Enhancing accountability at the World Bank

Steve Berkman, October 29, 2004

There is an old saying that “the road to hell is paved with good
intentions”. Sadly, this is all too true when we consider the track
record of the multi-lateral development banks.

Statement to the US Senate Committee on Foreign Relations
MDB Roundtable Discussion On Multilateral Development Bank Corruption

Supported by the donor
community, these banks hold a unique position as lenders of last
resort, and within that group, the World Bank has long been recognized
as the leading economic development institution. But leadership
requires certain qualities that can be undermined in a large
bureaucracy, and it is my observation that over the past few decades,
this bureaucracy has caused the Bank to stray from its mission. This is
not always immediately obvious to the outside observer who must rely
solely upon whatever information the Bank provides to the public, but
it becomes evident when one observes the abysmal economic state of
affairs in many of its client countries.

That there are competent, hard working, and dedicated individuals
within the Bank is without question. That the Bank has a bureaucratic
agenda that is frequently at odds with its development agenda, is also
without question. The key conflict between these two agendas lies with
the Bank’s lending culture which, although never formally stated in
writing, continues to place the creation of lending instruments and the
disbursement of funds above all else. Although problems related to this
lending culture have been noted in many internal reports and documents
over the years, the Bank has yet to overcome the bureaucratic
resistance to changing this culture. When we combine the pressure to
lend with the pervasive corruption that exists within numerous Third
World governments and among those who do business with them, it is easy
to see why the Bank has been unable to alleviate the deplorable
economic conditions in many of these countries that are now also
burdened with overbearing public debt. Debt that is due in large part
to the waste and theft of donor funds by corrupt individuals. Billions
of dollars of aid monies have been diverted into private pockets each
year through a system of aid funding that does not do enough to ensure
adequate accountability and transparency of the process.

The World Bank has an enormous potential for alleviating poverty and
suffering in the Third World and I believe that over the past several
decades, it has needlessly squandered this potential due to a plethora
of human, political and bureaucratic factors that have played into the
hands of corrupt individuals at the receiving end of the Bank’s lending
program. While in the past ten years the Bank has taken unprecedented
steps to deal with many of these factors, I believe it has yet to use
the full power of its intellectual, political and financial capacity to
address the primary causes of its failure to bring substantive benefits
to those who need them most. The Bank has become a bloated bureaucracy
with too many people doing too many things that have little or no
bearing on its primary mission. It has become a vehicle whereby funds
are loaned to Third World governments to encourage policy reforms that
are often ignored, conduct research that is seldom applied, purchase
equipment that is not put to use, and build infrastructure that quickly
deteriorates. And finally, it has long been a cash cow for Third World
politicians and public officials who manipulate the system for their
own enrichment. In the end, the money, and all that it can do for
development, is gone and nothing is left but corrupt and dysfunctional
public institutions, decaying infrastructure, huge debts, and the
dashed hopes of the indigenous populations.

In response to the Committee’s request, I would like to present the
following thoughts on how the MDB’s, and specifically the World Bank,
might move towards greater accountability and transparency in the
coming years. First and foremost, while in principle, the Bank is
accountable to its shareholders, it is by and large, the Bank
bureaucracy that provides the information they require. Under this
arrangement, there will always be the temptation to provide favorable
information over negative information. Nothing exemplifies this more
than the Bank’s historical avoidance of the corruption issue within its
portfolio. An issue that, until the arrival of President Wolfensohn in
1995, was never factored into its lending decisions. And even to this
day, we see that the Bank takes a defensive position whenever questions
arise as to just how much of its lending may have fallen into corrupt
hands. It has been my observation that systemic safeguards are more
than adequate to control the theft of Bank funds, but the will to
enforce those controls has been less than sufficient. I have, however,
observed that whenever outside experts look into the Bank’s lending
operations, the Bank’s attention to better fiscal control seems to
increase. A case in point, is the review conducted by the General
Accounting Office several years ago. This review was unique at the time
and caused the Bank to overcome some of the bureaucratic obstacles that
had previously constrained its anti-corruption efforts. In this regard,
I would suggest the Committee consider requiring that each IDA
replenishment be preceded by a review by the GAO of the Bank’s lending
program. Such reviews should not be based solely upon Bank documents,
but should include information obtained from other sources.
Specifically they should include inter alia:

a) A representative sampling of completed project,
sector, and adjustment lending operations to determine if the funds
provided by the Bank had been used for the purposes intended and with
due consideration to cost effectiveness.

b) A review of tranche, Special Account, and Statement of
Expenditure disbursements to determine if they had been properly
accounted for in accordance with Article III of the Bank’s Articles of
Agreement. Specific attention should be devoted to the eligibility of
goods, equipment and services procured, value for money, and other
anti-fraud related issues.

c) A review of the anti-corruption and fraud investigation program
with due consideration for the confidentiality of ongoing
investigations and any other sensitive matters.

d) A review of the amount of stolen funds recovered from
individuals, companies, or other non-government entities, which are not
to be confused with the cancellation of credits, or parts of credits.

e) A review of Trust Fund activities managed by the Bank.

f) A review of any other accountability issues that may be deemed appropriate.

In conducting such reviews, it is essential that the reviewers have
free and unhindered access to Bank staff, Bank documents, Borrower
documents, and the records of contractors, suppliers and consultants
who have conducted business in Bank funded activities.

While the Bank will have legitimate concerns about providing such
access to the US Government, the precedent has already been established
and has proven to have had a positive impact upon the Bank’s
accountability to its shareholders. I see no way that the Bank would be
harmed, or its mission compromised, by having a periodic review
conducted by a professional and unbiased external agency. Secrecy does
not serve the Bank or its mission well, and to those who would argue
that the costs of such reviews are not justified, I would respond that
even a small reduction in the theft of Bank funds could amount to the
saving of many millions of dollars in the long term. In the final
analysis, transparency as it relates to the Bank’s fiduciary
responsibilities can only be enhanced if, and when, its lending
operations are clearly and completely visible to its shareholders.

Moving on to a second issue, I would bring your attention to the recent
furor over just how much money has been lost by the Bank through
corruption. We have heard allegations that the amounts might be as high
as $100 billion, and we have heard the Bank’s claims that those figures
are grossly inaccurate. The fact is, that the Bank does not, to this
day, have even the slightest clue as to what this figure really is. It
seems strangely odd that an institution noted for its leadership in the
field of economics, would not consider the theft of its funds important
enough to quantify the problem as accurately as it could. The Bank
spends millions of dollars of its operating budget to produce a
plethora of arcane economic data. It can tell you exactly how much
annual household earnings are in the middle of the African bush, but it
cannot tell you how much may have been stolen from annual disbursements
amounting to billions of dollars. Are the losses 5%, are they 10%, or
are they more? Even if one accepts that corruption accounts for 5% of
the Bank’s disbursements, that would amount to over $6.0 billion for
the five-year period 1997-2002. The debate goes on, yet no one seems to
know for sure, and one has to ask, if Wal-Mart can give an accounting
of its losses to theft each year, why can’t the World Bank? In this
regard, I would suggest the Committee consider a requirement that the
Bank, in its Annual Report, include estimates of corruption losses in
its portfolio. This is not an easy task, but it can be done if the will
exists. Having personally been involved in such exercises, I can assure
the Committee, that this information can be extracted and I firmly
believe that when such information sees the light of day, it will be a
catalyst for greatly increased accountability on the part of all the

Steve Berkman
October 29, 2004

Mr. Berkman retired from the World Bank in January 1996. During his
twelve years with the Bank he worked on 110 development projects in the
education, transportation, water supply, energy, urban, agriculture,
health, and industrial sectors in 21 countries in Sub-Saharan Africa.
Based in the Africa Region Technical Department he advised Bank and
Borrower staff on various aspects of capacity building and the
management of public institutions related to Bank lending operations.
Concerned about widespread project failures due to financial
mismanagement in the public sector, Mr. Berkman produced a paper
documenting the various ways in which fraud and corruption are
perpetrated on development projects, the impact these practices have on
the development process, and the difficulty donor agencies have in
dealing with this issue. As a result of this paper, a Financial
Management Task Force, chaired by Mr. Berkman, was established to
assess the extent of financial mismanagement within the Bank’s Africa
lending portfolio. Unfortunately, without a budget or official staff
assignments, the task force accomplished little and was disbanded six
months later upon Mr. Berkman’s retirement.

In early 1998, the Bank’s Internal Audit Department created an
Investigations Unit to investigate allegations of fraud and corruption
on Bank funded projects. Mr. Berkman was called back on a consulting
basis to assist the Unit which has gone through several transformations
and is now operating within the newly formed Department of
Institutional Integrity. During his four years with the unit, he had
been the lead investigator for a number of cases in Africa and Latin
America, and had provided general assistance in other related matters.

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