Governance and Development Presented to Presented by Public

Governance and Development Presented to: Presented by: Public Sector and Anticorruption Core Course April 23 -26, 2007 Washington D. C. Ed Campos Governance Adviser for Bangladesh SASPR

The World Bank has come a long way in a brief period of time WDR on Institutio ns 1982 TI CPI (5/95 ) State in O. P. a Mainstreami Changin ng AC in g World Governance CAS (99) Strategic Pillar - CDF (97) Governan Compact (98) JDW ce “Cancer (97) Strategy of (00) Gov/A-C Corruptio Anticorruption Diagnostic n” Strategy s start (98) Speech (97) (10/96) PSG Implementati on Update (02) • Diagnostic/Data/ Monitoring Tools • Public Financial Management and Procurement • Administrative & Civil Service Reform Broadening & Mainstreaming The ‘Prohibition’ Era • Civil Society Voice, Transparency, & CDD • State Capture • Legal & Judicial Reform Internal AC unit created in WB (98) 1980 1995 1996 1997 1998 1 st set of firms Debarred from WB (99) 1999 2000 Formalizati on of INT (01) 2001 2002 Board endorses PW Bank Integrity President Strategy (05) (04) 2003 2004 2005 2006

Aid, Governance, and Development Outcomes

Governance and Development: Lessons of Global Experience • An effective state is crucial for growth and poverty reduction (WDR ’ 97) • For an effective state, good governance is a cross -cutting priority for: – Building a sound investment climate for growth (macroeconomic stability, rule of law, regulatory system, physical & financial infrastructure) – Empowering people to make growth inclusive through effective delivery of basic services (education, health, social protection)

Good Governance matters for investment and growth % Investment share in GDP 20% Income per capita Growth Rate 2% 1. 5% 1% 0. 5% 15% 0% -0. 5% -1. 0% 10% -1. 5% High Medium Low Governance Quality measured by perception of 4000 firms in 67 countries on: (i) protection of property rights; (ii) judicial reliability; (iii) predictability of rules; (iv) control of corruption. World Development Report Survey 1997

Corruption and Growth in Bangladesh Source: Extrapolated based on Rahman, Aminur, et al, Estimating the Effects of Corruption: Implications for Bangladesh, PRWP #2479, World Bank, 2000 For Bangladesh, a reduction of corruption from its observed level (measured by ICRG corruption index) to a level of, say, Poland would increase the annual average growth rate during 1990 -97 by 2. 14 percentage points (raising average per capita growth rate to 5. 5 percent). The latter growth rates, if extrapolated to 19902004, would yield a per capita income about 1/3 above the current level.

The direction of causality … Growth causes governance to … and better governance causes improve. . . growth v Burkhart and Lewis-Beck (1994) found that while higher per capita incomes foster democracy, democracy in turn does not foster higher incomes v B. Friedman (2005) argues that higher living standards encourage more open, tolerant and democratic societies v Using measures of rule of law, bureaucratic quality and corruption, Chong and Calderon (2000) found significant causality from good governance to growth and vice versa – i. e. “good governance” both contributes to and results from strong economic performance v Other studies have dealt with the potential for reverse causation by using exogenous instruments for the governance indicators and concluded that good governance has a significant and strong causal impact on economic performance … … but the debate on causality continues …

ov e G rna ro n w ce th & G Good governance is pro-poor Additional annual income growth due to an increase in the quality of governance (ICRG composite index) by 1 point Source: Knack, 2002 Reduction in the percentage of population living on less than $2/day due to the increase in the quality of governance (ICRG composite index)

Good Governance has many dimensions Citizens/Firms Political Accountability • Political competition, broad-based political parties • Transparency & regulation of party financing • Disclosure of parliamentary votes • Independent, effective judiciary • Legislative oversight (PACs, PECs) • Independent oversight institutions (SAI) • Global initiatives: UN, OECD Convention, antimoney laundering Effective Public Sector Management • Ethical leadership • Public finance management & procurement • Civil service meritocracy & adequate pay • Service delivery and regulatory agencies in sectors Civil Society & Media • Freedom of press, FOI • Civil society watchdogs • Report cards, client survey Private Sector Interface • Streamlined regulation • Public-private dialogue • Extractive Industry Transparency • Corporate governance • Collective business associations Citizens/Firms Formal Oversight Institutions Decentralization and Local Participation • • Decentralization with accountability Community Driven Development (CDD) Oversight by parent-teacher associations & user groups Beneficiary participation in projects Citizens/Firms Outcomes: Services, Regulations

The Bank operations focus only on some Citizens/Firms Political Accountability • Political competition, broad-based political parties • Transparency & regulation of party financing • Disclosure of parliamentary votes • Independent, effective judiciary • Legislative oversight (PACs, PECs) • Independent oversight institutions (SAI) • Global initiatives: UN, OECD Convention, anti-money laundering Effective Public Sector Management • Ethical leadership • Public finance management • Civil service administration • Sector management: Service delivery Regulation • • Civil Society & Media Freedom of press Freedom of information Civil society watchdogs Public hearings of draft laws Report cards, client surveys Participatory country diagnostic surveys Private Sector Interface Streamlined regulation Public-private dialogue Break-up of monopolies ICA/Doing buisness Extractive industries Corporate governance Collective business associations Citizens/Firms Formal Oversight Institutions • • • Local Participation & Community Empowerment Primary focus of WB operations in governance • • Decentralization with accountability Community Driven Development (CDD) Oversight by parent-teacher associations & user groups Beneficiary participation in projects Citizens/Firms Outcomes: Services, Regulations, Corruption

Public Financial Management of Public Finances Raising Revenues Tax/Customs Administration Allocating Revenues Budget Formulation Using Revenues Budget Execution Cash/Treasury Mgmt Procurement Auditing Internal Controls Reporting Public sector accounting Integrated FMIS

Administrative and Civil Service Reform Personnel Management Organizational Design Recruitment Promotion Transfers Career management Training Internal Restructuring Corporatization Executive Agencies Outsourcing Privatization

Governance and Corruption Not the same thing! Governance Corruption The manner in which the State acquires and exercises its authority to provide public goods and services Using public office for public private gain private • Corruption is an outcome – a consequence of weak or bad governance • Poor delivery of services and weak investment climate are other outcomes of bad governance

Corruption poses three risks Development Effectiveness Risk That corruption will undermine the impact of development efforts in general and in Banksupported projects Reputational Risk That Bank lending in countries with corrupt leaders will tarnish the Bank’s reputation Fiduciary Risk That Bank resources will be misappropriated and in some cases loans may not be repaid

Administrative Corruption: Private payments and other benefits to public officials in connection with the implementation of government policy and regulations Nepotism & Patronage: Corruption Favoritism shown to narrowly targeted interests by those in power such as granting favors, giving contracts or making appointments to office in return for political support State Capture: Influence of powerful economic interests in the public and private sectors in the formation of laws, regulations, policies through illegal provision of private benefits for public officials

Poor Governance Lack of Transparency Weak Voice & Accountability Monopoly Power Corruption Wide Discretion Inefficiency

When Governance Breaks Down. . . Citizens/Firms Political Actors & Institutions • Political Parties • Competition, transparency State Capture Formal Oversight Institutions • Parliament • Judiciary • Oversight institutions Administrati ve Corruption Cross-cutting Control Agencies (Finance, HR) Civil Society Patronage & Private & Sector • Civil Society Nepotism Watchdogs • Media • Business Associations Citizens/Firms Executive-Central Govt Service Delivery & Regulatory Agencies Subnational Govt & Communities Citizens/Firms Outcomes: Services, Regulations, Corruption

Improving Governance An Overall Operational Approach • Unbundle governance – What are the specific governance problems of concern? (Diagnostics) – – – Corruption? If so, where is it concentrated? Health? Education? Financial sector? Procurement? Grand corruption and capture? Administrative corruption? Poor delivery of public services? If so, which one? Insufficient private investment? (Integrating Governance into the CAS: http: //www 1. worldbank. org/publicsector/anticorrupt/documents/items of special interest) • Analyze underlying dynamics – What are the specific drivers of poor outcomes? (Political Economy/Institutional Analysis) – – – Powerful interests purchasing state policy for private interest Lack of citizen voice to influence service delivery Weak checks and balances to constrain arbitrary action • Sequence reforms and donor strategies – How to support drivers of change? (Implementation strategy) – – Analyze and support drivers of change Develop appropriate sequencing of public management and checks & balances Balance supply side interventions with demand side pressures Rely on multidonor partnerships, based on mandate & comparative advantage (Managing the Politics of Reform: http: //www 1. worldbank. org/publicsector/anticorrupt/)

Diagnostics: Drilling Down • Diagnosing Governance as a whole • Assessing the incidence of particular forms of corruption: where are the most affected areas? corruption • Evaluating corruption in cross cutting government processes, e. g. procurement processes • Evaluating corruption at the sector level, e. g. level education • Assessing risks at the project level

“Measuring” Quality of Governance and Corruption at the Country Level (Kaufmann-Kraay indices: ) • Rule of law • Political stability • Voice and accountability • Government effectiveness • Regulatory quality • Control of corruption http: //www. worldbank. org/wbi/governance/pubs/govmatters 4. html

Control of Corruption: Cross country Comparisons

Governance Indicators: Bangladesh

“Measuring” Quality of Governance and Corruption at the Country Level: Other Sources • The Open Budget Index (http: //www. openbudgetindex. org/Open. Budget. Index 2006. pdf) • Global Integrity Index (http: //www. globalintegrity. org/2004/scores. aspx? cc=id&act=s cores)

Forms of Corruption: Assessing State Capture Proportion of firms affected by capture of … 30 Parliamentary Votes Presidential Admin. Decrees 25 Civil Court Decrees 20 15 10 5 Hungary Estonia Russia Ukraine

Forms of Corruption: Administrative Corruption Service Delivery: Composition of Total Bribes Paid by Households in Cambodia

Forms of Corruption: Administrative Corruption The “Bribe Fee” List: Unofficial Payments by Firms in Ukraine Enterprises Type of License/Service/”Favor” Average fee required admitting need to pay (1996) “unofficially” Enterprise registration $176 Each visit by fire/health inspector $42 Tax inspector (each regular visit) $87 Telephone line installation $894 Lease in state space (square ft. per month) Export license/registration $123 Import license/registration $278 Border crossing (lump sum) $211 Border crossing (percent of value) 3% Domestic currency loan from bank on preferential terms (percent of value) Hard currency loan on preferential 4% terms (percent of value) 66% 81% 51% 78% $7 66% 61% 71% 100% 57% 4% 81% 85%

Forms of Corruption: Patronage & the Market for Public Office Public Officials Surveys: Purchasing Public Positions Customs inspectors 41 Tax inspectors 41 25 Natural resource licensers 27 60 48 52 43 33 39 Judges 32 16 25 Ordinary police 40 23 Investigators/ prosecutors 18 5 Ministers 0 10 21 24 Based on 1998 World Bank surveys of public officials in these countries: 218 public officials in Latvia (with Latvia Facts); 350 public officials in Georgia (with GORBI); and 97 public officials in Albania (with ACER). 19 20 Georgia Latvia 32 33 14 Local officials Albania 40 60 80 Percent of public officials believed to have purchased their positions

Sector Level: The Value Chain & Corruption Risk Mapping Health Sector -- Delivery of Essential Drugs

Health Sector: Delivery of Essential Drugs Tackling decision points vulnerable to corruption Competition & Transparency Registration Tracking systems Selection Monitoring based on Media transparent & coverage uniform of drug standards selection committee meetings User surveys Procurement Distribution Prescription & Disbursement

Public Procurement: Process Flow & Corruption Risk Mapping Procurement Planning Stages of the Procurement Process Preparation Advertisement Pre-qualification Bid Evaluation Award of Contract Implementation

Procurement Planning: Corruption Vulnerabilities Problem Area • Lack of Plans • Unclear Criteria for Project Selection Possible Distortion Mis-governance • Purposeful delay of procurement to feign “urgency” and go to direct negotiation Lack of competition • misallocation of resources Lack of Transparency Procurement of goods and civil works

Preparation: Corruption Vulnerabilities Problem Area • PMO given sole responsibility over the determination of contract packages and preparation of specifications (for civil works) • BAC members designated solely by Head of agency Possible Distortion Mis-governance • Contract splitting to allow unqualified bidders to participate or to revert to “simplified” bidding • tailor fitting to favor a preferred bidder • BAC members chosen to stack deck in favor of Head’s choice of contractor Procurement of goods and civil works Lack of competition Lack of Transparency

How can we improve governance and reduce corruption?

Enhancing Transparency

The Power of Transparency and Monitoring: PETS & Primary Education in Uganda Source: Reinikka and Svensson (2001), Reinikka and Svensson (2003 a)

Freedom Of Information

Why isn’t this man smiling? Media Freedom

Strengthening Accountability

The Report Card: Improving Public Services in Bangalore Source : PAC

Strengthening Demand for Public Financial Accountability Civil Society Oversight; Transparent, transparent, competitive eprocurement (Slovakia) (LAC) Strengthening Public Accounts Committees of Parliament Strengthening Supreme Audit Institutions (Hungary) (Kenya, Ghana, Zambia -- AFR) Accountability, Transparency & Integrity Project (Tanzania) Participatory Budgeting, Porto Alegra (Brazil) Procurement oversight by CSOs (Philippines) Strengthening Public Accounts Committees of Parliament (India) Public Expenditure Tracking & Information Campaigns (Ghana, Madagascar, Mozambique, Peru, Senegal, Tanzania, Zambia)

PEFA Indicators: Monitoring Progress Predictability and Control in Budget Execution Transparency of taxpayer obligations and liabilities Effectiveness of measures for taxpayer registration and tax assessment Effectiveness in collection of tax payment Predictability in the availability of funds for commitment of expenditures Recording and management of cash balances, debt and guarantees Effectiveness of payroll controls Competition, value for money and controls in procurement Effectiveness of internal audit controls for non-salary expenditure Effectiveness of internal audit Credibility of the Budget P I 1 Aggregate expenditure outturn compared to original approved budget P I 2 Composition of expenditure out-turn compared to original approved budget P I 3 Aggregate revenue out-turn compared to original approved budget P I 4 Stock and monitoring of expenditure payment arrears

Increasing Competition & Reducing Discretion

Public Procurement Using ICT: Chile § All supplier companies register, indicating areas of business (e. g. , IT, construction, furniture) § Public agencies submit tenders through internet § Automatic e-mail to all companies in selected area § Online information on name, position of official in-charge § Online information on results: who participated, proposals made, scores received, who won bid, historical record of agency’s purchases and contracts Engaging CSOs: Philippines ¨ Legal foundation a mess with over 100 laws and regulations ¨ New omnibus law needed for clarity and predictability in the process ¨ New law in 2003 with determined efforts of reform minded public officials allied with strong and unified advocacy efforts of CSOs to offset entrenched vested interests ¨ For credible enforcement: requirement that all bids and awards committees must have at least one observer from a certified CSO ¨ Extensive training of CSOs now under way

Emerging Issues

Reducing corruption in high-risk countries: Priorities for action Better understanding and management of political economy of reforms Tackle governance challenges in sectors (e. g. , power, ports, extractive industries) Partnerships and new instruments to support demand-side initiatives: working with civil society, media, parliamentarians Tackling political corruption (e. g. party finance, electoral corruption, etc. ) with partners Develop operational strategies to engage with corrupt leadership in clientelist, captured states

Improving Governance Systems Matching Supply and Demand v Supply-side Strengthen capacities and organizational arrangements – leadership, skills, human resource & financial management systems – embodied in state institutions to deliver public goods and services v Demand-side Strengthen accountability arrangements that enable citizens and firms to hold state institutions and officials responsible for decisions and outcomes: State institutions --elections, political parties, parliaments, judiciaries Non-state institutions -- free press/media, civil society organizations

Creating Reform Coalitions Philippines: Procurement Reform Transparency and Accountability Network (20+ member groups) PAGBA & AGAP (w/in Gov’t) Walang Ku-Corrupt Movement (Youth) Procurement Watch: Drew other civil society groups into the advocacy efforts and coordinated the activities Local chambers of Commerce (Private sector) CBCP (Church) Philippine Contractors Association (private sector – main takeholder)

Entrenched Corruption Networks: The Case on Montesinos in Peru Judiciary Civil Society International Political Parties Legislative Branch Alberto Fujimori 1 State (Bureaucracy) Vladimiro Montesinos Media Private Sector Municipal Government Source: “Robust Web of Corruption: Peru’s Intelligence Chief Vladimiro Montesinos, ” Kennedy School of Government Case Program, Case C 14 -04 -1722. 0, based on research by Professor Luis Moreno Ocampo; Peru: Resource Dependency Network, 2000 Military

Using Communications Strategically Radio: The swath & the dagger Reaching Out Print Media: Amplifying the problem TV: Raising the ante Advertising: Creating a ‘brand name’