Major Dam Companies Caught in African Bribery Scandal

In July, it was revealed in a respected South African newspaper that a dozen major international dam–building companies involved in the World Bank–funded Lesotho Highlands Water Project (LHWP) in Southern Africa had lavishly bribed at least one top official on the project, allegedly giving nearly US$2 million in bribes over ten years. The list of corrupt companies reads like a who’s who of the dam–building industry (see page 11 for full listing of companies and bribes paid).

At press time, the World Bank had indicated that its anti–corruption guidelines may not apply in this case, saying that the firms involved would not face any rebuke from the bank unless funds it specifically lent for the project were involved in the bribery.

The LHWP corruption story first appeared in the South African newspaper Business Day, as the Lesotho government’s court case against the corrupt official, Masupha Sole, drew near. The charge sheet states that the Sole "did unlawfully, intentionally and corruptly accept bribe moneys, over the period February 1988 to December 1998, from Lesotho Highlands Water Project contractors." Sole, appointed CEO of the LHWP in 1986, was suspended in December 1994 and dismissed from his position in 1995. One source told Business Day that contractors paid bribes directly into Swiss and French bank accounts in Sole’s name.

Project Background

The LHWP is Africa’s largest infrastructure project, involving five dams (one of which is built and another underway), miles of tunnels through the Lesotho mountains, and a small hydropower component. The project delivers Lesotho’s water to South Africa’s biggest urban area, which includes Johannesburg and Pretoria.

Controversial from the start, the project was initiated without critical environmental studies on erosion and downstream impacts, despite the impacts of diverting water on the project’s massive scale. The poor in South Africa’s townships, who suffer from water inequity dating to apartheid, will for the most part not be able to afford the project’s expensive water.

The project’s social impacts in Lesotho have been especially hard on the rural Highlands communities who have lost fields, grazing lands and access to water sources due to the project. Despite decade–old promises, their livelihoods have not been re–established and poor people have been pushed further to the edge in their struggle for survival.

Widespread corruption on the project is thought to be one reason that the social fund intended to help affected communities undertake develoment projects has accomplished virtually nothing. A September letter on the corruption scandal by Lesotho NGOs who represent dam–affected people highlighted problems plaguing the project’s social programs. "The fund has been and continues to be a tool of opportunistic politicians," write Motseoa Senyane of Transformation Resource Centre and Thabang Kholumo of the Highlands Church Solidarity and Action Centre. "Although the committee designated to select projects to be supported by the social fund has not met even once yet, money from the fund has been used to support ill–conceived projects built by workers hired according to political party affiliation. In Lesotho, we see the same stretch of road repaired; torn up the next week; repaired again the following week; and then torn up once more at the end of the month." The letter goes on, "Punishing the corrupt multinationals involved with the LHWP and closely monitoring the implementation of the project’s social fund would reassure us of the World Bank’s concern."

World Bank’s Role

The World Bank has lent more than $150m for the project. As the project’s problems have accumulated over the years, Bank officials have taken to pointing out that its investment represents just five percent of overall project costs. But if the Bank’s financial contribution to the Lesotho project is relatively small, its role in organizing the financing for the project was instrumental in getting it off the ground. The bank financed the design of the project, and set up an offshore trust in the UK to help other donors circumvent international sanctions against South Africa’s then–apartheid regime. The loan was nominally for Lesotho, a country far too poor to qualify for large loans.

According to confidential project documents, the bank was also responsible for "effective project management, human resource development and sound financial management," in addition to providing for design and construction supervision, the transfer of engineering and other technical skills to local staff, and oversight of social and environmental impacts.

The World Bank has proclaimed that fighting corruption is essential to its mission of reducing poverty and promoting environmental sustainability. But the corruption on this project will test the Bank’s resolve in fighting corrupt practices.

The bank’s procurement guidelines state it will "declare a firm ineligible, either indefinitely or for a stated period of time, to be awarded a bank–financed contract" if the firm is found to have "engaged in corrupt or fraudulent practices in competing for, or in executing, a bank–financed contract." A bank "sanctions committee" decides on these matters, and maintains a list of ineligible firms). The listing, found on the Bank’s web site, includes nine relatively small companies.

First indications are that the Bank believes its rules may not apply to this high–profile case, because the alleged bribes are not directly tied to bank loans on the project. A recent bank press release on the scandal states: "We will conduct an internal investigation to ensure that Bank policies and procedures have been followed on the components of the project that have been financed by the World Bank." The bank will certainly lose credibility in its war on corruption if it pursues this narrow view of its obligations.

The Washington Post on August 13 quoted the bank’s acting general counsel, Daoud Khairallah, as saying: "We cannot eradicate corruption in all situations where we have no control. . . . If any of our funds have been tampered with, yes, we can debar. But not if it’s something that we didn't have any control over."

Jeremy Pope, executive director of Transparency International, told the Post: "It’s a project the World Bank was involved in, and logic says –– if you're bribing, you're bribing; and if you're unfit to be bidding for business, you're unfit."

If the Bank were to debar companies found to have bribed the Lesotho official, it could have huge ramifications on a number of river development schemes. For example, Hochtief, Impregilo and Dumez are involved in the Bank–funded Ertan Dam in China. Acres International, Impregilo, Hochtief, Ed Zublin, Spie Batignolles and Dumez all have contracts on Xiaolangdi Dam in China, the Bank’s largest loan to China to date. Impregilo is also working on China’s Shanxi Yellow River Diversion Project, which will divert water from the already troubled Yellow River to the mining center of Datong; the Lower Kihansi in Tanzania, and Ghazi Barotha in Pakistan. Both Acres and Lahmeyer are involved in the Bank–funded Nam Theun II project in Laos. Acres is also building the Owens Falls Extension Project on the Upper Nile in Uganda, and is producing a study of hydropower and other energy options in Uganda with IFC funding. Many of these companies also are working on non–dam power projects with World Bank funding.

The World Bank’s fiscal oversight responsibilities on this project should have placed it in a position to uncover this corruption itself. The Lesotho official charged was fired in 1995, and yet bribes allegedly passed from the dam companies to his account as late as 1998. According to internal correspondence between the government of Lesotho and the World Bank, the bank was aware of serious management problems at least since 1994. A December 2, 1994 letter to the Government of Lesotho from the Bank’s Southern Africa Department acknowledges that a management audit of the project had taken place and that two officials, including the one who now stands accused of bribery, were suspended from their duties.

Ironically, as this mismanagement crisis began to unfold, the World Bank in this same 1994 letter voiced its support for the suspended managers, and said that the suspensions "could seriously jeopardize the progress of the project." The bank’s letter even threatened to take legal action against the government for making the management changes without its permission.

Firms Deny Involvement

A number of the companies involved have denied their involvement in the bribery, despite the fact that the Lesotho government has enough evidence to bring the corrupt official to court, and this evidence which has been confirmed by the Swiss government. According to reports in the Swiss newspaper SonntagsZeitung, an investigation by the district attorney in Zurich, Switzerland found that 12 firms had paid money directly to the Zurich and Geneva bank accounts of the accused official, or to bank accounts of third parties. The firms’ names had been blacked out in the Swiss court documents, but it seems likely they correspond to the 12 firms listed in the Business Day accounts. Thus far, only ABB has agreed to cooperate with the investigation.

All of the companies implicated in this scandal are from countries that have signed the Organization for Economic Cooperation and Development’s convention on corruption and bribery, which obliges signatories to adopt national legislation which makes it a crime to bribe foreign public officials.

The chairman of Transparency International, the Berlin–based NGO that monitors corruption, commented on this case: "Both bribe payer and recipient are defrauding the public, wasting resources and hindering development. There is no doubt that the international firms involved deserve censure."

BOX No. 1

The following list of companies and the reported bribe amounts paid was published in the July 29, 1999, edition of Business Day (South Africa). All figures in US dollars.

BOX No. 2

When Bribery is Business As Usual

The companies implicated in this scandal are no strangers to allegations of corruption. Spie Batignolles and Sogreah were involved in Kenya’s Turkwell Gorge Dam which, because of bribes reportedly paid to Kenya’s president and energy minister, cost more than twice what the European Commission said it should have.

Impregilo, Dumez and Lahmeyer were three of the leading firms involved in the Yacyretá Dam in Argentina and Paraguay, which Argentina’s President Carlos Menem has called a "monument to corruption." Yacyreta’s projected cost was $2.7 billion; the final cost was $11.5bn.

Lahmeyer and Impregilo also had contracts on Guatemala’s Chixoy Hydroelectric Project. Various sources estimate that between $350 and $500 million dollars were lost to corruption on this project. "The dam was the biggest gold mine the crooked generals ever had," according to Rafael Bolanos, dean of the School of Civil Engineering at Guatemala’s San Carlos University.

ABB and Dumez worked on Itaipú Dam (Brazil/Paraguay), which has been described as "possibly the largest fraud in the history of capitalism." The dam was originally projected to cost $3.4 billion, but skim–offs brought the final cost to around $20 billion. ABB also worked on Tucuruí Dam in Brazil, another project tainted by major corruption.