Memorandum submitted by The Corner House
1. The Corner House is a not-for-profit
research and advocacy group, focusing on human rights, environment
and development. It aims to support the growth of a democratic,
equitable and non-discriminatory civil society in which communities
have control over the resources and decisions that affect their
lives and means of livelihood, as well as the power to define
themselves rather than to be defined only by others.
2. Corner House staff have been involved
in monitoring the social, human rights and developmental impacts
of World Bank projects and policies since 1985. Most recently,
the Corner House participated in a review of the impacts of World
Bank-backed mining, oil and gas projects on indigenous peoples,
from which this Memorandum is drawn.
3. The research conducted by the Corner
House and its partner organisation has revealed a consistent and
unaddressed tendency for the Bank's safeguard policies to be routinely
ignored and for projects and programmes to be railroaded through,
despite clear evidence of their adverse impacts on indigenous
peoples, the environment and poverty alleviation. Recommendations
for internal reform have been blocked, watered down or sidelined.
Critically this pattern of serial institutional failure emerges
as a consistent theme in reviews of the Bank's performance across
the board.
4. The Corner House has identified six major
institutional failures as underlying causes of the continuing
breach of World Bank policies in project implementation; the pressure
to lend; "clientitis"; a tendency for the Board to act
as a rubber stamp; penalties that act against staff integrity;
the watering down of existing safeguard policies; and the Bank's
immunity against prosecution. These are detailed below:
A. THE PRESSURE
TO LEND
The World Bank has a raft of policies which,
if implemented, could contribute to reducing the social and environmental
impacts of its projects. Such policies, however, are routinely
flouted.
A 1992 report by the World Bank's Portfolio
Management Task Force, led by Willi Wapenhans, identified the
Bank's "pervasive preoccupation with new lending" as
a major cause of such breaches of World Bank policies. [49]Since
1992, the Bank has introduced a number of initiatives intended
to address the problems identified by Wapenhans. However, far
from remedying the problems, they have in many respects made them
worse, not least by streamlining business procedures in order
to speed up loan approvals and by introducing new rewards for
staff, who move projects through the approval process at a faster
pace, rather than for those who comply with policy. [50]Indeed,
a succession of internal reports has continued to criticise the
culture of loan approval—where staff are rewarded above
all for pushing money—as a major cause of project failure
and "leakage" (the Bank's euphemism for graft)[51]
[52]In
at least one instance, the full findings of one critical report—a
1997 review of the Bank's project portfolio by the Quality Assurance
Group—were never officially shared with Board members. Significantly,
the report concluded:
The lessons from the past experience are well
known, yet they are generally ignored in the design of new operations.
This synthesis concludes that institutional amnesia is the corollary
of institutional optimism[53]
B. "CLIENTITIS"
Like the "pressure to lend", the Bank's
desire to keep lending to its client governments—"clientitis",
in the words of Bruce Rich, International Program Director at
Environmental Defense, a US non-governmental organisation[54]—has
also been identified as a major cause of poor loans being approved
by the Bank. This is another problem that the Bank's management
and Board has singularly failed to address, exacerbating the problem
of corruption and poor project quality. Even when Bank staff have
been well aware of corruption in loans, they have frequently ignored
it in order to maintain the flow of lending.
The Bank's relationship with Indonesia during
the Suharto era illustrates the point. In a February 1999 study
of lending to Indonesia, for example, the Bank's own Operations
Evaluations Department (OED) noted:
Warning signals were either ignored or played
down by senior managers in their effort to maintain the country
relationship. Some staff feared the potential negative impact
on their opportunities that might result from challenging mainstream
regional thinking[55]
Significantly, the Bank's reluctance to fall
out with a major borrower led it to downplay major problems which
internal reports have revealed in the Indonesian banking system,
with the result that the "Bank's readiness to address the
subsequent financial crisis in Indonesia was seriously impaired."[56]
The Bank's Executive Directors are, it would
seem, as amenable to clientitis as its staff ... Internal World
Bank documents and external reports by the US Government and others
now provide plentiful evidence that the World Bank's Board, which
is responsible for ensuring that loans are spent as intended,
has approved loans to countries with a known record of corruption,
despite such countries failing to comply with the Bank's own anti-corruption
regulations and despite warnings that the loans were likely to
be misspent.
C. RUBBER STAMPING
BY THE
BOARD
The failure of the Bank's board to exercise
proper oversight over projects is also a constant theme of external
reviews of the Bank's performance. Again the beneficiaries are
those project developers whose applications would be rejected
if the Bank's procedures were properly observed.
As the US General Accounting Office (GAO) reported
in a major study of the Bank's fiscal management control, published
in April 2000, the Board continues to approve many projects which
fail to meet the Bank's minimal financial management requirements[57]
Of 12 projects in "corruption-prone"
countries randomly selected by the GAO, "six ... did not
meet the Bank's minimal financial management requirements at the
time that the Board approved the projects". The report continues:
Our review of 12 randomly selected projects approved
by the Bank since November 1998 identified five projects in which
the borrowers' implementing agencies had little or no experience
managing development projects, according to Bank records and staff
... Furthermore, for three of the 12 projects, the Bank determined
that the borrowers' implementing agencies had particularly weak
capacity for carrying out procurement in accordance with Bank
rules ... For four projects, the implementing agencies were not
yet functioning and did not have key staff or operating procedures
in place[58]
As a result of these and other deficiencies:
"The Board may not have had sufficient information
to assess the borrower's capacity when approving these loans."[59]
Although the GAO review notes that the Bank
has made "significant progress" in introducing anti-corruption
measures, it concludes, "further action will be required
before the Bank can provide reasonable assurances that project
funds are spent according to the Bank's guidelines."[60]
Given the huge sums that have been disbursed since the Bank began
operating over 50 years ago—some US$170 billion[61]—this
criticism, which is echoed by a succession of internal Bank reports
dating back to the early 1990s, is profoundly disturbing[62]
D. PENALISING
STAFF INTEGRITY
World Bank staff are frequently reluctant to
raise questions that might slow down a loan, fearing that by doing
so, it will adversely affect their career. Internal Bank memoranda
and reports have identified this as a major problem in addressing
the Bank's "culture of loan approval" and, indeed, corruption.
In a 1999 report on Indonesia, for example, the Bank's Operations
Evaluations Department (OED) notes that staff who had drawn attention
to major problems in the Indonesian banking sector were perceived
to have suffered "unjustified penalties to their career prospects."[63]
E. WATERING DOWN
EXISTING SAFEGUARD
POLICIES
The Bank's reaction to many of the governance
failures identified by Wapenhans and others has been to argue
that its safeguard policies are too complicated for staff to implement
and should therefore be streamlined. Other arguments have been
mustered to support "simplifying" the guidelines. Chief
amongst these is the claim that the guidelines impose unjustifiably
high transaction costs. This view has become commonplace amongst
other multilateral banks and bilateral development agencies. As
a recent joint statement by such institutions puts it:
We in the donor community have been concerned
with the growing evidence that, over time, the totality and wide
variety of donor requirements and processes for preparing, delivering
and monitoring development assistance are generating unproductive
transaction costs for, and drawing down the limited capacity of,
partner countries[64]
As non-governmental organisations have repeatedly
pointed out, such arguments ignore the very real financial and
development gains that result from ensuring projects conform to
the highest standards; they also ignore the high costs that result
from poorly planned projects or projects that generate public
opposition[65]
Nonetheless, the Bank has recently undertaken
revisions of a number of its safeguard policies. The revisions—undertaken
in the name of improving development effectiveness—have
resulted in a serious weakening of the ability of civil society
to hold Bank staff accountable for problems and failures in implementation.
By contrast, no steps have been proposed for making the financial
guidelines that apply to Bank projects more "flexible"
(read: "less stringent"). The revision process is restricted
to the Bank's social, environmental and development policy guidelines,
clearly signalling that quality control in these areas is less
important than ensuring borrowers pay up.
F. IMMUNITY FROM
PROSECUTION AND
FROM JUDICIAL
REVIEW
It is the Corner House's understanding that
staff of the World Bank have immunity from prosecution over matters
relating to Bank business, as do the Executive Directors of the
Bank. Citizens affected by World Bank projects and programmes—as
well as taxpayers in the countries that subscribe capital to the
Bank—are thus prevented from holding the decisions of Bank
staff accountable under the law. In the Corner House's view, such
immunity from prosecution directly undermines good governance
within the World Bank Group.
5. The need to address the institutional
failures that continue to undermine the implementation of Bank
safeguard policies is urgent. The Corner House recommends in particular:
— stiff staff penalties for non-compliance,
including career penalties;
— incentives to staff who apply safeguard
policies with the vigour they merit;
— stricter scrutiny of the advice given
to World Bank Executive Directors by Bank staff, including independent
assessment of project compliance with Bank safeguard policies;
— the introduction of mechanisms to
hold Bank staff and Executive Directors legally accountable for
the decisions made by the Bank.
6. A number of questions arise from the
above with regard to UK oversight of the World Bank Group, which
the Committee may wish to consider:
— was it parliament's intention in
granting the World Bank staff immunity from legal proceedings
that UK Ministers and civil servants should likewise be immune
to judicial review of decisions which they make giving rise to
the advice they give to the UK Executive Director at the World
Bank;
— what procedures does DfID follow
to verify the advice that World Bank staff provide to Executive
Directors prior to Board decisions;
— what action is the UK government
pressing for within the World Bank Group to address the institutional
pressure to lend and the problems of "clientitis";
— does the British government accept
that there remain serious shortcomings in World Bank accountability
to people affected by its projects and that Bank staff incentives
need to be reformed to change this;
— does the British government agree
that among these incentives should be enhanced Board scrutiny
of advice by World Bank staff to Executive Directors, and the
removal of the exemption of Bank staff from legal prosecution;
— does the British government share
NGO concerns with the proposed changes to the current World Bank
safeguard policies and what positions is it taking in the World
Bank on this?
49 World Bank (1992), Effective Implementation:
Key to Development Impact, Portfolio Management Task Force.
World Bank, Washington DC. Back
50
Rich, B, The Smile on a Child's Face: From the Culture of Loan
Approval to the Culture of Development Effectiveness? The World
Bank Under James Wolfensohn, Environmental Defense, Washington
DC, 1999, pp6-7. See also: World Bank Memorandum, Human Resources
Policy Reform, 6 March 1998 (internal document). Back
51
See, for example: World Bank Quality Assurance Group, Portfolio
Investment Program: Reviews of Sector Portfolios and Lending Instruments-A
synthesis, 22 April 1997 (draft internal report), p 20-; "World
Bank, Operations Evaluation Department, Effectiveness of Environmental
Assessments and National Environmental Action Plans-A process
Study, Report No 15835, 29 June 1996, p 37; World Bank, Operations
Evaluation Department, Poverty Assessment: A progress Review,
Report No 15881, 7 August 1996; World Bank, The World Bank
Procurement Function-Adjusting to Emerging Needs, April 1998;
World Bank Loan Administration Change Initiative-Implementation
Strategy Paper, 29 June 1998; World Bank, Quality at Entry
in Calendar Year 1998: A Quality Assurance Group Assessment,
July 1999. Such reports highlight the undue optimism of project
appraisals; the cynicism with which poverty assessments are regarded;
the continuing weaknesses in assessing government commitment,
local capacity and the more general risks involved in project
implementation; and the insidious institutional effects of the
pressure to lend. Back
52
The 1998 Loos Memorandum on Indonesia specifically identifies
the pressure to lend as a major factor in corruption: "There
is an inherent tension not only between volume/speed of commitments/disbursements
and the quality of our work, but also between these and potential
leakages." See: Loos, J "World Bank Office Memorandum
to Mr Jean-Michel Severino, Vice President, EAP". 19 October
1998. Back
53
World Bank Quality Assurance Group, "Portfolio Investment
Program: Reviews of Sector Portfolios and Lending Instruments-A
synthesis", 22 April 1997 (draft internal report), p 15. Back
54
Rich B, The Smile on a Child's Face: From the Culture of Loan
Approval to the Culture of Development Effectiveness? The World
Bank Under James Wolfensohn, Environmental Defense, Washington
DC, 1999: World Bank; Confidential Internal Document, Summary
of RSI Staff Views regarding the problem of "leakage"
from World Bank Projects Budge, Jakarta, August 1997. Back
55
World Bank Operations Evaluation Department, Indonesia Country
Assistance Note, 4 February 1999, p 25. Back
56
World Bank Operations Evaluation Department, Indonesia Country
Assistance Note, 4 February 1999, p 26. Back
57
US General Accounting Office, World Bank: Management Controls
Stronger but Challenges in Fighting Corruption Remain, GAO/NSIAD-00-73,
Washington DC, April 2000, p23. Back
58
Ibid, p15. Back
59
Ibid, p 19. Back
60
Ibid, p 5. Back
61
Rich, B, op cit 6, p 17. Back
62
In 1993, for example, the Bank's Financial Reporting and Auditing
Task Force reported that "les than 40 per cent of audited
financial information is received by its due date making it inconsequential
for project management" and that "Financial statements
received by the World Bank frequently are not reviewed by Bank
staff or are reviewed by staff without the necessary skills to
identify significant problems and initiate appropriate action."
See: Rich, B, op cit 6. Back
63
World Bank Operations Evaluation Department, Indonesia Country
Assistance Note, 4 February 1999, p 20. Back
64
Rome Declaration on Harmonisation, Rome, Italy, 25 February 2003. Back
65
As the chief executive of Britain's Export Credits Guarantee Department
notes: "Projects that take full account of environmental
and social issues in their design and operation are less likely
to fail than those that ignore them ... Controversy around projects
adds to costs: it is in the interests of exporters and credit
agencies to address that as a business issue." See: Brown,
V, Speech to Euro 2000 Conference, 2000, reported in Insurance
Day. "Environment protection now a factor in securing
export credit guarantees", 10 March 2003. Back
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