Funding Poverty: An Interview With Stephanie Fried

Posted: 29-Jul-2003; Updated: 10-Feb-2006

A new study of ADB's track record, based entirely on the bank's own project audit documents for projects in Indonesia, Pakistan and Sri Lanka, finds that over 70 percent of ADB projects in these countries are unlikely to provide long-term social and economic benefits. In fact, many of these projects have actually increased economic instability, social dislocation and environmental destruction, with devastating impacts on the poor.

What is ironic is that despite classification by the ADB as "successful" or "partially successful" projects, the bank's own audits reveal the appalling side-effects of these very same projects: infrastructures damaged or destroyed, communities displaced, ecosystems compromised, and even the stability of local banks undermined by bad debts. As is made plain in The Asian Development Bank: In Its Own Words [PDF], a new report issued by Environmental Defense and ADBwatch, urgent and far-reaching reforms are needed. Otherwise, the ADB will increasingly be an engine for economic failure, environmental destruction, indebtedness, and growing social and political problems throughout the Asia-Pacific region.

Environmental Defense scientist Stephanie Fried, a co-author of the report who works on issues relating to international finance and its effect upon communities and ecosystems, spoke about the ADB, and how affected populations in South Asia and the Pacific are struggling to halt the damage wrought by a system based on a culture of lending for lending's sake.

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Q: How much of this problem is the responsibility of the nations receiving these funds?

Stephanie Fried: Like the World Bank, the ADB is permeated by what [Environmental Defense attorney] Bruce Rich has called the 'culture of loan approval.' The pressure to lend is extraordinarily high. If you worked as a staff person for the ABD, the way you would rise up through the ranks would be tied to the volume of loans that you could push out the door. So when a staffer for one of these banks walks into a ministry of a client country, both the staffer and the ministry representatives are often highly motivated - for reasons that have little to do with alleviating poverty throughout the country - to ensure that money gets disbursed.

In countries where corruption is rife, it is well known that there is a calculus of 'leakage' - that is, a certain percentage of funds will be routinely siphoned off by ministries for the personal enrichment of a handful of staff. For example, in the case of Indonesia, a few years ago a World Bank report indicated that the Bank knew of the 'diversion' of between 50-80% of funds budgeted for project land acquisition and resettlement assistance. Of course, land acquisition and resettlement assistance funds are ostensibly meant to assist the poor who have been impacted by such projects.

So in the case of the ADB, both the ADB staffers and their clients at various ministries may be highly motivated to see quick disbursement of funds, with minimal oversight, for reasons that have little to do with widespread poverty alleviation.

What we suspect is that in many cases, the ADB officials themselves are the ones coming up with these projects, pushing them onto the government, getting the government to agree. If government officials are perhaps thinking of their 10 percent cut or 5 percent cut or 3 percent cut or 1 percent cut, and if you're talking about something on the order of a couple of hundred million dollars for a project, then a small percentage rake-off of one or two percent is a huge amount of money. So you have a very unhealthy confluence of interests which are institutionalized in the rather secretive way that the ADB does business.

In the case of the World Bank, we actually have internal e-mails between government officials and World Bank officials where the World Bank is saying, 'Here are the contents of the letter that your government is to write to us describing why you want these projects and here is a list of what conditions and stipulations you suggest for our projects.' So it can be a perverse exercise. And then these banks will later claim that a given project was the suggestion of a client country.

If you read through the descriptions of the ADB projects, you can see clear instances - for example, the Indonesian resource evaluation projects - where it could not be rationally argued that the Indonesian government asked the ADB for loans for things like outmoded technology to produce maps based on obsolete data at a map scale impossible for use by the national planning agency.

Q: It was interesting to read of the ADB's attempts in Indonesia to upgrade hospitals which consisted of superfluous changes like painting walls, rather than increased medical care. Or funds being used to purchase equipment that couldn't be maintained or was inoperable.

Fried: Or dangerous to use! For example, because the X-ray rooms were not constructed to meet safety standards, and staff weren't properly trained, expensive X-ray machines bought with loan funds couldn't be used. The ADB also financed medical waste incinerators which are notoriously polluting and provided no training for hospital staff on how to appropriately separate hospital waste for incineration in order to avoid the generation of dioxin, and the spread of mercury and chlorine-containing wastes.

Indonesia has ancient and respected traditional healing systems which reach much of the country. Yet the ADB's theory apparently was that by providing funds for hospitals to paint their walls, et cetera, this would increase the rate of hospital utilization. Of course this didn't work. Auditors found that the subject of monitoring and evaluating the benefits of the project hadn't even been discussed, some six years into the project.

Good programs that have brought medical care to local communities have involved working with traditional healers and doing a blend of improving some of their practices from a medical viewpoint, but also welcoming a lot of their traditional approaches: the use of local medicinal herbs, massage, and other traditional healing methods.

The ADB's pattern is one of staggering and, one would have to say, willful ignorance of project impacts spanning a period of decades. Part of this may be the revolving door nature of the business where different teams of consultants are involved with different projects as well as the complete lack of feedback, the complete lack of input in the design stage - in any stage almost - from supposed 'beneficiaries' of these expensive projects, that is, the poor. Actually, a more accurate term would be 'project affected communities.'

Q: When roads or irrigation systems other major infrastructure projects were built, were these done primarily to benefit companies at their behest?

Fried: That depends on the project. The ADB's very first loan to Indonesia in the late 1960's was for Sawit Sebarang, the largest palm oil plantation in the country. The local plantation workers' union had just been destroyed in the aftermath of the 1965 anti-Communist massacres which had ushered in the Soeharto regime. According to auditors, the ADB's project to rehabilitate the mill ended up taking a significant toll on plantation workers who no longer had a union to protect them - many were laid off, the income of the remaining workers remained the same or fell, and laborers were now forced to work double shifts. Auditors found that child malnutrition and health problems increased under the project as a result of the decrease in the size of allowable family gardens, the ending of a payments-in-kind program, and toxic pesticide spraying which killed fish in the rivers, birds and other animals.

Loans may also be made in the context of various government plans. For example, the government might announce a five-year plan to improve roads. The ADB might respond by offering a large loan, ostensibly to improve roads. However, remember the culture of loan approval and the pressure to lend and the structural and personal motivation on the part of ADB staffers and perhaps the high level ministry people who will be receiving the funds.

On large infrastructure loans, it's all in the contracting. Basically the apparent goal seems to have as many sub-contractors as possible - one Indonesian road project hired 1,800 contractors! Most of them didn't even own their own construction equipment but were able to get a cut of the loan funds. Each one was given a tiny section of road to work on. Many of them used the cheapest and most unreliable 'penmac' materials possible and eliminated crucial drainage ditches - leading to rapid post-project deterioration of the roads. ADB auditors found that 35% of the penmac-surfaced roads showed severe defects within three years! This particular project also paid for 10,000 person-months of domestic consultants and 500 person-months of international consultants, yet only half of the road links proposed (ostensibly by expensive consultants) were actually used in the project.

This type of project appears to be a sort of contractors' money machine and has little to do with road safety. The roads that tend to get repaired or built might very well have a corporate client on one end or another, but the Asian Development Bank is supposed to focus on the alleviation of poverty. And they're supposed to be able to justify these sorts of investments in terms of helping the poor. Remember, 35% of the penmac roads were found with severe defects 3 years after surfacing.

Q: Which might mean more ADB funds to re-build the roads a few years down the line?

Fried: Well, there's a problem because the ADB auditors repeatedly report that the Indonesian government does not provide appropriate funds for road maintenance. In this particular road loan, the Indonesian government did not comply with any of the loan covenants requiring increasing funding for maintenance of the roads funded by this project. The audit documents show that ADB projects do not seem to be closely linked to national priorities, competent planning, or an understanding of the realities of life in the Bank's client countries. The interesting thing is that their own documents illustrate the manner in which the ADB has been an engine for economic failure, environmental destruction, indebtedness, and social and political instability.

They're a bank, so it makes sense to carefully examine their finance sector projects. And in Indonesia there are some astonishing examples. They had a $250 million food crop sector program in the 1990s, and this program basically dumped loan money into the Indonesian banking system. The auditors couldn't evaluate it since there had been no benchmarks for what the program was supposed to do. They noticed that during the period of the policy reforms that were mandated by the loan, the gap between rich and poor increased. They couldn't tell if this was a direct result of the changes required by the Bank, but the ADB had never attempted to identify who would benefit from the changes, so there was no way to measure the impacts. They found that there were huge procurement irregularities in this loan for food crops, where some 16 percent of the funds were spent importing textile materials for - who knows? - somebody's factory. Not food crops! And the ADB turned the other way when these kinds of violations occurred.

The ADB mandated that in order to get this money the Indonesian government must reduce fertilizer subsidies for farmers, but they didn't analyze what would happen to the farmers, many of whom depended on access to cheap fertilizers. They did no analysis of the fertilizer sector, crop production, farm incomes, credit, irrigation fees, et cetera. Auditors found that significant amounts of money had been spent on a worthless computerized database that nobody used.

There was a $29.5 million Agro-Industries Credit Project, and it was an abysmal failure. It was an attempt to provide money to an Indonesian bank called the Bank Bumi Daya (BBD) which was then to lend these funds on to finance (supposedly) agricultural industry projects. Bank Bumi Daya was to find projects to support and they were not supposed to make large loans over 1.5 million dollars without explicit ADB approval. It turned out, however, that they spent 35 percent of project funds on large loans over $1.5 million. They bankrolled environmentally destructive projects including a notoriously polluting shrimp farm where auditors found that all wastes were dumped directly into the ocean without treatment. Three-fifths of the projects failed, and 90 percent of the projects with outstanding loans defaulted on their loans. So this obviously negatively affected the already dubious creditworthiness of the Indonesian bank that was receiving the ADB loan funds.

There's an incredible use of foreign consultants on these projects as well; ADB projects seem to be a sort of a money trough for hiring extraordinarily highly-paid foreign consultants. For example, Balinese farmers have developed what is arguably perhaps the most sophisticated and equitable irrigation system in the world - a system that has allowed a high population of agriculturally-based communities to be supported on a tiny island through irrigation planning controlled through a system administered by temple priests. The Balinese subak system ensures that each family receives enough water to grow rice - the primary food supply. The ADB had foreign consultants flying in to design a completely new system, telling farmers 'We're going to put canals here, canals there,' and basically destroying sections of the ancient local infrastructure and the social structure that went with it. This project was an outrageous (and expensive) assault on a highly functional economic base that has successfully existed for centuries! This is the kind of thing that calls for reparations; it does not call for blindly continuing to fund this sort of operation.

You can't write this off as simply an Indonesian problem due solely to that country's legendary levels of corruption. The ADB has chosen to make Indonesia the largest recipient of its loans. Pakistan is number two, and Sri Lanka receives a much smaller amount of funds, but the problems are the same. The thing to remember is the ADB is moving increasingly into what they call 'post-conflict' lending, and that's why the case of Sri Lanka is important. They're moving in a big way into Pakistan, and rapidly expanding their Pakistan portfolio, and who knows what other places in the world they'll be expanding into next given the current political climate.

Q: Is this problem endemic with other multilateral development banks, or is the Asian Development Bank unique in this regard?

Fried: The pressure to lend, the culture of loan approval, does underlie the international public financial institutions in general and produces disturbing results. The ADB has been particularly egregious in that it has been far more closed than, say, the World Bank. It is run largely by former Japanese Ministry of Finance officials and does not have a particularly open approach. Without functioning transparency and accountability mechanisms, the problems will only grow worse.

Q: There is no accountability?

Fried: Very little! As can be seen by reading through the Bank's own audit reports. One of the big problems is a persistent lack of transparency and accountability. It's outrageous that the ADB can label projects that are obviously wasteful and failures as 'successful' or 'partially successful'. The ADB's client countries will be paying off these loans for decades. There needs to be a clear method for compensating and paying reparations to communities which have seen their livelihoods destroyed by ADB projects.

The ADB's own audit department has been raising these issues for years, apparently to no avail. Frankly, the U.S. Congress needs to take a very hard look at the continued provision of funds for an institution which has clearly so often been an engine for economic failure, environmental destruction, and growing social and political instability. The same is true for parliamentary representatives from other member countries providing funding for the ADB.

At the ADB's meeting in Honolulu in 2001 - the last meeting held in a relatively open political arena - 64 NGOs issued a 'Peoples' Challenge" to the ADB' and outlined a series of key steps, including an immediate halt to a number of controversial projects directly impacting impoverished communities and protested by these communities. This makes sense because - given what auditors have found - if there are hundreds of villagers up in arms about a given project, there is definitely a need for an independent assessment, sooner rather than later. The NGOs also called for the initiation of clear compensation, reparation, and transparency mechanisms, and cancellation of illegitimate debts derived from poorly planned and failed ADB projects. You can see the full text of the NGO demands in our report.

Frankly, if these projects didn't work (and if they were, according to the ADB's own auditors, poorly designed and terribly executed), it is hard to understand why the recipient country should be paying for them.

Q: How much financial support does the United States give to the ADB?

Fried: The U.S is tied with Japan as one of the two largest funders of the ADB. The way the executive board is set up, the size of your vote is dependent upon the size of your contribution, and so the U.S. and Japan have the largest contributions and the largest vote. This is why the U.S. Congress plays such a crucial role in allocation of funds for the ADB.

FIND OUT MORE

• Report: The Asian Development Bank: In Its Own Words [PDF] (1.4Mb pdf)
• Press Release: Billions Spent on Wasteful Asian Development Bank Projects (7/23/03)
• Go to our Regional Multilateral Development Banks page
• Related link: The Asian Development Bank