FINANCE: Brazil, Russia top list of World Bank problem projects

By Pratap Chatterjee Reprint | | Print |

Pratap Chatterjee

SAN FRANCISCO, Sep 10 1996 (IPS) - Brazil and Russia have the highest proportion of problem projects financed by the World Bank, according to Bank documents obtained by IPS.

A new internal task force called the Quality Assurance Group (QAG) has identified 50 problem loans worth 13.6 billion dollars that have been approved over the past nine years. The problem loans, which are ranked in size from 600 million dollars to 195 million dollars, range from educating the rural poor in northeastern Brazil to repairing oil pipelines in Siberia.

Disbursements of all these loans have been slow or, in a few cases, suspended. Most of the problems relate to poor management or legal obstacles either within the Bank itself or in the borrower country, according to the documents.

The QAG was set up in response to a four-year-old internal report that found that over a third of completed projects funded by the Bank fell short of their financial targets — usually a ten- percent annual return on investment. The study — known as the Wapenhans report after its principal author, Willi Waphenhans — also pointed out that problem projects had increased by 150 percent in the 10 years since 1981.

While Wapenhans used the rate of financial return to assess success or failure, the QAG group used ten indicators, including financial performance, procurement progress and management performance, to flag problem projects. Unlike the Wapenhans study, the new report also considered only projects that are still being implemented, in part so that modifications could still be made.

The list indicates that 11 loans to Brazil, amounting to almost half of the 5.8 billion dollars in Bank loans presently committed to that country, have run into significant problems. Six loans to Russia, accounting for a third of the 6.4 billion dollars in loans approved by the Bank for Moscow since 1990, are in trouble.

With six problem loans apiece, Mexico and India also figure prominently on the QAG list. But, because of the larger overall volume in Bank lending to both countries, those projects represent only 23.43 and 10.3 percent, respectively, of all current Bank commitments to them.

The QAG group also suggested serious problems with a series of loans for water-supply projects around the world, from Turkey to Nigeria.

Topping the list of 50 problem projects are two huge loans to Russia totaling 1.1 billion dollars to revamp oil exploration in western Siberia. Part of the money had been earmarked to reduce environmental problems.

Peter Pease, the task manager for the two projects, told IPS that most of the problems were of a political nature.

“The three main factors that have held up these loans are the imposition of new export taxes, changes in duties on imported equipment and difficulties with transferring cash from the Ministry of Finance,” he said.

Some of these problems, he said, can be traced to the International Monetary Fund (IMF), the Bank’s sister institution, which pressured Moscow to impose taxes to increase revenues.

Already two oil companies — Purneftagaz and Kogalymneftegaz — have withdrawn from the World Bank programme. Four others — Varyeganneftegaz, Yuganskneftegaz, Megioneftegaz and Tomfkneftegaz — still hope to borrow from the Bank.

In Brazil, the Bank has run into problems over three education loans and two water-supply projects, according to the report which also listed a health project in north-eastern Brazil and the massive Itaparica dam project.

But Braz Menezes, the Bank’s principal operations officer for Brazil, says the situation has improved in the past year. “There has been a significant upturn in the Brazil portfolio although we shall want another year of experience before calling it a turnaround,” he said.

A country portfolio assessment conducted by his department showed that 18 projects were upgraded from unsatisfactory to satisfactory, while five others were downgraded over the past year.

“The Latin American country department is generally recognised as being tough on loan ratings, and we have no reason to believe that easier criteria were applied in the 1996 financial year,” the report said.

Other departments say that modifications made in performance measurement suggest that projects are not doing as badly as the QAG report suggests. “We are not convinced of the QAG numbers,” said Guillermo Yepes, the acting director of the water supply division of the Bank. “We have some disagreements with them.”

For example, waste water has been measured as a social good, but we believe today that it is more of an economic good. “(When) measured against more ambitious (standards), such as economic performance, we perform much better,” Yepes added.

Prem Garg, QAG’s director, was unwilling to discuss specific projects with IPS, noting that his team intends to send “custom- built panels” of experts from inside as well as outside the Bank assess problem projects in the field for as much as ten days at a time.

“It’s entirely possible that our figures are not right and the projects are not doomed to hell. We have used a rough-and-ready early warning system to take the temperature of the portfolio,” he said.

Garg said that his group, which was set up six months ago with a staff of three people, would use two methods to improve Bank projects — random quality checks on specific projects, and studies aimed at identifying cross-cutting themes and processes, such as the skill mix of staff, which might apply to certain kinds of problem projects.

“The fact of the matter is that we have not done as well as we would like in the last 10 to 15 years. There has been a perception that all the Bank cares about is quantity, and we want that to change,” he said.

Some Bank officials admit that the QAG’s methodology may be flawed, particularly with respect to projects in countries where the Bank is forced to rely heavily on central governments for information.

“In countries like Brazil, for example, we are able to measure bad projects directly. But, in a country like China, we have to accept government figures that could be completely fictitious,” said an official who asked not to be named. China, the Bank’s biggest borrower in recent years, is not listed as having any problem projects in the top 50 cited by the QAG report.

Others, such as Nancy Alexander of Bread for the World Institute, applaud the QAG’s effort and argue that the excuses made by the department chiefs for bad portfolio performance need to be treated sceptically.

“It’s not surprising that the QAG study found problems in Russia, Brazil and water supply. These indicators may not be the best but they are one of the most sensible innovations in the Bank to date,” she says.