SECTION 5: PROTECTING DEVELOPMENT ASSISTANCE
PROGRAMMES FROM CORRUPTION
84. In this Section we will examine the link between
aid and corruption before looking first at how multilateral funds
are safeguarded and secondly how bilateral funds are protected.
Links Between Aid and Corruption
85. Laurence Cockcroft, Transparency International
(UK), said "Few forms of aid have completely avoided either
directly or indirectly fuelling corruption".[204]
Even DFID's Country Strategy Paper on Indonesia admits "in
the past some donor funded projects probably fuelled corruption".[205]
World Bank staff estimated that in Indonesia about 20 - 30 per
cent of all development funds had been systematically diverted.[206]
In arguing that aid dependency was a "motor of corruption",[207]
Transparency International drew on the work of Judge Warioba,
a former Prime Minister of Tanzania and chair of the 1995 report
on corruption in Tanzania. He said that donor assistance created
a set of assumptions about continuing aid flows that were valued
more for the personal incomes they generated than their value
in raising GDP in the long run. This whole problem has been compounded
by donor organisations which strove to reach disbursement targets
and had weak financial controls so that aid was given with little
thought to the longer term goals and with little accountability.[208]
This is symptomatic of an overemphasis on inputs rather than considering
the intended outputs. We welcome the shift that DFID has made
to move from an input driven approach to one that focuses on outputs.
86. Anne Cockcroft, CIET, said that some of the problems
stemmed from the large sums of money in projects and programmes,
pressures to meet disbursement targets and a lack of incentive
to check how money was spent once a disbursement target had been
met.[209]
The Corner House suggested "What constitutes a development
failure from the point of view of the poor and civil society,
however, may well constitute a development success from the point
of view of funding agencies, consultants and companies involved
in a project. Even illconceived anticorruption programmes,
for example, are evidence of some sort of 'action' for which institutions
can - and do - claim credit".[210]
The Corner House said that staff at the World Bank were reluctant
to raise issues that might slow down a loan for fear that it might
adversely affect their career.[211]
87. We welcome the fact that DFID has recognised
that "Development programmes can themselves be vulnerable
to corruption in aid procurement and misuse or diversion of development
assistance".[212]
DFID has been improving procedures, upgrading systems and training
staff to ensure corrupt practices are prevented and detected.
This needs to be supplemented by internal and external audit.
88. Anne Cockcroft noted that some large donors paid
officials to attend meetings, which was to some extent a form
of corruption.[213]
The Committee was told that the UNDP paid those attending some
of its courses in Vietnam. This kind of activity can lead to skewed
priorities and may undermine important development work. Anne
Cockcroft felt that it was a misperception that you had to pay
people to attend meetings. We believe it is wrong for donors
to be paying people to attend meetings they should attend as part
of their duties. There may be legitimate expenses associated with
travel that can be reclaimed but donors should not be funding
any projects or programmes where money is routinely paid to government
officials or others simply to attend meetings.
89. Rick Helsby, PricewaterhouseCoopers, spoke about
some of the forensic investigative work they had conducted for
donor organisations, NGOs and the World Bank.[214]
He also noted that there were significant barriers to forensic
investigative work in developing countries including an unwillingness
or lack of ability on the part of local police to tackle cases
of fraud, an overwhelmingly bureaucratic process and an absence
of any mutual assistance agreements with other countries. He said
that this kind of work was also hampered by "a very illdeveloped
sense of corporate ethic".[215]
Building institutional and technical capacity in the criminal
justice and legal systems of developing countries is essential
if companies are to have the confidence that their investment
is protected by the rule of law and that the rule of law will
be evenly applied. Companies need to have the confidence that
they will have recourse to the police and courts where fraud and
corruption are discovered. Companies also need a non-corrupt legal
system so that business disputes can be settled fairly. In
fighting corruption, multinational companies have a role in sharing
best practice and supporting local industries in developing countries.
We will consider this in greater detail later in the Report.
HUMANITARIAN AID
90. Humanitarian relief can be subject to the same
demands for bribes at customs posts and port authorities as ordinary
commercial shipments. In areas of conflict there can be problems
transporting supplies due to financial extortion by one or more
of the parties engaged in the conflict, associated with the authorisation
and facilitation of the movement of goods. The distribution of
aid for disaster relief is often carried out through NGOs who
effectively act as agents for the distribution of food and other
supplies. As with all organisations, NGOs run the risk that a
failure of internal systems could result in fraud or corrupt practice.
The problem is compounded by the fact that local NGOs are often
established primarily in order to access funds from bilateral
donors and international NGOs. It is very often difficult for
donors to assess the financial and management capacity of local
NGOs. Transparency International said that "The temptations
to corruption within local NGOs remain a threat to the effective
delivery of their services, and to the cost effective expenditure
of the money which they raise".[216]
91. Transparency International pointed out that there
was a concern that some humanitarian relief could prolong conflict,
particularly in the case of famine relief. They gave the example
of southern Sudan where a significant part of famine relief had
been coopted by all sides of the conflict at one time or
another. We have discussed these issues in our Report on the Sudan.[217]
Transparency International pointed to similar dilemmas facing
the famine relief programmes in Sierra Leone and Angola. They
argued that "NGOs engaged in famine relief need to be more
open about these questions, and to recognise in public that a
significant part of their supplies may be misused in response
to extortion at the point of a gun. This may prove disturbing
to the giving public, but should also add support to the efforts
of the NGOs by increasing the weight of public opinion to do something
effective against corruption in the relief processes".[218]
DFID should try to develop a framework for the delivery of
humanitarian assistance that limits opportunities for corruption.
The Committee does not underestimate the difficulties associated
with this. DFID should engage with the organisations routinely
involved in the delivery of humanitarian aid to see what can be
done collectively to improve systems and procedures to limit opportunities
for corruption.
92. Richard Manning, DFID, acknowledged that humanitarian
aid could be threatened by corruption but argued that by increasing
DFID's capacity to understand the reality of what was happening
and by making use of efficient and experienced nongovernmental
organisations, they had limited the risk of British taxpayers
money being misappropriated.[219]
He recognised that it was not always possible to ensure that the
food supplies eventually ended up in mouths they had intended
to feed.[220]
We looked briefly at the role of corruption in conflict our Report
on Conflict Prevention and Post-Conflict Reconstruction,[221]
but further examination of this is required. The role that
aid plays in fuelling conflict, and the part that corruption plays
in this, requires further research.
THE QUALITY OF DECISION MAKING
93. Although decisions can be swayed and influenced
by corrupt practices, not all poor decision-making in developing
countries is due to corruption. Some poor decision-making is the
result of flaws and deficiencies in the decision-making process.
Richard Manning, DFID, said "The reality of the situation
is that development will only take place positively in countries
if their governments are taking substantive decisions on resource
allocations - one of the most important set of decisions that
any developing country can take when resources are so constrained.
It follows from this that whatever the sort of assistance one
is providing, if you are working in an aid dependent country donors
should be concerned about the quality of decision making in that
country generally and we are working to try and strengthen that".[222]
It is important that donors recognise the difference between poor
decisions that have been influenced by corrupt practice and those
that are simply the result of a flawed process. Decisions on the
use of funds freed up by debt relief are very prone to both corruption
and poor decision making. It is vital that donors work towards
the establishment of systems that can prevent both the corrupt
use of discretionary power and poor decision making.
Protecting Multilateral Development Funds from
Corruption
94. Multilateral development agencies play an important
part as standard setters and they must take a stronger stance
on corruption.[223]
DFID spends just over £1.1 billion through multilateral donors
(the bulk of which, just over £674 million, is spent by the
European Community). DFID relies on the controls of multilateral
agencies to provide an assurance that the assessed and voluntary
contributions it makes to them are protected from corrupt practice.[224]
Richard Manning told the Committee, "We look very carefully,
when we make a contribution to [multilateral development agencies],
as to how effective they are from all points of view".[225]
SAFEGUARDING WORLD BANK FUNDS
95. The April 2000 US General Accounting Office Report
on the World Bank[226]
noted that there had been significant improvements in developing
management controls within the World Bank. Richard Manning said
the US General Accounting Office had recognised that the World
Bank was making a serious effort. He said DFID believed the World
Bank controls were "up to the mark internationally"
and that this in itself, had sent a useful message to the regional
banks.[227]
However, the Report raised concerns that there were still issues
to be addressed before the World Bank could provide a reasonable
assurance that funds were being spent according to its own guidelines.[228]
96. It was interesting that many of the concerns
raised in the Report related to a lack of technical skills and
weak institutions in borrower countries. The Report noted that
the Bank had placed an increasing emphasis on building institutional
capacity. It expressed particular concern about the capacity of
borrowers to meet World Bank procurement requirements and the
ability of borrowers to deliver effective project management.
In the course of its investigation, the US General Accounting
Office looked at twelve randomly selected projects. In five it
found that "borrowers' implementing agencies had little or
no experience managing development projects".[229]
Six projects failed to meet the Bank's minimum financial management
requirements for approval. In three they had particularly weak
capacity for carrying out procurement and in four projects the
implementing agencies had not even been established.[230]
The Report recognised that capacity and institution building would
be both difficult and time consuming. It also noted the World
Bank Institute had questioned the sustainability of some of its
own anti-corruption work in African countries.[231]
97. Worryingly, the Report raised specific concerns
about the independence of project auditors, particularly government
auditors in borrower countries, used to audit Bank financed projects.
The Report said that ability of the Bank to provide assurances
that funds were being correctly spent was closely linked with
the success of institution and capacity building activities.[232]
98. We consider that improvements in the World
Bank, in terms of the strengthening of internal controls, are
providing an important lead for the regional development banks.
However, there are still some improvements that can be made and
we believe that DFID should look again at the US General Accounting
Office Report on the World Bank to identify areas of concerns
that DFID together with the Bank can work to improve.
99. DFID should also examine the concerns expressed
in the US General Accounting Office Report about the institutional
and technical capacity of borrower governments to assure that
funds are being spent correctly. Borrowing by national governments
should be transparent so that parliaments and civil society can
assess how funds are being spent. This will be key in safeguarding
British taxpayers' money spent through the World Bank and other
multilateral development agencies.
OTHER MULTILATERAL DEVELOPMENT AGENCIES
100. Transparency International recognised that the
positive anti-corruption initiatives by the World Bank have had
a considerable impact on other multilateral donors, especially
the regional development banks.[233]
The regional development banks and the World Bank can all benefit
from sharing improvements and best practice on their internal
controls.
101. The Asian Development Bank (ADB) is seen by
DFID as moving towards the anti-corruption procedures adopted
by the World Bank, although it maintains a "no bribery pledge"
that is optional on large contracts.[234]
Corruption is further down the agenda of the African Development
Bank where only brief mention is made of corruption in its rules
on procurement of goods and works.[235]
DFID should make corruption a central concern of the regional
development banks, eliminating its effect from all their activities.
DFID must use its membership of their Boards to ensure this takes
place.
102. The regional development banks and the World
Bank are key players in terms of tackling corruption. They often
have significantly more leverage than bilateral donors as a result
of the size of their programmes. Many of the bilateral donors
have very good programmes but are only small players in a given
country. Clare Short recognised this when she gave the example
of lending in Indonesia where the UK programme is the order of
£15 million compared to US$1 billion lent or given by the
Asian Development Bank. By working with the ADB to improve the
quality of its programmes the UK could have a greater impact in
terms of improving systems and quality of life than through the
current stand-alone programme.[236]
We were able to see a similar relationship at work in Vietnam
where the UK had a disproportionately high level of influence,
considering the size of its programme, largely as a result of
the constructive relationship it had with the larger players such
as the World Bank. DFID should encourage the multilateral development
agencies to ensure the complementarity and coordination of their
anti-corruption efforts. DFID should also seek to use the leverage
of the multilateral development agencies in working with difficult
governments or where DFID has a small presence.
103. The Committee has heard very little about ways
in which the EC is assisting developing countries in combatting
corruption. The EC has an important role to play. It is the fifth
largest donor of ODA and the second largest multilateral donor.
When the ODA of the EC and its member states' bilateral programmes
are taken together, they account for more than 40 per cent of
world ODA. The EC also has a number of additional advantages,
such as an extensive network of country delegations and a perception
of neutrality. As part of its Statement on Development Policy,
the European Commission proposed six 'priority areas' on which
it proposes to focus its development policy. One of the six areas
is 'good governance and the rule of law'. The Committee would
welcome further details from the Government on efforts being made
by the EC to address the problem of corruption in developing countries
and in EC programmes under its core policy area 'good governance
and the rule of law'.
104. With regard to accountability, Richard Manning,
DFID, conceded that "One has to say that we have significant
concerns about the European Commission".[237]
We request that DFID, in its response to this Report, comment
on the appropriateness and effectiveness of EC controls against
the corrupt and inappropriate use of its development budget.
DISBARMENT OF COMPANIES BY INTERNATIONAL FINANCIAL
INSTITUTIONS
105. The World Bank maintains a list of firms and
individuals barred from future procurement contracts. During the
inquiry the Committee heard evidence from a number of companies
that supported the development of such lists.[238]
The disbarment of companies by International Financial Institutions
on the grounds of corrupt or fraudulent practice is likely to
increase over the next few years[239]
and is likely to be a powerful tool for tackling corruption.[240]
DFID said that the Bank was looking at the scope for this kind
of information to be shared with other development agencies. There
are already arrangements in place to pass evidence of corruption
or other criminal offences to the prosecuting authorities of the
country in which the company is registered.[241]
We would encourage DFID to press forward with work on sharing
lists of debarred companies among development agencies. The harmonisation
of such lists around the world should make tackling corrupt practice
easier and signal that there are no safe havens where companies
willing to bribe can avoid exposure. DFID said "The Government
intends to come forward with practical proposals for the UK which
it will share with the Committee and promote through other national
development agencies".[242]
We look forward to receiving these proposals.
However, DFID said that "It is unlikely for legal reasons
that development agencies will be able to simply accept and implement
each other's decisions on disbarment. Each agency may need to
examine the evidence in each case for itself and reach its own
decision on whether sanctions are appropriate".[243]
We do not underestimate the difficulty there will be in achieving
agreement on this issue.
Protecting Bilateral Spending
106. In addition to protecting the money spent through
multilateral development agencies, it is essential that £1.3
billion spent bilaterally by DFID annually is adequately safeguarded.
Richard Manning, DFID, reassured the Committee "... it is
implausible that British aid money will have been used on any
significant scale for corrupt practice".[244]
However, this view was not shared by the Corner House.[245]
DFID'S CONTROLS
107. DFID operates within an accounting and controls
framework designed to meet Government Accounting requirements
and employs regular internal and external audit. DFID staff are
subject to the rules covering civil servants which exist to safeguard
impartiality and integrity and which ensure that staff cannot
use their official position and official information to further
private interests. DFID has an approval process for bilateral
and programme expenditure that ensures appropriate management,
monitoring, accountability and audit arrangements are in place
including the arrangements for procurement of goods and services.[246]
108. DFID would prefer to rely on partner governments
to provide local accountability but recognises this can be problematic.
DFID states that "Where local financial control regimes are
weak and do not allow reliance on governmentproduced audit
statements, DFID employs alternative arrangements".[247]
Such arrangements might include the use of independent auditors
or building audit capacity into the programme management structure.
Where DFID is providing budgetary support to governments it achieves
accountability by requiring its funds to be "earmarked for
agreed specific lines of expenditure".[248]
DFID intends to make use of both partner government and DFID funded
auditors to provide an assurance on how funds are spent.
SAFEGUARDING DFID'S PROCUREMENT
109. Procurement is obviously an area of particular
concern and DFID uses procurement agents to carry out this function.
DFID assesses these agents to ensure they are competent and adhering
to best practice. Richard Manning, DFID, said "...if you
look at the specific procurement arrangements which cover the
handling of British bilateral aid, there should not be any significant
scope for corrupt practice within that".[249]
Increasingly, DFID is relying on partner governments to undertake
procurement. This sometimes requires improvements in local systems
to provide the levels of assurance and probity required by DFID,
although these capacity building measures are in themselves a
development activity. Improvements in procurements systems in
order to handle British aid should lead to an increase in confidence
that all procurement in a country is done in an appropriate and
safe way.[250]
WHISTLEBLOWING, HOTLINES AND HELP LINES
110. Whistleblowing and hotlines for reporting corruption
are useful methods of controlling and policing corruption. DFID
is subject to the provisions of the Public Interest Disclosure
Act 1998 and staff have certain statutory rights in relation to
protected disclosures. We welcome the fact that DFID will issue
guidance to staff on their rights under the Public Interest Disclosure
Act 1998. DFID have told us that they would also seek to protect
the identity of any individual outside the Department who volunteered
information or drew its attention to suspected irregularities
or corrupt practice.[251]
111. David Phillips, Crown Agents, told us that they
found whistleblowing to be one of the most effective means of
recording and reporting corrupt practice.[252]
The World Bank has had similar success with a hotline they established
for reporting corruption, although the US General Accounting Office
Report said that they could do more to publicise the hotline among
World Bank projects.[253]
DFID should consider setting up a hotline for the reporting and
recording of corrupt practice. Such a hotline would need to be
advertised widely within projects and programmes that received
British funding. It should also act as a help line for those who
need advice on how the funding of projects can be safeguarded.
204 Evidence, p.105 Back
205 DFID,
Indonesia Country Strategy Paper, Sept 2000, para c8 Back
206 US
General Accounting Office Report World Bank: Management Controls
Stronger but Challenges in Fighting Corruption Remain, April 2000,
p7 and Evidence, p.301 Back
207 Evidence,
p.48 Back
208 Evidence,
p.48 Back
209 Q.523 Back
210 Evidence,
p.301 Back
211 Evidence,
p.308 Back
212 Evidence,
p.3 Back
213 Q.469 Back
214 Q.651 Back
215 Q.652 Back
216 Evidence,
p.50 Back
217 Seventh
Report from the International Development Committee, Session 1997-98,
Sudan, HC872-I Back
218 Evidence,
p.51 Back
219 Q.6 Back
220 Q.9 Back
221
Sixth Report from the International Development Committee, Session
1998-99, Conflict Prevention and Post-Conflict Reconstruction,
HC 55-I Back
222 Q.20 Back
223 Evidence,
p.49 Back
224 Evidence,
p.12 Back
225 Q.16 Back
226 US
General Accounting Office Report World Bank: Management Controls
Stronger but Challenges in Fighting Corruption Remain, April 2000 Back
227 Q.16 Back
228 US
General Accounting Office Report World Bank: Management Controls
Stronger but Challenges in Fighting Corruption Remain, April 2000,
p.5 Back
229 Ibid.,
p.15 Back
230 Ibid.,
p.15 Back
231 Ibid.,
p.17 Back
232 Ibid.,
p.6 Back
233 Evidence,
p.48 Back
234 Evidence,
p.14 Back
235 Evidence,
p.14 Back
236 Q.772 Back
237 Q.17 Back
238 Evidence,
p.331 Back
239 Evidence,
p.69 Back
240 Evidence,
p.69 Back
241 Evidence,
p.14 Back
242 Evidence,
p.14 Back
243 Evidence,
p.14 Back
244 Q.3 Back
245 Evidence,
p.298 Back
246 Evidence,
p.12 Back
247 Evidence,
p.12 Back
248 Evidence,
p.12 Back
249 Q.3 Back
250 Evidence,
p.13 Back
251 Evidence,
p.15 Back
252 Q.372 Back
253 US
General Accounting Office Report World Bank: Management Controls
Stronger but Challenges in fighting corruption remain, April 2000,
p.11 Back
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