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INDIA TODAY - The most widely read newsweekly in South Asia.
    CURRENT ISSUE APRIL 17, 2006
 
   BUSINESS & ECONOMY: WORLD BANK LOANS
 
Aiding Acrimony

The World Bank's decision to put on hold loans of over $1 billion has irked the UPA Government and jeopardised its rural health programmmes
 
  PICTURE SPEAK
CROSSING SWORDS: Wolfowitz (left) with Chidambaram
Finance Minister P. Chidambaram is not known to mince words. Last week, frustrated with the World Bank management's intransigence, he dispatched a stiffly worded letter to the institution's President Paul Wolfowitz. In his typical no-nonsense style, he expressed the Government's discomfort at the Bank's decision to put on hold indefinitely a raft of big-ticket health sector projects in India on grounds of possible corruption in an earlier loan.

The minister argued that the shortage of funds for the National Rural Health Mission, pioneered by the UPA Government, would affect future programmes on the eradication of polio and tuberculosis. A senior Finance Ministry official went a step further and said, "It is not the money. We are capable of funding the project worth about Rs 4,000 crore from other sources, but we are keen to clear our position."

It is probably for the first time in 62 years that the relationship between India and the World Bank has soured to this extent. It is not that India cannot fund its social spend. Fact is World Bank loans are for 30 years, come at Libor+2 and inculcate discipline.

The root cause of the acrimony is a procurement order for contraceptives and medicines given to Hindustan Latex, Pure Pharma Limited and Nestor Pharmaceuticals during the first phase of the World Bank-supported Reproductive and Child Health Care (RCH-I), about which the Bank received a complaint through an NGO. Its primary investigations found prima facie proof of a nexus between some politicians and the suppliers.

BANNED AID: Where the held-up loans are hurting
HEALTH

The procurement order for medicines under RCH-I given to Hindustan Latex limited, Pure Pharma and Nestor is under the scanner.

The World Bank has received complaints from an NGO on the execution of the $850-mn project.

Hindustan Latex has suspended two employees.

The Health Ministry has asked the CBI to investigate.

TRANSPORT

The World Bank has suspended $150 mn aid for roads and $79 mn for rehabilitation under MUTP. It is dissatisfied with the resettlement of the affected people.

Socio-economic and environmental consequences have not been fully considered.

The Bank is unhappy with Mumbai Metropolitan Region Development Authority's implementation capacity.

Though both sides are trying to defuse the situation, there is no doubt that the finance minister's letter has brought to a head events unleashed eight months ago when Wolfowitz made his advent as the Bank's new president and decided to make the fight against corruption his signature contribution. A senior Bank official in Washington DC confirmed receipt of the missive, saying, "We are looking at the letter in which the Indian side has proposed what I think are important steps to move forward."

In June 2005, weeks after Wolfowitz took charge at the World Bank, he gave the Indian Government a jolt by putting on hold the $850 million (approximately Rs 3,790 crore) loan for RCH-II, which was poised to be introduced to the board for approval. A neoconservative and former Pentagon strongman, Wolfowitz was sending out a message to all borrowers: shape up or ship out. After all, the Bank management had decided to pull the rug from under one of its most high-profile and vaunted clients. Not only is India the fourth largest borrower-$13 billion (approx. Rs 58,100 crore) spread over 63 projects-its democratic framework is a role model the Bank holds out to other developing countries.

   INTERVIEW | PAUL WOLFOWITZ

"The goal is not to paint India with any kind of broad brush"

A neoconservative, Paul Wolfowitz bid goodbye to the Pentagon to take over as World Bank president on March 31, 2005. On the anniversary of his appointment, he spoke to New York Chief of Bureau Anil Padmanabhan. Excerpts:

On comparing corruption in India with countries like Chad and Congo: I would not bracket India with the countries you mentioned. I would like to put this issue in a better context. India's development record over the past 15 years has been spectacular. It has brought an incredible improvement in the lives of the poorest. It has made India the envy of many other countries in terms of its hi-tech and advanced economic activity. It is providing inspiration to the countries that have been told that the only way to develop is through dictatorial rule. India is the biggest demonstration that one can have a pluralistic democratic society and still bring in development. So, if we have problems in one or two of the 63 projects, people ought to see it in that context. It is not the Bank's fight. It is India's fight. We are both concerned about it and are looking at solving this.

On RCH-II: Five new loans have been approved in this fiscal. There may be as many as seven by the end of the fiscal in June. Plus, there are others where we hope to move forward in the next few months if we can sort out the problems. There were problems that were uncovered in RCH-I and until we have the confidence that we know what the problems are and there are safeguards against their repetition, we have held up going ahead with RCH-II. This is not in a spirit of confrontation. This is in a spirit of neither side wanting to see problems in RCH-II. We are working cooperatively with the authorities. I can't go into the details. I think the spirit is really a co-operative one. It does not mean it is easy. The goal is to get these programmes back on track and certainly not to paint India as a whole with any kind of broad brush.

Despite an assurance from the Indian Government, entreaties from the Department for International Development (DFID), a co-financier to the loan, and endorsements from some senior World Bank personnel, the Bank management refused to relent. Instead, it extended the freeze to a clutch of other loans with a particular accent on the health sector. On March 1, the Bank took the battle against corruption in India to another level when its board "suspended" financing of the ongoing Mumbai Urban Transport Project (MUTP) following allegations of irregularities in the resettlement of the displaced. "The Bank suspended its financial support to MUTP because the Government of Maharashtra was not meeting its legal obligations under loan agreements," says Sumir Lal, spokesperson, World Bank.

The Inspection Panel appointed by the Bank submitted its findings to the board in the last week of March. This has led to some mid-term corrections being initiated by the Maharashtra Government and the loan will be resumed only after the World Bank is satisfied with the initiatives taken by the state Government. Maharashtra Chief Minister Vilasrao Deshmukh says, "We have convinced the World Bank that we will meet all the conditions they have put forth. The matter is shut for now."

Matters took an unpleasant turn even as the Government was dealing with this setback, when a series of seemingly inspired stories began surfacing in the American media naming India and Argentina, along with a host of countries from Africa, as those facing suspension or axing of loans due to Wolfowitz's determination to combat corruption. Some even saw it as a refreshing change reflective of a determined president. "India is one of the bank's most formidable clients: it borrows a lot, has a good economic record and tells development organisations to get lost if they behave condescendingly. But Indian politicians were said to have their hands on the health funds, so Wolfowitz blocked the loans," said The Washington Post.

The timing of the finance minister's missive suggests a point of confrontation, which the World Bank leadership has been quick to deny. In an interview to India Today Wolfowitz said, "This (failure to approve the loan) is not in a spirit of confrontation. This is in a spirit of neither side wanting to see problems in RCH-II. The goal is to get these programmes back on track and certainly not to paint India as a whole with any kind of broad brush (see interview)."

While this may be the case on the surface, as Indian authorities point out, the fact of the matter is that the Bank has not moved forward with the loan negotiations on health sector projects despite assurances. Reflecting this sentiment, C.M. Vasudev, a former Finance Ministry official who till July 2005 was executive director on the World Bank board, says, "There is no justification for holding up RCH-II on account of some misdeeds in the preceding project, especially since the Indian Government has assured the Bank that the guilty will be punished. Ultimately, the people, who are the potential beneficiaries, will suffer." In fact, the Bank management refused to come on board even after the Government reworked the project. About 14 safeguards were added to enhance trans- parency. "DFID has concurred with the safeguards and expressed its unhappiness at the delay in the approval of the project by the Bank," adds Vasudev.

However, senior officials at the Bank defend the management's stand and, at the same time, seek to play down perceived differences. "I am sure the Indian Government feels we move too slowly and we have felt that it is extremely important to get to the bottom of the problem that turned up in RCH-I before proceeding with RCH-II," says a senior Bank official close to the discussions. "I don't think there is disagreement on where we want to be at the end. We want to move ahead with RCH-II. They are a bit impatient and we are a bit meticulous," he adds.

The Indian Government's "impatience" is understandable given the abrupt manner in which the Bank pulled on the reins immediately after the leadership change last year. In the preceding fiscal year (July-June), the Bank had approved a record $2.9 billion (approx. Rs 12,960 crore) spread over 14 projects. This had followed approvals of $1.4 billion in 2004, $1.5 billion in 2003 and $2.1 billion in 2002. In contrast, this year only six projects worth $1.1 billion (approx. Rs 4,917 crore) were approved. All of these, including the $400-million Power Grid Corporation project, are single entity loans, unlike the complex RCH-ii project.

Wolfowitz, however, denies a decline in the sanctioning of loans. He says, "Five new loans have been approved in this fiscal year. There may be seven by the end of the fiscal year in June. Plus, there are others where we hope to move forward in the next few months if we can sort out the problems. There were problems that were uncovered in RCH-I and until we have the confidence that we know what the problems are and there are proper safeguards against their repetition, we have held up going ahead with RCH-II."

Perception in some sections of the Bank is that the problem has arisen because the new management has approached the issue of tackling corruption rather naïvely. This, they say, is because of the simplistic approach Wolfowitz had adopted in the Pentagon while gearing up for combat in Iraq. The management has tended to paint all corruption cases with the same brush, though it vehemently denies it. Says a senior Bank official: "The problems pertaining to these projects (in India) pale in comparison with the Enron scandal. Each country is very different. Each project is different and each sector is different."

Clearly, the events have swung to a climax with both sides having tipped their hand. It is to be seen who will blink first.

-with Neeraj Mishra in Delhi and Prerana Thakurdesai in Mumbai

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INDIA TODAY - The most widely read newsweekly in South Asia.
CURRENT ISSUE
APRIL 17, 2006
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