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ADB/OECD Conference on Combating Corruption in Asian and Pacific Economies

Introduction

Mr. Geiger, Mr. Iwasaki, distinguished panelists and participants, ladies and gentlemen:

Thank you for the opportunity to attend this workshop and offer a few observations at the outset. I am particularly grateful for Mr. Geiger's opening remarks. Future historians will no doubt view the OECD Antibribery Convention as a watershed in the struggle against corruption, and as a major step forward in addressing the "giving" side of the corruption equation. We are delighted to be able to work with the OECD in exploring the relevance of this treaty for Asia, and in considering a host of other measures that can help reduce corrupt and illicit behavior.

Until recently, many in Asia were relaxed in their attitudes about corruption. In a region used to high levels of growth, corrupt or illicit behavior was tolerated or even justified as a "lubricant" for economic growth. However, two developments have forced a radical reassessment, to the point where few would now deny that corruption exerts a heavy cost upon development in Asia. The first is the Asian financial crisis, and the fact that many have credited corruption, cronyism and nepotism with making a major contribution to the currency turmoil and falling stock markets that have engulfed the region from mid-1997 until recently. The second has been the rapid expansion in solid analytical work on the consequences of corruption, which has underscored just how costly, widespread and systematic corruption can be. For example, various studies have shown:

• Corruption can add between 20 percent to 100 percent to the procurement of government goods and services in a number of Asian countries.
• Corruption can cost governments as much as 50 percent of their tax revenues.
• Estimated losses due to corruption can total more than a country's foreign debt.
• Corruption diverts foreign investment, may reduce expenditure on social sectors such as health and education in favor of military spending and large capital projects, and leads to reduced asset life.
• Corruption undermines the creation of a professional, merit-based civil service.
• Corruption is a highly regressive tax, and its burden falls disproportionately upon the poor. Combating it is therefore essential in the realization of the Bank's goal of poverty reduction.
• As a number of recent tragedies have revealed, the cost of corruption is often measured not only in dollars and cents but also in human lives. Behind the hundreds and even thousands of lives lost each year to fires, landslides, collapsed infrastructure and ferry sinkings, there is often a sordid tale of building codes violated or safety standards overlooked by officials willing to turn the other way.
• In extreme cases, corruption can contribute to political instability and regime collapse.

About the Policy

Let me say a few words about the Asian Development Bank (ADB) and its anticorruption policy. Many of you are familiar with the ADB, a multilateral development finance institution that was established in 1966 to promote the social and economic progress of the Asian and Pacific region. The Bank is owned by the governments of 57 countries, of which 41 are from the Asia-Pacific region. Over the past three decades, the Bank has become a major catalyst in promoting development in the world's most populous and fastest-growing region.

The ADB seeks to combat graft and corruption as part of its broader work on issues of governance and capacity building. The ADB Board unanimously approved an Anticorruption Policy on 2 July 1998. ADB's policy is centered upon three objectives:

• supporting competitive markets, and efficient, effective, accountable, and transparent public administration, in the belief that efforts towards prevention of corruption will ultimately be more effective in the long run;
• supporting promising anticorruption efforts on a case-by-case basis and improving the quality of the ADB's dialogue with its developing member countries (DMCs) on a range of governance issues, including corruption; and
• ensuring that the ADB's projects and staff adhere to the highest ethical standards.

Implementation

We are now working hard to make the policy a reality. For the last year, I have been chairing the Task Force responsible for overseeing its implementation. Mr. Iwasaki (who will be chairing the first session on the agenda today) serves as secretary to the Task Force. We have formulated new staff guidelines that are being presented to the President and should be approved shortly. We have changed our procurement guidelines to allow for stricter rules on loan cancellation, blacklisting of firms or individuals and the right to audit in connection with possible instances of corruption, and we require full disclosure of all fees and commissions in Bank-financed activities. We have set up an internal unit within the Office of the General Auditor to investigate cases of fraud and corruption relating to Bank projects and staff, as well as a "hot line" that people can contact with information about corruption in Bank operations.

The ADB has long supported measures to enhance transparency, predictability and accountability in our lending and technical assistance operations, and we are now giving many of these initiatives a stronger anticorruption emphasis. Allow me to cite a few examples. Our $1.5 billion financial governance loan to Indonesia, approved in mid-1998, has a number of key anticorruption provisions that were worked out in consultation with the government. These include strengthening the internal audit agency, BPKP, and revising Indonesia's anticorruption legislation. Our loan to the Indian state of Gujarat has sought to improve public procurement and financial management, and to level the playing field for the private sector. Our public sector reform loan to the Republic of the Marshall Islands envisions the creation of an Ombudsman Office to mediate citizen complaints, including those relating to corruption.

We are now moving to address anticorruption issues in country programming and to improve project monitoring and supervision. These are more difficult and complicated tasks. It is easy to initiate such activities; it is hard to do them well and make sure they are effective. Yet we are committed to moving forward and ensuring that our deeds fully match our rhetoric. To this end, collaboration with other international financial institutions, and particularly the World Bank, has been an invaluable asset. We look forward to hosting the next MDB Working Group on Governance, Corruption and Capacity Building in Manila in November 1999.

The OECD Antibribery Convention

The Bank is not only concerned about corruption in our developing member countries (or DMCs). Our policy notes that an "unholy alliance" often exists between corrupt officials and corrupt foreign firms, many of whom are based in donor countries. Our policy requires the Bank to address both those who would give bribes and those who would take them.

In this context, our collaboration with the OECD takes on particular relevance. The OECD has been the driving force behind efforts to end the tax deductibility of bribes and criminalize the bribery of foreign officials, an effort that culminated with the signing of the OECD Antibribery Convention in Paris in December 1997. No other organization has done more to halt the flow of corrupt monies from individuals and corporations in the developed world to the developing world. The unit in which Mr. Geiger serves as Deputy Director, the Directorate for Financial, Fiscal and Enterprise Affairs, has played a particularly important role in addressing this problem and deserves a large share of the credit for this effort.

Not all are convinced of the applicability of the OECD convention in an Asian context, and we believe that this is a decision for our individual member governments to make for themselves. However, we believe strongly in the need to explore the relevance of this convention for our Asian DMCs, and the ways in which it could be adopted to Asian circumstances. It is to this end that we have been delighted to collaborate with our OECD colleagues in hosting this workshop.

Conclusion

I would like to conclude with an offer of partnership along two dimensions. As the MDB community moves to address questions of corruption more comprehensively, we are discovering that we know much less about the topic than we thought we did. There are many proposals on how to combat corruption. The participants at this gathering will no doubt put forward a number of additional excellent suggestions. But one finds a relative lack of solid, empirically grounded research that can help donors, such as the ADB, prioritize our interventions to ensure that our scarce anticorruption resources are utilized to best advantage. We are currently collaborating with other donors and supporting research on topics such as strengthening accountability mechanisms and improving public expenditure management. We welcome the opportunity to exchange information and findings in forums such as this, so that we can advance our collective knowledge about how to best combat corruption.

Second, we look forward to the opportunity to work closely with many of you--and particularly with officials from our developing member countries--to strengthen your anticorruption efforts. As I noted above, we believe strongly in prevention, and we have been active in areas of market liberalization and public administration reform for some time. We are also now beginning to work explicitly on anticorruption issues, such as the crafting of anticorruption legislation and the strengthening of supreme audit institutions.

We recognize all too well, that the struggle will be difficult. Corruption has a long history in Asia. Hindu, Confucian and Buddhist teachings dating back over two millenia warn of the dangers of bribery. Yet history also provides reason for hope, and the experiences of Singapore and Hong Kong demonstrate that much can be done if the proper legal and administrative systems are in place. One should not conclude that corruption is an inherent part of "Asian values." With improved professionalism in the public sector, and enhanced accountability, transparency and predictability, countries can be transformed to the point at which incidents of corruption are no longer widespread, but isolated and rare.

It is to this task, so important to the future economic health of both Asia and the world, that this conference is dedicated. We are particularly grateful to the OECD Directorate for Financial, Fiscal and Enterprise Affairs, and to the OECD Public Management and Administration Directorate, for their hard work and substantive inputs in helping to organize this conference.

We are also thankful for the assistance of many partner organizations. The Konrad Adenauer Foundation has played an important role in putting together the sessions on the media and civil society. The Pacific Basin Economic Council has provided invaluable assistance in identifying appropriate private sector participants. Other donors and NGOs, including Transparency International, the United Nations Development Programme, the United States Agency for International Development and the World Bank Institute, have also provided useful assistance and advice.

We are pleased to provide a forum for considering anticorruption issues in greater detail, and for advancing our common objective of ensuring that -- while the problem of corruption may indeed always be with us -- it need not always be an overwhelming concern. With improved transparency and accountability, and strong pressure on both those who would give and receive bribes, we hope that the future will witness greater integrity in the public and private sectors than exists today. It is with these remarks, and guarded optimism, that I am delighted to start the proceedings.

Answers to Potential Questions about the Bank's Anticorruption Policy

How Does the Bank Define Corruption?

The term "corruption" is used as a shorthand reference for a large range of illicit or illegal activi-ties. The Bank defines corruption as "the abuse of public or private office for personal gain." A more comprehensive definition is: "corruption involves behavior on the part of officials in the public and private sectors, in which they improperly and unlawfully enrich themselves and/or those close to them, or induce others to do so, by misusing the position in which they are placed."

With regard to the public sector, areas of "improper and unlawful enrichment" of greatest interest to the Bank will typically include the design or selection of uneconomical projects because of opportunities for financial kickbacks and political patronage, or procurement fraud, including collusion, overcharging, or the selection of con-tractors, suppliers and consultants on criteria other than the lowest evaluated substantially re-sponsive bidder. It would also include illicit payments to prevent the application of rules and regula-tions in a fair and consistent manner, particularly in areas concerning public safety, law en-forcement or revenue collection. It would incorporate payments to government officials to foster or sustain monopolistic or oligopolistic access to markets in the absence of a compelling economic ration-ale for such restric-tions. The theft or embezzlement of public property and monies; the sale of official posts, positions, or promotions; nepotism; or other actions that un-dermine the creation of a professional, meritocratic civil service; and extortion and the abuse of public office, such as using the threat of a tax audit or legal sanctions to extract personal favors, would also fall under this category.

With regard to the private sector, examples of corrupt behavior of greatest interest to the Bank would include the deliberate disclosure of false or misleading information on the financial status of corporations that would prevent potential investors from accurately valuing their worth, such as the failure to disclose large contingent liabilities or the undervaluing of assets in enterprises slated for privatization. It would also include the misappropriation of confidential information for personal gain, such as using knowledge about public transportation routings to invest in real estate that is likely to appreciate.

From time to time, it may be necessary for the Bank to employ more specialized definitions of corruption to address particular types of illicit behavior. In the area of procurement, for example, the Bank defines corrupt practice as including "the offering, giving, receiving, or soliciting of any thing of value to influence the action of a public official in the procurement process or in contract execution."

Is Corruption Really All That Bad for Development?

Yes. In earlier decades, some scholars argued that corruption had a beneficial impact upon economic development. In countries where public sector wages are often low and in some cases may not even be enough to live on, some maintained that it was natural for civil servants to augment their salaries by other means. It was alleged that corruption could advance economic efficiency by helping to restore artificial and administratively determined prices to market-clearing levels. Others maintained that corruption played a useful role in allowing cumbersome administrative procedures to be bypassed, or in transferring resources from wealthy individuals and corporations to those of more modest means. Still others maintained that corruption was a natural stage of development.

More recent research has demonstrated that there are serious flaws in these perspectives. First, such arguments often refer to the benefits stemming from specific illicit acts and do not consider the systemic impact of corruption. Although a given incident or transaction can have positive results, it may also generate negative externalities that degrade the performance of the system as a whole and compromise the economy's long-term dynamic efficiencies. Second, many of the alleged benefits from corruption only appear as such against the background of a public sector that is failing to perform effectively. The experience of countries such as Singapore indicates that patient and persistent efforts toward improved public sector management are likely to result in greater benefits over time than tolerating relatively high levels of corruption to compensate for these deficiencies. Finally, corruption is indiscriminate, in that it encourages people to avoid both good regulations and bad.

Although there is much that we do not know about corruption and its impact, the most recent empirical work indicates that it often extracts a significant cost upon the development process. Studies of corruption within individual cases or sectors paint a disturbing picture of resources lost, squandered, or devoted to sub-optimal uses. Econometric studies of the comparative impact of corruption upon various countries indicate that it can play a significant role in reducing their overall GDP and in diverting foreign investment to more stable and predictable sites. Studies of corruption in capital investment show that it diverts resources away from social sectors and towards defense and major infrastructure projects. Asset life is also lowered, as resources are directed away from maintenance and towards new projects and equipment. Survey data indicates that the costs of corruption are often borne disproportionately by the poor, while the provision of public goods and services is skewed towards the rich, the powerful and the politically well connected.

Corruption Has Been Around for a Long Time. Why is the Bank Only Addressing it Now?

The Bank has long been aware of the dangers of corruption among its projects and staff, and it has taken extensive measures to ensure that its operations adhere to the highest ethical standards. The Bank has a long history of integrating improvements in public sector management in its projects, which has helped to improve transparency, accountability and efficiency in many government ministries and departments.

The Bank's recent and more explicit focus on issues of governance and anticorruption has been in response to increased demand by our major stakeholders. On the donor side, the end of the Cold War has reduced the willingness of countries providing aid to overlook improprieties in light of broader geopolitical interests. Donor fatigue has placed increasing pressure upon foreign assistance agencies to demonstrate that they are delivering maximum value for the money. On the recipient side, in countries throughout the Asian and Pacific Region, the citizenry has served notice that it is no longer willing to tolerate gross abuses of public trust for private gain. The liberalization of the press in many parts of the world has enabled journalists to write more freely about official indiscretions. Improvements in education and increased information flow between countries have made their public more aware of anticorruption efforts in other countries and less willing to tolerate systematic abuses at home. The rise of new global non-governmental organizations dedicated to fighting corruption has helped bring and keep the issue in the spotlight in both the developed and the developing world.

Doesn't the Bank's Anticorruption Policy Involve Making Value Judgments that Conflict With Local Norms and Practices?

No. There are occasional gray areas, such as the practice of "rice cake money" in Korea or the tradition of presenting gifts to government officials in Thailand. However, there are many areas that are black and white. All ADB member countries, for example, have legislation outlawing the bribery of public officials.

The Bank believes that at its core corruption is a governance issue, in that it involves the ability of public and private sector organizations to implement policies and projects effectively and to advance transparency, predictability and accountability in their operations. The Bank's interest in corruption is motivated solely by its twin desire to ensure the highest degree of integrity among its projects and rapid, sustainable, and equitable growth among its member countries.

What Measures Does the Bank Take to Ensure that Its Projects are Free From Corruption?

The Bank relies on a number of institutional arrangements and reporting mechanisms to monitor the use of its resources. Project staff are responsible for project design and monitoring the physical implementation of projects, with assistance from the resident missions. The Consulting Services Division and Project Coordination and Procurement Division are responsible for overseeing the recruitment of consultants and the procurement of goods and services, working in collaboration with project staff. The Controllers Department is responsible for overseeing disbursement by the Bank on loan and TA projects; it is also responsible for administering loan repayment. The Treasurer's Department is responsible for payments and cash management.

The Bank's Guidelines for Procurement and procurement procedures have in effect been introduced to limit the possibility of fraud and corruption. The stringent procurement procedures set out in the Bank's Guidelines for Procurement ensure that bidders are treated equally and that the bidding process is carried out in a transparent and fair manner. In addition, internal procedures providing for the involvement of the Procurement Committee and the Consultant Selection Committee, with representatives from various departments, have promoted equal and fair treatment of contractors, suppliers and consultants. These committees ensure that contracts are awarded to the lowest evaluated substantially responsive bidder and that consultant proposals are ranked on the basis of quality.

The Office of the General Auditor conducts independent and objective appraisals and audits of the Bank's financial, accounting, administrative and operational functions and related information systems to ensure efficient and effective management.. Disbursement guidelines require annual audit reports on all project accounts to ascertain whether loan and TA funds were made to authorized payees in accordance with the agreements and the purposes intended. The Operations Evaluation Office is responsible for evaluating the performance of Bank loans and grants.

Bank staff are subject to a rigorous Code of Conduct that carefully delineates their rights and responsibilities. They are compensated well to minimize the incentives for corrupt behavior. The Bank is developing a series of training courses in disciplines ranging from ethics to forensic accounting to strengthen its internal capacity for addressing these issues. An elaborate set of internal procedures are utilized to ensure that staff adhere to the highest ethical standards, on the one hand, while protecting them from malicious or unfair accusations, on the other.

As was noted above, many of these measures are being strengthened, and new ones undertaken, in the wake of the approval of the Bank's Anticorruption Policy in July 1998.

What Should People do if They Come Across Evidence of Corruption among Bank Staff or in a Bank-Financed Project?

Their first step should be to contact the ADB's Anticorruption Unit in the Office of the General Auditor. Formal allegations should be lodged by providing the name and institutional affiliation (if any) of the individual lodging the complaint, a brief discussion of the nature of the complaint itself, including the names of the individual(s), organizations and/or any relevant third parties charged with malfeasance, as well as any corroborating evidence.

Anonymous complaints will be accepted, however the Bank's capacity to follow up on such information is often limited. The Bank has strong protections for "whistleblowers" (i.e. individuals who come forward with justified allegations of corruption) and employs stringent precautions to ensure that the highest levels of confidentiality are observed at all times.

The Anticorruption Unit will also be available to field informal inquiries regarding potential conflicts of interest or examples of corruption among Bank staff and projects. To ensure confidentiality, all communication is handled by trained investigative professionals and routed through secure phone and fax lines.

What Will the Bank Do if It Encounters Evidence of Corruption Among Its Staff or Within Its Projects?

The Bank has a fundamental commitment to ensuring that its staff and projects adhere to the highest levels of integrity. Its response to specific allegations of corruption will be tailored to the circumstances surrounding the allegation. Should the allegation involve Bank staff, then--depending upon the nature of the infraction--staff found guilty of such behavior will be subject to a number of sanctions, including summary dismissal and possible prosecution.

If the Bank's investigation uncovers credible evidence of corruption in a Bank-financed loan or TA grant, then--again depending upon the nature of the infraction and the government's willingness to act decisively in addressing it--the Bank could pursue a range of options. Breaches of specific loan regulations or covenants could result in a decision by Management to blacklist the firm involved, refuse to finance a contract award, suspend disbursements, or cancel the loan. Short of that, the Bank could request the reassignment, demotion, dismissal or prosecu-tion of personnel associated with various components of the project.

Will Bank Lending to Countries be Affected if Corruption is Found to be a Fundamental Problem?

Yes. If the Bank consistently encounters problems within a particular executing agency or sector, it could change its programming mix and avoid future lending and TA operations in that area. The Bank can also focus its programming upon strengthening NGOs and civil society to facilitate greater transparency and accountability in that sector or to pro-vide alternative means of service delivery.

Cases may occur in which corruption has reached such proportions that it poses a significant impediment to the probity of Bank operations or the attainment of a coun-try's fundamental development objectives. Under such cir-cumstances, Management could elect to lower or suspend Bank lending and TA operations to that country after consulta-tion with the country and the Board. Conversely, situations may also exist where a given country has made significant progress in improving the efficiency, effectiveness and integrity of its public and private sectors. Under such circumstances, Management may elect to accelerate the lending program or provide additional TA resources to ensure sustainability of the reforms.

For Further Information

Requests for further information about the Anticorruption Policy or the ADB's broader efforts in the area of governance should be made to the Governance and Public Management (GPM) unit of the Bank's Strategy and Policy Office.