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Responses to Allegations Contained within the IDB's Letter to the Editor of the Washington Times on November 12

, November 19, 2010

On November 9, Mr. Kelly Hearn published an excellent piece in the Washington Times that exposed the financial mismanagement of the investment portfolio of the Inter-American Development Bank (IDB), and a cover-up of environmental damages caused by the Camisea pipeline(s) through the Amazon Basin in Peru.

In a letter to the editor, the IDB responded with misleading and fallacious arguments designed to extend the cover-up. The arguments presented by the IDB are printed – word for word – below in bold. GAP’s response follows each point enumerated.

IDB Allegation #1

The article states that the IDB "last year suffered a billion-dollar loss after putting its money into mortgage-backed securities." In fact, the IDB registered $1.3 billion in net income last year.

The Truth: The losses referred to in the article are clearly attributed to bad investments. With a sleight of hand, the IDB switches the discussion to the Bank’s “net income.” In fact, no one know the value of the IDB’s investments in mortgage-backed securities at this date because the investments are illiquid. In any case, Mr. Hearn was describing losses that hit the IDB investment portfolio beginning in 2008 and continuing into the second quarter of 2009. The losses occurred because the IDB made substantial high-risk investments in mortgage-backed securities in 2006 and 2007, precisely when better bankers were dumping these dubious “assets.”

The IDB’s own Investment Review Panel Report asserted:

[F]irst, a relatively weak policy environment allowed significant problems to develop largely undetected; and second, Management placed undue reliance on policy to prevent problems and failed to develop an adequate risk management culture that also could have detected problems and provided remedies before the accumulation of significant losses (para. 1.3)

The review of the Bank's portfolio has established that these significant losses were concentrated in U.S. structured products bought in 2006 and 2007…. These include: Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDOs), and Collateralized Loan Obligations (CLOs), as well as AAA-rated tranches backed by lower quality collateral, such as Home Equity Lines of Credit (HELOCs) and second lien mortgages (para. 2.5)

IDB Allegation #2

It is incorrect to state that the U.S. government "is considering whether to approve" our $70 billion capital increase. In fact, the U.S. Treasury Department already has given its official approval by signing on to the March 2010 Cancun Agreement and, on July 21, formally endorsing the capital increase.

The Truth: Although the U.S. Treasury Department endorsed the capital increase by signing the March 2010 Cancun Agreement, it’s the U.S. Congress that must pass legislation approving and authorizing the funding requested. According to an April 2010 Congressional Research Service report “Any U.S. participation in the capital increases would require legislation. The Administration has requested that U.S. contributions to the Asian Development Bank (AsDB) capital increase be included in the FY2011 budget. Capital increases for the other MDBs, if agreed to, would likely be included in the FY2012 budget.” (p. 23)

An increase for the IDB has not yet been approved by Congress, which is considering it. Given the current budget deficit and the composition of the new Congress, the IDB capital increase will face an uphill battle.
 

IDB Allegation #3

The article next says U.S. officials have "begun to question the reasonableness of the IDB's loans" and that the bank is "more focused on securing new deals than making sure existing ones work as planned." The story offers no documentation or corroboration to support these baseless assertions. The IDB is, in fact, focused on making sure that our projects work as planned. Yesterday in Lima, Peru, more than 80 people gathered for the ninth public consultation on Camisea organized and hosted by the IDB since the loan's approval in 2003, with the participation of civil society organizations and representatives from affected communities.

The Truth: Last year, the Interethnic Association for the Development of the Peruvian Rainforest – AIDESEP, The Machiguenga Council of the Urubamba River – COMARU, Citizen Action for Camisea, and other civil society organizations signed a letter to IDB management protesting the stage-managed way in which these semi-annual “public consultations” are conducted. Among other things, the groups asserted that diverse participation was not guaranteed, relevant information was not provided to stakeholders, and the timeframe for the process was insufficient to allow meaningful dialogue. Specifically, the coalition wrote: “The meeting does not provide a guarantee of concrete results and commitments from the State, the IDB nor the companies of the Camisea Consortium with regards to the various aspects of the Camisea Project.”
 

IDB Allegation #4

Ms. Hearn's story purports - but provides no verifiable information - to substantiate the allegation that in 2007 bank officials "manipulated" a technical investigation to produce a "fraudulent" report that cleared the way for IDB financing.

The Truth: Because the IDB retaliates against whistleblowers, individuals who saw this occur cannot be named. Nonetheless, witnesses’ accounts, as reported to GAP, are consistent about what this process did (and did not) entail and who took part. The concerns identified in the technical report were not brought forward; the final report to the Board was a cut-and-paste job done in less than a week by non-experts that cleared the way for additional financing for Camisea by the IDB. The documented facts are these:

  • The final report to the Board did not reflect the validated E-Tech allegations, although the OII investigators knew that most of them were true;
  • Despite five ruptures and one explosion along the pipeline by 2007, $400 million in new funding was approved by the IDB Board in June 2008, for a consortium led by Hunt Oil for further Camisea pipeline construction.

IDB Allegation #5

The central allegation of the article relies on a statement by Bill Powers, president of the E-Tech consulting firm, who claims that one of the contractors in Camisea "utilized pipe left over from other projects" and that those pipes "played a material role in one or more of the pipeline ruptures." Mr. Powers himself has admitted that this allegation is false. During a public consultation on the Camisea project on June 4, 2007, which was recorded and published on our website, Mr. Powers said:

"E-Tech stated in its Feb. 27, 2006, report that a significant percentage of tubes left over from other projects were used in the Camisea pipelines. This explanation of the poor physical condition of some of the pipe, that the pipe must have been left over from other projects, was demonstrated almost immediately by TgP [the contractor] to be an incorrect explanation. It was unproductive for E-Tech to state as fact, based on the demonstrable physical evidence of corrosion, what was undocumented opinion."

The Truth: Like the diversionary referral to net income (above) this is a crude attempt to reframe the issue. The cause of the deterioration in the pipes was not the central allegation presented in the article. Bill Powers’ allegation that the pipes might be unsafe due to corrosion was the focus. The first time Powers is mentioned is in the following passages:

Bill Powers, E-Tech's president and an engineer, came forward with a detailed report claiming that the company that built the leaky pipeline had cut corners to avoid some $90 million in costs. He said the company — known by its Spanish acronym as TgP — violated the bank's loan agreement by using pipes that had deteriorated owing to inadequate storage before their use in the project.

Mr. Powers — who based his report largely on testimony, documents and photos provided by a Peruvian welding inspector who worked on the leaky pipeline — also claimed that TgP used unqualified welders and that it had changed the pipeline route without the bank's approval.

Weeks later, according to internal IDB e-mails, Mr. Powers' allegations were supported by Peruvian engineer Alfredo Arana, who offered to provide supporting photos and documentation for both men's claims. (emphasis added)

The IDB, conveniently, has chosen not to respond to the allegations of inadequate storage, the Peruvian welding inspector’s evidence, or Mr. Arana’s confirmations.

Secondly, regarding the allegation that the IDB chose to portray as pivotal, the IDB’s letter truncates Powers’ quote from the June 4th meeting so as to distort its meaning. The full quote is:

It was unproductive for E-Tech to state as fact, based on the demonstrable physical evidence of corrosion, what was undocumented opinion. However the substantive technical issue remains real today--accelerated corrosion on the interior walls of the pipeline.”(emphasis added)

Significantly, Mr. Powers did not retract his concern about the corroded pipes. He merely stated that he was incorrect about the cause of the deterioration. The fact remains that there were serious allegations about the pipe raised at such meeting not only by Powers, but other groups – as shown by the particular meeting minutes that the IDB itself cites (http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=1044078)

IDB Allegation #6

The article quotes Beatrice Edwards of the Government Accountability Project as saying: "[IDB officials] cobbled together a report dismissing the E-Tech [sic] and leaving still unanswered questions and allegations." In fact, the IDB rigorously examined all of E-Tech's allegations. The Bank hired R.W. Beck Inc., a respected engineering firm, to further evaluate these allegations and consulted numerous entities, including the pipeline operator, Peruvian government officials and local stakeholders.

The Truth: The fact that the IDB “rigorously examined” the E-Tech report in no way means that Ms. Edwards is incorrect. We are aware that the IDB rigorously examines any criticism it receives. It does not appear, however, that the examination of the E-Tech report resulted in any mitigation, despite the fact that investigators realized that many of E-Tech’s allegations were valid, and that the Beck report neglected many of them. Further, Mr. Hearn’s article actually detailed what happened after the Beck draft report was submitted to the IDB’s investigative unit. According to the article, one of the investigators wrote:

Beck had not looked into the qualifications of the welders, whether the pipes were new at the time of installation or if the pipeline route was altered to defray costs. What's more, she wrote, the appropriate experts hadn't even gone into the field to inspect the leaky pipeline.

The pipeline report still raised several concerns that echoed those of E-Tech. About the welders, for example, it noted that the same inspector issued welding certificates at two different locations on the same day. About the purported changes in the pipeline route, Ms. Contreras stated that the Beck report "dismisses the allegations rather summarily."

Months later, with the Camisea II decision looming and the pipeline's integrity still in doubt, Beck consultants working in Lima found themselves locked in a problem: TgP failed repeatedly to produce all of its welding records. And the documents it did hand over showed that even more welders than previously thought lacked qualifications.(emphasis added)

The article points out many indications showing the Beck report to be superficial in crucial respects. Significantly however, even this superficial report echoed some of the allegations against Camisea’s integrity made by E-Tech, but the final report given the Board does not adequately reflect this.

IDB Allegation #7

The article states that the IDB "failed to investigate" allegations of corruption made by a former Peruvian energy minister. As Ms. Hearns knows, the bank's Office of Institutional Integrity (OII) is only authorized to investigate allegations of fraud and corruption in projects directly financed by the IDB. The alleged corrupt activities referred to concern Peru's legislative process and are outside the scope of OII's mandate. As your story also notes, the IDB has never received formal allegations of fraud and corruption related to the Peru liquified natural gas project.

The Truth: As any competent investigator knows, the scope of allegations may be defined broadly or narrowly, depending on political convenience. In this case, clearly, it was convenient for the IDB to define the scope narrowly. While it’s true that “the corrupt activities referred to concern Peru’s legislative process” (because legislators allegedly received bribes), the same allegations implicate the consortium headed by Hunt Oil, which was the indirect beneficiary of the IDB loan. The consortium allegedly did the bribing, and therefore OII could and should have investigated.
 

IDB Allegation #8

The article implies that the IDB is being secretive regarding investigations by its Office of Institutional Integrity. In fact, the IDB's disclosure policy regarding such investigations is designed to protect the identity of whistleblowers, prevent reprisals against persons who inform us of possible corrupt acts and ensure the integrity of the investigative process. In this respect, our confidentiality policies match international best practices.

The Truth: As the nation’s leading whistleblower organization with a specific focus on monitoring multilateral development banks, GAP knows first-hand that the IDB routinely retaliates against whistleblowers. Most disturbingly, the reprisals often come from senior management and the very offices responsible for the IDB’s integrity: OII, the Office of the Executive Auditor, and the Ethics Office. Breaches of whistleblowers’ confidentiality and requested anonymity are common.