financing for companies controlled by the
Russian state, Kremlin-friendly oligarchs and large public
companies such as Lukoil, it is increasingly difficult to see
how these investments are consistent with the bank's goal of
furthering pluralism, multiparty democracy or market economics.
Russia doesn't need the money--at least, not from the
EBRD..[It] is increasingly wealthy, boasting more than $440
billion in foreign reserves, including over $110 billion
allocated to its sovereign wealth funds. This summer, Russia
even announced the creation of its own $10 billion Russian
Development Bank to invest in the same types of projects as the
EBRD itself.'' At the same time, many observers have noted, the
gusher of income from oil and gas sales was reducing the
pressure on the Russian government to continue with the wide-
ranging economic and governance reforms it had embarked upon
after the1998 economic collapse. ``You only reform when you
feel the pain,'' one IFI manager said.
EBRD officials insist that the nearly 250 projects they
have signed with Russia over the past three years are helping
reform the economy, expand markets, diversify the product mix,
and bring better governance and competition to a host of
sectors. ``When we invest in Russia, we get something back in
terms of transition impact,'' one top official told staff.
Another said, ``We invest in Russia for the same reason the
Nunn-Lugar program spends money in Russia-to get them to do
things they would not otherwise do because it is in our
interest that they do them.'' They say that contrary to the
characterization, few loans go to the firms of the so-called
oligarchs, only 14 percent go to state companies, and that
increasingly the money is going to regions outside Moscow and
St. Petersburg, where needs are greatest. (From 2005 to 2008,
annual investments outside those two centers rose from 68
percent of the total to 94 percent, according to the bank's
figures.) The EBRD has been a big player in the railways,
ports, and power sector. Where critics might view this as
propping up state-linked monopolies, the bank sees this
activity as implementing large scale reform by investing in
commercial subsidiaries, private rail operators, and improving
corporate governance and transparency in transportation, and by
helping privatize generating companies, and investing in safer,
cleaner and more efficient power plants. A restructured, more
flexible power sector has follow-on benefits throughout the
economy in terms of transition, one official explained: ``One
of the biggest problems facing a start-up small or medium
enterprise is getting access to the electricity grid.''
The EBRD is investing significantly in the Russian energy
sector, hardly one that is unable to attract capital. But after
gorging on cheap oil and gas for years, many Russian energy
users are highly inefficient. The bank says that ``Russia has
been the largest single recipient of EBRD sustainable energy
investment during Phase I of the bank's Sustainable Energy
Initiative, representing 28.3 percent of the total cumulative
SEI investments.'' This includes what the bank calls a
``landmark'' loan of 600 million euro to Severstal, a Soviet-
era steel and mining behemoth that was privatized in the hectic
early days of post-Communist Russia and is headed by Alexei
Mordashov, a one-time Soviet-era manager of the plant who is
now reputed to be one of Russia's richest so-called
``oligarchs.'' Severstal employs 92,000 people worldwide; has
operations in France, Britain, Italy and the United States
(where it is the fourth largest American steelmaker); and is
listed on the London Stock Exchange. The loan helped finance
the company's ``strategic energy efficiency program.'' The U.S.
voted to abstain (the only naysayer) on this 2007 loan because,
while it supported the goals of improving energy efficiency in
the region, it felt that a company of Severstal's strength
could have obtained private financing, and the company was
already pursuing an energy efficiency strategy. (In fact, the
U.S. has voted ``abstain'' or ``no'' on the other three
Severstal-linked loans made since 2002.) The bank also makes
loans in the small business sector, and about a third of the
portfolio is in the banking sector. Roughly a third of the
EBRD's Russia investments in 2008 were equity or quasi-equity
stakes.
The EBRD's own annual indices provide a mixed picture of
accomplishment at the macro level in Russia. While some areas
are already at the top of the scale-the index of small-scale
privatization and the index of price liberalization-others have
stubbornly refused to improve, or have even worsened slightly.
For instance, the index of large-scale privatization fell from
3.3 in 2002 to 3.0 in 2005, where it remains today. The index
of competition policy has remained stuck at 2.3 since 2002, as
have the ``roads'' component of infrastructure reform and the
enterprise reform index. The index for railways, where the EBRD
has put in much effort, has steadily improved from 2.3 to 3.0,
and the power sector index has done even better, from 2.3 to
3.3.
The EBRD is aware, of course, that Russian tycoons control
many corporate assets that were formerly state-owned in Russia
(and similarly, if to a lesser degree, in other former Soviet
republics), and that the stories of how they obtained control
are not always clear. But bank officials have essentially
decided that whatever happened in the murky past, right after
the Soviet Union collapse when the World Bank and western
governments were urging rapid privatization, should stay in the
past. They have in effect drawn a line in history and judge
their clients from that point forward. The EBRD says it does
due diligence integrity checks on that basis and only does
business with oligarchs who have proven their bona fides as
legitimate corporate chieftains and entrepreneurs.
To better understand the issues regarding Russian lending,
staff looked at loans not supported by the U.S. at Executive
Board meetings, including one for 120 million euro in July
2009, to the conglomerate Sistema, controlled by Vladimir
Evtoushenkov, listed by one account as Russia's 18th richest
billionaire. A chemical engineer by training with a doctorate
in economics from Moscow State University, he created the
company in the 1990s by cobbling together a bunch of
telecommunications, technology, and retail firms, the Soviet
travel agency Intourist, as well as some oil interests. It now
bills itself as ``the largest public diversified financial
corporation in Russia and the Commonwealth of Independent
States (CIS), which manages companies serving over 100 million
customers in the sectors of telecommunications, high-tech, oil
and energy, radio and aerospace, banking, real estate, retail,
mass-media, tourism and healthcare services.'' It is the
largest mobile phone operator in Russia and the CIS, and its
mobile company, Mobile TeleSystems (MTS), was listed on the New
York Stock Exchange in 2000. Sistema itself is listed on the
London Stock Exchange. Mr. Evtoushenkov, who is active on
corporate governance issues, is credited by one British
newspaper as having built the ``most western'' Russian
conglomerate. The loan, billed in the EBRD's press release as
``a shot in the arm for the high-tech sector at a time of tight
credit,'' in part financed the sale of the EBRD's own equity
interest in Sitronics, Sistema's electronic chips subsidiary,
back to Sistema, and provided liquidity for Sitronics, which
was facing a crisis-related credit squeeze. The U.S. voted to
abstain, citing a lack of transition impact and the fact that
60 percent of the loan would be used to pay for EBRD's exit.
(The loan went to Sistema because Sitronics itself couldn't
qualify.)
This was actually the sixth investment that the EBRD had
made in Sistema or its subsidiaries since 2004. The U.S.
supported three of the other five, and abstained on the other
two, in both cases arguing that a $17 billion a year company
like Sistema could easily obtain commercial financing for the
deals. The three it supported were to MTS for expanding or
upgrading mobile phone service to underserved areas in rural
Russia and the CIS countries. The bank said the Sitronics loan
was part of its larger effort to help Russia diversify away
from over-reliance on raw materials and develop ``a knowledge
economy'' and that it was riding to the rescue of a long-time
client, a solid company that ran into crisis-related trouble.
Staff interviewed Mr. Evtoushenkov, 61, at his offices near
Red Square in Moscow. He said he was grateful for the loan and
that his firm has developed good relations with the EBRD over
the years. ``They believe we are a very reliable partner,'' he
said. He stated he has known all the EBRD presidents, and said
he has never had any disputes or disagreements with the bank.
Staff asked why he would seek financing from the EBRD, which
doesn't offer concessional rates and often makes more demands
than normal banks. ``Some people may find it difficult to get a
loan from them, but for us it is not difficult,'' he said.
Prior to the crisis, he said, ``We had no difficulties getting
money,'' with about 40 percent of his company's financing
coming from within Russia, the rest from foreign sources,
including Asian banks. He said he was unaware that the U.S. had
voted against some of the Sistema loans. He praised the EBRD's
other work in Russia, especially its support for small and
medium businesses, which, he said, have difficulty getting
regular bank financing. Asked if he had any suggestions for
improving the EBRD or changing the way it operates, he said he
was quite satisfied with current arrangements, and urged that
there be no changes until the current crisis is over. ``Maybe
after 2010 they could reconsider their strategy, but not
today,'' he said.
Given Russia's size and importance, it is probably
inevitable that it would receive a large portion of the EBRD's
loans. It is also inevitable that there will be a political
dimension to the bank's lending strategy. Given the EU's
proximity to Russia, its much broader commercial engagement
with the country, its heavy reliance on Russian gas to keep
warm in the winter, and its member countries' tradition of
state-backed investment programs, the Europeans are naturally
more predisposed than the Americans (and others) toward an
expansive view of the EBRD's involvement in the Russian
economy. These two views will never be completely reconciled,
but staff believes that by applying a more rigorous and
transparent standard for lending decisions to Russia and
adopting a principle similar to graduation for the Russia
lending program the bank could come closer to a consensus on a
way forward that would more equitably distribute its resources
around the region and enhance its credibility among donor
country taxpayers.
Additionality is the prime source of skepticism about the
EBRD's activities in Russia. If the EBRD is doing things in
Russia that ``they would not otherwise do,'' (to quote the EBRD
official above), taxpayers are reasonable in asking just why
Russia isn't doing it and why the bank is. The EBRD should be
especially transparent when it is lending to large state-owned
or controlled enterprises like the railroads, or to the
oligarchs. As Mr. Evtoushenkov said, during normal times he,
and presumably most of Russia's tycoons, has ready access to
commercial capital. It strains public credulity on
additionality when the bank lends money to a private firm
controlled by a man whose net worth is greater than the bank's
annual profit in a good year. The bank should issue a detailed
public policy statement on the additionality criteria and a
step-by-step explanation of how the determination is made, and
with each Russian investment include a statement on how the
criteria were applied and the procedures followed.

SRI LANKA: THE NEED FOR CONCERTED CONFLICT SENSITIVITY\49\
---------------------------------------------------------------------------

\49\ Excerpt from ``Sri Lanka: Recharting U.S. Strategy After the
War'' December 2009, Senate Foreign Relations Committee.
---------------------------------------------------------------------------
Sri Lanka's economy suffered from the high cost of fighting
its separatist war with the Liberation Tigers of Tamil Eleem
(LTTE). Expensive purchases of war-related equipment and
ammunition, often on longer-term contracts and using up
valuable foreign reserves, coupled with a drop in exports due
to the global economic downturn, pushed Sri Lanka to request a
$2.6 billion stand-by arrangement from the IMF in early 2009
which was approved in July. The overall defense budget has yet
to see any sort of ``peace dividend.'' Longer-term contracts
with foreign suppliers of military equipment, particularly
China, continue to weigh heavily on the budget, and the
military has pushed for an expansion of bases and personnel in
the North. Some contend that a continued high level of troops
is required in the formerly LTTE-held areas to hunt down
remaining LTTE forces, seize hidden caches of weapons, and
prevent any resurgence of violence. At the same time, military
and civilian officials stressed to staff that the bulk of the
requested increase of about 15 percent in the defense budget is
due primarily to the government's need to pay down military
debts incurred during the final stages of the war.
Donors have responded to the war's end by shifting their
portfolios to the North and East of Sri Lanka. However, there
is a chance that this could breed resentment in the South where
there is still much poverty. While some international donors
seemed to be artfully calibrating their operations in Sri Lanka
so as not to exacerbate underlying tensions, others chose to
ignore the conflict outright. U.S. government assistance has
focused on conflict sensitivity and economic equity among all
ethnic groups--Sinhalese, Tamil, and Muslim--and on addressing
the regional economic imbalances in conflict-affected areas
that have been amplified by the conflict.
World Bank staff in Sri Lanka, including Country Director
Naoko Ishii and Senior Country Economist Claus Pram Astrup,
should be commended on their development of a ``conflict filter
to enhance effectiveness and reduce reputational risks'' at the
concept design and implementation stages of projects. As laid
out in the World Bank Sri Lanka Country Assistance Strategy
Paper 2009-2012, the filter asks:

Have sufficiently broad stakeholder consultations been
conducted?

Have adequate impartial grievance mechanisms been
established?

Are project management and administration adequately
sensitive to inter-ethnic issues?

Are conflict-generated needs adequately identified?

Have opportunities to strengthen reconciliation and inter-
ethnic trust been adequately identified?

World Bank staff noted that the filter had been a useful
engagement tool. The Asian Development Bank as well as other
international donors factor in conflict though in less formal
ways.
However, the IMF does not officially consider conflict
sensitivity at all and almost prides itself on its tunnel focus
on financial indicators, although the IMF's mandate is
macroeconomic stability--and a key factor to economic stability
is resolution of war and conflict. On July 24, 2009, the IMF
approved a $2.6 billion loan to support the Government of Sri
Lanka's ``ambitious program. to restore fiscal and external
viability and address the significant reconstruction needs of
the conflict-affected areas, thereby laying the basis for
future higher economic growth.'' The IMF did not examine the
possible impact of its program on the conflict in Sri Lanka.
The IMF reportedly did not provide its Executive Board with a
copy of the government's reconstruction program, a program
which had not been shared publicly in Sri Lanka and received no
input from civil society. Though the World Bank consults IMF
assessment letters when it does significant budget support, the
IMF did not reciprocate the consultation and incorporate the
results of the World Bank's conflict filter.
IMF Resident Representative Koshy Mathai argued that
although the government had used the IMF Letter of Intent as a
vehicle to clarify its own reconstruction plans and
humanitarian assistance and despite IMF staff interest in those
issues, it was outside the IMF's mandate to have conditionality
in political and military areas. He suggested that other
international fora were more appropriate for addressing those
concerns. The first of eight tranches (roughly $330 million
each) of the loan was in the reserves at Central Bank as
prescribed and the second tranche was also approved.
In addition, the IMF did not fully engage with Sri Lanka
around issues of military spending. In October 1991, the IMF
Executive Board discussed Military Expenditure and the Role of
the Fund. While most Directors indicated that military
expenditures ``can have an important bearing on a member's
fiscal policy and external position,. national security, and
judgments regarding the appropriate level of military
expenditures required to assure that security, were a sovereign
prerogative of national governments and were not in the domain
of the work of the Fund.'' \50\ This is a discussion that
should be revisited by the IMF Executive Board.
---------------------------------------------------------------------------
\50\ Document of the International Monetary Fund, Buff Document No.
91/186--October 3, 1991, ``Concluding Remarks by the Acting Chairman
Military Expenditure and the Role of the Fund,'' Executive Board
Meeting 91/138 October 2, 1991.
---------------------------------------------------------------------------

THE ASIAN DEVELOPMENT BANK'S INSPECTION PANELS

Two projects reviewed by AsDB inspection panels are
illustrative of the bank's attitude. One, the $500 million
Samut Prakarn wastewater project in Thailand outside Bangkok,
led to numerous corruption-related charges by the Thai
government against many senior officials of the project. (None
of them were AsDB employees). The project is not only notorious
in Thailand, where the Prime Minister at the time was quoted in
the local press as saying, ``This project is riddled with
corruption'' related to major, unapproved changes in the plans
for the huge sewage treatment facility, land speculation,
political influence peddling, gross overcharging, and selection
of a site that posed major environmental hazards. It is also
famous within the AsDB, which provided a portion of the
financing. As one bank official explained to staff, ``It became
a very hot issue within the AsDB. Half the staff said nothing
was wrong, half said there was. It paralyzed the board, which
refused to find the bank at fault.''
Aside from the many failures to follow AsDB procedures
which led to the corruption, the bank's response to the
corruption once discovered also has been found wanting.
According to the Bank Information Center (BIC) report, a
management mission to Thailand in 2000 ``did not take the
allegations seriously and was more concerned with defending
management's previous decisions.'' As the case went on, the
bank kept citing various bureaucratic and legalistic reasons
why its various units could not tackle the corruption issues
head-on. ``Management's review of the project failed to find
any evidence of corruption,'' the BIC report concludes, ``and
both the Inspection Panel and the Anticorruption Unit of the
Office of the Auditor General declined to consider the issue at
all. Moreover, the AsDB has never publicly commented on the
results of the investigations by the Thai authorities, or the
fact that the government has instituted criminal proceedings
against so many senior officials on the project. Nor has AsDB
taken any action in light of those findings, or launched a
wider investigation of corruption on the project.''
Bank officials noted that one major result of the
controversy was to completely revamp the so-called
``accountability mechanism'' and replace the cumbersome
Inspection Panel system with a more streamlined and user-
friendly ``accountability mechanism'' that has an ombudsman--
called a Special Project Facilitator (SPF)--and a Compliance
Review Panel (CRP). An issue that bears monitoring is borrowing
country cooperation with AsDB investigations: at the beginning
of this controversy, the Thai government refused to admit
members of the Inspection Panel into the country. This provoked
protests from the U.S. representative and others, as well as
formal expressions of concern from the board. The issue may
have been resolved by the change in the Inspection Panel system
(which was done with the site access issue very much in mind).
At the time, the Panel was composed of outsiders, like the
World Bank's Panel. Under the new system instituted in 2004,
the Special Project Facilitator is considered bank staff, and
as such has a clear right to visit AsDB project sites. The
Compliance Review Panel, while they are now also bank
employees, are considered agents of the board and have to ask
the host country for permission to enter.
A second revealing case was the outcome of a 2004
Inspection Panel on a large irrigation project in Pakistan, the
Chasma Right Bank Irrigation Project Stage III, which found a
number of areas where the bank failed to follow its own
procedures regarding environmental impact and community
consultation, among others. No allegations of corruption have
so far surfaced. The panel found that AsDB management believes
``the provisions of the `internal laws' of the bank are not
mandatory'' and in this case chose to ignore them because they
would cause delays. As the panel notes, ``An internal law of
the bank may be amended or repealed by the board'' but not
ignored at management's whim. ``As long as it remains, there
must be strict compliance.to hold otherwise would result in
uncertainty and undermine the authority of the Board.'' Equally
illustrative is management's response to the panel report,
which was defensive and at times dismissive. Said one
compliance official of the bank's response: ``They shouldn't be
in total denial of wrongdoing. It gives a very bad impression
of the bank.''
This accountability mechanism-the SPF and the CRP--is
overdue for a required five-year review, with some saying there
isn't enough data to review (which itself raises questions).
Since 2004, only 25 cases have been brought to the SPF, but all
except nine have been ruled ineligible. The SPF is supposed to
act as a mediator to help resolve problems between the bank and
the complainants, not as a tribunal. Requests to the CRP for
compliance review must be preceded by the filing of a complaint
with the SPF. Only three compliance requests have actually been
filed with the Compliance Review Panel: one was determined by
the CRP to be ineligible (a water supply project in Nepal), one
is being reviewed by the CRP (an environmental project in
Fuzhou, China, filed in June 2009), and in the third, a
transport project in Sri Lanka, the AsDB was found to be non-
compliant and the remedial action has been under ``monitoring''
by the CRP for four years. (The CRP also took over the
monitoring of the Chasma project in Pakistan mentioned above.
That monitoring was completed in 2009, and a final report is
due in early 2010.) The new mechanism apparently suffers some
of the same problems of access as the old one. In November of
2009, China denied the CRP consent to visit the Fuzhou project
site to continue its review. According to the CRP's website,
``the CRP then attempted to obtain further evidence via
translator-assisted teleconferences with the Requesting
Parties.'' Considering the significant amounts of money China
has received from the Asian Development Bank (and the World
Bank) over the years, it is disturbing that officials would
block an investigation into the use of AsDB funds, and raises
questions about whether they are trying to protect individuals
who may have acted improperly. This development is all the more
reason why the AsDB should commence an independent review of
the accountability mechanism without further delay.
The office of the USED, which has been pushing hard against
management inertia and working with Board colleagues to get the
review underway, continues to encourage greater bank engagement
with a range of stakeholders and noted to staff that,
``according to some observers, it seems that Affected Persons
(APs) still find it difficult to access the Accountability
Mechanism; the Accountability Mechanism is not regarded as
responsive to the concerns of APs, who are the intended
beneficiaries of AsDB interventions; livelihoods are still
considered to be at risk under some AsDB projects, especially
infrastructure projects; and some stakeholders are still
skeptical as to the Bank's commitment to governance and
accountability and the `independence' of the SPF and the CRP.''
Similar problems have been raised at the inspection panels of
other banks.
Whenever (and if) the review is started, it will not be
completed until after publication of this report. However, the
USED's office and other stakeholders have raised a number of
issues that should be addressed in the review, and Congress may
want to use them as a checklist to help gauge how thorough the
review process was and how effective it was in addressing
concerns.

Has the Accountability Mechanism achieved its 2003
ambition: i.e. has it become a less complex,
transparent, independent, more efficient forum to
handle complaints and consider compliance? And is it
contributing to improved development effectiveness or
has it enhanced the quality of AsDB projects?

The AsDB has a dual phase system requiring APs to go
through the consultation/problem-solving phase before
requesting an investigation under the compliance review
phase-is this two-step system appropriate; or should it
be collapsed into a consolidated system (perhaps
following the IFC/MIGA model)?

Is the Accountability Mechanism truly ``independent?'' The
SPF reports to the President, and the CRP reports to
the Board, but the President is the Chairman of the
Board. Many commentators questioned this arrangement
and consider that this does not represent best
practice.

Independence also raises issues of budget, staffing,
performance assessment, access to independent legal
advice (not dependent on obtaining legal advice from
the AsDB's General Counsel) and the right to engage
experts and consultants (not dependent on processing by
Central Operations Services Office.)

The Accountability Mechanism policy requires at least two
affected persons to initiate a complaint and compliance
request (or for representatives to have clear authority
to represent them), but an AsDB project may affect
natural habitats, heritage sites, endangered species
and so forth, where there may be no ``affected
persons,'' as such, to trigger the AM. Nevertheless,
the AsDB must still be accountable and compliant in
such cases. What can be done to guarantee the AsDB's
accountability and compliance in such cases?

YEMEN: EMPOWERING REFORM FROM WITHIN\51\
---------------------------------------------------------------------------

\51\ Excerpted from ``Following the Money in Yemen and Lebanon:
Maximizing the Effectiveness of U.S. Security Assistance and
International Financial Institution Lending,'' January 2010, Senate
Foreign Relations Committee http://foreign.senate.gov/imo/media/doc/
54245.pdf
---------------------------------------------------------------------------
The World Bank has about $1 billion in existing projects in
Yemen. The Bank's objective in Yemen is to facilitate Yemen's
further progress toward the Millennium Development Goals. These
goals, in turn, are in sync with the stated goals of the
Republic of Yemen Government (ROYG), as articulated in the
National Reform Agenda, the focus of which is on human
development, including education and health; water resource
management; and good governance. The National Reform Agenda,
however, was developed with substantial input from the
international donor community.
Although successful projects can be externally driven, the
potential for success increases when IFIs support ``locally
owned'' initiatives. Locally owned reform processes entail
participation--and buy-in--from the local community and
government in development projects. When there are in-country
efforts to solve endemic problems, IFIs should foster and
support these endeavors. An examination of the current
situation in Yemen reveals that IFIs have opportunities to
incorporate these types of locally owned initiatives into their
planning and implementation strategies.
One potential opportunity to engage with the ROYG is
through locally owned development and poverty reduction
planning. Unhappy with the slow pace and uneven results of ROYG
reform efforts, a small group of largely Western-educated and
well-connected intellectuals and technocrats, under the
auspices of the President's son, developed a targeted action
plan to focus the government's short- to medium-term reform
efforts. This group took into consideration the Government's
Third Five-Year Plan for Poverty Reduction, as well as other
existing plans and strategies, but determined that these
various plans sought to take on too many challenges at once.
Therefore, the group independently developed 10 priorities
on which the ROYG should focus for the next year. The 10 points
are not perfect; they do not address head on the need to
eliminate government subsidies for diesel, for example, relying
instead on a strategy of seeking lower prices on the
international market to reduce costs. That said, because this
plan is ``locally owned,'' in the words of one of its drafters,
it stands a greater chance of success than reforms mandated by
foreign donors. IFIs and the international donor community
should work to empower and support this model and invest in
similarly structured endeavors.
Another opportunity to support locally owned initiatives is
by encouraging investment in the private sector. Increased
foreign direct investment (FDI), as well as domestic
investment, will be critical if Yemen is to create needed
jobs--and hope for the future--among its increasing population
of young job seekers. According to the 2009 report of the UN
Conference on Trade and Development, Yemen is experiencing a
downward trend in FDI inflows. Gross domestic investment as a
percentage of GDP has also declined over the past two years.
In the face of falling oil revenues and its rapidly
depleting oil sector, the ROYG had been putting its hopes in
the development of the liquefied natural gas (LNG) sector. As
the Country Director for the International Finance Corporation
put it, however, the slump in the international market for LNG
renders this strategy no longer viable. He made the case that,
``If Yemen's economic development prospects are to have any
success, it will be as the result of very time-consuming, hard-
slogging micro-financing.'' There are no quick fixes. Right
now, he said, there is no coordination among donors on private
sector development. Nor were there any micro-finance banks
based in Yemen, although one--al-Amal--has announced plans to
open there.
To the extent that micro-finance banks need to be induced
to enter the Yemeni market, IFIs should provide incentives. The
IFIs should work in conjunction with the ROYG to focus more
attention--and resources--on private sector development. The
International Finance Corporation (IFC) has thus far provided
business education training to 26,000 graduates, many of whom
will become trainers themselves. Such activities should be
expanded and built upon on a national and local level to
realize reform and development goals.

TRANSPARENCY AND THE EUROPEAN BANK FOR
RECONSTRUCTION AND DEVELOPMENT

At the EBRD, which lends almost exclusively to the private
sector, officials have sometimes defended non-disclosure
practices as being necessary to protect a firm's competitively
significant data. Staff appreciates this concern, but believes
that it is used to justify keeping far too much information
from public scrutiny. Staff has looked at some internal EBRD
documents and believes that in many cases it would be a simple
matter to ``scrub'' the documents of commercially sensitive
information. The EBRD in 2006 updated its Public Disclosure
Policy, the cornerstone of its transparency efforts, yet the
U.S. abstained when the policy came up for board approval. The
USED felt, as did a number of NGOs, that while an improvement
over the previous policy, the new one did not go far enough,
perhaps reflecting the strong desire of the bank's private
sector client base for maximum confidentiality. The new public
information policy didn't require disclosure of board votes,
for instance, and it maintained a poor appeal process for those
who feel they were wrongly denied access to information. The
exercise demonstrated, as one NGO member put it to staff, ``The
EBRD is not willing to accept a presumption of disclosure.''
The EBRD should take a number of concrete steps to improve
transparency. First, the bank should develop and publicize an
explicit set of criteria for the advanced countries to
``graduate'' from EBRD lending. Currently, the only former EBRD
client to graduate is the Czech Republic, which did so in 2007.
Seven other EU clients were also expected to graduate by 2010,
but that was put off when the financial crisis hit-yet there
were no public benchmarks to justify the decision. (Why, for
instance, didn't Poland graduate, since it escaped the
recession that hit other Central European countries?). Making
the graduation criteria public and clearly defined would help
mobilize public opinion within client countries to press for
change. Once graduation is understood in the markets to be a
rigorous and objective standard, countries that meet the
criteria would be rewarded with improved risk ratings and
better access to global capital markets. From the point of view
of taxpayers and legislators in donor countries, having an
explicit graduation goal and orienting all the bank's
operations toward reaching it would make clear that the EBRD is
not trying to build an empire or perpetuate its existence, but
rather working conscientiously to put itself out of business.
This would help clear up questions about the bank's long-term
mandate.
Second, the EBRD should be more transparent about the
potential ``transition'' impact of it loans and investments,
since its mandate is to hasten the implementation of capitalist
structures, not to be just another commercial lending fund.
Staff recommends more transparency and detail in how the
potential transition impact ratings are disclosed for each
project. Currently on the website there is a brief, two-line
description of the transition impact, but more specific
information available to those inside the bank, such as a
rationale for the loan, its additionality, the downside
transition risks, etc., is not disclosed, apparently because
``commercially sensitive'' information might be revealed.
Likewise, staff recommends that the U.S. (and other donors, for
that matter) give more detailed explanations for their
``abstain'' or ``no'' votes, especially on large or
controversial projects. For instance, the U.S. recently
abstained on the largest single loan in EBRD history-$500
million to the Russian railway-without public explanation.
Treasury officials said this policy of reticence has to do with
internal board dynamics, but staff believes the taxpayer would
be better served by bringing these debates out into the open.
Third, the EBRD should be more transparent regarding one of
its other key mandates, namely, additionality, the principle
that the bank should lend only to clients who cannot get
reasonable financing elsewhere. The additionality criteria
should be more transparent and more explicit, both as a
statement of policy and on individual investments. (This is in
addition to the earlier recommendation regarding more
transparency in transition impact.) If EBRD is making loans to
a resource-rich country like Russia because the government or
private investors won't, taxpayers are reasonable in asking
just why they aren't and why the bank is. The EBRD should be
especially transparent when it is lending to large state-owned
or -controlled enterprises like the railroads, or to the so-
called oligarchs, the billionaires who control many business
groups. It strains public credulity on additionality when the
bank lends money to private firms controlled by very wealthy
people.

THE INTER-AMERICAN DEVELOPMENT BANK'S NEED
TO STRENGTHEN FINANCIAL MANAGEMENT

Inter-American Development Bank is in the process of
reforming its practices after its unrealized loss of $1.9
billion in 2007/2008 from its liquid portfolio of cash
management instruments. After detecting the losses, Senator
Lugar's staff has meet regularly with the Inter-American
Development Bank to promote needed changes to the IDB's
financial management to ensure that the losses do not recur.
Joshua Goodman of Bloomberg wrote an article ``IDB's Losing
Bets in U.S. Mortgages May Weaken Case for Funding'' on March
21, 2009, excerpted below, which describes the issues around
the financial losses:

The Inter-American Development Bank failed to rein in
managers who made losing bets in the U.S. mortgage market,
including investments in securities issued by Countrywide
Financial Corp., according to an outside consultant's findings
reviewed by the IDB board today.
The Washington-based bank, the biggest lender for
infrastructure projects in Latin America, took a nearly $1
billion loss last year after plowing as much as 60 percent of
its cash reserves into mortgage-backed securities, an unusually
aggressive investment strategy that went ``largely undetected''
by agency officials, according to the review by Oliver Wyman,
the consulting unit of Marsh & McLennan Cos.
* * * * * * *
The weaknesses allowed the IDB to risk twice as much of its
cash portfolio in asset-backed securities as the World Bank
does, and 10 times as much as the Asian Development Bank, the
consultant's review found.
``You can't run these things like a hedge fund,'' said Morris
Goldstein, a former deputy director of the International
Monetary Fund's research department and senior fellow at the
Peterson Institute for International Economics in Washington.
``Portfolios of official lenders have to be very
conservative.''
Wyman recommended possibly hiring outside financial managers,
the ``urgent'' improvement of oversight and the establishment
of guidelines so assets have a ``high probability of being
liquid in the most adverse market conditions.''
IDB Chief Financial Officer Ed Bartholomew disputed the
consultant's findings, saying the mortgage and asset-backed
securities peaked at 42 percent, not 60 percent, of its
investment portfolio. After writing down the securities by an
average 25 percent, the figure fell to 26 percent at the end of
2008, he said. More than 99 percent continue to perform and
about 85 percent carry the top AAA credit ratings, he said.
`No Material Effect'
``The magnitude of these unrealized losses has no material
effect'' on the bank's ability to lend, Bartholomew said in an
interview today. ``Any capital increase would be driven by a
long-term vision about the kind of lending we want to
support.''
The IDB's bets were fueled by pressure to increase returns on
what were supposed to be highly liquid investments, the
consultant's review found. That led to the purchase of two
Countrywide Financial mortgage-backed securities in October
2007, after the collapse of the subprime mortgage market had
already caused the mortgage lender's shares to plunge more than
50 percent, according to the review.
``It's surprising how far they invested in these toxic
assets,'' said Claudio Loser, former director of International
Monetary Fund's Western Hemisphere department and now a fellow
at the Inter-American Dialogue in Washington. ``In hindsight it
was a stupid decision.''
Lugar's Concern
Senator Richard Lugar of Indiana, the ranking Republican on
the Foreign Relations Committee, said the strategy was of
``grave concern'' and sought explanations in a Feb. 5 letter to
IDB President Luis Alberto Moreno. A copy was provided by
Lugar's office.
``It would be premature to consider a capital increase before
Congress is assured that the IDB's financial structures and
controls are robust and that necessary reforms have been
implemented,'' Lugar said in an e-mailed statement today.
``The IDB is making a `tremendous effort' to increase
donations from members this year so it can approve a record $18
billion in loans,'' Moreno, 55, said in a March 5 interview
published on the IDB website. A commission of outside experts
headed by former Peruvian finance minister Pedro Pablo
Kuczynski will present its recommendations at the annual
meeting.
``The IDB faces an uphill battle,'' Clay Lowery, a former
assistant U.S. Treasury secretary for international affairs who
is now a managing director of the Glover Park Group in
Washington, said in an interview today. ``They are asking for a
capital increase, which is important to Latin America, at a
time when it appears that they had taken significant risks in
their trading book.''
Lowery said the Treasury first raised concerns about the
IDB's investment strategy in late 2007.
Funding Needs
Bartholomew said he couldn't discuss any plans for the
capital increase request until they were discussed by the IDB's
board.
The IDB needs more funding because Latin American and
Caribbean countries are increasingly turning to the lender as
the credit crisis deepens. Jamaica, on Jan. 16, became the
third country following Costa Rica and El Salvador to tap a $6
billion emergency liquidity line the bank created last October.
Remittances to Latin America and the Caribbean from migrant
workers are forecast to fall this year for the first time on
record, as unemployment rises in wealthier nations. If the
crisis persists two years, poverty could swell by as much as
12.7 million people, according to IDB estimates.
To help relieve some of the strain on social services, the
IDB is aiming to approve a record $18 billion in loans,
compared with last year's previous record of $11.1 billion.
``The IDB is very worried,'' said Loser. ``For the first time
in seven years, credit markets are closed to Latin America.
They know they'll be called on to increase lending for the next
two to three years.''

A P P E N D I X E S

----------

Appendix I.--U.S. Engagement

Although the international financial institutions (IFIs)
are run by their own managements, the member governments
exercise policy direction and oversight responsibility. A board
of governors for each IFI, representing all member countries,
meets once a year to make policy decisions, while boards of
executive directors meet more frequently to approve projects
and supervise operations of the institutions.
As the largest shareholder in all of the IFIs except the
Asian Development Bank, the United States takes an active
oversight role. The U.S. Governor of all six institutions is
the Secretary of the Treasury. The Treasury Department is the
lead agency in charge of operational policy and the day-to-day
conduct of U.S. participation in the IFIs.
The State Department also follows policy on the IFIs as it
relates to U.S. political relationships. The Under Secretary of
State for Economic, Energy, and Agricultural Affairs is the
U.S. Alternate Governor for the multilateral development banks.
For the International Monetary Fund (IMF), however, the
Alternate Governor is the Chairman of the Federal Reserve.
The U.S. Executive Directors are appointed by the President
and confirmed by the Senate. The Alternate Executive Directors
are subject to Senate approval only for the IMF, the World
Bank, and the Inter-American Development Bank (IDB). The
Executive Directors and Alternates represent the United States
at executive board meetings and report to the Secretary of the
Treasury through the Assistant Secretary of International
Affairs.
Other U.S. government agencies are also involved in
oversight of the IFIs. The Working Group on Multilateral
Assistance (WGMA) meets weekly to coordinate agency views on
all loan proposals scheduled for consideration by the executive
boards of the multilateral development banks during the
following two weeks. Chaired by the Treasury Department, these
meetings include representatives from the State, Agriculture,
and Commerce Departments, USAID, Federal Reserve Board, and the
Export-Import Bank.
In addition to the confirmation of Executive Directors
through the Senate Foreign Relations Committee, the Congress
determines the level of U.S. contributions to the IFIs. It can
also pass legislation directing U.S. policy towards the IFIs.
For instance, Congress has adopted laws requiring the Executive
Directors to seek specified improvements in the institutions'
treatment of environmental issues. In this regard, USAID
reports to Congress on the environmental impact of IFI loans.
Congress also requires the Treasury Department to report to the
appropriate congressional committees on the actions taken by
each IFI to implement the policy goals specified in
legislation.
The Senate Foreign Relations Committee and the House
Committee on Financial Services have jurisdiction over
development bank authorization legislation, while the Senate
and House Foreign Operations Appropriations Subcommittees
control U.S. funding levels. The authorization committees also
conduct oversight of the IFIs through hearings and informal
consultation with the executive branch.
Appendix II.--The International
Financial Institutions

International Monetary Fund
The International Monetary Fund (IMF) was created at the
1944 Bretton Woods Conference in New Hampshire to prevent a
return of the international financial chaos that preceded World
War II. Its formal mission is to ``foster global growth and
economic stability,'' provide ``policy advice and financing to
members in economic difficulties,'' and work ``with developing
nations to help them achieve macroeconomic stability and reduce
poverty.''\52\
---------------------------------------------------------------------------
\52\ ``About the IMF,'' International Monetary Fund, http://
www.imf.org/external/about.htm
---------------------------------------------------------------------------
The IMF has three principal functions and activities: (1)
surveillance of financial and monetary conditions in its member
countries and of the world economy, (2) financial assistance to
address major balance of payments problems, and (3) technical
assistance and advisory services to member countries.\53\ Based
in Washington, D.C., the IMF currently employs about 2,600
staff.
---------------------------------------------------------------------------
\53\ ``The International Monetary Fund: Organization, Functions,
and Role in the International Economy,'' Jonathan E. Sanford and Martin
A. Weiss, Congressional Research Service, April 22, 2004.
---------------------------------------------------------------------------
The IMF has developed various loan instruments, or
facilities, that are tailored to address the specific
circumstances of its diverse membership. The majority of IMF
loans come from the General Resources Account (GRA), using one
of two facilities: Stand-By Arrangements (SBA), which address
short-term balance of payments problems, or the Extended Fund
Facility (EEF), which focuses on longer-term difficulties with
external payments.\54\
---------------------------------------------------------------------------
\54\ ``IMF Lending.'' http://www.imf.org/external/np/exr/facts/
howlend.htm
---------------------------------------------------------------------------
Low-income countries may borrow at a subsidized interest
rate under new concessional financing facilities. Approved by
the IMF Executive Board on July 23, 2009, these new facilities
are intended to make financial support more flexible and
tailored to the diversity of low-income countries. They replace
the existing Poverty Reduction and Growth Facility (PRGF) and
the Exogenous Shocks Facility (ESF), and will be organized
under the umbrella of a new Poverty Reduction and Growth Trust.
The three new lending windows are the Extended Credit Facility
(ECF), which provides medium-term support; the Standby Credit
Facility (SCF), which addresses short-term and precautionary
needs; and the Rapid Credit Facility (RCF), which offers rapid
low-access financing with limited conditionality to meet urgent
balance of payments needs.\55\
---------------------------------------------------------------------------
\55\ ``IMF Support for Low-Income Countries.'' International
Monetary Fund, http://www.imf.org/External/np/exr/facts/poor.htm
---------------------------------------------------------------------------
The United States' total IMF quota is $337.2 billion. The
United States is the largest shareholder with a quota of 37.15
billion Special Drawing Rights (SDRs),\56\ worth approximately
$57.7 billion, and a 16.77 percent voting share.\57\
---------------------------------------------------------------------------
\56\ The SDR is an international reserve asset, created by the IMF
in 1969 to supplement the existing official reserves of member
countries. SDR also serves as the unit of account of the IMF and some
other international organizations.
\57\ ``IMF Members' Quotas and Voting Power, and IMF Board of
Governors,'' International Monetary Fund, http://www.imf.org/external/
np/sec/memdir/members.htm
---------------------------------------------------------------------------
In response to the global economic crisis, the G-20 nations
agreed in April 2009 to triple the IMF's lending capacity to
$750 billion, based on contributions from member countries. In
June 2009, the U.S. Congress approved $108 billion in new loan
authority for the IMF. Several other countries have pledged
contributions to increase IMF resources, including, as of July
2009, Japan ($100 billion), European Union ($100 billion),
Norway ($4.5 billion), Canada ($10 billion), Switzerland ($10
billion), Republic of Korea ($10 billion), Australia ($7
billion), Russia (up to $10 billion), China (up to $50
billion), and Brazil (up to $10 billion). \58\
---------------------------------------------------------------------------
\58\ ``Bolstering the IMF's Lending Capacity,'' International
Monetary Fund, http://www.imf.org/external/np/exr/faq/contribution.htm

Table 1.--International Monetary Fund Disbursements\58\
Billions of U.S. Dollars
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
GRA 11.13 36.86 39.14 31.52 6.47 3.55 3.67 1.49 20.82 18.43
PRGF-ESF 0.76 1.35 2.09 1.32 1.26 0.63 0.78 0.51 0.99 1.42
----------------------------------------------------------------------------------------------------------------
Note: 2009 data as of June 30, 2009
\58\ ``Total IMF Credit Outstanding for all Members from 1984-2009," http://www.imf.org/external/np/fin/tad/
extcred1.aspx

World Bank

Like the IMF, the World Bank was created as a result of the
1944 Bretton Woods Conference. Its initial purpose of
rebuilding post-war Europe grew to encompass worldwide poverty
alleviation and sustainable economic development. Currently
focused on the achievement of the Millennium Development Goals,
the World Bank aims to ``fight poverty'' and ``to help people
help themselves and their environment by providing resources,
sharing knowledge, building capacity, and forging partnerships
in the public and private sectors.'' \60\
---------------------------------------------------------------------------
\60\ ``About Us,'' http://web.worldbank.org/WBSITE/EXTERNAL/
EXTABOUTUS
---------------------------------------------------------------------------
The World Bank pursues these objectives through the
provision of financial and technical assistance. More than
10,000 employees from over 160 countries work at the World
Bank. Two-thirds are based at the headquarters in Washington,
D.C., while the remaining third work in more than 100 country
offices in the developing world.\61\
---------------------------------------------------------------------------
\61\ ``Who We Are and What We Do,'' http://web.worldbank.org/
WBSITE/EXTERNAL/EXTABOUTUS
---------------------------------------------------------------------------
The World Bank divides its lending between the
International Bank for Reconstruction and Development (IBRD)
and International Development Association (IDA). The IBRD
assists middle-income countries with loans at near-market rates
using funds raised on the international capital markets.
Established in 1960 due to concerns that low-income countries
could not afford to borrow at near-market rate terms, the IDA
provides concessional loans to the world's poorest countries.
The IDA's highly discounted assistance is funded with
contributions from donors and transfers from the IBRD and is
increasingly provided as grants.\62\
---------------------------------------------------------------------------
\62\ ``The World Bank's International Development Association
(IDA),'' Martin A. Weiss, Analyst in International Trade and Finance,
Congressional Research Service, April 1, 2008.
---------------------------------------------------------------------------
As of June 30, 2008 (the end of the World Bank's fiscal
year), total subscriptions to the IBRD were $157.43 billion.
The United States is the largest contributor, having subscribed
to $31.96 billion of the IBRD's capital stock. Of this amount,
$2.0 billion is paid-in and $29.96 billion is subject to
call.\63\ The United States has a 16.36 percent voting
share.\64\
---------------------------------------------------------------------------
\63\ Callable capital is a contingent liability, payable only if a
multilateral development bank (MDB) lacks sufficient funds to repay its
own creditors. None of the MDBs has ever attempted to collect a portion
of their callable capital.
\64\ ``The World Bank Annual Report 2008,'' The World Bank, http://
siteresources.worldbank.org/EXTANNREP2K8/Resources/
YR00_Year_in_Review_English.pdf
---------------------------------------------------------------------------
As of June 30, 2008, total contributions to the IDA were
$177.5 billion. The United States is also the largest
contributor to the IDA, having subscribed or contributed $38.98
billion. The United States has a 12.71 percent voting
share.\65\
---------------------------------------------------------------------------
\65\ Ibid.
---------------------------------------------------------------------------
The last general capital increase of the IBRD was agreed to
in 1988, and the United States provided its final installment
to the IBRD's capital in FY 1996. The most recent round of IDA
replenishment negotiations (IDA-15) concluded on December 14,
2007.\66\ At the meeting, donors agreed to provide $41.6
billion, an increase of $9.5 billion over the previous
replenishment (IDA-14) ($32.1 billion). The United Kingdom
pledged donations of $4.3 billion over three years, making it
the largest single donor to IDA-15. The United States increased
its pledge by 30 percent to $3.7 billion and will see its share
rise from 13.8 percent to 14.7 percent. Several countries are
contributing to IDA for the first time: China; Cyprus; Egypt;
Estonia; Latvia; and Lithuania.\67\
---------------------------------------------------------------------------
\66\ ``The World Bank's International Development Association
(IDA).'' Martin A. Weiss, Analyst in International Trade and Finance,
Congressional Research Service, April 1, 2008.
\67\ ``Contributions to the Fifteenth Replenishment,'' The World
Bank, http://siteresources.worldbank.org/IDA/Resources/Table1IDA15.pdf
---------------------------------------------------------------------------
Since their creation, cumulative IBRD lending is $446
billion and IDA commitments are $193 billion.

Table 2.--World Bank Operations.\68\
Billions of U.S. Dollars
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
IBRD 10.92 10.49 11.45 11.23 11.05 13.61 14.14 12.83 13.47 32.90
IDA 4.36 6.76 8.07 7.28 9.04 8.70 9.51 11.87 11.23 14.00
----------------------------------------------------------------------------------------------------------------
Note: 2009 data as of June 30, 2009
\68\ ``The World Bank Annual Report 2008,"''The World Bank, http://siteresources.worldbank.org/EXTANNREP2K8/
Resources/YR00_Year_in_Review_English.pdf.

Inter-American Development Bank

The Inter-American Development Bank (IDB) Group was co-
founded by the United States and 19 other member countries in
1959 in response to social and political turmoil in Latin
America and the Caribbean in the context of the Cold War. Based
in Washington, DC, the IDB now has 26 borrowing members and
employs approximately 2,000 staff.
The IDB aims to ``combat poverty and promote social
equity,'' \69\ providing loans and grants and offering policy
advice and technical assistance. The IDB's primary lending
window is non-concessional Ordinary Capital (OC). The Fund for
Special Operations (FSO) is the concessional window of the IDB
and focuses on economic development in the hemisphere's poorest
nations: Bolivia, Guyana, Haiti, Honduras, and Nicaragua. The
FSO makes subsidized loans with interest rates of 1 percent to
2 percent and maturities of up to 40 years.
---------------------------------------------------------------------------
\69\ ``What We Do,'' Inter-American Development Bank, http://
www.iadb.org/aboutus/whatWeDo.cfm?lang=en
---------------------------------------------------------------------------
As of December 31, 2008 (the end of the IDB's fiscal year),
total subscriptions to the IDB were $100.9 billion. The United
States is the largest contributor, having subscribed to $30.31
billion of the IDB's capital stock. Of this amount, $1.3
billion is paid-in and $29.01 billion is subject to call. The
United States has a 30.01 percent voting share.\70\
---------------------------------------------------------------------------
\70\ ``Annual Report 2008,'' Inter-American Development Bank,
http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=1924122
---------------------------------------------------------------------------
The most recent general capital increase for the ordinary
capital account and the FSO was in 1994. The U.S. contribution
of $153.7 million was contributed in six equal installments
over the 1995-2000 period.\71\ At a meeting on July 2, 2009,
the IDB Board of Governors set a December 2009 deadline for
technical discussions on a proposed capital increase and a
replenishment of the FSO.\72\
---------------------------------------------------------------------------
\71\ ``Report on the Eighth General Increase in the Resources of
the Inter-American Development Bank,'' Inter-American Development Bank,
http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=2080953
\72\ ``IDB Governors set roadmap to strengthen Bank, increase
resources to fight crisis,'' IDB News Release, July 2, 2009, http://
www.iadb.org/news/detail.cfm?language=English&id=5504
---------------------------------------------------------------------------
Between 1961 and December 2008, the IDB approved $149.00
billion of operations from its Ordinary Capital and $18.52
billion from the FSO.

Table 3.--IDB Operations.\73\
Billions of U.S. Dollars
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
IDB 4.969 7.411 4.143 6.232 5.468 6.448 5.632 8.577 11.085
FSO 0.297 0.443 0.406 0.578 0.522 0.41 0.605 0.152 0.138
----------------------------------------------------------------------------------------------------------------
\73\ ``IDB Annual Report," Inter-American Development Bank, www.iadb.org/ar/2008

African Development Bank

The African Development Bank (AfDB) Group was founded in
1964 ``to help reduce poverty, improve living conditions for
Africans and mobilize resources for the continent's economic
and social development.'' It employs 1,491 employees in its
headquarters in Tunis, Tunisia, and in 23 field offices.\74\
---------------------------------------------------------------------------
\74\ ``About Us,'' African Development Bank Group, http://
www.afdb.org/en/about-u
---------------------------------------------------------------------------
The AfDB Group comprises two main lending facilities. The
African Development Bank provides grants, loans, and technical
assistance. The African Development Fund (AfDF) is a
concessional facility for low-income African member countries
created in 1972. There are currently 38 AfDF borrower
countries. The AfDF is primarily financed by 24 non-regional
countries including the United States, Canada, and several
European and Asian countries.\75\
---------------------------------------------------------------------------
\75\ ``The African Development Bank Group," Martin A. Weiss,
Analyst in International Trade and Finance, Congressional Research
Service, January 30, 2009.
---------------------------------------------------------------------------
The United States is the second largest shareholder after
Nigeria. At current exchange rates, total U.S. paid-in capital
through December 31, 2008 is approximately $220.4 million.
Total callable capital is approximately $1.95 billion.\76\ The
United States has a 6.33 percent voting share.
---------------------------------------------------------------------------
\76\ ``The African Development Bank 2008 Annual Report,'' African
Development Bank Group, http://www.afdb.org/en/about-us/financial-
information/annual-report
---------------------------------------------------------------------------
The most recent general capital increase for the AfDB was
in 1998. The total capital increase was approximately $7
billion, the U.S. share of which is 5.8 percent. The total U.S.
paid-in capital commitment of $40.8 million was paid over 8
years ending in FY 2007. In December 2007, negotiations
concluded for the eleventh replenishment of AfDF resources
(AfDF-VI) that will provide financing of $8.9 billion during
2008 to 2011. The U.S. total three-year commitment for AfDF-11
is $468.2 million. In the current AfDF-11 replenishment, the
U.S. share is 8.7 percent (behind the United Kingdom, Germany,
and France).\77\
---------------------------------------------------------------------------
\77\ ``The African Development Bank Group,'' Martin A. Weiss,
Analyst in International Trade and Finance, Congressional Research
Service, January 30, 2009.
---------------------------------------------------------------------------
Between its inception in 1967 and December 2008, the AfDB
approved approximately US$38.2 billion of operations and the
AfDF approved approximately $28.0 billion.

Table 4.--African Development Bank Group Operations.\78\
Billions of U.S. Dollars
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
AfDB 0.63 1.24 1.36 1.16 1.25 1.16 1.45 2.30 2.36
AfDf 1.01 1.46 1.08 1.54 1.42 1.54 2.13 1.70 2.55
----------------------------------------------------------------------------------------------------------------
\78\ ``The African Development Bank 2008 Annual Report," African Development Bank Group, http://www.afdb.org/en/
about-us/financial-information/annual-report

Asian Development Bank

Founded in 1966, the Asian Development Bank (AsDB) aims
``to help its developing member countries reduce poverty and
improve the quality of life of their people.'' With
headquarters in Manila, Philippines, and 27 field offices, it
employs approximately 2,5C00 staff.\79\ The AsDB's primary
activities are extending project loans and grants, making
equity investments, and providing technical assistance to its
developing member countries.
---------------------------------------------------------------------------
\79\ ``Our Vision,'' Asian Development Bank, http://www.adb.org/
About
---------------------------------------------------------------------------
The Asian Development Fund (AsDF), the AsDB's concessional
facility, was created in 1972 to provide loans to Asia's
poorest countries. The AsDF is funded principally through
periodic replenishments by donor nations. There have been seven
replenishments since the AsDF was created in 1972.
The United States and Japan are the largest shareholders,
each owning $8.5 billion worth of shares in the institution.
This ownership stake corresponds with a voting share of 12.76
percent. As of December 31, 2008, the United States has
contributed $3.42 billion to the AsDF. Voting shares in the
AsDF are the same as in the AsDB.
The most recent capital replenishment, AsDF-9, covers the
years 2005 to 2008. Donors agreed to contribute $7 billion over
the four-year period, an increase from the $5.7 billion
provided during AsDF-8 (2001-2004). Japan maintains its
position as the leading AsDF contributor in AsDF-9 with $1.18
billion pledged, followed by the United States with $461
million, Australia with $218 million, and the United Kingdom
with $202 million. Contributions from the Asia and Pacific
region accounted for almost half of the replenishment.
The most recent general capital increase of the AsDB was
agreed to in 1994. In April 2009, the Board of Directors
(including the United States) approved a resolution providing
for a new capital increase allowing for a 200 percent increase
in the capital stock of the institution. It is expected that
the administration may seek an increase in the U.S. paid-in
capital for the institution over the next several years as part
of the new general capital increase.
To date, the Asian Development Bank has approved $143.5
billion of operations.

Table 5.--Asian Development Bank Group Loans.\80\
Billions of U.S. Dollars
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
AsDB 4.01 3.98 4.01 4.73 4.05 4.40 5.99 8.07 8.70
AsDF 1.57 1.36 1.65 1.38 1.24 1.36 1.27 1.89 1.79
----------------------------------------------------------------------------------------------------------------
\80\ ``Asian Development Bank Annual Report 2008,'' Asian Development Bank, http://www.adb.org/Documents/Reports/
Annual_Report/2008

European Bank for Reconstruction and Development

The European Bank for Reconstruction and Development (EBRD)
is the newest of the multi-lateral development banks, founded
in 1990 to help bring capitalism and market economies to
formerly Communist eastern and central European countries and
the new states from the former Soviet Union and Yugoslavia.
(Mongolia was originally included, too, and Turkey was added
last year.) Unlike the other development banks, it does not
have development or poverty alleviation as one of its stated
missions, and it usually works with the private sector, state-
owned companies or municipal entities, rather than with
national governments. As a result, it has until now had little
direct role in promoting economic or governance reforms outside
of specific sectors. ``We are a project-driven bank,'' one
official told staff in August 2009 during an interview in
London. Also, uniquely, the EBRD applies a political standard
to its clients, namely, that their countries are ``committed to
and applying the principles of multiparty democracy, pluralism
and market economics.''
EBRD investments, like those of the other development
banks, take the form of loans, guarantees, and equity
investments. The EBRD's loans are required to meet three
criteria-that they have ``transition impact;'' that they
provide additionality, that is, the client must be unable to
get reasonable financing elsewhere; and that they be based on
``sound banking principles.'' The EBRD does not have a
concessional loan window like the other development banks, it
takes commercial risk, and it nearly always gets its money
back. In fact, in the three years before the current crisis,
the bank turned handsome profits, up to more than two billion
euros a year, leading to talk of a dividend for shareholders
and raising questions about whether the bank was really
necessary in the booming east. (That ended last year when the
bank recorded its first annual loss since the Russian financial
crisis of 1998.) There is an inherent tension between the
additionality and sound banking requirements-if the investment
is sound, why couldn't the client get the financing from
someone else? Similarly, transition impact is sometimes
difficult to define and quantify.
The United States is the largest shareholder in the EBRD.
The United Kingdom is the second largest shareholder. As of
December 31, 2008, the United States has committed
approximately $2.7 billion. The United States has a 10.15
percent voting share.
The most recent general capital increase of the EBRD was
agreed to in 1996. The U.S. share was $285 million. Since its
founding, the EBRD has approved approximately $59.99 billion in
operations.S6602

Table 6.--EBRD Operations.\81\
Billions of U.S. Dollars
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
EBRD 3.61 4.94 5.267 5.03 5.58 5.78 6.67 7.54 6.87
----------------------------------------------------------------------------------------------------------------
\81\ EBRD Annual Report and Financial Statements," European Bank for Reconstruction and Development, 2008, http:/
/www.ebrd.com/pubs/general/ar08.htm

Appendix III.--World Bank Lending
and Parliamentary Approval

February 2009.
Borrowing member countries which require parliamentary
approval or ratification of lending instruments (loans,
credits, IDA grants) with the Bank and IDA include those
requiring approval or ratification of each loan or other
agreement, and countries where parliament sets a ceiling within
which the executive branch can conclude individual agreements
without further approval or ratification.
Sub-Saharan Africa:
Angola, Benin, Botswana, Burkina Faso, Burundi, Chad,
Comoros, Congo Brazzaville, Cote D'Ivoire, Democratic Republic
of the Congo, Ethiopia, Gabon, Ghana, Guinea, Madagascar,
Malawi, Mali, Niger, Rwanda, Senegal, Sierra Leone, South
Africa, Sudan, Tanzania, Togo, Uganda, Zambia, Zimbabwe*

* in non-accrual, current status unclear. Current status of
Liberia also unclear.

East Asia & the Pacific:

Cambodia, China, Timor Leste, Republic of Korea,
Indonesia,** Mongolia, Palau, Vanuatu

** parliamentary approval of development projects is given
through annual budget law.

Eastern Europe & Central Asia:

Albania, Armenia, Bosnia & Herzegovina, Bulgaria, Croatia,
Georgia, Kazakhstan, Kyrgyz Republic, Macedonia, Moldova,
Montenegro, Romania, Russia, Serbia, Tajikistan, Turkey,
Ukraine

Latin America & the Caribbean:

Bolivia, Brazil, Colombia, Costa Rica, Dominican Republic, *** El
Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua,
Paraguay, Peru, Trinidad & Tobago, Venezuela

*** Ecuador currently unclear based on 2008 Constitution.

Middle East & North Africa:

Algeria, Djibouti, Arab Republic of Egypt, Lebanon,
Tunisia, Republic of Yemen

South Asia:

None
Appendix IV.--Inter-American
Development Bank (IDB)

List of Countries that Require Legislative Authorization
or Ratification of IDB Loan Contracts

August 2009

Countries that Require Legislative Authorization or Ratification of IDB
Loan Contracts
(for Sovereign or Sovereign Guaranteed Loans)*
------------------------------------------------------------------------
Legislative Ratification of Signed
Legislative Authorization Required Loan Contract Required for Entry
for Signing of Loan Contract into Effect
------------------------------------------------------------------------
Bahamas.......................... Bolivia
Belize (> US$10 million)......... Costa Rica
Brazil........................... Dominican Republic
El Salvador...................... El Salvador
Guatemala........................ Haiti
Honduras......................... Honduras
Venezuela........................ Nicaragua
............................... Paraguay
------------------------------------------------------------------------
* The summary information included in the above chart was prepared by
the Bank based on information provided, as of August 2009, by
borrowing member countries concerning their approval of Bank sovereign
(or sovereign-guaranteed) loans. The chart does not address the
details of any applicable legislation or regulation, and there may be
circumstances under which, depending on the details of a specific Bank
operation, the rules summarized in the chart may direct a different
conclusion. Further, the Bank does not represent itself as having the
authority to interpret the laws of its member countries, and
authoritative text on the subject of the chart should be provided by
those member countries with respect to their own legislation.

Appendix V.--Tables

Table 7.--U.S. Contribution and Voting Shares in the Multilateral Development Banks.\81\
----------------------------------------------------------------------------------------------------------------
Contribution Share Voting Share
(percentage) (percentage)
----------------------------------------------------------------------------------------------------------------
World Bank Group
IBRD...................................................... 16.8 16.4
IDA....................................................... 22.1 12.9
IFC....................................................... 24.1 23.6
MIGA...................................................... 18.9 15.1
Asian Development Bank
AsDB...................................................... 15.6 12.8
AsDF...................................................... 12.6 12.8
EBRD 10.1 9.8
NADBank 50.0 50.0
Inter-American Development Bank
IDB....................................................... 30.3 30.0
FSO....................................................... 50.5 30.0
IIC....................................................... 25.5 25.1
MIF....................................................... 39.4 29.1
African Development Bank
AfDB...................................................... 6.4 6.4
AfDF...................................................... 12.7 6.1
IFAD 13.6 13.6
----------------------------------------------------------------------------------------------------------------
\81\ ``Multilateral Development Banks: U.S. Contributions FY1998-2009,'' Jonathan E. Sanford, Specialist in
International Trade and Finance. Congressional Research Service, January 27, 2009 (RS20792).

Table 8.--Development Bank Management's General Capital Increase (GCI) Requests as of January 13, 2010
(in millions of U.S. dollars
--------------------------------------------------------------------------------------------------------------------------------------------------------
Implied
Current Proposed Annual U.S.
Subscribed Proposed Increase Paid-in
Multilateral Development Bank Capital Base Increase Paid-in Contribution
(dollars) (percent) Capital over 5 years
(percent) (dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
World Bank Group: IBRD $190,000 30 6 $655
(including SCI)* *
World Bank Group: IFC*** 2,400 85 100 482
AfDB 38,000 200 6 270
EBRD 30,000 50 10 150
IDB 101,000 200 4 2,420
AsDB 50,000 200 4 535
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Paid in only. Budget estimates assume five year pay-in period.
** IBRD includes approx. annual cost of a selective capital increase (SCI) to maintain shareholding at $23 million.
*** The IFC does not have callable capital.
Source: Treasury Department Staff

Table 9.--Projected Net Private Financial Flows to the Emerging Markets and Estimates of MDB Lending, With and
Without Implementation of Management's General Capital Increase (GCI) Requests
Net private flows to emerging markets* ($ billion)
----------------------------------------------------------------------------------------------------------------
2007 2008 2009(f) 2010(f)
----------------------------------------------------------------------------------------------------------------
Total................................................... 1252 648 348 672
Latin America......................................... 229 132 100 151
Emerging Europe....................................... 446 270 20 179
Africa/Middle East.................................... 155 75 37 69
Emerging Asia......................................... 422 171 191 273
----------------------------------------------------------------------------------------------------------------
* Source: IIF, http://www.iif.com/emr/article+204.php

Table 10.--Regional MDB Commitments*
($ billion)
----------------------------------------------------------------------------------------------------------------
2007 2008 2009(f) 2010(f)
----------------------------------------------------------------------------------------------------------------
Total................................................... 29.3 31.8 50.2 48.1
IDB with GCI.......................................... 8.7 11.2 15.1 16.0
EBRD with GCI......................................... 8.0 7.4 11.9 14.1
AfDB with GCI......................................... 2.6 2.7 10.3 5.3
AsDB with GCI......................................... 10.0 10.5 12.9 12.7
Total w/o GCIs.......................................... 29.3 31.8 50.2 27.5
IDB without GCI....................................... 8.7 11.2 15.1 12.0
EBRD without GCI...................................... 8.0 7.4 11.9 9.0
AfDB without GCI...................................... 2.6 2.7 10.3 2.5
AsDB without GCI...................................... 10.0 10.5 12.9 4.0
----------------------------------------------------------------------------------------------------------------
* Source: MDBs, U.S. Treasury Department estimates

Appendix VI.--Senate Foreign Relations Committee Hearings Chaired by
Senator Lugar

With the intent of strengthening reforms at the
multilateral development banks (MDBs), particularly those
related to corruption, Senator Lugar chaired six Senate Foreign
Relations Committee hearings in the 108th and 109th Congress on
May 13, 2004, July 21, 2004, September 28, 2004, April 21,
2005, March 28, 2006, and July 12, 2006. The hearings included
representatives from the Treasury Department, the United States
Executive Directors to the MDBs, academics, non-governmental
organizations and members of civil society. (A summary of
recommendations from the hearings is available in Annex I.)
The following witnesses testified at the first hearing on
Thursday, May 13, 2004, entitled ``Combating Corruption in the
Multilateral Development Banks:'' Ms. Carole Brookins, U.S.
Executive Director, The World Bank; Mr. Hector Morales,
Alternate U.S. Executive Director, Inter-American Development
Bank; Dr. Jeffrey Winters, Associate Professor, Northwestern
University; Mr. Manish Bapna, Executive Director, Bank
Information Center; Ms. Nancy Zucker Boswell, Managing
Director, Transparency International USA; Professor Jerome I.
Levinson, Distinguished Lawyer in Residence, Washington College
of Law, American University. Written testimony is available at
http://www.foreign.senate.gov/hearings/2004/hrg040513a.html
At the second hearing on Wednesday, July 21, 2004, named
``Combating Multilateral Development Bank Corruption: U.S.
Treasury Role and Internal Efforts,'' the following witnesses
testified: The Honorable John B. Taylor, Under Secretary for
International Affairs, Department of the Treasury; The
Honorable Richard Thornburgh, Of Counsel, Kirkpatrick &
Lockhart; Mr. Guido Penzhorn, Advocate and Senior Counsel,
Durban Bar (South Africa); and Ms. Kimberly Ann Elliott,
Research Fellow, Institute for International Economics. Written
testimony is available at http://www.foreign.senate.gov/
hearings/2004/hrg040721a.html
On Tuesday, September 28, 2004, at the third hearing called
``Combating Corruption in the Multilateral Development Banks
(III),'' Mr. Bruce M. Rich, International Program Manager,
Environmental Defense and Dr. George Ayittey, Distinguished
Economist in Residence, Economics Department, American
University both testified. Written testimony is available at
http://www.foreign.senate.gov/hearings/2004/hrg040928p.html
The subsequent witnesses testified on Thursday, April 21,
2005, at the fourth hearing entitled ``A Review of the Anti-
Corruption Strategies of the African Development Bank, Asian
Development Bank and European Bank on Reconstruction and
Development:'' The Honorable Paul Speltz, U.S. Executive
Director, Asian Development Bank; The Honorable Mark Sullivan,
III, U.S. Executive Director, European Bank for Reconstruction
and Development;
Mr. Hemantha Withanage, Executive Director Center for
Environmental Justice Convenor, Sri Lankan Working Group on
Trade and
International Financial Institutions; and Mr. Tom Devine, Legal
Director, Government Accountability Project. Written testimony
is available at http://www.foreign.senate.gov/hearings/2005/hrg
050421a.html
At the fifth hearing called ``Multilateral Development
Banks: Promoting Effectiveness and Fighting Corruption'' on
Tuesday, March 28, 2006, the following witnesses testified:
The Honorable Clay Lowery, Assistant Secretary for
International Affairs, Department of the Treasury; The
Honorable Cynthia Shepard Perry, U.S. Executive Director of the
African Development Bank; Dr. William Easterly, Professor of
Economics, Co-Director of the Development Research Institute,
New York University; Dr. Ruth Levine, Acting President,
Director of Programs and Senior Fellow, Center for Global
Development; and Dr. Adam Lerrick, The Friends of Allan H.
Meltzer Chair in Economics, Director of the Gailliot Center for
Public Policy, Tepper School of Business, Carnegie Mellon
University. Written testimony is available at http://
www.foreign.senate.gov/hearings/2006/hrg060328a. html
At the sixth hearing named ``Multilateral Development
Banks: Development Effectiveness of Infrastructure Projects''
on Wednesday, July 12, 2006, the following witnesses testified:
The Honorable Clay Lowery, Assistant Secretary for
International Affairs, Department of the Treasury; The
Honorable Jaime Quijandr!a, Executive Director for Argentina,
Bolivia, Chile, Paraguay, Peru and Uruguay, The World Bank; The
Honorable Carlos Herrera Descalzi, Former Minister of Energy
and Mines, Vice-Dean, National Engineers Association of Peru;
Dr. Korinna Horta, Senior Economist, Environmental Defense; and
Mr. Manish Bapna, Executive Director, Bank Information Center.
Written testimony is available at http://
www.foreign.senate.gov/hearings/2006/hrg060712a.html
Appendix VII.--Acronyms and Abbreviations

AfDF--African Development Fund

AfDB--African Development Bank

AFT--Transantiago Financial Administrator

AIDS--Acquired Immune Deficiency Syndrome

APs--Affected Persons

AsDB--Asian Development Bank

AsDF--Asian Development Fund

BIC--Bank Information Center

CIS--Commonwealth of Independent States

CPIA--Country Policy and Institutional Assessment

CPPR--Country Portfolio Performance Ratio

CRP--Compliance Review Board

CRR--Capital Resources Review

DIR--Detailed Implementation Review

EBRD--European Bank for Reconstruction and Development

ECF--Extended Credit Facility

EFF--Extended Fund Facility

EITI--Extractive Industry Transparency Initiative

ESF--Exogenous Shocks Facility

EU--European Union

EU-8--Poland, Czech Republic, Slovakia, Hungary, Estonia,
Latvia, Lithuania, Slovenia

FDI--Foreign Direct Investment

FSO--Fund for Special Operations

G20--Group of 20 (Argentina, Australia, Brazil, Canada, China,
France, Germany, India, Indonesia, Italy, Japan,
Mexico, Russia, Saudi Arabia, South Africa, Republic of
Korea, Turkey, United Kingdom, United States, and the
European Union)

GAO--Government Accountability Office

GCI--General Capital Increase

GDP--Gross Domestic Product

GOI--Government of India

GOL--Government of Lebanon

GRA--General Resources Account

HIV--Human Immunodeficiency Virus

H.R.--House Resolution

IADB--Inter-American Development Bank

IBRD--International Bank for Reconstruction and Development

IDA--International Development Association

IDB--Inter-American Development Bank

IEO--Independent Evaluation Office

IFAD--International Fund for Agricultural Development

IFC--International Finance Corporation

IFI--International Financial Institution

IIC--Inter-American Investment Corporation

IMF--International Monetary Fund

LHWP--Lesotho Highlands Water Project

LNG--Liquefied Natural Gas

LTTE--Liberation Tigers of Tamil Eleem

MDB--Multilateral Development Bank

MDRI--Multilateral Debt Relief Initiative

MIGA--Multilateral Investment Guarantee Agency

MIF--Multilateral Investment Fund

MTS--Mobile TeleSystems

NADBank--North American Development Bank

OC--Ordinary Capital

OED--Operations Evaluation Department

ROYG--Republic of Yemen Government

PRGF--Poverty Reduction and Growth Facility

RCF--Rapid Credit Facility

SBA--Standby Arrangements

SCF--Standby Credit Facility

SDR--Special Drawing Rights

SEI--Sustainable Energy Initiative

SFRC--Senate Foreign Relations Committee

SPF--Special Project Facilitator

UN--United Nations

US--United States

USAID--United States Agency on International Development

USED--United States Executive Director

WGMA--Working Group on Multilateral Assistance

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