---------------------------------------------------------- FREE for JOIN Indonesia Daily News Online via EMAIL: go to: http://www.indo-news.com/subscribe.html - FREE - FREE - FREE - FREE - FREE - FREE - Please Visit Our Sponsor http://www.indo-news.com/cgi-bin/ads1 ---------------------------------------------------------- Secret WB Document on Corruption in Indonesia - Pt I - Dear Readers, Several persons familiar with the World Bank claim that the document below is authentic. But inasmuch as Joyo has no way of verifying such claims, this document is being sent to list members for informational purposes only. The copy received did not include the name(s) of the author(s) of the Memorandum nor of the introductory paragraph describing the Memorandum. -- Joyo ############################################################# Secret WB Document on "Why Corruption Levels are Unlikely to Change under the Proposed Arrangements" -- Part II Excerpt: " There is evidence, as the report of the recent World Bank mission on corruption suggests, that the pattern of coordination that kept this system [of corruption]running smoothly has broken down. The authoritarian arrangement which imposed informal discipline in order to keep the system's level total extraction at a sustainable level gave way to one in which new opportunities arose during the pre-crisis growth period. These opportunities were seized upon by officials acting as individual rent-maximizers regardless of overall cost. By the time the crisis hit, Suharto's ability to act as a "stationary bandit" had long since been overcome by events. " ************************ FULL TEXT OF THE MEMO (PART II) Dealing with Incentives toward Corruption Corruption in padat karya programs appears to include the following forms: 1 . skimming off portions of the budget in the expenditure circuit from central department account to the work site; 2. collusion in public works design and implementation so that work requirements are overestimated, contractor competition is managed, bids are inflated, and kickbacks paid to officials; 3. extortion by officials manning control points between center and work site, e.g. requiring payment for local budge approval or avoidance of a negative audit report; 4. arbitrage by the project officers, field supervisors, and foremen, in which either ghost workers are recorded as present, or standard wage-rate payments are recorded but substandard wages are paid and the difference pocketed; 5. nepotism and favoritism in the selection of projects and of eligible workers, possibly in return for kickbacks or favors. The modalities of corruption are no doubt more varied than this, nor are the above forms universally in evidence - it is too soon to say either way based on findings to date. Nevertheless, it does appear that the above practices are common in works programs, and that they would be present in the labor-intensive works programs implemented in 1999 unless special action is taken. These forms of corruption have varied sources. The colonial tradition of "wet" departments appears to have been carried over into the New Order, with civil service salaries set very low, often ten percent or less of the cost of a lifestyle considered commensurate with the official's position. Social pressure to keep up with one's peers in the civil service - to say nothing of one's neighbors and friends in the private sector - requires improvisation that takes well-known forms: creating projects that pay salary supplements and allowances out of government development budgets, land and investments, moonlighting, and graft. This system, then, works on the assumption that officials will supplement their salaries through a variety of manipulations, and it requires cooperation among various levels of officialdom to pass the expected shares of graft earnings up and down the line. The basis for such this system is a unitary government, a dominant ruling party, the presence of the military at all levels and in all departments, Javanese cultural influence stemming from precolonial history and the nationalist movement, an authoritarian and technocratic approach to administration and development, weak civil society with little capacity or opportunity to exercise scrutiny, and a shared fear of separatism and fragmentation. In other words, corruption has helped (I) hold a potentially fractious society together, (ii) direct opportunities and benefits to key supporters, and (iii) provide some uplift to the pribumi population, through the distribution of patronage in the form of government positions, projects, and other benefits. Such a system may be able to sustain an equilibrium at a medium to high level of corruption, provided it can keep at bay such destabilizing influences as alternative power centers, campaigns for reform and democracy, large new sources of rents, economic crises, and forms o f indiscipline such as inordinate greed. There is evidence, as the report of the recent World Bank mission on corruption suggests, that the pattern of coordination that kept this system running smoothly has broken down. The authoritarian arrangement which imposed informal discipline in order to keep the system's level total extraction at a sustainable level gave way to one in which new opportunities arose during the pre-crisis growth period. These opportunities were seized upon by officials acting as individual rent-maximizers regardless of overall cost. By the time the crisis hit, Suharto's ability to act as a "stationary bandit" had long since been overcome by events. The situation has changed. The ending of the Cold War has reduced pressure for a united front. Foreign donors are becoming more demanding. International financial markets play a much greater disciplining role in Indonesia than in the past. The pre-existing system of graft has lost some of its rationale. There is still a concern about the unity of the country, and about distributing benefits to pribumi constituencies. There may be yet other agendas at play that help keep corruption networks active, but these may be less strong than before. In this situation, a new direction charted by the chief of state, commitments to reform the civil service, the judiciary, the audit systems, and the instruments that encourage the flow of information (FOIA, whistleblowers, etc.) could have more of an impact than they might have in the past. What does this mean here and now, for the short-term works programs that we hope to protect under the new loan? An ambitious reform agenda is a long-term matter. In the short term, it makes sense to (I) pursue the closest approximations possible to the changes suggested above, (ii) within a special zone or ring-fence, (iii) using special provisions of limited application in terms of time or breadth, (iv) while allowing state mechanisms to provide proxies of the most important benefits normally supplied through graft. This implies changes on several fronts, and setting up civic monitoring mechanisms alone will not produce substantial reductions in corruption. It also means that any such changes that cut strongly against the social gradient that sustains corruption networks will likely be resisted, manipulated, and perhaps undermined. Can the loan package be designed to address these points? Suggestions Following are some thoughts that might be pursued as design elements of the loan package, in addition to what the Bank is already contemplating: 1. Bring all individual projects under a strict budgetary ceiling - say 50 or 100 million rupiah. Larger projects could either be prohibited or made subject to special and more stringent reporting and monitoring procedures. In theory, it is harder to skim substantial amounts from many small projects than a few large ones. Assuming certain other conditions (see below), smaller pots tend to encourage clearer "ownership" rights, less free-riding, and less illicit redistribution. As with the current Cipta Karya program, small projects can use simplified rules and procedures for design, planning, bidding, contracting, etc. 2. Direct all project funds through bank accounts at or near the level at which the project is being implemented. Removing fund flows from the usual circuit running from the center to the local level, through sub-national treasuries, removes substantial opportunities for diversion. It does not cure such problems as kickbacks, bribery, favoritism, etc. Still, the impression I've gotten that officials are resisting this move means that it probably would have an impact. One might couple this with some kind of documentary system of tranche releases, analogous to the process of fund release under a documentary letter of credit, in this case using perhaps certified invoices, receipts, worker attendance lists, audit reports, etc. 3. Use independent private sector auditors to supplement and re-check what is to be done by the departmental Inspectors General and BPKP. At the risk of piling up costs, one might consider using an international accounting firm to do central audits and a few spot-checks. 4. Provide civil service pay top-ups or equivalent benefits. This is a contentious issue, since Indonesian officials already use their development budgets to pay themselves top-ups. One might, first, rationalize that system by making those top-ups a transparent part of official pay-scales, and second, use a portion of the expected gain due to reduced corruption to pay an extra top-up. On the latter point, one might take a "not here, not now" or "zero tolerance" stance, while providingin exchange an additional top-up calculated as follows: if one removes the entire 20-30% leakage (choose a mid-point estimate, e.g. 25%, hence $150 million, if the total program were $600 million), then one pays back to the civil servants one-half of this in formal top-ups, and lets the other half flow down to the target population. Of course, it is unreasonable to expect zero leakage, but this must be the formal target, lest one condone leakages of any given amount. Such a system would apply only within the ring-fence. Assuming the Forestry and Manpower programs can be excluded, this leaves BAPPENAS, Public Works, and Home Affairs as the main central departments operating within the ring-fence. This would have to include both centrally- and locally-implemented works. It may be a bit of a stretch, but the analogy here would be the hiving off of tax departments in some countries, applying special procedures and salary scales or converting them into revenue boards. This approach would likely require a Presidential decree setting the terms for the program, such as official salaries, summary dismissal upon receipt of certain specified evidence of wrong-doing, performance criteria, transparency rules, project planning and implementation procedures, etc. 5. Require signals to be sent by the President and relevant ministers of seriousness of purpose. Habibie has already acknowledged problems of KKN. One might condition the loan package on a major speech announcing the new approach to labor-intensive works, in which KKN is not tolerated within the ring-fence, and all relevant officials make strong rhetorical commitments to integrity. This could easily become a charade, but apparently this kind of zero-tolerance rhetoric was used with some success by the Director General of Public Works in the context of one of the Bank- funded programs (Kecamatan Development?). 6. Institute special budgetary and policy authority at local levels without central approval - again, by special decree applicable only to the programs concerned. Here, the idea is to move some programs quickly down to lower levels - kabupatens might be a good place to focus - and to remove the checkpoints above this level that attract corruption via bribes and kickbacks for project and budget approvals, skimming off part of the funding flows, etc. This would be a kind of pilot decentralization experiment, again within the ring-fence. 7. Require selection of works and laborers by public hearings, public processes, and public verification. This is a kind of direct democracy approach where everyone in the affected area is invited (required?) to turn out in order to witness and approve these steps. Obviously, this could only work as such at the very lowest levels. 8. Use international monitors of engineering standards of output quality, etc. Much of the slack taken up by means of corruption is apparently created by loose estimations of manpower and materials requirements by project engineers. The margin is then distributed in the form of overinvoicing, kickbacks, and other means. One approach here might be to have organizations from the region with experience and good credentials in this area participate in the re-definition of standards, and perhaps in audits and spot-checks. 9. Check gross disparities in work-days per capita in different jurisdictions - there appear to be very wide divergences that would be difficult to justify in terms of need here. These seem to point to patronage processes that grossly distort program outcomes. 10. What is needed for the just-mentioned checks and other anti-corruption activities is the capacity to investigate and pursue problems of corruption. This is not dealt with in the proposals about independent civic monitoring. The idea of a special prosecutor was apparently mooted but strongly opposed by Indonesian officials. An alternative approach might be to use the existing systems - Inspectorate General, BPK, BPKP, procuracy - but to require special transparency provisions to apply to all matters concerning the ring-fenced programs. In other words, one might require all monitoring, investigation, and prosecution by these agencies to be conducted to a much greater extent in public, as concerns the programs in question. Again, this would require a decree or other special dispensation. 11. Create islands of integrity. This is the overall logic of the ring-fence, but one might develop this further in the form of special whistleblower incentives and protections, freedom of information provisions, complaint mechanisms, bid protests, etc. One might also suggest some form of "integrity pacts" to be entered into by the relevant officials, contractors, NGOs, traditional authorities, donor agencies, etc. This could involve an entity such as transparency international. 12. Determine more precisely what the most damaging forms of corruption are within the programs concerned, and focus mainly, or even exclusively, on them. For example, patronage and nepotism might be judged to be relatively benign, while certain distortions, rakeoffs, and kickbacks might be viewed as more damaging. The integrity provisions of the loan package should perhaps focus on the latter. 13. Avoid the perception that the Bank is setting up alternative power centers. This is not an easy task if one is to pursue the above-stated goals seriously. Nevertheless, one needs to leave room for more benign functional equivalents of the corruption networks to operate in order to achieve the goals of: unity, continued (relatively) strong policy direction from the center, uplift of pribumi populations and other key constituencies. How one does this without outright condoning of corruption is difficult to say ex ante, but in principle this should enter into discussions of the ways in which the ring-fence is set up. Otherwise, the Bank will run a serious risk of failure. What this Might Mean for the Appraisal Mission and the Loan Drawing out the implications of the above for the loan package, if any, is obviously the Bank's task. I would very much like to be as specific on this point as possible, but have not yet had the leisure to think this through. With the appraisal of the SSNAL moving forward, you confront three basic options: (I) do not make the loan because there are insufficient assurances of integrity in SSN expenditures, (ii) make the loan on the basis of some version of the integrity conditions now being contemplated, or (iii) make the loan without any reference to or representations about corruption - acknowledging that the need for balance of payments support is overriding. I am not sure to what extent option (iii) has been aired. Of course, it would be perfectly consistent with past lending programs, in which the Bank stipulated that it had confidence that audit mechanisms and investment targets were such as to minimize the risk of default. The new variables at play now are Indonesian and international concerns about corruption in development - including multilateral lending - programs, and direct criticism of the Bank concerning the governance of its programs in Indonesia. Obviously, our target is option (ii). The question is whether the insufficiency of definable conditions or of Indonesian fulfillment of those conditions triggers (I) or (iii). To my untutored sensibility, it seems that (I) is not seriously being contemplated. To adopt option (iii) would mean climbing down off the soapbox and reversing course. The one big advantage this would have is in avoiding any Bank certification that Indonesia has actually met a series of anti-corruption conditions. It seems to be broadly assumed that the conditions under option (ii) are unlikely actually to bite, given the pressures to disburse and the difficulties of suspending tranches. I may be underestimating the Bank's commitment in this regards, and if so, my apologies. I just think it's worth considering whether releasing the initial tranche upon certification that the integrity conditions have been met (option ii) doesn't then provide a cover for all sorts of manipulations - creating, to use a now tired concept, a problem of moral hazard. -end- ++++++++++++++++++++++++++++++++++++++++++++++++++++ Didistribusikan tgl. 23 Jul 1999 jam 09:52:43 GMT+1 oleh: Indonesia Daily News Online <[EMAIL PROTECTED]> http://www.Indo-News.com/ ++++++++++++++++++++++++++++++++++++++++++++++++++++
