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Helping Countries Combat Corruption: The Role of the World Bank

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4. Controlling Corruption in Bank-financed Projects

The Bank has a responsibility under its Articles to ensure that the funds it lends to borrowers are used for their intended purposes and with due attention to economy and efficiency. The Bank is also interested in the development effectiveness of its projects and sees loans as a vehicle for the transmission of best practice in project management to borrower governments. Central to the management of Bank-assisted projects are the Bank's procurement and loan disbursement procedures.27

Procurement

In public procurement, bribery and extortion are consensual crimes with the public at large as victim. Both givers and takers of bribes have every reason to keep quiet. Companies that have paid bribes, but not enough to win the contract, seldom call foul. Firms that have not bribed are often reluctant to lodge formal complaints even if they believe the successful bidder unfairly won. Bank procurement rules, based on open, competitive tendering with predisclosed evaluation and selection criteria, and Bank supervision are, overall, powerful deterrents to bribery. But fraud and corruption may still occur if Bank guidelines are not followed during bidding or contract execution. If the Bank is to have the moral standing to advise countries on the control of corruption, it must be seen to have effective processes to ensure that its own loans are, to the maximum extent possible, free of corruption.

Recent initiatives to strengthen the procurement process under Bank-financed projects include:

  • Modifying the Procurement and Consultant Guidelines in August 1996 and January 1997, respectively, with a new section headed "Fraud and Corruption," setting forth how the Bank will disbar from future Bank-financed projects indefinitely or for a stated period a bidder it determines has engaged in fraud or corruption. The Bank may declare misprocurement and cancel the disbursement of funds if a public servant is found to be involved in a corrupt practice and the government does not take corrective action. The Standard Bidding Documents also now require information on commissions to agents and establish the right of the Bank to inspect the supplier/contractor's books.
  • Introducing a provision in the Procurement and Consultant Guidelines to permit, at the request of a borrower, the inclusion in the bid form of an undertaking to observe the laws of the country on fraud and corruption in bidding and execution of the contract (in effect, a "no bribery pledge").
  • Introducing more transparency in the selection of consultants by requiring public advertisement of larger assignments, disclosure of shortlisted firms and their technical scores, and public opening of financial proposals.
  • Launching in-depth surprise procurement audits of selected projects in some countries to identify weaknesses in the procurement supervision system.

    The Bank's Strategic Compact recognizes the importance of controlling fraud and corruption in the projects the Bank finances. The Compact includes additional funds to improve procurement, disbursement and audit capabilities. With respect to procurement the Compact provides resources for:

  • Increasing the number of skilled procurement staff to better support task managers throughout the project cycle.
  • Increasing the frequency of country procurement assessments to help borrower governments improve public procurement institutions and systems and thus build local capacity.
  • Intensifying ex post reviews by external auditors, for procurements not covered by the Bank's prior review process, to ensure greater borrower accountability.

Implementation of the above measures has begun and will be spread over three years.

The Cost Effectiveness study initiated by the President is examining measures to improve the efficiency of business processes including procurement supervision, and its recommendations are awaited. The decentralization of the Bank's business, another important component of the Strategic Compact, warrants a review of the feasibility and merits of delegation of procurement assistance and supervision functions to field offices. The outcome of these reviews will be presented in a procurement supervision strategy paper for discussion with the Board later this year. The paper will incorporate lessons from recent independent Country Procurement Audits. The paper will also examine the need for additional measures to strengthen the Bank's procurement supervision.

Codes, pacts, and pledges

Corporate codes of conduct.  Some have proposed that bidders under aid-financed contracts should be screened according to whether they have established corporate codes and compliance procedures that discourage bribery. If this were adopted, a "white-list" of firms eligible to bid under donor aid contracts would be developed. The Bank should support the principle of adopting corporate codes eschewing bribery, although it would be impractical to make corporate codes a condition for participation in Bank-financed international competitive bidding contracts at this stage for the following reasons:

  • Making corporate codes an eligibility requirement would restrict competition until codes become common for both large and small firms in all countries in which firms bid for Bank-financed contracts. Bank policy is to broaden, not restrict, competition for Bank-financed procurement.
  • Corporate codes may not spread until countries criminalize foreign bribery. Only the United States has done this effectively, and few firms outside the United States have adopted corporate codes that address bribery (though the International Chamber of Commerce [ICC] is now urging all its national committees to encourage firms to adopt such codes).28
  • Neither the Bank nor the borrower would have the resources to verify the adequacy of compliance procedures, a problem likely to persist until global standards and certification processes are developed.

When foreign bribery is more widely criminalized, corporate codes become common, and certification standards are established, corporate codes might be considered as a requirement in Bank-financed international competitive bidding contracts. In the meantime the Bank can encourage bidders to submit information on corporate codes and compliance procedures on a voluntary basis. The Bank will also follow international developments in this area closely.

No bribery pledges.  The objective of a "no bribery pledge" is to discourage bribes, primarily in international bidding, by committing firms to bid on a bribe-free basis, secure in the knowledge that competitors are similarly binding themselves. The most basic form of the no bribery pledge is a letter from the chief executive of each bidding company promising that the firm will obey the laws of the country and not bribe to obtain the contract. Furnishing such a pledge would be a condition of bidding. Typically, this would be matched by a public announcement by the head of government that officials would neither accept nor solicit bribes. More elaborate versions of the no bribery pledge extend the pledge to contract implementation and to subsidiaries and subcontractors. They propose the submission of codes of conduct and a certification at the completion of the contract that bribes have not been paid at anytime. The no bribery pledge could be part of a broader "integrity pact" entered into voluntarily by government and bidders, featuring efforts to address capacity constraints in government and enlist the support of civil society in monitoring compliance.29

Advocates of the idea argue that a no bribery pledge can be a powerful signal that the rules of the game have changed. Furthermore, a pledge not to bribe offers a solution to the collective action dilemma that many firms that bribe in foreign markets face—they would rather not bribe but cannot be sure their competitors will abstain as well. Bidders may therefore welcome the chance to reduce the cost of bidding, and a no bribery pledge might increase competition and lower prices. Countries with weak procurement capacity that find it difficult to effectively police the bidding process may welcome the approach.30 There is a risk, however, that aggressive firms may sign and bribe anyway.

To enable the Bank to respond to borrowers that request such a clause in Bank-financed projects, the Bank has amended its Procurement Guidelines so that, at the request of a borrower, an undertaking to observe the country's laws on bribery may be inserted into the bid form as part of a national anticorruption program. The key to the effectiveness of a no bribery pledge is credibility. This means it must be accompanied by supporting reforms which improve bidding and contract execution processes. Ideally, such reforms should emerge from a dialogue with the private sector in which constraints to efficient bidding for public sector contracts and their execution are discussed and remedies agreed on.

Loan disbursement

The Bank's loan disbursement procedures affect the control of corruption in Bank-financed projects. When the Bank lent heavily for large infrastructure projects, the proceeds of loans were often disbursed directly to contractors, on presentation by government of payment documentation. Now, with a different mix of projects and in an effort to develop borrowers' institutional capacity, increase project effectiveness, and reduce the Bank's costs, disbursements are increasingly made into special accounts established by the borrower, Around $8 billion out of $16 billion investment lending is routinely disbursed through special accounts. This includes about $4 billion of some $9 billion annually, or approximately one-half of total disbursements, which are made against statements of expenditure. The latter summarize how money has been used for agreed categories of project expenditure.31

The extent to which the Bank can check statements of expenditure is constrained by several factors. At headquarters it is often difficult to match items claimed for reimbursement with line items in the project accounts and to determine whether the items are eligible for Bank financing. Moreover, Bank staff conducting supervision missions carry out only limited on-site reviews of documentation due to claims on their time for resolving other project management and implementation problems.

In the long run more emphasis should be placed on borrower capacity building, by strengthening financial management and better integrating physical implementation with financial indicators and loan disbursement. The Loan Department has been developing a new approach to disbursement, the Loan Administration Change Initiative (LACI), which emphasizes the importance of borrower financial management and accounting systems to manage and monitor Bank projects effectively. Instead of being disbursed against individual expenditure transactions or statements of expenditure, the proposal is to disburse loans in quarterly payments against supporting documentation and other information derived from borrower financial management systems and reported quarterly in an integrated Project Financial Management Report, to include a project progress report, financial statements, and a procurement management report. This would strengthen the linkage between financial information and the physical progress of a project. LACI would be a graduated approach, with new projects following the LACI process and projects in the existing portfolio being converted to the new process when the Bank determined that acceptable project financial management systems were in place and reporting formats were agreed to. An integral feature would be the development of performance measurement systems. This approach would require the participation of a financial management specialist on each project task team. LACI is currently at the pilot stage. If it meets its objectives after a thorough assessment of the pilot results, the Bank will progressively adopt LACI as the basis for loan disbursement in countries that meet the required standards. Improved financial management approaches will, in any case, be implemented, regardless of whether there is a direct link with disbursement requests, as envisaged under LACI.


Notes

27. The stocks of IBRD and IDA projects currently disbursing are $88.4 billion and $42.5 billion, respectively, against an annual flow of new loan approvals of $14.5 billion and $6.9 billion, respectively, in FY96. This stock of projects collectively generates about 40,000 individual procurement contracts annually, of which 10,000 (60 percent of value) are conducted under international competitive bidding rules, and 20,000 (30 percent of value) are conducted under local bidding rules. About 10,000 contracts undergo prior review by Bank staff (60 percent of value). The remainder are subject to what is termed "post-audit" selective checking after the event to verify that procurement followed the procedures specified in the loan documents.

28. The International Chamber of Commerce (ICC) encourages its members to adopt a voluntary code of conduct to combat extortion and bribery in international trade.

29. The introduction of a no bribery pledge is being discussed by the Global Coalition for Africa with a number of African governments.

30. Another approach is to contract out the procurement process to international procurement agents. Alternatively, specialist firms may be used to provide benchmark prices against which to compare the prices obtained from government bidding. Both approaches have been applied at various times in Latin America and elsewhere.

31. In FY93 total disbursements were $18 billion, of which $7.8 billion was made against statements of expenditure. In FY96 total disbursements were $19.1 billion, of which $9.4 billion were made against statements of expenditure.

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