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Investigators are looking into whether the German engineering giant lined its own pockets on a Pakistan power plant project
The newcomer picked a setting rich in tradition for his first major public appearance. Peter L?scher, who has been the CEO of German engineering, electrical and telecommunications giant Siemens since the beginning of the month, spoke in Nuremberg's 14th-century city hall of Nuremberg. He spoke about "challenges" and "trust" that needs to be won back. But a genuine strategy for taking the crisis-racked company into the future? Nowhere to be found. Instead, L?scher wants to use his first three months (more...) in the new position to explore the worldwide Siemens empire, he said.
Indeed, the primary challenge facing the new Siemens CEO and his Chairman of the Board Gerhard Cromme (more...) is that of keeping up with the investigators. Bad news continues to swirl around the company. Following the affairs surrounding secret bank accounts and paid-off workers' councils, the World Bank in Washington is now also investigating the Munich-based high-tech giant.
In late June, World Bank investigators met with an unnamed former Siemens engineer at Madrid's Westin Palace Hotel. The internationally experienced project manager worked for a Siemens power plant project during the 1990s. And what he had to say during their almost five-hour-long chat was of great interest. Siemens is alleged to have artificially driven up the costs for the construction of a power plant completed in the Punjab region of Pakistan during the late 1990s. The result may have been several millions worth of inflated World Bank subsidies for the project.
The informant described in detail how he was hired to work for the project in 1996, via a middle man at a German engineering company. Operating under the name of Rousch Power Ltd., a wealthy Arab clan had gotten the $500 million power-plant project off the ground. And Siemens was to build it -- a combined cycle gas turbine (CCGT) plant with a 412 megawatt capacity. In addition, the German industrial giant was to purchase shares of the operating company via its subsidiary Project Ventures.
The financing was split among the World Bank, a Pakistani bank group and an international bank group. Together, they provided $370 million. The remaining $130 million was to be provided by the companies involved in the construction of the plant.
But the newly arrived project manager quickly began to doubt the accuracy of the internal accounts. About $370 million dollars -- precisely the amount of credit approved -- went to Siemens, despite the fact that, in the project manager's experience, comparable plants had previously only cost around $220 million. Had Siemens perhaps found a way to achieve partial ownership of a power plant without investing a single dollar of its own? Were the possible overpayments used to bribe local decision-makers?
The project manager shared his suspicions with his superiors at Siemens -- and was thrown out. Soon the Pakistani authorities also grew suspicious. Later, there were some arrests made in connection with the project, but the investigations appear to have yielded no results.
Siemens now says its attention was already drawn to the alleged overpayment by the former employee in 2004, whereupon the case was investigated internally. "No indications" of possible abuses were found, according to Siemens.
On the Lookout for Corruption
"The man was incompetent," one now-retired Siemens manager who was involved in the project says today, in justification of the project manager's sacking. "Plants powered by fuel oil are simply much more expensive to construct than conventional gas turbine plants. They require half a chemical factory," he says in explanation of the high costs.
Experts from VGB PowerTech, a German association of major power plant operators, believe the use of such technology ought to raise construction costs by no more than 10 to 15 percent, although the construction of the necessary infrastructure could cost an additional several million in a developing country.
Still the World Bank investigators seem to be taking a close look at what their informant has told them. Nor does it come as a surprise. The World Bank has long had its eye on Siemens on the lookout for possible corruption-related crimes.
As early as February, an investigator from Washington showed up in Munich for confidential talks with the public prosecutor's office there. He wanted to know how the investigations were proceeding -- and whether World Bank projects featured at all in the information obtained about Siemens's secret bank accounts.
"It is true that a World Bank investigator has approached us in connection with our investigation into Siemens," Christian Schmidt-Sommerfeld, the senior public prosecutor, confirms. And probably not for the last time, he added.
Will Siemens Be Blacklisted?
The risks for Siemens are huge. Already facing a possible billion-dollar penalty from the Security and Exchange Commission (SEC) -- the US government agency responsible for enforcing federal securities laws -- an additional confrontation with the World Bank could be bad for business. Indeed, the electronics giant could be excluded entirely from lucrative World Bank projects in the future.
The consequences for the company's balance sheet would be catastrophic. According to a World Bank compilation, Siemens has worked on 134 projects supported by the Bank since July, 2000 worth a total of more than $1.3 billion.
The construction of a subway system in the Indian metropolis of Mumbai is just one example. The contract in this case is worth some $220 million. Siemens is also pocketing $186 million for a new, 780 kilometer (485 mile) high-voltage power line that will connect two other Indian cities, and which is scheduled for completion in 2011.
Losing such contracts would be dangerous for Siemens. Indeed, one need only look at the experience of German consulting and engineering company Lahmeyer International to find out just how dangerous.
During the 1990s, the Germans bribed the directors of a dam project in Lesotho, paying them several hundred thousand euros. The corrupt managers did little to keep their sudden wealth a secret and openly showed off their new villas and expensive cars. Four years ago, Lahmeyer began paying the bill for its corruption. A local court levied a fine of ??1.5 million ($2 million).
In November of last year, that penalty was followed by another, which was significantly more difficult to stomach. Lahmeyer suddenly found itself on the World Bank's black list. The German company is now barred from all projects financed by the World Bank until 2013.
And Siemens's fate could be worse still. Companies blacklisted once by the World Bank are often also banned from the programs of other development banks. Moreover, many US companies later refuse to do business with such blacklisted companies.
Siemens's new CEO L??scher has a lot of convincing to do -- and not just within his own company.