A Building investigation reveals proposals to pay contractors directly and take ‘aggressive’ actions to defend them from rogue governments, as evidence mounts that UK firms are being hit by non-payment

The World Bank is set to protect contractors against corrupt government clients by paying them directly. The move comes as more and more firms are struggling to be paid for the work they do on World Bank-financed projects.

The difficulties are understood to have affected UK firms including Halcrow, Scott Wilson and architect Levitt Bernstein, and are estimated to have cost them at least £100m.

Halcrow and Levitt Bernstein were unavailable for comment.

Senior officials at the World Bank will go before its executive board next month and propose a series of measures to solve the problem. These will involve an overhaul of the bank’s loan procedures that will enable it to step in and provide extra funds to pay contractors directly when money has gone missing or is unfairly withheld.

The governments concerned could then be barred from receiving further loans until the bank is convinced that it will not do the same again. World Bank officials hope that this will act as an deterrent against corruption.

The decision to take action comes as the World Bank has become increasingly aware of the problem. Western construction firms, including those in UK, are owed millions of pounds on infrastructure, health and education projects because of corruption and rule-bending by developing world governments.

Hilary Benn, secretary of state for international development, and Graham Hand, chief executive of the British Consultants and Construction Bureau, have expressed serious concerns to the World Bank on the issue.

Hand met the bank in July to provide evidence of the unfair withholding of payment. He said: “Companies are not prepared to put up with the problem any more. I know of some smaller companies that have gone close to the wire over these payment problems. In some cases there is direct corruption: an official within the government will offer to make sure a firm gets paid in return for 5% of the contract cost.

“In other instances the situation can look legitimate as countries avoid paying by hiding behind bureaucracy: they backtrack on agreements over which currency to pay in, or on contractual arrangements that work will be tax-free by blaming changes of personnel or policy.

We will be addressing the payment situation aggressively

Jim Adams, vice president, World Bank

“They sometimes don’t pay even when ordered to by arbitration. The goalposts are shunted sideways, and a company’s profit margins on a scheme disappear like smoke. If these measures are passed it will be a sea change at the World Bank.”

Jim Adams, World Bank vice president, confirmed that proposals were due to go before the board next month.

He said: “We will be addressing the situation aggressively as the number of problems has increased in the past few years.

“We want arrangements to increase the probability of payment to contractors, and we want to strengthen bank instructions to ground staff to ensure that contracts are followed properly and payments are made.

“We haven’t found that we have policy problems, but we do have issues over our terms of engagement.”

Adams said that the bank would advise governments that there would be an “explicit link” between a country’s payment record under the new regime and its chances of securing further funding for projects.

He said: “Certainly a country’s portfolio is one of the things we look at when considering loans. We have two types of funds, commercial and soft loans at lower rates. It is certainly an issue on soft funds and we will be making that clear.”

Adams said that the measures and the threat of penalties should bring about a change in many countries’ attitudes towards payment. He said it would also help prevent rows between construction firms and some of the more reliable clients, which had begun complaining that contractors and consultants were raising prices after experiencing payment difficulties on other projects.

These measures will mark a sea change at the World Bank

Graham Hand, BCCB

Adams said: “It will help them, as governments with better payment practices will be recognised for that. Many feel they are unfairly penalised by contractors when they are pricing work, as contractors raise prices to accommodate the poor payment practices of some countries.”

Adams and other senior officials are finalising a draft of the proposals, which they intend to put before the World Bank’s executive board. The officials are set to be backed by representatives from the UK, USA, France and Canada, all of which all have contractors that have suffered.

Sources close to the negotiations have said that World Bank president Paul Wolfowitz, who is known to be more business-friendly than previous World Bank chiefs, is likely to support the measures.

However, the British Consultants and Construction Bureau fears some developing countries on the board may react angrily.

Hand said: “Some developing countries may see this issue as something other than it is, and mistake it for a colonialist statement of intent.

“But this is purely about commercial issues.”

One solution that could be deployed by bank officials in this case would be to strike a trade-off over other procurement reforms currently under discussion.

Separate reforms being considered by the World Bank involve allowing selected borrowing countries to use their own procurement systems for projects, rather than using standard forms provided by the World Bank.

Construction representatives are wary of these measures, however, as they fear there would be political pressure on the World Bank to promote too many countries to this “A list”.

Scott Wilson: Owed £1.5m for Indian roads project (see map graphic)

Consultant Scott Wilson is owed £1.5m by the Indian state of Jharkhand under World Bank loan CR 2439-IN, a debt that was scheduled for payment in 2001. In 1995, Scott Wilson was appointed by the state government of Bihar (now Jharkhand), as a consultant on the rural roads component of the Bihar Plateau Development Project. The initial 30-month contract was extended three times, with a completion date of June 2000. However, Scott Wilson was obliged to stop work in March 2000, after problems in securing scheduled payments for their work. The matter eventually went to arbitration in February 2002, and the arbitrators found unanimously for Scott Wilson in June 2003. The total debt, originally £1.1m, is now more than £1.5m and remains unpaid. Scott Wilson continues to work in India and has 250 staff in the country.

Graham Hand: ‘The World Bank has a responsibility’

The World Bank has traditionally taken the view that the non-payment of firms working on its contracts is not its problem, as it has considered this to be a contractual issue. However, the British Consultants and Construction Bureau felt that the World Bank had a responsibility to ensure that work was carried out properly and was paid for, as it was using taxpayers’ money. Although the World Bank itself is not an arbitration authority, we felt that it should step in before arbitration became necessary.

The proposals officials have come up with would go a long way towards solving the problem. We are talking about a step change in standards. We know that we are not aware of all the cases there are; companies often do not want to be seen to be complaining for political reasons. But it is a serious problem for the industry and the borrower countries. If these practices continued, not only would companies lose millions of pounds, but they would stop working for these governments. This would erode competition and the quality of developments.

Graham Hand is chief executive of the British Consultants and Construction Bureau

How the World Bank works

The World Bank gives financial and technical help to developing countries around the world. It is made up of two development institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). These institutions are jointly owned by 184 countries.

The IBRD focuses on middle income and credit worthy poor countries, while the IDA concentrates on the poorest countries in the world. Together, they provide low-interest loans, interest-free credit and grants to help developing countries with education, health, infrastructure and communications.Paul Wolfowitz, who is close to US President George Bush, was approved as the 10th president of the World Bank Group by the institution’s board of executive directors on 31 March 2005.

How the World Bank funds projects at the moment

  • Agrees to make a loan to a developing world government to fund management and/or construction services on a specific infrastructure project, agreed in advance
  • Bank opens a loan and pays in the agreed amount. Client country uses money to finance the agreed project
  • The loan remains open for a fixed timeframe only, after which no more money can be transferred into or out of an account. This applies even if the contractor has not been paid.

    The proposed reforms

  • Where the World Bank is aware of payment problems on a contract, it will be able to keep a loan open. It will pay more money into the fund if necessary to cover costs
  • Where the World Bank becomes aware of a dispute after the loan has expired it will be able to reopen the loan and pay in the required funds
  • World Bank officials will consider records of additional payments when determining whether a country should receive further loans
  • Tighter control on governments by World Bank ground staff
  • Greater link-up between ground staff and top-level World Bank management to spot problem contracts early.

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