Institution Says it Made Reforms
By Glenn R. Simpson
The report, prepared in August 1997 for senior bank officials, points to an entrenched culture of corruption, which has been blamed for Indonesia's severe economic retrenchment and the political unrest that prompted President Suharto to step down in the spring. The analysis, prepared by World Bank staff in Indonesia, appears to reflect the bank's awakening last year to Indonesia's endemic corruption, but bank officials have claimed they were ignorant of the problems until only recently.
In July 1997, World Bank officials strenuously denied allegations of corruption. "We know exactly where our money is going," Jean Michel Severino, vice president for East Asia, said at the time. "We do not tolerate corruption in our programs." Mr. Severino didn't return a phone call yesterday seeking comment.
The World Bank called the report "largely anecdotal" and noted that it
found no wrongdoing by bank staff. It said that since the report's
preparation, the bank has devoted significant attention to corruption
issues in Indonesia, and implemented reforms. "The campaign against
corruption is a major part of our dialogue with the government," the bank
said, and affects loan decisions to Indonesia.
While most World Bank employees are honest, the report states, "our
projects are being implemented in an administrative culture which is not
just tolerant of collusion and diversion of funds, but which blatantly
expects civil servants to supplement their incomes by such means." The
bank's developmental loans are administered jointly by its officials and
employees of the governments receiving the loans.
The report cites the bank's weak internal controls, which have been criticized in confidential internal reports during the past decade. It estimates that at least 20% to 30% of Indonesian government funds earmarked for development are "diverted" to bureaucrats and politicians. There is no reason to believe the rate of diversion is any smaller in bank projects, the report says, "as our controls have little practical effect."
In a letter the World Bank President James Wolfensohn, the Environmental
Defense Fund, based in Washington, asked for public release of the
report. It urged the bank "to be more candid in its public appraisals of
the economic prospects and structural issues and problems concerning not
just Indonesia, but all its borrowers." The letter was co-signed by 112
private development and environmental groups from 31 countries.
World Bank officials declined requests from The Wall Street Journal to
release the report. A Page One article last month in the Journal detailed
allegations that the World Bank has long tolerated corruption in its
Indonesia projects.
Mr. Wolfensohn recently launched an anticorruption drive within the bank and in its client countries. That effort was hailed by the environmental group, which closely monitors the bank's activities. But the group also expressed concern that not enough is being done to combat a "culture of loan approval" that rewards spending with little regard for efficacy.
The report attributes much of the corruption to Golkar, the Indonesian
ruling party founded by Mr. Suharto, particularly in the two years
leading up to Mr. Suharto's May 1997 re-election. Corrupt practices are
described in minute detail, and the level of corruption -- often referred
to as leakage -- is rated for different governmental sectors.
The report largely ascribes the problem to a colonial bureaucratic system
that presumes civil servants will supplement low wages by moonlighting,
receiving kickbacks, or siphoning off state funds.
Much of the corruption involves state contracts with firms owned or
controlled by government officials and their relatives. The report cited
"numerous reports of diversion of 50% to 80% of funds budgeted for
project land acquisition and resettlement assistance," areas in which the
World Bank has participated heavily. It found the worst siphoning of
funds -- defined as 25% or more -- in ministries of Home Affairs,
Transmigration, and Forestry.
Last year, a World Bank official in Indonesia said bank projects were protected from corruption via a system of independent audits. But the report stresses that improving the audits' quality and accuracy is "perhaps the most blatant and serious issue for immediate attention." Other recommendations include making new loans to raise civil servants' wages, increasing the pay of Indonesian World Bank employees coupled with a "serious policy of zero tolerance" for fund diversion, backed by penalties, and contracting reforms."
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