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Corruption

Publicly Guaranteed Corruption
Corrupt Power Projects and the Responsibility of Export Credit Agencies in Indonesia

The Corruption Policies of Switzerland and other Creditors

On February 15th, 1999, the OECD anti-corruption convention entered into force. It requires OECD member states among other things to ban the bribing of foreign officials in international business and to confiscate bribes and other benefits of corruption. As a means of sanctioning, it not only proposes prosecution, but also the exclusion of companies that have paid bribes abroad from the government procurement procedures in their own country. On May 1st, 2000, the bill executing the convention entered into force in Switzerland.

In an interview with Inge Altemeier, free-lance researcher to the Berne Declaration, ERG director Peter Silberschmidt on May 22nd, 2000, commented on corruption in the Indonesian power plant projects. He admitted offhand that the export credit agencies had joined together to “exercise pressure on Indonesia”. To this end, he indicated, the agencies would also increasingly cooper­ate with the International Monetary Fund and the World Bank. Silberschmidt took the view that the Indonesian government had signed the power purchasing agreements, and consequently had to honour these contracts. As the ERG director saw it, corruption was a problem of the re­cipient country and “had to be dealt with by Indonesia itself”.

In the foreword to ERG’s 1999 annual report, published in the end of June 2000, ERG chair Bar­bara Rigassi described the problems in Indonesia in a more conciliatory fashion, while failing to mention corruption. She pointed out that the massive devaluations could make „comprehensive renegotiations of important initial aspects of the contracts necessary”. Whereas at home, profit expectations were rising, “social compatibility was a necessary yardstick for measuring commer­cial necessities” in Indonesia, the ERG chair noted.

ERG director Silberschmidt’s attitude to lay the blame for corruption solely on the host country, is not logical and politically unacceptable. "It takes two to tango", the conservative Sunday Times wrote on April 30th, 2000, in an editorial on the issue of corruption. The article continued: "If in­fluential government officials in a developing country are offered enormous bribes and succumb to the temptation, the fault must be shared equally by those who offer the funds to secure some considerable unfair advantage for themselves. (...) [The First World conglomerates] corrupt offi­cials and whole societies with offers of unimaginable wealth, and then, when their contract is complete, they pull out and return to Europe or the US, leaving widespread moral and financial contamination in their wake."

The combat of corruption and the promotion of Good Governance are among the official objec­tives of the Swiss foreign and development policy. Then Federal President Flavio Cotti in 1998 confirmed, in a debate in the national parliament as well as in a letter to the Berne Declaration, that Switzerland was pursuing this objective also in Indonesia. At the meetings of the Consulta­tive Group on Indonesia, in which partners of development cooperation with Indonesia meet annually, Switzerland also repeatedly advocated the promotion of Good Governance. Further­more, the Swiss Agency for Development and Cooperation, on September 25th, 1998, adopted comprehensive guidelines on the fight against corruption. These guidelines favour among other measures the promotion of judiciary independence. If the competent authorities do not show any effort to combat corruption, a last resort may be to stop Swiss development cooperation alto­gether. And according to the guidelines, "companies guilty of bribing [in development coopera­tion] are to be blacklisted".

The pressure exercised by Export Risk Guarantee to prevent the Indonesian government from challenging the validity of corrupt contracts in court squarely contradicts the official Swiss policy on corruption. ERG, however, did not even inform the Ministry of Foreign Affairs about its lobby­ing tactics in Indonesia. “All we do is making hotel reservations”, a spokesman of the Swiss em­bassy in Jakarta commented on ERG’s visits. Despite the commitment to coherence in foreign policy, the offices responsible for the external economic policy are apparently playing close to their chest. The ERG chair remarked to the Berne Declaration that, in this instance, consultation with the Foreign Ministry had “not been called for”, because the talks in Jakarta “had exclusively been concerned with the debt service for business insured by ERG”.

Even though the contracts in question had been concluded before the enforcement of the Swiss criminal law on corruption, the procedure of ERG in Indonesia is against the Swiss policy on corruption. Is the granting of guarantees for corrupt contracts compatible with ERG legislation? Even this is doubtful, to say the least. Pursuant to article 9 of the ERG act, the exporters are required to supply the information necessary for the business deal to be assessed. The ERG commission, however, does not receive any information on the payment of bribes, even though this would be of relevance for the assessment of a business deal. In addition (pursuant to article 5 of the same law) “losses incurred by the exporter because of not conforming to the contract, (...) are not covered by the guarantee”. This is another reason for ERG not to make any com­pensations to exporters when their contracts are challenged because of bribes. In a conversa­tion with the Berne Declaration on July 8th, 1998, ERG’s then chair Rolf Jeker said that the inter­pretation of this article was “an open question”, to be solved based on a real case. The conflict with the Indonesian government is the real case which calls for a clarification of this question.

In a detailed letter of July 10th, 2000, the Swiss Minister of Economic Affairs Pascal Couchepin responded to the criticism of the Berne Declaration. He basically shared the BD’s view that all forms of corruption had to be combated. According to his letter, ERG did however not examine the supply and financing contracts submitted in guarantee applications. The basis of the ERG order was – following the principle of trust – the data provided by the applicant. In no phase of the negotiations between ERG and Indonesia, the Minister wrote, had Indonesia put forward corruption as an argument. Therefore, corruption was not a matter of discussion during the most recent round of negotiations. Contrary to this statement, the Indonesian authorities had indeed suspended the PLN payments on the grounds of corruption. Also, Federal Councillor Couchepin did not deny that Switzerland had exercised pressure on Indonesia in this matter. Finally, the Minister of Economic Affairs announced that the new OECD convention was going to have an effect on ERG. Where evidence of bribery was found, the options of revoking guarantees or of refusing compensation for losses incurred was to be introduced for ERG.

The US Exim Bank, OPIC, Germany’s Hermes, Great Britain’s Export Credit Guarantee Depart­ment and Australia’s EFIC have procedures in place which allow them to declare the coverage of corrupt projects void. Indonesia’s experience demonstrates that while such policies exist, they do not always stop export credit agencies from defending the interests of corrupt clients. Can­ada’s Export Development Corporation is presently reviewing its policies regarding corruption. Several other major export credit agencies were not prepared to inform the Berne Declaration about their policies regarding corruption.

In his letter to the Berne Declaration, dated November 5th, 1998, then Federal President Cotti emphasised that “[the corruption problem] could only be combated in an internationally con­certed effort". Therefore, OECD’s Export Credit Group (ECG) according to Cotti discussed the question as to „how the corruption problem in the field of export credit guarantees can be tackled internationally”. Indeed, dealing with so-called “non-productive investments” has been on the ECG’s agenda for some time. It is a tedious discussion, however, and has hardly led to any practical consequences so far. For the time being, OECD governments confine themselves to voluntarily exchanging information on official export credits to highly indebted countries (so called HIPC countries). The G7 are trying to put pressure on the OECD countries not to grant any export credits at all for unproductive projects in poor countries. The discussion will be taken up again by the ECG on November 13th-17th, 2000. So far, export credit agencies have obviously found it easier to coordinate themselves internationally in order to pressurize a poor country like Indonesia which is willing to fight corruption than to stop funding corrupt projects.

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