Global Policy Forum

By Nicholas Hildyard

 Presentation to Chatham House Conference:  "Corruption in Southern Africa -  Sources and Solutions"

 I have been asked to discuss the charges currently being prosecuted in the Lesotho courts against 19 corporate and individuals accused of bribing a top official  in the Lesotho Highlands Water Project in order to gain project contracts. My allotted task is to explore the question: "What went wrong?"

 I want to turn this question around. Instead of asking "What went wrong?" I would like to ask, "What went right? For whom?"  I want to do so because I would like you to consider the possibility that what went most "wrong" - and continues to go most "wrong" - from the perspective of project affected people, human rights groups, environmentalists and a range of other civil society groups concerned with accountability, transparency, equity and sustainable development is precisely what went most "right" from the perspective of those who have benefited institutionally and financially from the project.

 Taking this approach may, I hope, challenge us to reconsider some widely held explanations of corruption and "development failure", whether in Southern Africa or elsewhere, and to look afresh at proposed solutions. It may encourage us, for example, to focus less on the perceived "lack of political will" to tackle corruption and more on those vested interests that daily generate immense political will to block investigations when they are initiated and to undermine anti-corruption drives. It may encourage us to look not only at how regulations could be improved but also at the daily institutional practices that actively encourage the flouting of existing development guidelines and anti-corruption regulations. Or again, to look not only at ways of opening up decision-making to public participation and scrutiny but also at the institutionalized racism that assumes the Third World to be inherently corrupt and corruptible and which thereby underwrites bribery even where nominally accountable procedures are in place.

 I will return to these points later. First, I would like to look at some specific examples of how "what-went-wrong-for-civil-society-went-right-for-corporations" - and how this phenomenon may actively have laid the ground for corrupt practices. I leave it to the courts to decide whether or not such corruption took place as alleged. My concern here is to examine how the actions (and inactions) of the public institutions involved may have aided and abetted bribe giving, regardless of whether or not any bribery actually occurred.

 WHAT-WENT-WRONG-WENT-RIGHT 1:  SANCTIONS BUSTING

 From its outset, the Lesotho Highlands Water Project was founded on rule- breaking. The project, which is intended to divert water from Lesotho to South Africa, 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 Directors of the World Bank (who collectively represent the bulk of the world's governments). From a civil society perspective, this was the first thing to "go wrong" with the project. For the companies and bureaucracies, however, it was the first thing to go "right". Indeed, the project could not have proceeded without such sanction busting.

 Rule breaking on this scale is hardly conducive to encouraging good project governance. Moreover, it did not stop there. Throughout the project cycle, numerous World Bank guidelines - intended to ensure that the project is implemented without adverse effects on the environment and on people - have been flouted; the project was approved on the basis of a deeply flawed and inadequate environmental impact assessment, striking construction workers have been shot, and project-affected peoples moved without proper compensation. The World Bank - one of the project's principal players - has done little to ensure compliance. On the contrary, it has dodged and ducked its critics, even maintaining the convenient fiction that Lesotho is the borrower for the project (despite South Africa in fact responsible being for repaying the loans) where this has proved useful in evading its responsibilities. In 1998, for example, residents of a local township filed a claim with the World Bank's Inspection Panel, pointing out that as the project effectively ignores demand side management in South Africa, it is in breach of World Bank rules for water projects. In response, the Bank stated: "As important as demand side management in the water sector is, there is no specific reference in the project to such measures, nor is there a legal requirement in the loan for RSA [Republic of South Africa] to implement such policies, since this is a loan to [Lesotho-based] LHDA."

 Again, it is doubtful if the project would have got the go ahead had the Bank's guidelines been properly enforced. What went wrong once again went right.

 WHAT WENT WRONG WENT RIGHT 2:  THE "GOOD OLE BOYS" SYNDROME

 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, South Africa's SACCE and Britain's ECGD). The ECGD's support amounted to £66 million and went in loan guarantees five UK companies: Balfour Beatty, Kier, Stirling, Kvaerner Boving and ABB Generation's UK subsidiary.

 Not one of these agencies however ever vetted the corruption records of the companies bidding for contracts. Even today, there is no binding requirement for any of them to undertake such a vetting process of the companies they award contact to. Yet, most of the companies now in the dock in Lesotho - charged with passing some £2 million in bribes to a key official in order to win the contracts for the project - are no strangers to allegations of corruption. Spie Batignoles and Sogreah, for example, were involved in Kenya's Turkwell Gorge Dam which, because of bribes reportedly paid to Kenya's president and energy minister, cost more than twice what the European Commission said it should have cost.

 Impreglio, Dumez and Lahmeyer were three of the principle firms involved in the Yacyreta Dam in Argentina and Paraguay, which Argentina's President Carlos Menem called "a monument to corruption".

 Lahmeyer and Impregilio also had contracts on Guatemala's Chixoy Dam. Various sources estimate that between $350 and $500 million were lost to corruption on this project.

 ABB and Dumez worked on the Itaipu Dam on Brazil/Paraguay border. The dam was originally projected to cost $3.4 billion, but the final cost cam to around $20 billion. Numerous corruption allegations surround the project.

 As for Balfour Beatty, it was banned in 1996 from bidding for contracts in Singapore following allegation (denied by the company) of corruption. It was also involved in the Pergau dam in Malaysia. Here an article in yesterday's Observer is particularly pertinent. The author, Gregory Palast, quotes barrister Jeremy Carver, an advisor to Transparency International. Carver reportedly told Palast: "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 great pride that he personally handed over the cheque to the government minister for the Pergau dam 'bribe' in Malaysia." Identifying Carver's interlocutor as "the chairman of Balfour Beatty", Palast continues: "The corporate honcho 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."

 Balfour Beatty is part of the Lesotho Highland Project Contractors consortium. In March 1991, according to Swiss bank records which form the basis of the prosecution's case, the consortium allegedly paid 585,000 pounds via an intermediary into a Swiss bank account controlled by a Lesothan official. Only one month earlier a building contract was signed, worth one hundred and thirty five million pounds.

 In March 1994 the consortium allegedly paid another two hundred thousand pounds 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.

 Yet even when this evidence was set out in the charge sheets against the companies, many of the funding agencies which supported them appear to have taken no steps to scrutinize the allegations. In the case of the UK Export Credits Guarantee Department, for example, the agency at first denied that Balfour Beatty, one of the companies it supported, was being prosecuted (a position it justifies on the grounds that although the charges had been filed, the case has still to come to court); it has made no inquiries to the chief prosecutor in Lesotho; and its own inquiries appear to have ended when assured by the company that no wrong doing took place. Meanwhile, demands from non-governmental organizations that the company be suspended from applying for other credits pending further investigations (it is currently seeking one for the equally controversial Ilisu Dam) have been resolutely rebuffed.

 Yet again, what went wrong from a civil society perspective - the total absence of any good governance mechanisms requiring the vetting of contractors or mandatory investigations where allegations have been made of a company -  went right for the companies. Indeed, had checks been undertaken and their results made public, it is an open question how many of the companies would have been awarded contracts.

 WHAT-WENT-WRONG-WENT-RIGHT 3:  DON'T LET FINANCIAL OVERSIGHT GET IN THE WAY OF MY CAREER

 Internal investigations into the consistent failure of World Bank staff to implement operational directives on issues such as resettlement and environment have repeatedly highlighted the "pressure to lend" as a major reason for non-compliance. The Lesotho saga adds a further twist to this indictment.

 Leaked correspondence between the World Bank and the Lesotho government suggests that the Bank knew of corruption allegations against Masupha Sole, the former director of the Lesotho Highlands Development Authority who is alleged to have taken the bribes, as early as 1994. The Bank's reaction, however, was to berate the Lesotho authorities for having suspended Sole from his post pending an investigation into the project's accounts. Their reason: it would interfere with project construction timetables and could lead to costly overruns.

 In a letter to Mr Pekeche, Principal Secretary at the Ministry of Natural Resources, Praful Patel of the Bank's Southern Africa Department, gripes: "While the undertaking of a management audit may be normal practice, the suspending of key management staff in order to conduct such an audit is most unusual. In our view, the absence of key members of senior staff from the project during this critical time could seriously jeopardize the progress of the project."

 Instead of picking up the ball and immediately suspending the companies pending a corruption inquiry - the minimum that the Lesotho authorities' audit should have prompted - the Bank effectively turned a blind eye to the corruption charges. Yet again, what went wrong for civil society - the institutional pressure to push ahead with the project regardless of evidence of corruption - went right (in this case, very right) for the companies. Had suspensions been instituted at this stage in the proceedings, many of the companies might not have been awarded contracts for the second phase of the project - constructing the Mohale Dam.

 Indeed, it now emerges that, despite previous assertions to the contrary, the Bank - and the South African authorities - knew full well of the corruption charges at the time that Mohale was approved. Nonetheless, the Bank pushed to have Mohale built now, rather than in a decade's time when the water may be needed in South Africa, because the contractors were in place and it would be therefore be cheaper than waiting.

WHAT-WENT-WRONG-WENT-RIGHT 4: NOT MY PATCH, GUV

 Now that the corruption charges have been laid against the companies, history looks set to repeat itself. Although the Bank has instigated an internal investigation, the investigators - Arnold and Porter, a prestigious Washington-based law firm - have been subject to innumerable restrictions. For example, 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. 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. 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 raising 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."

 Clear evidence too that the Bank's claim to be a passive bystander in the project - the basis for restricting its action in the event of a conviction - is nothing short of hogwash. Hogwash, however, which, like so much of the Bank's previous actions and inactions, will ensure that "what-goes-wrong-goes-right" - at least for the companies' accused of corruption.

DRAWING CONCLUSIONS

 Where does all this lead us? What immediate conclusions might we draw from the pattern of institutional behaviour documented above?

 First - and most obvious - that the problem of corruption is unlikely to be addressed by new regulations unless and until the well-documented structural and institutional barriers to their rigorous implementation are addressed. Put simply, the World Bank and other funding agencies are institutionally predisposed to behaviour that "makes-things-go-WRONG-for-civil-society-and-R IGHT-for-the-corporations-that-benefit-from-the-projects-they-finance-or-und erwite".

 Second, that addressing those institutional and structural barriers will require root-and-branch overhaul of the mission, management and culture of institutions such as the World Bank. Institutions which act so consistently to the detriment of openness, accountability and democratic decision-making processes do not do so because of minor, easily remedied institutional failures. Their delinquency is far deeper-seated. Combating the pressure to lend, for example, requires more than mere exhortation to take seriously the World ank's guidelines: it requires radical changes in incentives; severe career penalties for those who flout the rules; and legally-enforceable means of redress for those who suffer the consequences.

 And, third, that such radical change is unlikely to come about through the goodwill of the institutions under scrutiny. Public pressure is essential if change is to be achieved.

 In that respect, the Lesotho corruption trial represents an opportunity not to be missed. It offer the chance to hold the World Bank and other funding agencies to account; to insist that they formally suspend all the accused companies until the Lesotho case arrives at its conclusion; that they instigate thorough, independent investigations of the allegations immediately and publish their findings; and that they debar any company found wanting from all future contracts and support.

 The Lesotho Government has played its part - exploding the myth that all Third Worlders are on the take in the process. It is now up to those outside Lesotho to take up the fight. And to "Organise! Organise! Organise!" to ensure this time it is civil society, not the companies, which find themselves at the right end of any official decision.