[act.indonesia] Urgent: NGO Signon Ltr to WB on Indonesia Corruption

Source APC Newsgroup: act.indonesia

Written by: indomdb_action@edf.org
Date: 11 Nov 1998 13:00:51
Subject: Urgent: NGO Signon Ltr to WB on Indonesia Corruption

From: IndoMDB Action@EDF on 11/11/98 03:59 PM
Subject: Urgent: NGO Signon Ltr to WB on Indonesia Corruption
To: Colleagues in the international environmental,
human rights, and development communities
From: Stephanie Fried and Bruce Rich
Environmental Defense Fund, Washington D.C.
The following is a periodic email broadcast from the
International Program of the Environmental Defense Fund. Below
please find a draft letter and memorandum written in response
to a letter written by World Bank President, James Wolfensohn
and sent to a coalition of 112 Indonesian and international
NGOs which had earlier raised questions about corruption in the
World Bank's loan portfolio in Indonesia. Mr. Wolfensohn's
response to the initial international query about corruption
was not satisfactory, hence the follow-up letter. The manner
in which the World Bank addresses the issue of corruption in
Indonesia has serious implications for its other projects
throughout the world. This draft letter and memorandum is are
being circluated worldwide for endorsements (signons) from
environmental, human rights and development NGOs and other
civil society organizations. Please send endorsements and
comments to indmdbac@edf.org or IndoMDB_Action@edf.org. The
easiest, of course, may be to use the reply key on your email
handler. Please include your full name, organization, address,
and fax and phone numbers. PLEASE SEND REPLIES BY NOVEMBER 19.
Thank you very much for your consideration of this matter.
++++++++++++++++++++++++++++++++++++++++++++++++++++
DRAFT LETTER
Dear Mr. Wolfensohn,
We are writing to thank you for your letter of September 3,
sent in response to concerns over World Bank corruption and
lending practices raised by 112 NGOs in 31 countries, with
particular reference to Indonesia. We welcomed the specific
responses and commitments in your letter, such as your
engagement to consider the formalization of a process for
environmental assessment for sector adjustment loans. However,
we must express our disappointment that you did not address
many of the most critical specific issues raised by 112 NGOs in
31 countries in our August 18 letter. We are writing to raise,
again, these issues which are crucial for addressing the linked
problems of corruption in World Bank lending, the culture of
loan approval, and the Bank's pattern in too many cases of not
acting on evidence of loan mismanagement so as not to offend
major borrowing clients. The lack of an explicit response to
several of the most important points in our letter indicates a
failure to send Bank staff, management and shareholders a
strong signal that, in the light of the Bank's fiduciary
responsibilities, a much more intensive and transparent
monitoring of the Bank's portfolio is a pressing priority.
We are aware that the Bank has begun to identify some general
approaches that in theory could limit diversion of Bank lending
in Indonesia, for example in the September 20, 1998 Aide-
Memoire of a recent World Bank Mission headed by Ms. Katherine
Marshall, Director of the East Asia and Pacific Region. We
commend the Bank for the posting of this document on the world
wide web. Unfortunately, as we discuss in more detail below,
there is an absence of specific, concrete, credible actions on
the part of the Bank that at the moment give any expectation
that these recommendations can and will be put into operation
in a credible, effective way.
The lack of specific, concrete responses to a number of our key
questions is all the more troubling given World Bank plans to
lend $3.5 billion in quick disbursing loans to Indonesia over
the next eight months before the 1999 Fiscal Year 1999 ends on
June 30th. We believe that the Bank will be violating the most
basic fiduciary duty to its shareholders if it proceeds with
appraising and approving these proposed loans without radical
institutional changes in its current operating procedures in
Indonesia. To date there is very little evidence that anything
has changed on the ground. Despite plans for a huge increase in
lending volume ($3.5 billion in FY 1999 in contrast to $703.2
million in loan commitments for FY 1998), there is little
evidence that civil society has been properly consulted, that
credible, effective anti-corruption measures are in place, or
that the World Bank has taken any steps to hold promised public
consultations in the preparation and appraisal of both ongoing
an and planned Structural and Sector Adjustment loans. All of
this stands in increasingly stark contrast to your well
publicized claims to be changing the Bank's culture from one of
loan approval to development effectiveness that delivers
results on the ground.
The Bank's lack of progress in changing its approach in the
Indonesia situation is all the more critical, since it is a
test case for ongoing efforts of the G7 and other Bank
shareholding countries to promote long overdue reforms in the
lending practices of the Bretton Woods institutions. Moreover,
we understand that the Bank is preparing $4 billion in quick
disbursing loans as part of the larger international financial
support plan for Brazil. We fear that the debacle of public
international lending to Russia, including billions of Bank
loans of which the mainstream international financial press
asserts hundreds of millions are unaccounted for, may be
repeated on an even larger scale in Indonesia and other
countries without major, credible changes in the Bank's
approach. For example, as recently as October 24/25 the
Financial Times asserted that "half the $500 million which the
World Bank gave the country [Russia] to restructure its coal
industry has gone missing-even as coal miners sat outside the
main government offices in protest against months without
wages," (p. xxvi), reaffirming a similar charge made by
Business Week in August, 1997. I. Issues in our letter of
August 18th, 1998 that have not addressed and answered.
We have attached a memorandum which discusses these unanswered
issues in more detail, but in this cover letter we wish to
summarize them as follows:
1. We are disturbed by your lack of response to our
questions about the disconnect between statements of high
ranking Bank officials and the situation as it is portrayed by
internal Bank memoranda. In fact, your letter of September 3rd
has added to this disconnect by stating that "we lead the world
in applying well-established procedures for competitive
procurement of goods and services, controls on disbursement of
Bank funds and ex-post audits on the use of our funds. Bank
staff follow implementation of all our projects closely,
including regular site visits , special technical audits on the
effectiveness of fund usage, and regular scrutiny of
expenditure documentation against actual use of funds" and that
the Bank "has begun to deal more effectively in the design of
new projects." Such statements are in direct contradiction to
what is widely acknowledged both outside and inside the Bank to
be the case in the current situation in Indonesia. We refer,
for example to the not internal memorandum of Ms. Jane Loos to
Mr. Jean-Michel Severino, Vice President for the East Asia and
Pacific Region, dated October 19, 1998. This memorandum, which
was not publicly released but was widely distributed in the
Bank, notes inter alia the following:
"Our mission confirms earlier reports on corruption in
Indonesia: that it is pervasive, institutionalized, and a
significant deterrent to overall growth of the economy and
effectiveness of the Bank's assistance."
"Practically all key institutions are involved: judiciary,
civil service, security forces, even internal and external
audit firms."
"We cannot rely on probity of audits both from BPKP (Government
internal audit agency) and ocal associates of international
audit firms."
"Despite apparent compliance with World Bank guidelines and
documentation requirements for procurement, disbursement,
supervision and audits, there is significant leakage from Bank
funds."
"We also found that Bank procedures /standards are not being
applied uniformly.A key problem relating to leakages in
decentralized projects executed at subnational levels is weak
supervision of physical implementation in the field, by both
the central ministry technical staff and Bank missions..there
is little follow-up by country or sector management to call
into question the operating systems themselves. The auditing
requirements have been allowed to deteriorate into a
superficial exercise; even an agency with overdue audits was
not excluded from receiving new loans."
That the Bank is now risking $3.5 billion in such an
environment defies the imagination, given the negligible
progress in instituting basic reforms, auditing, procurement,
transparency, and public consultation.
With all due respect, we feel obliged to communicate to you
that we suspect that one explanation for the disconnect between
some of your statements and the record from recent internal
World Bank memoranda is that you may not always be fully
informed by your own senior management. The Loos report is now
the third internal World Bank document to directly contradict
Mr. Severino's and the Bank's public assertions that "we know
exactly where our money is going.. If supervision of our
projects produced any evidence of misappropriation or
misallocation of our funds, we would take swift action to stop
it.there is full accountability on the use of bank funds
through a comprehensive system of independent ex-post financial
audits of project accounts." (World Bank Group, "Indonesia and
the World Bank," News Release No. 98/1426/EAP, July 28, 1997)
2. Your letter of September 3 did not respond to our
request for the identification and public release of studies of
Corruption in World Bank lending to Indonesia, including the
document prepared by Bank Resident Staff in Indonesia (RSI) in
the summer of 1997. We ask again for the official release by
the Bank of these reports, as well as of the Public Expenditure
Review for Indonesia, which Bank staff promised they would
release to our groups but to date have not. We commend the Bank
for its posting on the web of one report on corruption
subsequent to you letter, the Aide Memoire of the World Bank
Team headed by Katherine Marshall, dated September 20, 1998. We
address the recommendations made in that aide-memoire later in
this letter.
3. Your letter lacked specificity and credibility
concerning many our concerns about how Bank procedures and
policies have changed to address ongoing corruption and prevent
future diversions in light of its internal reports on
corruption. The policy reforms you referred to in the Public
Reform Support Loan (PSRL) were for the most part introduced
not by the World Bank, but by the International Monetary Fund.
One of the measures your letter cites, "in particular" to
"limit the potential for diversion of funds"-the
decentralization of funding of social programs--is cited in the
most recent internal, non-public Bank memoranda as increasing
the risk of corruption, viz. "Shift in project design from
infrastructure /energy projects with large ICB contracts to
social investment projects implemented in numerous provinces
and by various sub-national levels of authority have increased
the risk and probably the size of the leakages [diversions]."
(Memorandum of Ms. Jane Loose to Mr. Jean-Michel Severino, Vice
President for the East Asia and Pacific Region, dated October
19, 1998). Finally, Bank assertions about the environmental and
social sustainability of palm plantation exports in the PSLR
are contradicted by continuing practices supported by the
Indonesian government, including use of fire for clearing and
forced seizure of indigenous lands. A recent report by the
Center for International Forestry Research (CIFOR), a CGIAR
institution supported by the Bank, indicates that "crisis aid"
from international institutions may actually assist the GOI in
carrying out environmentally and socially damaging programs
such as the notorious transmigration program in forested
regions of the Outer Islands.1/
4. We welcome and praise your commitment to formalize a
procedure for environmental assessment of Sector adjustment
loans, but the Bank has still not instituted policies for
environmental assessment and public disclosure concerning its
fast disbursing Structural Adjustment Loans, which in the
current crisis are the fastest growing part of the Bank's
portfolio.
5. We were deeply disturbed by the lack of any response
whatsoever concerning our questions on the ongoing Bank---Price
Waterhouse investigation of corruption in Indonesia, and our
concerns that this investigation address the main issue, the
systematic diversion of significant portions of the entire
Bank Indonesia portfolio, not just individual cases of
corruption by Bank staff.
6. Finally, as we detail in the attached memorandum, there
is an evident disconnect between Bank claims of greater and
more transparent involvement of civil society in Indonesia in
the current crisis and the actual conditions of Bank-NGO
interactions as reported by Indonesian and international
groups.
II. The Urgent Need for Concrete, Specific Measures
As we noted at the beginning of this letter, the September 20,
1998 Aide Memoire by Ms. Katherine Marshall recognizes the
urgency of undertaking specific, concrete measures to deal with
corruption in World Bank lending to Indonesia, especially since
the World Bank has mobilized $14 billion from official donors
over the next two years and itself has already decided to push
through $3 billion in quick disbursing adjustment loans for
Indonesia this fiscal year. However, the major actions
identified in the Aide-Memoire ("Fence off the social safety
net programs; make immediate progress in transparency and
information; initiate an irreversible process to define and
advance with a national anti-corruption strategy; prepare
meaningful processes and initial actions to address long-term
structural issues") do not appear to be materializing in any
credible fashion. We are disturbed by one aspect in particular
of the Bank's current approach, which is reiterated in the
September 20 Aide-Memoire, namely that little effort is being
made to investigate the mechanisms and scale of ongoing
corruption in World Bank lending. It would seem problematic to
devise a strategy to alleviate the problem of systematic
corruption in World Bank lending to Indonesia, without a more
comprehensive, detailed investigation of the modalities and
mechanisms that constitute the problem, with a view of
formulating specific corrective approaches, rather than general
commitments and statements of purpose which the Bank does not
have a very good record of delivering on.
In fact, the World Bank in its current approach is not taking
credible actions itself to "fence off the social safety net,"
nor is it practicing the transparency it preaches. A case in
point involves the Public Sector Adjustment Loan (PSAL), which
is being disbursed in two $500 million tranches. It is not
clear at all how this and other quick disbursing adjustment
loans will in reality go to partially support social safety net
programs. Generic claims of the World Bank have little
credibility in the absence of specifically articulated,
concrete systems of independent review and on the ground
monitoring. We invite you to corroborate this yourself-can you
find out just where on the ground the first $500 million
tranche of the PSAL has gone?
The systematic nature of the problem, including the fact that
"auditing requirements have been allowed to deteriorate into a
superficial exercise" and the failure to date of "senior
management to call into question operating systems themselves"
is described in convincing detail in the October 19 memorandum
of Ms. Jane Loos to the Vice President for East Asia and the
Pacific. Moreover, the Bank has not in its preparation of the
PSAL evidenced much practice of the participation and
transparency it is advocating. There was no public,
participatory discussion in the preparation and appraisal of
this loan, nor have its terms and conditions been made public,
nor have high ranking Bank officials responsible for the
Indonesia program-such as the Vice President for East Asia and
the Pacific-met with representatives of Indonesian civil
society. There also has been no indication to date of when the
promised participatory consultation for the Agricultural
Adjustment Loan might also take place. All of this is marked
contrast even to the IMF in recent months, whose Vice President
for East Asia has met with representatives of Indonesian NGOs
and which has made public the past two letters of intent.
III. Conclusion
In short, the current situation is most alarming. The Bank is
pushing through what amounts to pure balance of payments
support loans into a government whose systematic corruption-
acknowledged in several recent internal Bank memoranda and
reports-will ensure that hundreds of millions of dollars will
be 'leaked,' diverted and stolen; indeed there are strong
indications-expressly acknowledged in the Loos, Marshall, and
Dice reports--that the risk of large scale diversions under the
current transitional regime will be even greater than in the
past. We urge you to alter the preparation and appraisal of the
planned structural adjustment lending so that it is timed with
participatory public consultations in Indonesia to identify and
put into place the specific modalities, review and monitoring
systems that would increase the likelihood that past corruption
of World Bank lending will not repeat itself. The modalities
and review and monitoring requirements should be linked to
conditioned disbursements of the loans. Otherwise, the Bank
will be reinforcing on a disastrous scale the culture of loan
approval and "incremental approach" (disbursing loans despite
evidence of violation of loan covenants, inadequate auditing
and monitoring etc.) so devastatingly documented six years ago
by the Wappenhans and Morse Commission Reports (as well as the
Bank's two volume official history) as at the root of its poor
performance and unsatisfactory development effectiveness. To
proceed with these loans as currently planned would indicate an
institutional optimism completely disconnected from past
experience, reflecting total institutional amnesia.
Otherwise, it would appear that the main and immediate
consequence of this balance of payments lending will be to
provide funds to enable the Indonesian Government to pay back
its existing debt-to the World Bank. The Bank will not only
violate its most basic fiduciary duty to its shareholders, it
will be contributing to and reinforcing moral hazard in
international public lending on a scale hitherto unprecedented
in history. And it will be the Indonesian people who will be
left with an increased debt burden to service over the next
generation.
We thank you in advance for your attention to these concerns
and look forward to the Bank's detailed response.
Sincerely,
[NGO Signons here]
Attachment
+++++++++++++++++++++++++++++++++++++++++++++++
DRAFT MEMORANDUM
ISSUES IN THE AUGUST 18, 1998 LETTER OF
112 NGOS IN 31 COUNTRIES
THAT REMAIN TO BE ADDRESSED
1. Disconnect Between Statements on Corruption of High Ranking
Bank Officials and Internal Bank Memoranda.
Your letter contained no response to our question of why, a
month prior to the completion of the Bank's internal report on
corruption which echoed widely-held sentiments of Bank staff in
Indonesia, the Bank's Vice President for East Asia and the
Pacific, Mr. Jean Michel Severino, stated in a press release
that allegations of massive and systematic misappropriation of
Bank funds in Indonesia -- on the order of 30% of all project
funds -- were "demonstrably untrue" (World Bank Group,
"Indonesia and the World Bank," News Release No. 98/1426/EAP,
July 28, 1997). Mr. Severino went on to claim, "We know exactly
where our money is going. . We do not tolerate corruption in
our programs."
In the same press release, the Bank's Country Director for
Indonesia stated that, "there is full accountability on the use
of bank funds through a comprehensive system of independent ex-
post financial audits of project accounts. He continued, "the
procurement of goods and services financed under Bank loans is
conducted through open, transparent, and competitive
international procedures. Funds are disbursed only to
suppliers of these goods and services under contracts approved
by the Bank." These statements stand in stark contrast to the
views of Bank staff and civil society in Indonesia at the time
and appear either woefully ignorant or purposefully misleading
and untrue. Either way, it is clear that there is a serious
"disconnect" between the Bank's public presentation of
information about one of its largest client countries and its
own internal evaluations of the country's practices. This
raises substantial questions about channels of communication
within the Bank, and raises questions whether the pressure to
lend and the desire not to offend a major client has fostered,
and continues to foster a climate of internal censorship within
the Bank.
We are disturbed that your letter of September 3rd has added to
this disconnect by stating that "we lead the world in applying
well-established procedures for competitive procurement of
goods and services, controls on disbursement of Bank funds and
ex-post audits on the use of our funds. Bank staff follow
implementation of all our projects closely, including regular
site visits , special technical audits on the effectiveness of
fund usage, and regular scrutiny of expenditure documentation
against actual use of funds" and that the Bank "has begun to
deal more effectively in the design of new projects." We refer,
for example to the not publicly released internal memorandum of
Ms. Jane Loos to Mr. Jean-Michel Severino, Vice Prsident for
the East Asia and Pacific Region, dated October 19, 1998. This
memorandum, which was widely distributed in the Bank, notes
inter alia the following:
"Our mission confirms earlier reports on corruption in
Indonesia: that it is pervasive, institutionalized, and a
significant deterrent to overall growth of the economy and
effectiveness of the Bank's assistance."
"Practically all key institutions are involved: judiciary,
civil service, security forces, even internal and external
audit firms."
"We cannot rely on probity of audits both from BPKP (Government
internal audit agency) and ocal associates of international
audit firms."
"Despite apparent compliance with World Bank guidelines and
documentation requirements for procurement, disbursement,
supervision and audits, there is significant leakage from Bank
funds."
"We also found that Bank procedures /standards are not being
applied uniformly. A key problem relating to leakages in
decentralized projects executed at subnational levels is weak
supervision of physical implementation in the field, by both
the central ministry technical staff and Bank missions..there
is little follow-up by country or sector management to call
into question the operating systems themselves. The auditing
requirements have been allowed to deteriorate into a
superficial exercise; even an agency with overdue audits was
not excluded from receiving new loans."
We reiterate our question, and respectfully request a direct
answer as to how the public statements by Bank officials can be
reconciled with strikingly different and clear observations by
Jakarta-based Bank staff, internal Bank memoranda, and other
long-time observers of Indonesian business practices.
2. Lack of Response to Request for Identification and Public
Release of Studies of Corruption in World Bank Lending to
Indonesia
Your September 3 letter contained no response to the first of
our five major queries, namely the request for the public
release of the findings of a 1997 Bank study on corruption in
Indonesia, and other such Bank reports that may exist. We
believe that this study is the "secret document" referred to in
the Jakarta Post which has since been "leaked [to the public]
by a conscientious staff member of the bank" ("World Bank Must
Face the Corruption Music," Jakarta Post, 9/23/98). It now
would appear that this document is titled "Summary of RSI Staff
Views Regarding the Problem of "Leakage" from World Bank
Project Budgets," and containing appendices titled "Discussion
Points Regarding Improved Transparency in Procurement
Processes" and "Options for Bank-GOI Action to Reduce
Development Budget `Leakage.'" The report is commonly referred
to as the Dice report. We would like to know whether this is,
indeed, the only Bank study of corruption in Indonesia. If
there are other Bank studies, we request that the Bank make
their contents available to the public, especially to
Indonesian civil society.
In addition, in a meeting in Washington last November, Bank
staff informed several of our organizations that the Bank was
conducting a Public Expenditure Review for Indonesia, and
stated that when the review was completed, we would receive a
copy. We understand that this review was completed several
months ago and includes a rather detailed analysis of
Indonesian government expenditures under Suharto, including
information that would be of use to Indonesian civil society
organizations attempting to work in cooperation with the Bank
on uncovering corruption. We believe it is essential to
release this document to organizations of Indonesian civil
society and to the international public at large, and request
the Bank to do so without delay.
3. Lack of Specificity and Problems Concerning Changes in Bank
Procedures and Policies in Lending to Indonesia
A. Our first query also requested details on the extent to
which the Bank had modified its lending practices in Indonesia
in light of the internal 1997 corruption report; this question
was not answered with any specificity.
Your letter responds to our query in only the most general
manner, mentioning that since 1996, the Bank has "taken
important steps to combat corruption by tightening auditing
procedures in operations we finance" and that the Bank has
"put in place internal safeguards against fraud and corruption"
such as the establishment of "an oversight committee on fraud
and corruption." With respect to Indonesia, your letter refers
principally to the reform program supported by the recent
Policy Reform Support Loan PRSL) and quick-disbursing
adjustment loans focusing on the abolition of various
government monopolies and cartels, as well as the
decentralization of funding of social programs supported in
part by these loans. In fact, your letter asserts that
"indeed, most of these actions were taken before we disbursed
the first tranche of the Bank [PRSL] loan."
We are especially disappointed that despite clear staff views
indicating the contrary, your letter asserts in an apparent
echo of the July, 1997 press release (cited above) by Mr.
Severino and the Bank's Country Director for Indonesia, that
"despite criticisms from some outside observers, we lead the
world in applying well-established procedures for competitive
procurement of goods and services, controls on the disbursement
of Bank funds, and ex-post audits on the use of our funds.
Bank staff follow implementation of all our projects closely,
including regular site visits, special technical audits on the
effectiveness of fund usage, and regular scrutiny of
expenditure documentation against actual use of funds." This
was clearly not the case in Indonesia, given what is now
publicly known. Finally, your letter seems to contradict itself
later on by stating that the Bank has "begun to deal more
effectively with corruption in the design of new projects"
through "direct channeling" of funds to beneficiaries, and
through "the involvement of civil society in scrutinizing
project implementation," and that the Bank is "considering
further tightening of procurement procedures; adopting
competitive salaries/honoraria for counterpart staff of project
implementation units; establishing benchmark unit prices and
consultant billing rates and requiring justification of any
variance" etc.
These general statements and expressions of intention of what
the Bank is now considering, or has begun to do in new
projects, do not present any concrete information on what exact
steps the Bank took in Indonesia over the past year and one
half as part of its anti-corruption program, and to what extent
the nearly $2 billion the Bank approved in loans to Indonesia
between July, 1997 and September 1998 have been prepared,
appraised, and supervised to forestall the risk of the
systematic diversion of hundreds of millions of dollars through
the practices identified in the Dice report.
In particular, we would request a clarification of exactly how-
if at all-- the Bank made the changes in the auditing and
procurement procedures of on-going and planned loans as
recommended by RSI in July, 1997 for the Indonesian loan
portfolio: B. Issues and Problems with Efficacy of Bank Policy
Reforms in Indonesia.
In your discussion of the positive reforms -- which we welcome
-- and which you state were linked to the recently approved
Policy Reform Support Loan (PRSL) -- i.e. the abolition of
monopolies, the lifting of intra-regional trade distortions,
the attempt to include the Reforestation Fund in the government
budget, the widespread audits of banks, etc. -- we must
respectfully point out that most of these reforms were
introduced, not by the World Bank, but by the International
Monetary Fund. According to the IMF, however, the World Bank
was responsible for inserting language in the January, 1998 IMF
letter of intent mandating the privatization and expansion of
the environmentally and socially damaging oil palm sector. In
the documentation provided by the Bank to the Executive
Directors prior to their vote on the PRSL, the Bank simply
echoed Indonesian government promises about the environmental
sustainability of oil palm plantations 2/: "Forestry and land
management has been strengthened through the issuance (April 8)
of a [GOI] decree that defines site suitability criteria for
oil palm plantation development. This will limit plantation
development to districts identified for non-forest cultivation
in provincial spatial plans, give priority to land that is
already vacant or cleared of forest, and exclude sites with
deep peat soils." 3/
An examination of the Indonesian government's April 8 decree,
however, shows that it fails to address two of the major
problems associated with Indonesian large-scale plantation
establishment: the use of fire -- the decree does not require
zero-burn land clearing techniques -- and the forced seizure of
indigenous lands. No mention is made of indigenous land rights
-- hak adat, hak ulayat. Only the general phrase, "land
unencumbered by hak", or "rights" is utilized. "Hak" is a term
which, in the past, has tended to refer to official commercial
rights such as mining, logging concession, other plantation
permits. In addition, the decree is only applicable to palm oil
plantations and does not apply to pulp and other equally
damaging plantations. It also allows oil palm plantation
establishment on up to two meter-deep peat soils (a fire
hazard), and mandates a minimum of 10,000 hectares per
plantation, effectively eliminating many smallholders from
participation. The "vacant lands" that are prioritized under
this decree for oil palm expansion are likely to be indigenous
forested territories. In Indonesia, "vacant" or "empty" land
is often a euphemism for land under swidden cultivation by
indigenous peoples.
In addition, the Public Information Document for the PRSL which
you note was "posted on the Bank's external website" was only
made public after repeated complaints by EDF that no public
documentation had been made available for months. It was
posted on the web a few days after a particularly heated
meeting between Washington-based NGOs, Bank staff and several
Executive Directors of the Bank.
4. More Action Needed on Environmental and Disclosure Policies
in Adjustment Loans
Our fourth query called for full environmental assessment,
public transparency and participation in the preparation and
appraisal of fast disbursing non-project loans. We would like
to express our thanks for your commitment to consider the
formalization of a process for environmental assessment of
sector adjustment loans. Our organizations were disturbed
however to hear once again that the Bank currently still does
not require environmental and social assessments for its
adjustment loan portfolio. There is a growing body of research
that indicates that non-project lending by the Bank and IMF
indeed has serious direct and indirect environmental and social
impacts that existing Bank policies on environmental and social
issues are intended to address. We believe is essential that
the Bank require a more comprehensive procedure through which
all sector and structural adjustment loans will under go an
assessment that addresses all relevant Bank environmental and
social policies, including those relating to indigenous
peoples, resettlement, and public access to information.
A recent report from the Center for International Forestry
Research, CIFOR, a Bank-supported CGIAR research center, for
example, details the manner in which through "crisis aid" the
IMF and other entities engaged in financing GOI activities may
be assisting the GOI in carrying out its notoriously
environmentally and socially damaging transmigration program in
forested regions of the Outer Islands, despite crisis-imposed
shortfalls in the Department of Transmigration's budget.4/
Economic crises in developing countries typically lead to a
decline in government spending on directed settlement programs
and this, in turn, tends to alleviate pressure on forest cover.
Indonesia's spending on directed settlement or transmigration
in 1998-1999 will probably not decline, however, because,
according to CIFOR, the shortfall will be compensated by non-
project foreign assistance. The Department of Transmigration
has a shortfall of seven percent in this year's budget compared
to last year's, but this may be partly offset by support from
the IMF and other sources of foreign aid.
Without through environmental and social assessments, loans
such as the PRSL and planned quick disbursing Bank Structural
Adjustment Loans risk exacerbating some of the environmental
and social problems they are intended to alleviate. Such
assessments should include adherence to policies of public
access to information and broad processes of consultation with
communities and NGOs in Indonesia's Outer Islands which are
likely to bear the brunt of activities possibly supported
through such loans. Disbursement and monitoring conditions for
non-project loans should ensure that the use of Bank and other
donor funds support socially and environmentally sound
activities.
5. Lack of Response on Details of the Bank's Internal
Investigation into Corruption in Indonesia
Most important and disturbing, your response ignored addressing
our fifth query, concerning the single most important ongoing
measure the World Bank can now take to revise its lending
practices in Indonesia to reduce future corruption in Bank
lending, namely to undertake a thorough investigation of the
systematic practices through which Bank funds may have been
diverted from their intended purposes, as identified in the
Dice report. In our letter of August 18, we stated that it will
be a critical mistake to limit the current Bank investigation
of corruption, both in Indonesia and in other borrowers, to
individual cases of abuses of individual Bank staff for
immediate financial gain. In Indonesia, any meaningful
investigation of corruption would include all of the aspects of
contracting and procurement as outlined in the Dice report. In
our letter, we provided an outline of the steps necessary for a
results-oriented investigation of corruption, including the
need for detailed assessments of completed Bank infrastructure
and other projects in conjunction with Indonesian civil society
organizations; the targeted auditing of agencies and ministries
which have acted as Bank counterparts in Indonesia, including
Bappenas, BANGDA, BPN, PU, etc.; comparisons of standard GOI
salary tables with property and asset ownership evidenced by
Bank counterparts and the basing of future decisions about
counterpart relationships on the existence of corruption
indicated by the Bank investigation; the request for input from
the Indonesian public via Indonesian language radio and
newspaper announcements listing projects to be examined; the
set-up of an anonymous tip hotline/Post Office Box, etc. While
we welcome the Bank's announcement that it has set up a
corruption hotline accessible to Indonesians through an
international operator, we note that most Indonesians do not
have access to the International Direct Dial telephone lines
necessary to access an international operator. To be of use, a
corruption hotline must be accessible by ordinary Indonesian
citizens form ordinary telephones and include a local number
that can be dialed anonymously and free of charge in each
province where the Bank has projects. In addition, given the
cultural reluctance of many Indonesians -- especially those in
rural areas -- to use a telephone, a Post Office Box number
must be provided to ensure that written statements on
corruption (under guarantee of anonymity) may be sent to the
Bank.
Initial reports from Indonesian NGOs invited to meetings by the
Bank to discuss corruption in response to our letter of August
18 and earlier NGO-Bank meetings in Washington have not been
encouraging. Indonesian NGOs have found Bank staff apparently
unwilling to undertake an examination of corruption in existing
and past Bank projects; the current Bank approach appears to
focus on future projects without learning from the past -an
orientation which appears disingenuous and destined to repeat
the findings of the 1997 Quality Assurance Group Synthesis
Report appraisal of the Bank's current culture under your
tenure: "The lessons from past experience are well known, yet
they are generally ignored in the design of new
operations.institutional amnesia is the corollary of
institutional optimism."
Thus, we would like to request information on the overall goals
of the Bank's corruption investigation and on the progress made
to date: for example, what is the scope of the investigation?
Is it only targeted at individual Bank officials, or is it an
investigation into the processes whereby Bank funds were/are
siphoned off by corrupt government counterpart officials so
that they did not/do not reach the intended beneficiary groups,
i.e. the poor. Your letter states, on fraud and corruption,
that "from time to time our internal controls do reveal
wrongdoing by individual staff members of consultants; these
have been, and always will be dealt with swiftly, decisively,
and transparently. . [W]hen we uncover improper behavior, swift
and appropriate action is taken." While we welcome the Bank's
commitment to pursue such wrongdoing, this clearly is not the
main manner by which the diversion and outright theft of Bank
funds occurred and may still be occurring in Indonesia. In
addition to investigating "staff members and consultants," does
the Bank intend to investigate and identify corrupt contractors
and sub-contractors on Bank projects? Corrupt government
officials who siphoned money directly out of Bank projects?
Corrupt officials who steered Bank contracts to non-performing
businesses owned by their relatives?
We wish to cite a recent example, one among many, of a fairly
typical, recent Bank infrastructure project which appeared to
follow the path of procurement and auditing corruption
enumerated in the Dice report: the Second Jabotabek Urban
Development Project (Loan 3219). This large loan is of
interest since it represents a six-year $175 million investment
by the Bank in Jakarta's water supply-exactly the sort of
environmental, social project which the Bank sees at the heart
of its vocation. [****environmental showcase loan?? -- data on
this &on Jabotabek I & resettlement problems ******] At the end
of six years, the Bank's own 1997 and June, 1998 documentation
-- which labels the performance of the project, as well as the
conduct of the GOI and Bank staff, "satisfactory" -- shows that
poverty alleviation and water quality goals were largely unmet;
that construction had been handed over to 200 separate
subcontracting firms which provided "only barely acceptable"
construction services; that at one point, six years worth of
audit data had not been submitted by GOI in violation of loan
covenants; that Bank funds were "held up" in transit through
the GOI bureaucracy -- the Dice report documents this as a way
for GOI officials to collect interest on Bank funds; and that
in February, 1998 the entire Jakarta water system was
"privatized," "an event parallel to but facilitated by the
[Bank] project."5/ The June, 1998 document, written after the
fall of Suharto and circulated throughout the Bank in July,
1998, failed to mention that the "privatization" in February,
1998 of assets associated with this six-year project was
actually the take-over of the city water supply by Suharto's
grandson, Ari Sigit, and the son of Liem Sioe Liong, one of
Suharto's closest business partners (see enclosed Straits Times
clipping). The 54 page Bank document repeatedly mentions "two
private consortia," "two private operators" who were taking
over the water supply, but never mentions who they are. The
"two private operators" planned to raise water prices an
average of 25%. 6/
We have provided a detailed list of questions pertaining to
this project in Appendix A, and would like to know, in addition
to the answers to those questions, the following information:
Is the Bank already investigating this project? If so, what
progress has been made to date? How has Indonesian civil
society been involved in the investigation? Does the Bank plan
to bring criminal charges against subcontractors and government
officials if proven that they were involved in fraudulent
procedures? What steps has the Bank taken to identify the
fraudulent contractors? Are the contractors identified as
producing sub-standard work in this project now banned from
Bank contracts? Were any prosecuted under Indonesian law? Were
GOI officials investigated in relation to this project? Were
any found guilty of malfeasance? Were any prosecuted? Were
steps taken to ensure that those individuals are banned from
work on Bank projects? Will the Bank share the results of its
investigation with other international financial institutions
such as the Asian Development Bank? With Indonesian civil
society? Did the Bank request that GOI refund some of the loan
that was used fraudulently? In its documentation on this loan,
the Bank lists fifteen other loans related to the Second
Jabotabek Urban Development Project, including one in military-
occupied Irian Jaya. Since the practices identified in this
loan appear to be systematic and wide-spread, does the Bank
intend to investigate corruption in these related Water Supply
and Urban Loans?
6. Disconnect Between Bank Claims and Actual Conditions of
Interactions with Indonesian Civil Society and the NGO
Community
Concerning your description of the Bank's openness to civil
society participation in the investigation of corruption in its
Indonesian projects -- "We see an important role for civil
society in such a[n anti-corruption] program and are advocating
the fullest possible public participation. We have held
regular meetings with NGOs in Jakarta. etc." -- we can only
assume that, perhaps your staff has not provided you with
detailed information regarding the nature of past and current
Bank-NGO interactions and meetings on corruption and other
topics in Indonesia. We have been informed by our Indonesian
counterparts that this claim of openness to NGO participation
in discussions of corruption has not exactly been the case.
The Director of WALHI-the Indonesian Environmental Forum, an
umbrella organization for some 300 Indonesian environmental
NGOs --, reports that over the years Indonesian NGOs were
repeatedly rebuffed by the Bank whenever they attempted to
initiate discussions on the corruption evident in Bank-financed
projects. Their calls for an open discussion of corruption
went unheeded as Bank staff assured them that there was a limit
to what the Bank could do and that all World Bank projects were
"clean". According to the International NGO Forum on
Indonesian Development, INFID, a coalition of over 100
Indonesian and international NGOs,7/ even the recent meetings
called by the Bank for "civil society" have been quite
disappointing. In one case, Bank staff approached INFID for a
meeting and attempted to limit the NGO attendees to only three
people. INFID rejected this offer. In other cases, INFID and
other NGOs have been given less than 24 hours notice and no
supporting documentation prior to Bank-sponsored NGO meetings
on corruption. The latest invitation faxed to INFID indicated
that only the Director of INFID would be welcome to attend and
did not provide a list of which other organizations had been
invited.
In one of the meetings to which you referred in your letter
8/, INFID, Indonesian Corruption Watch (ICW) and other NGOs
were dismayed at the Bank's unwillingness -- expressed by Bank
officials in response to NGO requests during the meeting -- to
delve into past cases of corruption as well as the Bank's
insistence on trying to design a program to prevent corruption
in the future without examining past corruption in detail. In
the press conference following the Bank-NGO meeting, a member
of anti-corruption NGO Gema Madani stated that it was clear
from the meeting that the anti-corruption rhetoric of the Bank
appeared to be a "PR performance, to gain [a] better social
image in order to back up the inefficient management of the
World Bank." 9/ At the same press conference, in response to
reporters' queries, an ICW representative responded that it was
indeed possible that the Bank was acting in collusion with the
Indonesian government to cover up past cases of corruption. In
addition, the Bank conducts its civil society meetings entirely
in English since Bank staff are apparently not capable of
speaking Indonesian. It is difficult to comprehend how non-
Indonesian-speaking Bank staff will be able to take a
leadership role a comprehensive investigation of corruption in
Bank projects in Indonesia. If full civil society
participation is desired, it is clear that Bank staff must
either learn to speak Indonesian, or be willing to hire
translators so that they are capable of conducting all meetings
with members of Indonesian civil society in Bahasa Indonesia.
In the opening paragraph of your letter, you refer to the July
30 meeting between Bank staff in Washington, D.C. and EDF and
other NGOs as reflective of "our desire to encourage a
constructive and cooperative relationship with the NGO
community as a partner in our mandate to promote the economic
development of our client countries." In fact, it took the
NGOs involved over a month of attempts to set up that very
meeting which, due to Bank staff inattention to our requests
for scheduling, almost did not occur. We repeatedly requested
written materials to be provided in advance of the meeting by
the Bank on the Agricultural Sector Adjustment Loan which had
been planned since February, 1998, and on the Bank's
considered opinion on the environmental and social impacts of
oil palm plantation privatization and expansion in Indonesia.
After several requests, we received only two general papers
(the day before our meeting), neither of them on the specific
topics requested. Just prior to the meeting, which ended up
being scheduled merely forty-eight hours in advance -- a time
period which did not permit the attendance of many of the
Washington-based NGOs which had expressed interest in being
present -- the Bank's Country Program Coordinator (Indonesia
Country Unit) who was handling meeting arrangements on behalf
of the Bank informed us that the issue of corruption was not
relevant to discussions about the planned Agriculture Sector
loan in support of palm oil privatization and expansion. He
requested that the topic of corruption be dropped from the
planned NGO agenda. It was only at our repeated insistence
that the issue of corruption was placed on the agenda at all.
In conclusion, there still appears to be a
substantial disconnect in the information being publicly
presented about Bank activities in Indonesia -- including
information on corruption in past and present Bank projects,
and on the process of NGO "participation" in Bank anti-
corruption activities -- and on-the-ground reality.
Footnotes
1. "Indonesia: Policy Reform Support Loan Supplemental Note",
World Bank, 6/26/98.
2. Ibid, p.***
3. Ibid, p.***
4. Sunderlin, William D. 1998. Between Danger and
Opportunity: Indonesia's Forests In an Era of Economic Crisis
and Political Change. CIFOR. September 11, 1998. p.5.
5. "Implementation Completion Report, Republic of Indonesia,
Second Jabotabek Urban Development Project," The World Bank,
June 23, 1998 (circulated July 10, 1998).
6. In the end, after the fall of Suharto, the water supply
privatization contract was removed from the Suharto family
circle.
7. Report on Corruption Watch Group Meeting with World Bank,
Jakarta (YLBHI), September 1, 1998, other correspondence.
8. "I have asked our Jakarta office to contact the Government
and Indonesian NGOs such as INFID and ICW immediately." p.4
9 Report on Corruption Watch Group Meeting with World Bank,
Jakarta (YLBHI), September 1, 1998.

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