By Greg Rushford
30 June 2005

A proposed shift in the World Bank's procurement policy is expected to have major ramifications in Asia and is causing concern in Washington. When incoming World Bank President Paul Wolfowitz reported for duty on June 1, waiting in his inbox was a strong letter from Richard Lugar, the Indiana Republican who chairs the powerful Foreign Relations Committee of the U.S. Senate. In his letter, the senator asked Mr. Wolfowitz to investigate -- and report back -- concerns that the bank's staff is considering a major change to its currently stringent procurement policies that, critics assert, could open its contract awards to corruption. "My sincere hope is that any future World Bank policies strengthen, not undermine, the World Bank's effort to thwart corruption related to its funding," Mr. Lugar declared.

The bank is considering financing 10 pilot projects without insisting on the usual strict audit and management-supervision requirements being enforced by its in-house procurement officials. Instead, the idea is that local officials would be trusted to award these contracts in an effort to push recipient countries into bringing their own procurement systems in line with the bank's rigorous standards of transparency.

While officials say they haven't yet identified which countries' procurement regimes might be clean enough to qualify, names that are being bandied about within the bank include Poland, Turkey, Brazil, Chile and China. In Asia, India and China -- or at least selected "world class" Indian and Chinese procurement agencies -- are likely to come under serious initial consideration. Even selected procurement agencies in Asian countries like the Philippines that are hardly paragons of good governance would be considered, if they can convince bank officials that they can be trusted not to take the money and run.

This proposed shift in procurement policy at the World Bank is a big deal. Each year, the bank finances some $6-7 billion worth of investment projects world-wide that are open to international bidding. In Asia, it has particularly wide ramifications since the Manila-based Asian Development Bank last month announced that it would follow the World Bank's lead and consider a similar change in its procurement policy. The ADB puts out an estimated $1.25 billion in annual contracts for international bidding.

"Our policy is that if a country's policies are equal to ours, okay; otherwise, we won't do it," says Armando Araujo, the World Bank's director of procurement policy, explaining the new approach. "If a country does not carry out its promises, it will be caught in the audit to follow." Such audits would be expected to be conducted within two or three years of the initial contract awards.

That's too little, too late, complain critics who range from anti-corruption watchdogs at Transparency International to influential U.S. business organizations like the National Foreign Trade Council, which has also written a strong letter to Mr. Wolfowitz. The NFTC's members include major exporters like General Electric and Oracle, as well as many smaller enterprises. The corporate types worry that they would be cut out of lucrative contracts by local officials who would not have to worry about the advance close scrutiny by World Bank procurement officials, who currently hover over recipient countries (who in turn chafe at the conditions imposed by the "Nanny Bank"). "We believe the proposal is counter to current anti-corruption efforts, and will open the door to less transparency, less competition, and increasing costs of bidding for contracts," explains Mary Irace, the NFTC's vice president for trade and export finance.

American corporate consultant Diane Willkens represents clients world-wide who bid on projects that are funded by the World Bank and its sister lending institutions. An important part of Ms. Willkens' job description is to work with the international civil servants to scrutinize the often-devilish details buried deep in local contracts -- looking for evidence of bid-rigging, bribery, and so-called "lock-out" specifications that are written to benefit only one company in the world. "Currently, if a bidder sees that another bidder doesn't have the equipment, it can go to World Bank or ADB officials and get the offender disqualified," Ms. Willkens explains. "But if local country procurement systems are used, the banks will only come in later and evaluate what happened."

In Manila, ADB officials decline to be drawn into a discussion of which Asian countries they consider clean enough to qualify. No wonder. A cursory review of Transparency International's rankings of the most corrupt countries in the world -- China, India, Thailand, Vietnam, Bangladesh, the Philippines -- suggests ample reasons for apprehension. Even the relatively clean Malaysia (by regional standards, at least) has refused to sign onto the World Trade Organization's Government Procurement Agreement, whereby signatories pledge to increase transparency in contract awards.

Mr. Araujo says that he understands the concerns, but insists that the proposal is misunderstood. Responding to my hypothetical about the worries of turning over control of multi-million dollar contracts to officials in such notoriously corruption-ridden countries like the Philippines, he said that the World Bank is ready to help if officials in such countries can show they have really cleaned up their act. Mr. Araujo praised the Philippines for "accepting our criticisms" and recently enacting anti-corruption legislation. "If we can provide incentives this may be one way, with caution, with a restrictive framework, to encourage moves in the right direction." Mr. Araujo stated.

So how should Mr. Wolfowitz respond to Sen. Lugar and the critics? One idea comes from business consultant Diane Willkens. If the World Bank wants to provide incentives to Third World countries that want to showcase their world-class procurement agencies, why not first publicize any demonstrable examples of procurement successes? She asks. "Find any place where it has gone well, and give out a gold star, perhaps a President of the World Bank award." Until the World Bank and its sister development institutions can identify in public the specific countries that have contracting agencies that can pass the good governance test, why take the risks of loosening the present stringent procurement controls?

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Mr. Rushford is editor of the Rushford Report, a Washington, D.C.-based newsletter on the politics of trade and finance.