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Down to Earth IFIs Factsheet Series

No 27, December 2002

IFIs in Indonesia

This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.

The World Bank's Anti-corruption Strategy and Institutional Integrity Department: Effective in Combating Corruption?

It is widely known that many projects funded by the World Bank have been corrupt and that the World Bank has supported governments that have done little to combat corruption. However, it was not until 1996 that the Bank finally institutionalized a strategy and mechanism to deal with corruption. The Bank's Institutional Integrity Department — the anti-corruption mechanism of the Bank — has recently investigated several Bank-funded projects in Indonesia. How effective this is remains to be seen.

World Bank's Anti-corruption Strategy and Institutional Integrity Department

In November 2000 the World Bank merged its Corruption and Fraud Investigations Unit (CFIU) and the Office of Business Ethics into one entity called the Department of Institutional Integrity. The Department is led by Maarten de Jong, a Dutch national. As Director, Mr. de Jong is responsible for advising senior management as well as developing investigative strategies and procedures that contribute to policy initiatives and programs to strengthen the Bank's anti-fraud and corruption efforts. The Director takes on the task of raising awareness of the need for observance of high ethical standards by Bank staff. To ensure that independence is maintained, the CFIU reports directly to the Bank President.

Having identified corruption as the single greatest obstacle to economic and social development, the Bank has adopted a four-part strategy which prioritizes:

The CFIU conducts investigations into all allegations of fraud and corruption within the Bank Group or in connection with Bank Group-funded contracts, including those funded through the Global Environment Facility (GEF), such as:

The World Bank and Corruption in Indonesia

A number of the Bank's internal reports have revealed serious corruption problems in Bank-funded projects in Indonesia. A 1998 Bank internal reports estimated that approximately 30% of funds for the Government's urban development budget, which was supported by World Bank loans, was siphoned off through various means. However, Bank's concerns about corruption in Indonesia only became official in its 2001-2003 Country Assistance Strategy (CAS) for Indonesia in which Indonesia's weak fiduciary environment and the endemic nature of corruption were noted.

The CAS outlines a four-part strategy to help ensure that World Bank funds are used as intended: (i) prevention of corruption through improved design for new projects (Smart Project Designs); (ii) strengthened fiduciary supervision of ongoing projects; (iii) enforcement through investigation of fraud and corruption cases; and (iv) support for government reforms in procurement and financial management.

According to the Bank, through its Smart Project Designs approach, projects are designed or redesigned so that they become cost efficient and cost saving. For example, the Bali Urban Investment Project — redesigned in FY 2000 — adopted a policy to reduce the chances of collusion and increase open competition, which would empower capable, honest contractors. The Bank claims that since this policy was implemented in 2002, bid prices have been much lower.

Other measures include:

  1. Tightening the review of implementing agencies' procurement of goods and services;
  2. Monitoring compliance with accounting and auditing requirements;
  3. Securing Bank resources allocated to supervision of its projects in Indonesia and enhancing the capacity of the World Bank office in Jakarta to improve compliance with procurement, accounting, and auditing requirements;
  4. Promoting beneficiary involvement in the design and implementation of its projects by building relations with civil society and local communities to help prevent misuse of development funds.
Together with the Asian Development Bank and other donors, the World Bank prepares a Country Procurement Assessment Report and a Country Financial Accountability Assessment. These reports are intended to support the donors' efforts to further strengthen oversight of the borrower's procurement processes and to review all allegations of irregularities therein.

According to the Bank, all complaints are reviewed, and, when appropriate, investigated according to established guidelines. The Bank's database on procurement has been established. As of June 2002, the Bank office in Jakarta had received 231 corruption-related complaints, most of them involving allegations of irregularities in the procurement process. Seven cases involved specific allegations relating to bribery and misuse of funds. One-hundred-and-ninety cases had been reviewed by Bank staff and the Government of Indonesia and considered closed.

The Bank says that actions taken relating to these complaints include the barring of firms from participation in future procurement, refund of expenditures by the government which were ineligible for financing by the Bank, re-tendering of procurement, placement of complainant firms on short lists when justified, requiring a supplier to comply with the specifications in the original bid, and sanctions by government for fraudulent advertising.

The Bank does not disclose critical information, such as the timeframe for reviewing a corruption allegation, number of cases received within certain period of time, types of cases, actions taken on each case and how proven corruption cases are settled.

The Bank — through its Department of Institutional Integrity —conducted a fiduciary audit on the Bank-funded Sulawesi Urban Development Project II (SUDP-II) early this year. See the box below.

The CFIU in Action: the Case of Sulawesi Urban Development Project II

The Sulawesi Urban Development Project II intends — through a programmatic approach — to reduce the backlog of urban infrastructure investments by providing assistance to a total of forty local governments and their water enterprises in Sulawesi. The loan was approved in November 1996. The total project cost is USD 341.2 million. USD 155 million of this was initially planned as a loan from the World Bank, but the loan was scaled back to USD 88 million following the Asia financial crisis. To date, the Bank has disbursed approximately USD 76 million.

The SUDP II fiduciary review involved a broad overview of procurement, implementation, and financial management practices accompanied by an intensive review of a sample of contracts in four cities. Despite a severe problem of missing documentation, the review found evidence of collusion among bidders and common ownership of shell companies. The review also found inadequate project oversight by implementing agencies and consultants, which resulted in contract non-compliance, failure to complete work, and changes in contracts without appropriate approvals. Similar problems were found in financial management.

According to the Bank's Country Director in June 2002, the Government and World Bank agreed on the following steps:

  • Expenditures on the SUDP-II from the World Bank loan will remain on hold until a final decision on the future of the project is made;
  • The World Bank's Department of Institutional Integrity will complete its work on follow-up actions to the field investigations, and appropriate remedial actions will be taken in accordance with the loan agreement. The World Bank will also declare problems in procurement as appropriate;
  • With the World Bank's support, the Government will prepare an action plan to address issues raised by the fiduciary review so that such problems do not reoccur in any new urban project financed by the Bank.

A Genuine Intention to Combat Corruption?

The Bank's attempt to conduct a fiduciary review on SUDP-II was received with skepticism among observers and even some Bank staff. John M. Miller, Team Leader (April 1998 – April 2002) of the Project Coordination Office of SUDP-II, categorized the Bank as a willing partner in the corrupt system in Indonesia. He further said that the Bank's mantra has always been to "push money" and that projects have been rated on how effectively they do this pushing — never mind that SUDP-II may have been poorly designed and prepared.

The Bank needs to redefine project success — to move from "pushing money" to setting benchmarks relating to how project objectives are met, project sustainability, participation of and ownership by executing agencies and the communities and public, and transparency and governance issues. Consequently, the benchmark for bank project officers' performance assessment should also be changed in accordance with the redefinition of project success. Without this, Bank project officers have no incentives for change.

The Bank's Department of Institutional Integrity should also ensure that complaints are followed up. They should make certain that there is transparency on how corruption allegations are handled and what sanctions will be taken against individuals and firms involved in corruption.

In the end, the Bank's commitment to combating corruption will be judged according both to the success of corruption prevention efforts and its effectiveness in dealing with corruption when it does occur.

World Bank website
World Bank's Resident Staff in Indonesia (RSI) website
"World Bank Integrity in Combating Corruption" by John M. Miller. The Jakarta Post, October 7, 2002.
"Indonesia. Fiduciary Review of the Second Sulawesi Urban Development Project. Overview Report" June 2002. The World Bank Office, Jakarta, and the World Bank Department of Institutional Integrity, Washington.

This IFI factsheet is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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