Improving Governance and Combating Corruption in the Transport

Improving Governance and Combating Corruption in the Transport Sector William D. O. Paterson Pinki Chaudhuri May 30, 2006 AC Transport chapter - zero draft

Rationale for Review of Corruption in the Transport Sector u The Economic Rationale u The Integrity Rationale – Substantial size of infrastructure budgets – Large and numerous contracts in the transport sector – easy target for corrupt capture – Resulting in unjustifiable losses of public funds through leakage – approximately 5 -40% of transport allocations are lost due to corruption – Inter-sectoral, pervasive nature of corruption: need for macroinstitutional integrity – Vulnerability of the transport sector due to higher incidence of tangible state goods such as permits, licenses, and contracts that are targets for corrupt capture – Need for a practice and knowledge base to combat corruption to facilitate work of operational teams AC Transport chapter - zero draft 2

Defining Corruption u Corruption – (1) The misuse of public funds for private gain – (2) The misuse of public funds, goods, or office for private or political gain u State Capture: Use of public office, entities, rules, laws, policies other than for their intended purpose/s. BOTH CORRUPTION AND STATE CAPTURE MUST EVIDENCE INTENT AND ACTION OTHER THAN FOR INTENDED PURPOSE AC Transport chapter - zero draft 3

Distinguishing Corruption and Governance Failure u u Governance failure vs. Corruption: Inefficiency vs. intent and action to divert state goods for illicit private gain Governance Failure vs. State Capture: Inefficiency vs. use of public office, entities, laws, rules other than for intended purpose/s ALL CORRUPTION AND STATE CAPTURE IS GOVERNANCE FAILURE, BUT NOT ALL GOVERNANCE FAILURE IS CORRUPTION. AC Transport chapter - zero draft 4

Types of corrupt Behavior Most Prevalent in the Transport Sector Bribes u Kickbacks u Collusion u Bid rigging u Fraud u – Misrepresentation of legal status or qualifications – Front companies, etc. AC Transport chapter - zero draft 5

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State Capture at National and Sector Levels National Level Sector Level • Election rigging • “Buying” of candidates by engg. Firms • Large pockets of discretionary funding • Large scale political capture of agency leadership • Manipulation of the judicial process • Sector budgetary allocation rules subverted for political purposes • Road Fund revenues not earmarked • Road Fund revenues used for political purposes AC Transport chapter - zero draft 7

Governance Failure at the Agency Level u u u u Unclear budgetary allocation rules within the sector Outdated planning methods and mechanisms, undue political influence in the selection and prioritization of projects Weak procurement mechanisms with ample scope for leakage Weak financial and project monitoring systems and protocols allowing scope for manipulation Absence and/or scarcity of information technology, communication systems and networks, causing uneven work and monitoring quality Absence of rigorous recruitment and human resource development procedures, with scope for subversion of established rules and technical requirements Inadequate audit procedures and systems Lack of explicit anti-corruption plans and awareness AC Transport chapter - zero draft 8

Administrative Corruption at the Project Level Manipulation of design and cost estimation u Deceptive, uncompetitive bid specifications u Collusions and kickbacks u Firm collusion u Change orders u False certification u Bribes for processing payments to contractors u AC Transport chapter - zero draft 9

Corruption Risk Mapping: What It Looks Like and the Forms it takes u u Political Economy Context: the broadest enabling environment Failure of Sector Governance – – Discretionary allocation of capital expenditures Political influence over recurrent expenditures Manipulating budgetary entitlement criteria Capture of State entities Ø Ø Governance failure: concentration and bundling of power and functions Macroeconomic justification for “legitimate” diversion of user charge revenues to subsidize other sectors Appropriation of funds for projects/programs with political kickbacks or purpose Outright corruption: looting of Road Funds AC Transport chapter - zero draft 10

Transport Corruption at the Project Level u Arbitrary Appointments – reward for favors, channel for corrupt actions – lack in skill, capacity or qualifications u Procurement Value Chain - Vulnerabilities – – – u u Design Specifications: tailoring to favor contractor/s Bid specifications: information asymmetry Kickbacks: corrupt quid pro quo Contractor Collusion, cartel activity Circumventing fairness rules Ex post change orders Certification of Works Payments to Contractors AC Transport chapter - zero draft 11

What Can Task teams and Governments, Donors Do About It Optimal approach: u Prevention u Detection u Deterrence u Reform of Sector, Entities, and Incentives AC Transport chapter - zero draft 12

The Operational Role of WB Projects AC Transport chapter - zero draft 13

Prevention u u Measures to make it difficult to perform corrupt acts, e. g. Procurement – – – u Computerized prequalification Standardized bid & evaluation docs Web announcements of bids, awards Open access to ads, bid docs Citizen participation in bid opening Financial management – – Accounting systems Transaction tracking Trial balance and other internal controls AC Transport chapter - zero draft 14

Detection u Red Flags: Indicators of Suspicion – Local agents with unclear roles – Bidding irregularities in favor of a few contractors – Unexplained delays – Unreasonable pre-qualification requirements – Selection of unqualified contractors / prolonged prequalification period – High bid prices, few bidders, same bidders – Apparent affiliations among bidders’ affiliated companies – Bid securities issued by same bank, serial numbers AC Transport chapter - zero draft 15

Detection – Pattern of Bid Rigging AC Transport chapter - zero draft 16

Red Flags vs. Actionable Evidence: Where is the Proof? u Real task of detection is in conducting investigations to gather evidence – Receipts, forged docs, bid analysis, technical audits u u Techniques combine legal, forensic, and accounting expertise Some recent tools and techniques – Maintenance of databases containing bid information that can be checked or searched based on queries that “trigger” incriminating information – Maintaining reporting hotlines to accept tips, information, complaints – Range of new financial investigative software applications AC Transport chapter - zero draft 17

Operational Issues for Task Teams u u u Training in detection skills INT type activity has a cost, not all complaints can be handled by expert investigations When should task teams call in the experts, when to handle in house? How to mainstream some of the investigative techniques to assess in house? Implications: resources, learning curve, training, commitment AC Transport chapter - zero draft 18

Controls and Monitoring u Accounting, Auditing u Monitoring – Internal controls & audit – Financial mgt systems – tracking systems – Audit access clauses in contracts – Technical audits – In-house monitors (can be captured) – Independent monitors at arms length more effective – Third party monitoring – an evolving concept – Third party monitoring consortium completes the enforcement task spectrum AC Transport chapter - zero draft 19

Deterrence u Sanctions u Legal and Judicial Integrity – Scope - Agency-wide, donor-specific, or international – Important to establish strict sanctions, including debarment – More important to enforce – Finally, legal and judicial environment must promote a culture of compliance – Transport teams can play a role in contributing to procurement laws and reforms by identifying sector specific issues, loop holes, remedies AC Transport chapter - zero draft 20

A-C Plan Design Options u Improving Accountability and Transparency u Business Process Improvements u Restructuring of sector entities for improved efficiency – External Monitoring - formal – Internal agency controls – External Monitoring – civil society (e. g. , Agency report cards) – Industry integrity actions – E-government – Applications to improve efficiency, monitoring, transparency and reduce human influence – Empowering human resources to manage organizational change AC Transport chapter - zero draft 21

Key New Areas of Work Needed u Measuring Integrity: – Indicators and Baseline Data to measure progress u Anti-corruption Frameworks and Plans – Teams will need to identify appropriate approach for country conditions: a strict enforcement approach; or u integrated enforcement and sector reform approach u – More analytical and operational expertise is needed to test approaches, build communities of practice in this area and share knowledge – Important for governments and donors to fund this mandate adequately at country and project levels in order to mainstream into core development practice AC Transport chapter - zero draft 22

This is a work in progress – your comments and suggestions will be very welcome to make this chapter operationally useful Thank you AC Transport chapter - zero draft 23