MARCH 1987 - VOLUME 8 - NUMBER 3
I N T E R N A T I O N A L F I N A N C E
Cooking the Books in Asia
by Samantha Sparks
The Asian Development Bank (ADB), the third largest multilateral lender, is under attack. Critics, ranging from former U.S. board members to ADB employees, are charging that top Bank officials have encouraged distortion of loan data in order to ensure approval of economically unsound projects.
For the last several years, they charge, the lending policy at the Japanese-dominated development bank has been shaped by political considerations rather than solely by economic criteria, as stipulated in the ADB's charter.
The current ADB leadership has sacrificed project quality in order to keep loan levels high and maintain the Bank's political standing in Asia and the South Pacific, critics told the Multinational Monitor.
An ADB spokesperson in Manila denied the charges.
At stake is the future of ADB president Masao Fujioka, a former Japanese Finance Ministry official. Several sources are predicting that Fujioka will be forced to leave the bank after an upcoming April meeting of the ADB's Board of Governors in Osaka, Japan, because of allegations brought against the Bank.
The Asian Development Bank, founded in 1966, is the largest financier of development projects in Asia, with loan commitments to its 26 country borrowers totalling some 51.9 billion in 1985. It enjoys a highly favorable rating in the world's capital markets, with its estimated 2.75 percent return on total assets, well above those of its two regional counterparts or the World Bank.
The ADB, like other development banks, has sought to maintain high lending levels for a variety of reasons, both political and economic.
A powerful ADB enhances Tokyo's political stature in the Asian region. Moreover, even ADB's supporters concede that contract awards at the Bank favor Japanese companies.
With a staff of less than 600, the ADB is a relatively small institution, essentially run by the Japanese. Japan has been under considerable pressure from the West to raise its development lending to a level more commensurate with Tokyo's economic might. The United States in particular has argued forcefully for an increase in Japanese development financing.
In recent years, however, the ADB, like other development banks, has suffered from changes in the world economy. On the one hand, Asian countries like Singapore, Hong Kong, and South Korea can now afford to borrow more cheaply and easily from traditional capital markets. On the other, many of its borrowers have been hit by recession and cannot afford to borrow as much as they used to.
As a result, loan commitments are slipping. Commitments fell 15 percent from 1984 and 1985, and are not expected to rise before the end of the decade.
ADB's many critics, who include the former U.S. delegate to the Bank's 12-member international Board of Directors, say Fujioka has established an informal loan quota system in order to sustain high lending levels, demanding that a certain number of projects be approved each year regardless of their quality.
More cautious observers concede that "there's room for improvement" in the ADB's lending policies, but argue that the Bank's problems are par for the course at development banks, and not unique to the ADB.
A former ADB financial analyst is suing the Bank on charges that he was fired for refusing to present false data on an economically unjustifiable loan.
"I know project figures were cooked, because I helped to make them up," said Peter Nelson, an Australian economist fired from the ADB last November.
Nelson and other staffers accuse the ADB of violating Article 36 of its charter, which stipulates that bank loans should be contingent only upon economic considerations, not political ones.
The most grievous instance of loan doctoring occurred on a $35 million loan to Burma to develop edible oil milling facilities there, according to Nelson.
Nelson took part in a four-person mission to Burma in September, 1984, to appraise the potential for an edible oil milling facility there. The appraisal team returned from that mission to inform the Bank there was not enough raw material to justify the projected economic returns on the project.
But Nelson's manager, Sam Rao, refused to accept Nelson's recommendation that the project be terminated. Nelson says he was later told by Rao that ADB president Masao Fujioka had made approval of the Edible Oil project a condition for hiring Rao.
Nelson and a colleague, Deiter Lepper, were sent back to Burma on what Nelson described as a second, "unofficial appraisal mission", meaning that they were not authorized to go by the Bank's board.
This time, two ADB economists were armed with fake data showing the project to be economically viable if a private sector component was added, according to Nelson. But they were shunned by the Burmese Minister of Cooperatives, whose subordinates argued that the second mission was inappropriate because the project had already received preliminary approval from the Bank.
In November 1984, then ADB Vice President Ashok Bambawale vetoed the Burma Oil Loan, citing a number of shortcomings in the project. After Bambawale retired, however, Nelson was sent back to Burma yet again during April and May, 1985. And although he and other economists persisted in questioning the project, their objections were excluded from the final Appraisal Report that was submitted to the ADB's Board, Nelson said.
The loan, approved in February, 1986, is being managed by the British consulting firm, UDL.
According to Nelson, Fujioka and other top ADB officials pushed the Burma Oil project past the Bank's Board of Directors in order to boost both the Bank's dwindling lending levels and the political standing of two Burmese Cabinet ministers.
"The Japanese wanted to keep a foothold in Burma," said Nelson.
The ADB had made no other loans to Burma that year, and Fujioka felt the Bank was in danger of losing sway over the government unless some money went to Rangoon, Nelson said.
In a statement, ADB spokesperson R.D. Patcheco contested Nelson's allegations.
"We deny that ADB loans are doctored, as claimed by Mr. Nelson," Patcheco said. "Each project undergoes a thorough scrutiny that involves between 20 to 25 different specialists. A variety of alternative calculations of economic and financial returns for each project on different assumptions are usually made during this process."
Regarding Nelson's charge that he had been "illegally terminated," Patcheco said there was "no question" of illegal termination "as the Bank fully met the terms of [Nelson's] contract, which did not include any obligation on the Bank to extend his employment" beyond the expiration date of Nov. 10, 1986.
Nelson was let go, Patcheco said, because Nelson's superiors concluded he "had difficulty in accommodating his working methods to the teamwork nature of the Bank's project appraisal process."
But the substance of Nelson's charges was corroborated by other staffers and by internal Bank memos in a recent investigation by the Far Eastern Economic Review.
According to this account, the Burma Oil loan was not the only instance of loan doctoring at the ADB, although it appeared to be the most egregious. Other questionable projects included construction of fishing ports in South Korea, loans to the nearly bankrupt Indonesian Development Bank, and a grain storage project in Pakistan.
Nelson and other critics hold Fujioka, nicknamed "the shogun" inside the ADB, directly responsible for the Bank's spurious loans.
Morris Goldman, an analyst at the conservative Washington-based Heritage Foundation, said, "We have a situation at the ADB where leadership is almost obsessed with reaching lending targets."
"It's as if they had lost sight of their original goals," said Goldman. "Moving loans isn't the same thing as economic development. But like any good bureaucracy, [the ADB] wants to grow and prosper."
Joe Rogers, the former United States Executive Director at the ADB and an outspoken critic of the Bank, is more blunt.
"Fujioka's an embarrassment," Rogers said. "Most of the donors would have liked to have seen him leave at the end of his first term".
Although the U.S. has pushed for reform of the Bank's lending policies, some sources say Washington pulled its punches at the ADB in order to wrest concessions from the Japanese during negotiations over broader monetary concerns like the politically-charged issue of a general capital increase for the World Bank.
These sources argued that with a relatively paltry S2 billion annual contribution to the ADB, Washington can afford to turn a blind eye to the ADB's indiscretions, if by doing so it gains in other, more important negotiations with the Japanese.
The wrangling between Japan and the United States over an agreement that would permit an increase in the World Bank's capital while at the same time preserving a shareholder balance of power acceptable to both shareholders - is one such negotiation.
The United States, the largest (19 percent) shareholder, currently enjoys effective veto power at the World Bank.
The ADB is expected to undergo a tough review at the Board of Governors meeting in April. And, prompted by Nelson, the Australian government is presently investigating the Bank's lending policies, with an eye toward reassessing Australia's 7 percent - $1.1 million - share of the ADB's capital.