The Scandal of Corruption in Development Aid

For all the effort development agencies invest to help developing states combat corruption, recent reports of corruption in Japanese and Norwegian development aid projects along with an earlier paper on corruption in World Bank projects remind that the development community does little to attack corruption in the one area where it has the most control: the projects it funds.

Last week Thanhniennews, an English language Vietnamese news service, reported that Japanese consultants had admitted paying $1.3 million in bribes to Vietnamese officials to win contracts funded by the Japanese development agency while a Vietnamese official was alleged to have been bribed $780,000 on another Japanese supported project.  Over the past 20 years Japan has provided Vietnam with some $20 billion in aid and is expected to furnish close to $2 billion in 2014.  Experts on the Japanese-Vietnamese relationship say the revelations, like previous corruption scandals, will likely have little effect on the continued flow of Japanese aid.  In 2008, for example, widespread bribery was discovered in a transportation project, and the only consequence was aid was cut off for four months.

Eirik Jansen writes in Corruption, Grabbing and Development: Real World Challenges, a recent volume from Elgar, about a corruption scandal in a $60 million Norwegian aid project in Tanzania.  After eight years of glowing reports about the project’s success and annual audits showing expenses were properly accounted for, persistent rumors of abuse led the Norwegian government to retain a Danish auditor to carefully scrub project records.  The findings:  costs for seminars lasting only two days were billed as though they had run six; Tanzanian employees were given double per diem allowances and paid overtime for days they were on vacation; construction projects were overpriced and procurement rules ignored; inventory records were not maintained or were not accurate; and so on and so forth.  When asked if $30 million of the $60 million spent on the project might have been lost to corruption, the Danish auditor replied that that figure “was not far from the truth.”  What did Norway do when the full dimensions of the corruption were laid bare?  Almost nothing.

In “Corruption in World Bank Financed Projects: Why Bribery is a Tolerated Anathema,” Nathaniel Hobbs recounts how corruption manifested itself in 90 World Bank projects worth just over $1 billion in Sub-Saharan African.  The winning bidder is chosen on the basis of price, quality, and the amount of bribe it is willing to pay.  Project payments during the course of contract execution depend upon approval by the recipient country’s personnel, something that can add as much as an additional 10% – 15% to the contract price.  One staff member told Hobbs that this system operated in all 22 Bank projects he had supervised over an eight year period despite Bank controls designed to expose fraud and corruption.

In an earlier post I suggested that donor agencies are reluctant to admit how much corruption infests their projects for fear that the democratically elected legislatures that provide the funding will cut it off.  Hobbs, Jansen, and the author of the Vietnam story offer additional reasons:  diplomatic relations, career incentives of the aid workers, the hope that somehow things will get better on their own.

But these all seem lame to me, particularly given what the impact of the status quo. For no matter how loudly the development community condemns corruption rhetorically, its continued willingness to tolerate corruption in its projects speaks far louder.  The evidence is in:  corruption retards economic growth and undermines the state’s legitimacy.  Its most harmful effects are often felt by the world’s poorest.  Isn’t it time the community most committed to helping the poor, the development community, confront a corruption scandal of its own making?

17 thoughts on “The Scandal of Corruption in Development Aid

  1. Hobbs seems to suggest that the key stage at which bribery comes into play is when the borrower government chooses which bidder to approve. Given that lenders have a fair amount of power based on their financial position, and that (one would expect) lender country governments are generally less likely to be corrupt, would it make sense for lenders to demand a greater say in the selection of contractors? An audit as thorough as that described in your post would probably not be cost-effective, but some sort of preliminary screening and audit function should reduce the prevalence of corrupt contractors within the projects that these donors fund.

    • While I agree with Phil’s best in that there may be ways in which the development community can design measures to maximize oversight and minimize corruption, I don’t think giving aid organizations more say about hiring subcontractors will actually improve the situation. Even assuming there is less corruption aid organizations than say the beneficiary country’s government, corruption takes place in many different forms: often times different subcontractors bring the price up through collusion, or underpay another subcontractor or bribe the auditor of the project. It will be very difficult for an aid agency to spot which subcontractor may be more corrupt than another. In addition, this would invite further criticism of development aid being imperialist, as more input for development organizations would mean less input from the aid-receiving government.

  2. Your post seems to assume that the cost of fighting corruption in developmental aid projects is worth it. But I wonder if the threat of legislatures cutting off aid is real. Could admitting to the corruption problem in development aid projects undermine the development agencies to a point where “sunshine” actually harms development? Does our answer to that question depend on our frame of reference (short-term vs. long-term) in the sense that exposure of this problem might carry short term costs but reward us in the long-term?

    Also, do the benefits of development projects outweigh the costs of the incremental corruption they add to the recipient nation? In other words, would those nations be better off with “more development aid + more corruption” or “less development aid + less corruption”? I obviously don’t have the answers to these questions, but I wanted to share them since they came to me while I was reading your post.

    • I had exactly the same thought as Jordan when reading this post. It seems very difficult, for all the reasons give by donor agencies mentioned in the article, to continue to be effective as aid agencies while shedding light on ongoing corruption involved in these aid efforts. As corruption is hard to eliminate, this will mean highlighting and/or actively combatting corruption will result in less money available for actual development projects. Would the loss in aid money be worth the incremental benefit to the anti-corruption movement?

      • As I understand Rick’s argument, we should want to confront these scandals regardless of the effect on “gross” development flows not just for moral reasons, but because the value of what’s being donated is being wildly overstated. There are at least two reasons for this: First, loss and waste may be an order of magnitude greater (from Hobb 10% to Norway’s ~50%) than is often assumed. Second, the ill-supervised aid funding may actually perpetuate corruption more broadly in host countries and thus negate much of the presumably positive impact of the aid funding. Add these together and it could be that $100 billion in aid is only generating $40-70 or some such number in institutional and economic value for its recipients. So it could potentially be worth a big drop in funding to confront this problem.

        To Phil’s point, if the first reason is true, then even very expensive auditing and oversight measures could be nakedly cost-effective, not to mention ethically desirable. To the concern you and Colette raise, Jordan, I think you’re correct in framing it as short vs long horizon issue. Scandals may lead to some near term reductions in gross aid (though not necessarily significantly in relation to other political and budgetary factors) that would be worth it in the long run if aid is made more efficient and scrupulous. But even in the near term, revelations could just as easily lead to a reallocation of money on oversight, rule of law, and renewed accounting and accountability programs for both donors, contractors and others down the line. I find an interesting point of comparison to be the idea (admittedly quite debatable) that multinationals subject to strict compliance obligations can sometimes raise the bar within a particular industry upon entering a new country, because they import their own liability concerns and tighter management regimes. Proponents believe these companies may ‘rub off’ on their peers through flow of personnel, standard setting, pass-through provisions and the like. Banks and donor agencies try to do this too in many different ways — but, if we believe they have not been as effective at either maintaining or spreading such practices, we should ask whether it’s the resourcing, the threat of law enforcement, or managerial culture attendant to profit motive that accounts for these differences — and then consider these principles as a guide for reform of the aid sector. If a scandal serves to galvanize new approaches, it should be a net gain for all involved.

  3. Thanks to Daniel for speaking so well to several of the points I had planned to address this morning. The point is what foreign assistance funding achieves – not how much is provided.

    Remember too that money “lost” to fraud and corruption doesn’t just melt away or get parked in overseas bank accounts. It can go into the coffers of the ruling party to entrench it in power, frustrating peaceful democratic development and possibly contributing to violent rebellion.

    Nor is this fanciful drawing room speculation. Consider the consequences of corruption in the humanitarian aid provided Somalia when Western forces withdrew after an American helicopter was shot down in Mogadishu (a story told in the movie “Black Hawk Down”). Famine set in, and the World Food Program began shipping emergency relief. Given the security vacuum, WFP contracted with three young entrepreneurs to ensure the shipments made it from the Mogadishu port to famine victims across the country. The three created private armies to guard the trucks, and over time, as they won contract after contract from WFP, the three entrepreneurs morphed into some of the most powerful warlords in the country. Today they often play the role of “spoiler,” disrupting efforts to forge a lasting peace in Somalia. In its 2010 Report, the Monitoring Group on Somalia pursuant to Security Council Resolution 1853 revealed that the three’s contracts were constantly renewed thanks to bribery.

    Phil suggests that donor agencies exercise more control over procurement and conduct more audits. In the 2005 Paris Declaration on Aid Effectiveness donor and recipient countries agreed on a set of principles that makes “country ownership” of foreign assistance the guiding principle. The declaration was a reaction to the often heavy-hand of donors who would dictate to a recipient government what projects would be undertaken and where. An understandable response but one consequence has been that in the name of country ownership donors have pulled back from the types of intrusive oversight of their aid dollars often necessary to ensure there is no “leakage.”

    Intrusive oversight is not cheap as several of the comments note. But what has been the cost to the Somali people of corruption in the WFP program?

    • While Jordan and Colette’s points about the tradeoff inherent in seriously confronting this form of corruption are well taken, I find Dan and Rick’s counterarguments more convincing for one additional, perhaps naive reason: it’s hard to know how to calculate the costs and benefits of action without confronting the problem head on. Jordan points out that he doesn’t have the answer to whether the world is better off with “more development aid + more corruption” or “less development aid + less corruption.” But answering that very question requires taking the problem at the level of seriousness that Rick’s initial posts suggests.

      In the absence of an idea of how to answer the question of whether confronting the problem is “worth it,” without triggering the very scrutiny the donor agencies are afraid of, it seems strange to err on the side of (1) not finding out the depth of the problem, (2) not finding out the costs of the solution, and (3) not allowing for democratic accountability.

  4. The last sentence in the post is a question about what can donors do themselves to prevent corruption in their own projects. This could be interpreted as addressing the issue of their own self-policing. I am not suggesting that was the intention and limit of the question. However in addition to self-policing I think the donors need external policing. They should be put on the same legal footing as business and private individuals. International boundaries are no boundary to prosecution of businesses and their staff that pay bribes. But the Ngo seems to be treated differently. The link below seems to be what I am referring to. To be balanced: it can be assumed that it is an unusual happening but on the other hand perhaps it is the tip of the iceberg. Who can really know if the reported secrecy in the link is the norm. Above the law?

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