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

2. The ‘Prohibition’ Era 19801990199519961997199819992000200120022003 WDR on Institutions 1982 JDW “Cancer of Corruption” Speech (10/96) State in a Changing World (97) Diagnostic/Data/ Monitoring Tools Public Financial Management and Procurement Administrative & Civil Service Reform Civil Society Voice, Transparency, & CDD State Capture Legal & Judicial Reform Broadening & Mainstreaming The World Bank has come a long way in a brief period of time TI CPI (5/95) Anti- corruption Strategy (97) Governance Strategy (00) 1st set of firms Debarred from WB (99) Formalization of INT (01) Strategic Compact (97) O.P. Mainstreaming AC in CAS (99) Governance Pillar - CDF (98) Internal AC unit created in WB (98) Gov/A-C Diagnostics start (98) 20042005 Board endorses Integrity Strategy (04) PSG Implementation Update (02) PW Bank President (05) 2006

3. Aid, Governance, and Development Outcomes

4. 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)

5. Good Governance matters for investment and growth 10% 15% 20% High MediumLow % Investment share in GDP HighMediumLow -1.5% 0% 1% 2% 1.5% -0.5% -1.0% 0.5% Income per capita Growth Rate Governance Quality Governance Quality 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

6. Corruption and Growth in Bangladesh 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 1990- 2004, would yield a per capita income about 1/3 above the current level. Source: Extrapolated based on Rahman, Aminur, et al, Estimating the Effects of Corruption: Implications for Bangladesh, PRWP #2479, World Bank, 2000

7. The direction of causality …  Burkhart and Lewis-Beck (1994) found that while higher per capita incomes foster democracy, democracy in turn does not foster higher incomes  B. Friedman (2005) argues that higher living standards encourage more open, tolerant and democratic societies Growth causes governance to improve... … and better governance causes growth  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  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 …

8. Good governance is pro-poor 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) Additional annual income growth due to an increase in the quality of governance (ICRG composite index) by 1 point Governance & Growth

9. Political Accountability Political competition, broad-based political parties Transparency & regulation of party financing Disclosure of parliamentary votes Formal Oversight Institutions Independent, effective judiciary Legislative oversight (PACs, PECs) Independent oversight institutions (SAI) Global initiatives: UN, OECD Convention, anti- money laundering Citizens/Firms Decentralization and Local Participation Decentralization with accountability Community Driven Development (CDD) Oversight by parent-teacher associations & user groups Beneficiary participation in projects 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 Effective Public Sector Management Ethical leadership Public finance management & procurement Civil service meritocracy & adequate pay Service delivery and regulatory agencies in sectors Good Governance has many dimensions Outcomes: Services, Regulations

10. Political Accountability Political competition, broad-based political parties Transparency & regulation of party financing Disclosure of parliamentary votes Formal Oversight Institutions Independent, effective judiciary Legislative oversight (PACs, PECs) Independent oversight institutions (SAI) Global initiatives: UN, OECD Convention, anti- money laundering Citizens/Firms Local Participation & Community Empowerment Decentralization with accountability Community Driven Development (CDD) Oversight by parent-teacher associations & user groups Beneficiary participation in projects 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 Effective Public Sector Management Ethical leadership Public finance management Civil service administration Sector management: Service delivery Regulation The Bank operations focus only on some Primary focus of WB operations in governance Outcomes: Services, Regulations, Corruption

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

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

13. Governance and Corruption Not the same thing! State The manner in which the State acquires and exercises its authority to provide public goods and services public Using public office for private private gain Governance Corruption 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

14. 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 Development Effectiveness Risk That corruption will undermine the impact of development efforts in general and in Bank- supported projects Corruption poses three risks

15. Corruption Administrative Corruption: Private payments and other benefits to public officials in connection with the implementation of government policy and regulations 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 Nepotism & Patronage: 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

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

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

18. 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://www1.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://www1.worldbank.org/publicsector/anticorrupt/) Improving Governance An Overall Operational Approach

19. Diagnostics: Drilling Down Diagnosing Governanceas a wholeDiagnosing Governance as a whole Assessing the incidence ofparticular forms of corruptionwhere are the most affected areas?Assessing the incidence of particular forms of corruption: where are the most affected areas? Evaluating corruption incross cutting government processese.g. procurementEvaluating corruption in cross cutting government processes, e.g. procurement Evaluating corruption at thesector levele.g. educationEvaluating corruption at the sector level, e.g. education Assessing risks at the project levelAssessing risks at the project level

20. Rule of law Political stability Voice and accountability Government effectiveness Regulatory quality Control of corruption “ Measuring ” Quality of Governance and Corruption at the Country Level ( Kaufmann-Kraay indices: )http://www.worldbank.org/wbi/governance/pubs/govmatters4.html

21. Control of Corruption: Cross country Comparisons

22. Governance Indicators: Bangladesh

23. Other Sources “ Measuring ” Quality of Governance and Corruption at the Country Level: Other Sources The Open Budget Index (http://www.openbudgetindex.org/OpenBudgetIndex2006.pdf)http://www.openbudgetindex.org/OpenBudgetIndex2006.pdf Global Integrity Index (http://www.globalintegrity.org/2004/scores.aspx?cc=id&act=s cores)http://www.globalintegrity.org/2004/scores.aspx?cc=id&act=s cores

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

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

27. The “Bribe Fee” List: Unofficial Payments by Firms in Ukraine Enterprises Type of License/Service/”Favor” Average fee required admittingneed to pay (1996)“unofficially ” Enterprise registration$17666% Each visit by fire/health inspector$4281% Tax inspector (each regular visit)$87 51% Telephone line installation$89478% Lease in state space (square ft. per month)$766% Export license/registration$12361% Import license/registration$27871% Border crossing (lump sum)$211100% Border crossing (percent of value)3%57% Domestic currency loan from bank on4%81% preferential terms (percent of value) Hard currency loan on preferential4%85% terms (percent of value) Forms of Corruption: Administrative Corruption

28. Albania Georgia Latvia 020406080 Customs inspectors Tax inspectors Natural resource licensers Judges Ordinary police Investigators/ prosecutors Local officials Ministers Public Officials Surveys: Purchasing Public Positions Percent of public officials believed to have purchased their positions 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). 48 60 41 52 41 25 43 33 39 27 32 16 25 10 40 23 5 18 24 33 32 14 21 19 Forms of Corruption: Patronage & the Market for Public Office

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

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

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

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

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

34. How can we improve governance and reduce corruption?

35. Enhancing Transparency

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

37. Freedom Of Information

38. Why isn’t this man smiling? Media Freedom

39. Strengthening Accountability

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

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

42. Note: The scores range from A (highest) to D (lowest). Shaded patterns indicate a “+” score (e.g. PI-4 is a B+). PI-19 is not scored. This Table is based on PFM Performance Indicator Table in Annex A. 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 out-turn 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

43. Increasing Competition & Reducing Discretion

44. 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  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

45. Emerging Issues

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

47. Improving Governance Systems Matching Supply and Demand  Supply-side Strengthen capacities and organizational arrangements – leadership, skills, human resource & financial management systems – embodied in state institutions to deliver public goods and services  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

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

49. Media Private Sector Municipal Government Military State (Bureaucracy) Political Parties Civil Society International Legislative Branch Judiciary 1 Entrenched Corruption Networks: The Case on Montesinos in Peru Source: “Robust Web of Corruption: Peru’s Intelligence Chief Vladimiro Montesinos,” Kennedy School of Government Case Program, Case C14-04-1722.0, based on research by Professor Luis Moreno Ocampo; Peru: Resource Dependency Network, 2000 Vladimiro Montesinos Alberto Fujimori

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