Time To Scale Back In Indonesia?

The World Bank rethinks its role

As director of the World Bank's office in Jakarta, Mark Baird knew well the risks of operating in one of the world's most graft-ridden countries. So he took extra precautions last July when he sought bids for $200,000 in supply contracts. To make sure all had a fair shot, the World Bank took a display ad in a local newspaper announcing a public tender. Baird then had the paper send him a page proof to show it had really been printed. For good measure, Baird's staff bought that day's paper.

To his shock, the ad wasn't there. The space the bank had paid for was instead filled with Bloomberg Financial Markets data. The paper's director admits the page proof was fake, and government officials told the bank the winning bidder used "improper procedures" to get the contract. The lesson, says Baird, is that corruption in the bank's local projects is "so systematic and so well-hidden that it's not easy to get your hands around it."

SORRY REALITY. For decades, foreign lenders and well-meaning Indonesians alike simply learned to live with the sorry reality of doing business in the world's fourth-largest nation. But as Indonesia struggles to rebuild an economy laid waste by the 32-year rule of deposed President Suharto, a major rethink of the World Bank's role is under way. The legacy of diverted funds and an unpayable mountain of foreign debt in one of the World Bank's biggest clients has supplied ample fodder for critics in the U.S. Congress who want to downsize the institution. The bank also has become a target of Indonesian nationalists--including the economic policy czar in the five-month-old government of Abdurrahman Wahid--who think it's time to end the country's reliance on foreign agencies.

Considering Indonesia's desperate need for foreign funds, of course, a complete World Bank pullout is doubtful. The $5 billion in aid the bank helps coordinate annually on behalf of many lenders funds everything from power projects to antipoverty programs. But a cutback now is likely in Indonesia, where the bank has 9% of its $117 billion in loans to developing nations. "Both sides expect to see a reduction in [World Bank] lending from the exceptional levels of the recent crisis," says Kwik Kian Gie, Coordinating Minister for Finance and Economy.

With its prestige on the line, the World Bank is turning Indonesia into a test case for its new Oversight Committee on Fraud & Corruption, based in Washington. The bank has canceled $1.5 billion in commitments for projects ranging from energy to roads. The bank is putting a priority on programs that steer funds more directly to those in need, such as a fund that gives scholarships to 4 million students.

There's little argument that it's time for the World Bank to take a fresh look at what it's doing in Indonesia. That it has helped accomplish some great things since its arrival in 1966 is undeniable. It helped finance Indonesia's first real road network, electrical grid, and telephone system, as well as clinics and schools. But Indonesia's economic collapse turned the spotlight on the institution's failings. Its biggest was tolerating rampant corruption under Suharto. Indonesia Corruption Watch (ICW), an independent monitoring agency, estimates that 20% to 30% of all development aid in Indonesia is being wasted. A big reason: Loans for specific projects are given directly to the central government, which often doles out contracts on the basis of political connections. "Only lip service is paid to transparency and fair play," contends Chitta R. Bhattacharya, the World Bank's senior procurement specialist in Jakarta.

Indonesia's handling of a World Bank-funded power grid for impoverished Javanese villages in the mid-1990s is a case in point. Instead of asking for bids for major pieces of the project, which involved installing hundreds of kilometers of high-voltage cable, officials broke the job into small contracts, where bidding was easier to manipulate. Much of the work went to Suharto cronies.

SYMBIOTIC RELATIONSHIP. Perhaps the most abused project was the $255 million Sub-District Development Program to improve living standards in 20,000 villages. Often, structures were simply covered with fresh paint and streets were cleaned. In most villages, the officials picked their own relatives as suppliers, says Corruption Watch investigator Husni Thamrin, who has hardware-store receipts that show 25 cents markups on 75 cents paintbrushes. "Imagine what this costs if you calculate 20,000 villages," he says.

World Bank officials knew of such problems for years. But until the economy collapsed, they reasoned that the benefits of aid greatly outweighed the graft. Besides, Suharto repaid loans on time. "The World Bank and Indonesia have a symbiotic relationship," explains Hadi Soesastro, executive director of the Center for Strategic & International Studies in Jakarta.

To Wahid, however, the World Bank's presence is intermingled with Suharto's corrupt legacy. Kwik and other nationalists regard the annual credits from the World Bank as contributing to Jakarta's debt burden, now equal to 93% of gross domestic product. Rather than accept more bank loans, they argue that Indonesia's current debt should be forgiven. That view is shared by the Meltzer Commission, a panel appointed by Congress that has called for overhauling the bank. Blaming the bank also plays well domestically. Officials "want to raise the sense of nationalism and say: `We won't depend on these foreigners anymore,"' says Sri Mulyani Indrawati, secretary-general of Jakarta's National Economic Council.

Trouble is, Jakarta still needs the World Bank. No other lender will give it the rock-bottom 6.85% interest rate and 20-year maturity that the bank offers. Country director Baird says he would prefer that the bank cut its lending to Jakarta by up to two-thirds, or to about $500 million annually, within three years.

Wahid and World Bank President James D. Wolfensohn have met recently to weigh other options. No one is disclosing any details. But they are likely to mark the start of a new relationship.