Jakarta – International financial institutions paid about $35 million in the late 1980s to build the highway that meanders from Jakarta's international airport to the city, crossing picturesque rice paddies and fish ponds.

But the 1.2-meter thick layer of crushed stone that was supposed to keep the pavement above flood level was never laid and the project became known as the "highway heist" – a glaring reminder of the corruption here that donors must overcome in aiding areas shattered by the December 26 earthquake and tsunami.

With hundreds of millions of dollars pledged as relief aid, many fear that corrupt officials in Indonesia will devour a portion of the humanitarian funds.

Thousands of relief workers – from the US Navy and Marines to UN agencies and private organizations – rushed to deliver food and water and establish temporary shelters for hundreds of thousands of survivors along the battered coasts of Sumatra island. As the mission becomes one of rebuilding rather than emergency aid, observers say the conditions for corruption are rife.

"Based on our past experience in other disasters in Indonesia, corruption is highest in the reconstruction and rehabilitation phase, rather than during the emergency response," said Luky Djani, from the independent watchdog Indonesia Corruption Watch. "We want to focus our monitoring efforts on reconstruction and rehabilitation because in these two stages corruption will be rampant."

Indonesia's media has taken the lead in warning of the potential pitfalls. "It is well known that the government's credibility is very low in preventing and eradicating corruption," an editorial in The Jakarta Post said. "This has raised doubts as to whether the government will be able to handle public money from all over the world in a transparent manner."

Newly elected President Susilo Bambang Yudhoyono has moved quickly to pre-empt the potential crisis by appointing international accounting agency Ernst & Young to track the relief funds. He also has pledged to work with donor countries to ensure that aid for tsunami victims is not stolen by corrupt officials.

"There will be no corruption," said Alwi Shihab, the senior welfare minister who is in charge of the relief effort. To bolster the promise, he said the government would publish a monthly list of all aid "contributions and where it is going to avoid any suspicion."

The government has estimated that rebuilding efforts in the most devastated area, Aceh province, will cost at least US$4 billion. The earthquake and wave flattened wide swaths of Indonesia's Sumatra island, killing tens of thousands and sweeping whole villages into the sea. Some towns will have to be rebuilt from scratch.

Yudhoyono's administration has said that most foreign governments that have pledged aid are insisting that they be allowed to manage the funds.

The Cabinet was drawing up plans for the use of aid in the reconstruction and rehabilitation phases that would guarantee the donations are channeled to tsunami victims, said Sri Mulyani Indrawati, minister for national development planning.

This would include the creation of a new management structure, where donors could track the progress of projects they are financing and the way their money is being used.

Staffan Synnerstrom, a senior official of the Asian Development Bank, insisted that outside lenders were determined "to make arrangements that would minimize this risk."

However, administrators who have seen corruption in the past warn that the new safeguards don't go far enough. Kwik Gian Gie, economic minister in the former administration of President Megawati Sukarnoputri, predicted that on building or infrastructure projects, it was "safe to assume a 40% markup."

Indonesia is listed as one of the world's most corrupt nations by Transparency International in its latest Corruption Perceptions Index. Since his inauguration three months ago, Yudhoyono has publicly lamented that corruption has become "systemic" in the country.

Many Indonesians feel the corruption and its resulting abuse of power threatens the survival of the country's fledgling democracy and could usher in another period of military rule. A US-backed army general, Suharto, ruled Indonesia with an iron hand for 32 years before pro-democracy protests and riots forced him to step down in 1998.

During his reign, Suharto, his family and his military and business cronies are alleged to have plundered at least US$30 billion. Suharto was charged in 2000 with embezzling the equivalent of more than $600 million from a number of foundations run by his family. The charges were eventually dropped when judges ruled he was too ill to stand trial.

Aceh has long been regarded as Indonesia's most graft-ridden province.

It is home to a long-running separatist war in which about 15,000 people have died in the past decade. Power in the province is largely in the hands of the military, widely regarded as one of the country's most corrupt institutions.

The province is extremely rich in natural resources – the liquefied gas industry alone, which supplies much of Japan's and South Korea's needs, brings in about US$5 billion annually. Critics warn that as efforts to rebuild the shattered infrastructure get under way, it will be difficult to keep contractors with ties to the army brass and top bureaucrats from padding their bids or claiming to have performed nonexistent tasks.