Select Committee on International Development Appendices to the Minutes of Evidence




  UK Company Involvement: Knight Piesold

  UK Government Involvement: Export Credits Guarantee Department

  Between 1986 and 1993, Knight Piesold was "overview consultant for detailed design and construction" for the 155 metre-high concrete Turkwell hydropower dam in Kenya—a $300 million project. Knight Piesold documents obtained by The Corner House state the funding for its involvement in Turkwell came via the UK Export Credits Guarantee Department (ECGD), which was not publicly reported at the time.

  Other companies involved in the dam included GE Alsthom, Norconsult and Sogreah. Spie Batignolles, the French construction company, won the construction contract which did not go out to competitive tendering. [124]

  In March 1986, an internal memorandum written by Achim Kratz, then European Commission delegate to Kenya, was leaked to the Financial Times. [125] The memo stated that the contract price was "more than double the amount Kenya's Government would have had to pay for the project based on an international competitive tender." The memo continued, "The Kenyan government officials who are involved in the project are fully aware of the disadvantages of the French deal . . . but they nevertheless accepted it because of high personal advantages." [126]

  Kenyan observers say that these "personal advantages" included payments of millions of dollars to Kenya President Daniel Arap Moi and to the then Energy Minister Nicholas Biwott. [127] When the dam was completed in February 1991, the Kenyan press described it as "the whitest of white elephants" and a "stinking scandal".

  For two-and-a-half years after completion, the dam operated at less than half its designed operating capacity and when it was officially opened by President Moi in October 1993, the reservoir was less than a quarter full.

  As a result of the corruption scandal surrounding the Turkwell Gorge project, international donor aid to Kenya's energy sector was frozen for a decade and only began to return in late 1996. [128]


  UK Company Involvement: Knight Piesold

  UK Government Involvement: Export Credits Guarantee Department

  Since 1989, Knight Piesold has continued to be involved in a dam project run by the state-owned Kenya Electricity Generating Co. called the Ewaso Ngiro project — three dams, generating 180MW of electricity and costing a total of $350 million by the project's due completion date of 2007. In 1992, a World Bank study team criticised a £38.1 million contract for feasibility studies and environmental impact assessments that the company won in 1990 for being "five times what such services would normally cost".[129]

  The World Bank's report was obtained by the Financial Times, which reported that the UK Government's ECGD had backed 85 per cent of Knight Piesold's fee. The reputation of the client, then called Kenya Power and Lighting Corp, was already tainted by allegations of corruption and other criminal offences against Energy Minister Nicholas Biwott — including accusations that he was one of two prime suspects in the murder investigation of Foreign Minister Robert Ouko killed while investigating high level corruption. Biwot was arrested, then released for lack of evidence. The World Bank documents stated that at least £15.3 million had been paid up front to Knight Piesold, even though the project was not due to come on-stream for another 10 years. "The exorbitant cost of this contract together with the high level of upfront payments . . . even before the feasibility study has been completed, raises fundamental questions about procurement practices and financial management," the World Bank report said. Knight Piesold said at the time that the "fee was entirely in line with the norm for work of this nature". Since this scandal, Knight Piesold won further contracts for full tender design and documentation".

  The three-dam project links the Ewaso Ngiro and Amala rivers with a 3.5 kilometre-long tunnel, reversing the Amala's flow which will "consequently suck water from Masarua Swamp", giving Kenya the ability to tap water from the rainy West to the arid Rift Valley. The Masarua Swamp is a key water resource within the famous Serengeti National Park.

  The project is causing massive controversy between Kenya and Tanzania, according to a March 1999 report from Mishael Ondieki at The Nation newspaper in Kenya. "Tanzanians are convinced that the formation of dams in Kenya will drain water from Tanzania, leading to migration of animals from their country," Oneiki quoted one source saying. "It is predicted that the project, if commissioned, could jeopardise the East African Cooperation regional alliance. "Other sources told Ondieki that Tanzania, teaming up with Uganda, wanted to stop Kenya generating power so as not to threaten Tanzanian power finding a market.

  The Nation said that Knight Piesold had recently prepared a report claiming that the project was viable and would have "little impact on the environment". However, the report went on to state that it was unable to give conclusive results because of insufficient data on the levels of the Ewaso Ngiro river and Lake Natron into which the river drains. "It is increasingly difficult to carry out Kenyan research on Lake Natron since it is on the Tanzanian border," the newspaper quoted the Knight Piesold report.

  Knight Piesold also spoke to Tanzanian fears about fragile flamingo nesting and breeding sites being destroyed: "It will definitely affect the flamingo nesting areas but will not at any point hinder them from their breeding grounds since the lagoon there they breed will not be affected." Tanzania has twice vetoed the project, fearing the Masarua Swamp in the Serengeti will be drained, driving wild animals permanently to Kenya.

  The Kenyan Government is pushing the project; its permanent secretary in the Ministry of Energy, Crispus Mutitu, accused the media of giving the project bad publicity, adding that the country's electricity supply would worsen if the project was not undertaken. The Government will have to pay 30 per cent of the total cost of the project under World Bank arrangements — conditions that it has failed to meet on several past projects, which have consequently stalled. 15




  Both the World Bank-funded Itaipu Dam and the Yacyreta dam on the Parana River have been beset by corruption allegations. Brazilian journalist Paulo Schilling and Para-guayan ex-legislator Ricardo Canese have described the building of Itaipu as "possibly the largest fraud in the history of capitalism. Itaipu was originally projected to cost some $3.4 billion, but skim-offs by the military rulers of Paraguay and Brazil and their colleagues contributed to the cost skyrocketing to around $20 billion." Meanwhile, the Yacyreta dam was famously described by Argentinian president Carlos Menem as a "monument to corruption".

  Impregilo and Dumez led a joint venture as main contractor. Lahmeyer International was the second company in the 10-company consortium responsible for the engineering and construction supervision, called CIDY. Harza was the lead company in CIDY. Voith Hydro and Dom. Eng. Works manufactured 13 of the turbines and Impsa and Cometarsa the remaining seven. Voith did the hydraulic design for adjustable blade units, and Voith and GE Canada the mechanical design. Siemens supplied generators (with Ansaldo, Mitsubishi, Hitachi and Toshiba). Impregilo assembled the turbine-generators on site (with CIE, Sade and Iglys).

  The Yacyreta dam's costs soared from an original estimate of $2.7 billion to $11.5 billion, and the still unfinished dam is currently 10 years behind schedule. It has faced technical, financial, social and environmental problems. Three turbines had to be taken out of service in 1998 at a cost of $5 million in lost production when cracks appeared. In May 1999, four turbines failed and the binational operating company, Entidad Binacional Yacyreta (EBY), is seeking damages from the manufacturers of $200,000 for each day the turbines are inactive.

  The floodgates of Yacyreta's reservoir were closed in 1994 before a detailed environmental and social mitigation plan was in place. The reservoir has never been filled to its full capacity and the dam is operating at only 60 per cent of its installed capacity, below the project's financial break-even point. Financing has not been found for the $857 million worth of additional construction work required to fill the reservoir, nor for past and future resettlement and environmental mitigation costs.

  The project was economically justified on the assumption that Argentinian electricity demand would increase by 8-10 per cent per year during the 1980s. In fact, demand grew by around just 2 per cent, so that when the first turbines came on-line in the mid-1990s, Argentina already had a surplus of generating capacity. The World Bank Performance Audit Report says: "Based on the foregoing, the Audit concludes that Yacyreta was not a least-cost solution to expanded power supply and its relevance to the country's priorities was negligible. On several occasions, the Bank had good cause for stopping the project before the major civil works were too advanced."

  Less than 25 per cent of the 50,000 people who would be forced to move to make way for the Yacyreta's reservoir if fully filled have been resettled so far. The World Bank's Inspection Panel outlines "unsanitary conditions . . . in many of the stagnant bays created by the reservoir (which) pose health risks to poor people living in low-lying urban areas." The panel also found that thousands of people have lost their jobs as a result of the dam and have received no compensation. A June 1999 internal report to the Board of the Inter-American Development Bank points out some "serious problems in EBY's dealings with civil society, particularly people affected by the project and organizations that are speaking for them on the Paraguay side, as EBY's institutional credibility has eroded."

  The Itaipu dam, meanwhile, has drowned a large area of Atlantic forest, the fastest disappearing forest in Brazil. Many of the 42,000 people displaced by the dam moved to resettlement schemes in Amazonia, with disastrous effects for themselves and for the indigenous peoples and forest of the region. The reservoir has caused the local spread of bilharzia, a debilitating water-borne disease, previously unknown in the area.



  Finance for the massive Paiton 1 and Paiton 2 coal-fired power complex in Java, Indonesia, has been guaranteed by a number of ECAs, including JEXIM, US Ex-Im, OPIC and Hermes. The UK's Barclays Bank was one of eight banks which syndicated the loan for the Paiton 1 project and the West Merchant Bank is reported to be heavily involved in financing Paiton 2, with Prudential Assurance providing debt cover for the project. PowerGen, the UK energy utility, has a 35 per cent share in Paiton 2.

  The bid to build and run the Paiton 1 project was won by Mission Energy-General Electric, a joint venture which had the backing of President Clinton, former Vice-President Dan Quayle, and such Washington insiders as Ron Brown, Robert Rubin, Warren Christopher and Henry Kissinger.

  In December 1998, the Wall Street Journal reported a series of corruption scandals associated with Paiton 1. Members and friends of the Suharto clan, among them Hashim Djodjohadikusomo, a relative of Suharto, as well as Agus Kartasasmita, a brother of the Energy Minister and later Minister for Economic Affairs, had been attributed a 15 per cent stake without payment. [131] Djodjohadikusomo and Kartasasmita were also awarded the order to supply coal for the plant, despite their company having no previous experience in the coal business. The contract was awarded without public tendering. The Indonesian National Audit Commission has been estimated that such corrupt contracts increased the cost of Paiton 1 by $600 to $1000 million.

  As Peter Bosshard notes, these costs were shifted to the Government by charging PLN, the state electricity board, an extremely high price for the electricity it purchased from the Paiton plant. The final electricity tariff was set at 8.6 cents per kilowatt-hour of electricity, 32 per cent higher than comparable tariffs in Indonesia and 60 per cent higher than in the Philippines. "It was a presidential decision", commented Negah Sudja, a former head of research at PLN, in the Asian Wall Street Journal, "Everybody knew it was nepotism, but we couldn't do anything about it." The President of PLN, Djiteng Marsudi, was more explicit: "The power companies dictated terms to us because they had Indonesia's first family behind them. Resisting them was like suicide."

  Ex-Im officials were told by government officials and by PLN staff that they did not want and could not afford the plant, but that they were powerless to challenge the project as it had the backing of the President.

  The economic collapse in S.E Asia and the crash of the Indonesian rupiah meant that PNL could no longer meet its obligations under the power purchasing contracts, which had to be paid in dollars. Initially, the Ministry of Mines stepped in but by March 1998, it had run out of funds. The contract was renegotiated but the tariff was not disclosed

  With the fall of Suharto in May 1998, the new Government announced that it would check all power purchasing agreements for corruption and nepotism. Where this could be proven, the contract would be considered null and void. PLN is focusing its attention on five power plants, including those at Paiton.

  In October 1999, PLN filed a suit against the companies that operate Paiton 1 in a move to void the power purchasing agreement. However, PLN was advised by Indonesia's new president, Addurraham Wahid, not to proceed—and the head of its negotiating team, along with the head of the company, were dismissed.

  Indonesia's Attorney-General, however, is confident of a prosecution eventually. "We are in possession of unambiguous evidence for corruption. So far, however, we have been forced by political pressure to suspend our investigations until an interim agreement has been been concluded. Once we will be able to proceed with the investigations, it will become clear which companies have been paying bribes." [132]

  Pressure from western governments on PLN to conclude a settlement has been intense. In July 1999, a delegation of the export credit agencies from Switzerland, Germany, the USA and Japan warned ministers that a renegotiation of the power purchasing contracts would have a detrimental impact on inward investment. A refusal to "pay would impair Indonesia and our ability to work with you in the future." In late 1999, the government gave into pressure and withdrew the legal action against the Paiton operators.


  UK Company Involvement: Balfour Beatty, Kier International, Stirling International, Kvaerner Boving and ABB Generation's UK

  UK Government Involvement: Export Credits Guarantee Department, World Bank, European Investment Bank, Commonwealth Development Corporation

  Nineteen companies and individuals are currently on trial in Lesotho, charged with paying millions of dollars in bribes to obtain contracts on the Lesotho Highlands Water Project, a massive water diversion scheme intended to bring water from Lesotho to South Africa. Four British firms—Balfour Beatty, Sir Alexander Gibb and Partners, Kier International and Sterling International Civil Engineering—are implicated.

  British taxpayers have underwritten loans to UK contractors involved in the project—including those implicated in bribery—to the tune of £66 million. [133] Gibb, Balfour Beatty and their partners received EU grants. The EU along with the World Bank are so determined that this criminal trial should be a watershed for international trade that they have offered to pay for Lesotho's prosecution.

  According to Swiss bank records, which form the basis of the prosecution's case, the Lesotho Highlands Project Contractors consortium of which Balfour Beatty is a part allegedly paid £585,000 in March 1991 via an intermediary into a Swiss bank account controlled by the Lesothan official in charge of the project. Only one month earlier a building contract was signed, worth £135 million pounds. In March 1994 the consortium allegedly paid a further £200,000 to the official's account. Two weeks later, they signed the contract to build another dam, worth forty one million pounds. Altogether, this consortium alone allegedly handed over a million pounds in bribes.

  From its outset, the Lesotho Highlands Water Project was founded on rule breaking—not least rules enshrined in the World Bank's Charter that forbid the Bank from meddling in the internal political affairs of a member country. The project was first conceived during the Apartheid era when South Africa was subject to international sanctions. To avoid the difficulties of international financiers openly aiding the then-apartheid regime, the project's financial advisers—Chartered WestLB—set up a London-based trust fund through which payments could be laundered. It was an arrangement which, to say the least, was of borderline legality — yet it was sanctioned at the highest international level, not least through the Executive Directors of the World Bank (who collectively represent the bulk of the world's governments).

  Funding for the project has come from the World Bank; the European Investment Bank; the German, British and French bilateral aid agencies; the UK Commonwealth Development Corporation; commercial banks including Banque Nationale de Paris, Dresdner and Hill Samuel; and a number of export credit agencies (including Germany's Hermes, France's COFACE, Italy's SACE, South Afrikaans's SACCE and Britain's ECGD). The ECGD's support amounted to £66 million and went in loan guarantees for five UK companies, four of which are now being prosecuted. Not one of the financing agencies, however, appears ever to have vetted the corruption records of the companies bidding for contracts.

  Although the Bank has instigated an internal investigation into the current corruption, the investigators—Arnold and Porter, a prestigious Washington-based law firm—have reportedly been subject to restrictions. For example, Non-governmental organisations have told by Bank officials that the firm has been denied complete access to World Bank files and is only allowed to copy files which it could have obtained via third parties. This is denied by the Bank. Once completed, the investigation will not be made public.

  Meanwhile, demands by NGOs that any conviction in the Lesotho courts should result in the companies being debarred from World Bank contracts, as required under World Bank rules, are being steadfastly resisted. Convictions in the court, the Bank has stated, will have no bearing on the Bank's future dealings with any of the companies.

  Instead, the Bank is insistent that it will only disbar companies if its own internal investigations show that a company has been involved in corruption involving a project component specifically financed by the World Bank. Surprisingly, at the Bank's AGM 2000 in Prague, President Wolfensohn publicly announced that the Bank will wait for the results of the trial. Nevertheless it is not clear how the Bank will act in case companies will be convicted under the Lesotho law and not found guilty under the Bank's internal investigation.

  In any case, President Wolfensohn made it clear that the Bank will only disbar companies if investigations show that a company has been involved in corruption involving a project component specifically financed by the World Bank. Since the Bank only made a small contribution to the multimillion dollar financing scheme, this would mean that few—if any—companies are affected.

  That position is based on the narrowest legal interpretation of the Bank's guidelines and a singularly selective view of the Bank's involvement in the project. Not only did the Bank finance the design of the project: it was also responsible for setting up and coordinating the financing programme. Indeed, in a confidential 1991 World Bank project document, the Bank explicitly states;

    "In the early stages of project preparation, the Government of Lesotho explicitly requested that the Bank be the lead agency in the rising of the massive amounts of funds required for implementing the project and in helping to guide the complicated and sensitive negotiations between Lesotho and the Republic of South Africa. That the proposed project has reached its current stage is clear evidence of the Bank having successfully fulfilled this role to date."


  UK Government involvement: Department for International Development

  See attached Extract from Comptroller and Auditor General of India's Report. (Not printed. Available at  99/Kar  civil3  99  chapter3.pdf)



  UK Government involvement: Credit being considered by Export Credits Guarantee Department, World Bank.

  The proposal to dam Bujagali Falls is currently before the World Bank, with a decision expected to be reached within six months. If approved the 250MW hydropower scheme will inundate one of Uganda's prime tourist destinations located on the Victoria Nile, a river already modified by the existence of two other large dams—the Owen Falls dam and the Owen Falls Extension. At a total cost of US$520m it is reported to be the largest private investment in East Africa.

  The project is a joint venture between the UK's AES Electric Ltd, a wholly owned subsidiary of the US AES Corporation, and the Ugandan company Madhvani International. AES Nile Independent Power, with offices in both Kampala and London, is the company established to oversee the project.

  Formal approval for the project by the both the Ugandan Government and the World Bank was rejected on numerous occasions; however the Ugandan Parliament finally agreed construction in 1999. World Bank concerns over the deal centred on the cost—more than 15 per cent of Uganda's GDP—together with certain aspects of the Power Purchasing Agreement (PPA). Consequently, in 1999, the World Bank instigated a 12 month suspension on signing of the PPA in order for the contract, under which there would be a 30 year power purchase deal with the Ugandan Electricity Board (UEB), to meet it's required guidelines.

  Within Uganda criticisms of the project came from government ministers, NGOs and the media. Following allegations of corruption in Uganda Confidential, a letter from three members of parliament, Absalom Ongom, chair of the Parliamentary Committee on Works, James Mwanda, chair of the Committee on Commissions, Statutory Authorities and State Enterprises, and Wandera Ogalo, chair of the Committee on Legal and Parliamentary Affairs, was sent to the then Minister for Energy and Mines, Richard Kaijuka, calling for his resignation. It was alleged that Kaijuka had demanded "a bribe of US$500,000 from Nile Independent officials out of which [he] received US240,000 with the balance to be paid . . . after the signing the agreement between Uganda Electricity Board and Nile Independent Power". Kaijuka was subsequently dismissed and replaced by Syda Bumba.

  Between 1998 and 2000, police investigations revealed massive embezzlement of AES Nile Power funds, culminating in the arrest of three staff, including the company administrator. The company is reported to have lost over Sh600m through fraudulent practices.

  The project has also been criticised for the lack of transparency in the allocation process. As it was not put out for international competitive tendering it is not known how AES procured the contract to build Bujagali.

  Madhvani is also being investigated by the World Bank over allegations of corruption and faces possible debarment from World Bank projects. [134]




  The Pergau dam, built on the Malaysian-Thai border with £234 million of British overseas aid, has become a byword for patronage politics and the illegal use of aid money. The contracts for the dam were awarded jointly to Balfour Beatty — a company with close links to the British Conservative Party — and Cementation International, a company which employed the son of the then Conservative Prime Minister, Margaret Thatcher, as an adviser. Balfour Beatty, a major donor to the then-ruling Conservative Party, won civil works contracts for the dam — without competitive bidding. The works included a 75-metre high zoned earthfill dam, power tunnels and shafts, an underground power cavern and a 24 km water transfer tunnel, together with a pumping station.

  Britain's aid agency, the Overseas Development Administration (ODA), opposed the funding of Pergau. However, Thatcher made an oral offer to fund the dam during a visit to Malaysia in 1989, conditional on a full economic appraisal. In 1990, an ODA review of Malaysia's power sector identified a number of alternative projects and concluded that Pergau would not be an economic proposition until the year 2005 at the earliest. Nonetheless, the government agreed to fund the project in February 1991. At the time, Alan Clark, the UK Defence Procurement Minister, argued that withdrawal of support for Pergau "would have an adverse impact on UK relations with Malaysia in general and defence sales in particular."

  Documentary evidence subsequently revealed that the aid package was linked in writing to a reciprocal arms deal whereby the Malaysian government agreed to buy over £1,000 million worth of British military equipment in return for the UK funding Pergau. A judicial review brought by a British NGO, the World Development Movement, against the Foreign Office led to a High Court ruling that aid for Pergau was in violation of the 1966 Overseas Aid Act, which forbids British aid money being used for the purchase of arms. Conservative ministers in parliament had consistently denied the link between aid for the dam and arms.

  Subsequently, the "revolving door" between Whitehall and the City, which has long ensured a place for ex-Ministers and top civil servants in the boardrooms of corporate Britain, saw Sir Charles Powell, Thatcher's foreign affairs adviser until 1990, become a director of Trafalgar House, which owns Cementation. Both Lord Prior, a former minister under Thatcher, and Lord King, ennobled by Thatcher, have also been linked to the affair. 17

  In July 2000, Gregory Palast of The Observer interviewed barrister Jeremy Carver, an advisor to Transparency International. "I went to a DTI reception. I was introduced to someone who identified himself as the chairman of a company and we were talking about corruption. He announced with enormous pride that he personally had handed over the cheque to the government minister for the Pergau Dam `bribe' in Malaysia." The corporate honcho, the chairman of Balfour Beatty, was not confessing, but boasting about the payment which he may have considered not a bribe but just the cost of doing business Malaysian-style. Carver noted that the then Tory Trade Minister, learning of the pay-off, publicly congratulated Balfour Beatty on its "patriotic competitiveness." [135]

124   Geary, K, Grainger, M, Lang, C, Hildyard, N, Dams Incorporated: The Record of Twelve European Dam Building Companies, Swedish Society for Nature Conservation, Stockholm, February 2000, p. 89. See also: Ozanne, J, "Mr Biwott the businessman: A look at the former Kenyan minister's road to riches", Financial Times, 27 November 1991. Back

125   McCully, P, Silenced Rivers-The Ecology and Politics of Large Dams, Zed Books, London and New York, 1996, p. 261. Back

126   Ozanne, J, "Mr Biwott the businessman: A look at the former Kenyan minister's road to riches", Financial Times, 27 November 1991. Back

127   McCully, P, Silenced Rivers-The Ecology and Politics of Large Dams, Zed Books, London and New York, 1996, p. 262. Back

128   Goldman, A and Wrong, "M, Survey-East African Community: Future looks brighter", Financial Times, 5 November 1996, p. 4. Back

129   This section is drawn from: Geary, K, Grainger, M, Lang, C, Hildyard, N, Dams Incorporated: The Record of Twelve European Dam Building Companies, Swedish Society for Nature Conservation, Stockholm, February 2000. Back

130   Information on Paiton derived from Bosshard, P (in collaboration with Altemeier, I), Publicly Guaranteed Corruption: Corrupt Power Plant Projects and the Responsibility of Switzerland, Berne Declaration, October 2000. Back

131   Bosshard, P (in collaboration with Altemeier, I), Publicly Guaranteed Corruption: Corrupt Power Plant Projects and the Responsibility of Switzerland, Berne Declaration, October 2000. Back

132   Bosshard, P (in collaboration with Altemeier, I), Publicly Guaranteed Corruption: Corrupt Power Plant Projects and the Responsibility of Switzerland, Berne Declaration, October 2000. Back

133   Channel 4 News. Back

134   Tumisiime, J, "Madhvani in trouble with the World Bank", The Monitor, 12 August 2000. Back

135   Palast, G, "War on Corruption? Not quite, Minister", The Observer, 9 July 2000, Business, p. 5. Back

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