Chad May Alter Its Pledge on Oil Funds

Hard-Line Stance Tests World Bank

Six months after assuming the presidency of the World Bank, Paul D. Wolfowitz is facing his first big test in his new job. An avowed hard-liner on corruption, he must decide whether the bank should wash its hands of one of its most controversial projects, in a country with a notoriously corrupt regime.

At issue is a 650-mile pipeline that the World Bank helped finance for Chad, a landlocked central African nation of about 10 million, to transport oil from the country's interior to a coastal port. Despite objections by critics that oil money in such countries is almost invariably squandered or stolen, the bank backed the pipeline in the hope of showing that Africa could use its mineral riches to benefit the poor. It secured an agreement with Chadian leaders that most of the government's oil proceeds would go into a closely supervised escrow fund in London, to be disbursed and invested on the nation's behalf in areas such as education, health and rural development.

Now that the oil has been flowing for two years, the wisdom of the bank's gamble is coming under renewed questioning because the government is threatening to unilaterally change the terms of the deal.

Out of cash for its regular budget amid mounting security problems involving army deserters and refugees on the border with Sudan, the government announced in October that it intends to amend the law governing the petrodollars so it can use a larger chunk of the money for any purpose it likes, including its security forces. Under the proposed new law, the government would double, to 30 percent, the amount of oil money that it can spend without oversight. The government would also halt the diversion of 10 percent of the oil money into a "future generations" fund that is to be spent only after Chad's oil wells run dry.

A low point for the bank came several weeks ago after repeated phone calls from Wolfowitz to Chad's president, Idriss Deby, went unreturned, according to bank officials, who said the episode aroused considerable consternation in their ranks. Deby has taken a defiant public stance in response to the bank's protests against the proposed legal changes, declaring last month, "I will not allow anyone, even if they are a partner, to violate our national sovereignty."

Deepening the bank's woes, its resident representative in Chad, Noel Tshiani, was placed on leave after allegations of sexual harassment, according to Chadian press reports that bank officials confirmed only on condition of anonymity because the matter is under investigation. Tshiani declined to respond to e-mails seeking comment.

In the past few days, however, the situation has improved slightly as the government postponed parliamentary action on the legal changes and sent a letter dated Dec. 16 asking the bank to dispatch a high-level mission "as soon as possible" to N'Djamena, the capital -- possibly an olive branch, though bank officials are not sure.

All this poses a tough dilemma for Wolfowitz, the former U.S. deputy defense secretary who took the bank's helm last June pledging to put a high priority on intensifying the bank's anti-corruption efforts.

The bank has the legal right to take punitive measures in response to any action by the Chadian government to change the agreement, which so far has generated more than $300 million in revenue for public purposes in Chad. The measures could include barring new aid to the country and insisting on immediate repayment of the loans it made for the pipeline. But the bank is instinctively loath to cut off financial ties with a country; it argues that the country's poor are likely to suffer most from the withholding of aid -- a painful prospect in Chad, one of the world's most impoverished nations, where 80 percent of the population relies on subsistence farming and livestock raising.

In Chad's case, a cutoff of bank money raises serious geopolitical concerns as well, because it might increase the risk of a financial collapse for the government that could lead to Chad joining other neighboring countries as a failed state and a haven for terrorists. The cash-strapped government has already fallen into arrears on salary payments to civil servants. Doing the same to the military raises the danger of a bloody coup against Deby, who has ruled Chad since seizing power in 1990.

On the other hand, if Wolfowitz is too flexible with Chad, he risks exposing the World Bank and himself to criticism that the fight against corruption is little more than hot air.

Chad tied with Bangladesh for the worst corruption rating among nations in the most recent annual survey by Transparency International. The government's cash squeeze suggests that misappropriation of public resources is continuing apace. Normal budget accounting is nonexistent, and bank officials cannot understand how the government can be broke, especially since it has directly received some of the oil money, about $38 million, for its general budget. Allowing the government to take money from the London escrow fund might only invite further waste and would set a terrible precedent for future projects in the oil and mining sector, bank officials fear, by signaling that such "ring-fencing" arrangements don't work.