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 the chief executive officer of the project, allegedly giving nearly US$2 million in bribes over ten years.

Patrick McCully of International Rivers Network commented, "This list of corrupt companies reads like a who's who of the dam-building industry." The reported bribes ranged from a low of US$2,456 (Diwi Consulting, Germany) to a high of $733,404 for the Highlands Water Venture consortium.

The LHWP corruption story first appeared in the South African newspaper Business Day, as the Lesotho government's court case against the CEO, Masupha Sole, drew near. 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.

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.

A controversial project from the start, it 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 vulnerable rural Highlands communities who have lost fields, grazing lands and access to fresh water sources due to construction of 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. In Lesotho, as in many places, corruption, environmental degradation and increasing poverty go hand in hand.

The World Bank's Role

The World Bank has lent over $150 million 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 U.K. to help other donors circumvent international sanctions against South Africa's then-Apartheid regime. To avoid calling attention to these sanctions-busting activities, 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 loudly proclaimed of late 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.

Unfortunately, first indications are that the Bank believes that 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."

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.