World Bank Report Card: 'Material weakness' on corruption

World Bank Report Card. WSJ Editorial
'Material weakness' on corruption.
WSJ, Apr 25, 2009

[The IEG report referred to can be requested from us]

The world's finance ministers are gathered in Washington this weekend for the spring meeting of the World Bank, which recently announced that it would spend up to $45 billion over three years for public-works projects alone. But as they shovel the money out the door, they might want to consider how carefully it will be spent -- or misspent.

Last week, the bank quietly released a review of the internal controls of its International Development Association, or IDA, which dispenses about $10 billion a year in long-term, interest-free loans to the world's poorest countries. While broadly congratulating the bank, the review discovered "significant deficiencies" in six areas, from "management oversight of project processes" to "operational risk management." The review also noted that the bank suffered "material weakness" in "the complex of controls to manage the risk of fraud and corruption" in IDA-financed projects. Material weakness is bank-speak for an "F."

The review was commissioned in 2006 during Paul Wolfowitz's tenure and is a first of its kind for the bank. It is the work of the Independent Evaluation Group (IEG), a misnamed unit since its staff are on secondment from the bank and have careers to consider in assessing the work of their colleagues. So consider the review to have been graded on a curve. And at 690 acronym-laced pages, it is almost purposely written to be read by as few people as possible.

Still, give the IEG credit for producing a remarkable rebuke of an institution that likes to boast of its "action plans" and "governance strategies" to reduce corruption. As the review gets around to noting on page 38 of Annex D, while the bank has initiated various initiatives to combat fraud and corruption, "the internal controls to make these effective are not yet in place."

Thus, the IEG reports that the bank's "treatment of F&C [fraud and corruption] considerations has often been sparse." That goes for the bank's design of country strategies and its project supervision. The bank's procurement guidelines, for instance, "were designed to ensure equity and economy, and there is no explicit F&C prevention in these guidelines."

The IEG also faults the bank for what it calls "tone at the top": "There is still fear among some staff that seeking out F&C issues in projects and reporting on observed improprieties may lead to reprisals from their managers, and managerial signals and behavior are not always consistent with these messages. Overall, mixed messages and ambivalence are still considered prevalent."

This ambivalence is reflected in the bank management's response to the IEG findings. While management acknowledged "significant deficiencies" in its handling of fraud and corruption, it rejected the finding of a material weakness. Instead it praised itself for the "assertive and concrete" actions it has taken since Robert Zoellick became president nearly two years ago.

This response reflects the bank management's belief that corruption, while regrettable, is a tolerable cost of the bank's good works. Meanwhile, the only real sanction that would matter -- cutting off corrupt projects -- almost never happens. To wit, the bank has just doled out another quarter-billion dollars to a Kenyan project the corruption of which we reported over a year ago. Bank staff will get the message.