1 Mainstreaming Governance and Anti-Corruption in the CAS and in the Sectors: Identifying potential entry points Francesca Recanatini and Vinay Bhargava Senior Economist, PRMPS and Senior Advisor, PRMPS and EXT Course on Public Sector Governance and Anti-corruption June 4-7, 2007 The World Bank

2 Outline of presentation GAC practices in CASs: A retrospective (FY99-06) What will be done differently in CASs: Expectations under the new strategy How To Mainstream GAC in CASs: A Suggested Five Step Approach How To Mainstream GAC in Sectors: Potential entry points and On-going Initiatives

3 FY99-06: Main Findings and Conclusions Explicit discussion of GAC issues in CASs, as required under the guidelines, has become mainstream. Increasingly the discussion of GAC issues in CASs is grounded in the Bank ’ s AAA. Helping countries with governance and anticorruption has become a regular feature of the Bank ’ s assistance. About 90% CASs (FY99-06) GAC related triggers used in about 80 % of the CASs. Increasingly CASs are discussing risks from corruption to the Bank financed projects. Coordination with other donors in GAC has become a regular feature of CASs.

4 FY06 CASs: Current Practices and Areas for Improvement FY06 CASs were better than earlier years but several potential areas for improvement. DIAGNOSIS: CASs CFAA,CPAR and PER main sources. Rare to see Governance assessment/surveys as the source Relationship between GAC and growth discussed Discussion on non-government checks and balances institutions An explicit connection between diagnosis and prescription Discussion on sustainability of reforms and political economy

5 FY06 CASs: Current Practices and Areas for Improvement (2) Entry Points: Building capable and accountable states dominates Half the CASs supported demand side of governance (transparency, CSOs, private sector) Limited work at the sector level with few exceptions Assessment and Mitigations of Risks: Only half of the CASs assessed risks to Bank operations and only 30% discussed reputational risks. Majority did not assess risk of deterioration but 75% specified GAC related triggers Main mitigation strategy: Fiduciary controls and social accountability mechanisms

6 What will be done differently in CASs ? Expectations under the new GAC strategy. Explicit consideration of (based on improved diagnostics): GAC challenges and adequacy of government’s program Risks posed by GAC challenges to the development and the Bank Ways to involve private sector and accountability mechanisms Stay engaged but tailor each CAS to Country Circumstances: Weak governance but strong government GAC program Weak governance but uneven government commitment Most poorly governed settings Course corrections during the CAS implementation with the Board’s involvement. Source: guiding principles 3-6 and pages of the GAC Strategy.

Scale up governance work where it matters most for development – alleviate governance constraints to poverty reduction Moving Forward: What Will the World Bank do Differently? Systematically scale up engagement with private sector & industrialized countries – to tackle the supply side of corruption Scale up multistakeholder engagement – with civil society, media, parliaments, local communities in policy making & service delivery Work with donors & other int’l actors to ensure a harmonized approach & collective action – based on respective mandates & comparative advantage Systematically integrate governance in sectoral projects & programs – in extractive industries, infrastructure, forestry, health, education Strengthen country systems while enhancing anticorruption measures in WB operations – a/c action plans; enhanced disclosure, participation & monitoring

Governance System Actors, Capacities and Accountability Political Governance 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 Outcomes: Services, Regulations, Corruption

9 How To Mainstream GAC in CASs? A Suggested Five Step Approach 1. Take stock of GAC landscape and legacy including the constraints that GAC poses to growth and poverty reduction. 2. Formulate C-GAC strategy and entry points suitable for the country GAC challenges and government commitment. 3. Assess and mitigate risks (fiduciary and reputational) to the Bank’s proposed engagement. 4. Formulate partnership (including coalitions), consultations and communication plan. 5. Develop results framework including the M and E arrangements and GAC related triggers (as applicable).

10 Step 1: Stock taking: Objectives Determine adequacy of diagnostics (commission more?) DPR, ICA, IGR, GAC diagnostic surveys, Doing business PEFA, PER, CPAR, CFAA, ROSC, Country GAC Assessment DFID Driver of Change, TI- National Integrity Surveys, TI- Global Corruption Barometer, Global Integrity country report, OECD-DAC- MDB Joint survey, External intelligence sources Determine GAC as constraint to growth and poverty reduction Assess country circumstances faced. Weak governance but strong government GAC program Weak governance but uneven government commitment Most poorly governed country setting.

11 Step 1–Stock Taking : A check list Aggregate and disaggregate governance indicators (e.g., KKZ, CPIA, TI, Global Integrity, Doing Business, ICA, Country client survey) Political economy of GAC reforms and degrees of freedom for action GAC as constraint to growth and poverty reduction: Summary findings of diagnostics and evaluations (AAA), Government strategy and commitment—current and historical Inventory and efficacy of key check and balances institutions in the government (executive/non-executive branches) and NGOs. Key anti-corruption champions/partners (in and out of government) Legacy issues: donor assistance; media monitoring; corruption scandals On-going and recent Bank anti-corruption activities (last CAS) Relatively high risk ministries/public enterprises

12 Step 2: Formulate C-GAC strategy, entry points and assistance instruments A typical C-GAC program should include the following elements: Objectives and approach to assistance Proposed entry points Proposed mix of lending and non-lending instruments Risk assessment and mitigation Results framework and triggers

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 Step 2: Helping Countries – Various Entry Points Outcomes: Services, Regulations

14 Step 2: Involve institutions to limit corruption Judiciary Legislature Decentralization with accountability Constitutionally independent accountability institutions Anti-corruption agency Election Commission Ombudsman Supreme audit institutions Media NGOs

15 Step 2: Choosing the mix of assistance tools for an entry point Undertaking and disseminating ESW Grants for institutional capacity building WBI capacity building programs Sponsoring in-country dialogue events Fitting lending operations with anti- corruption plans Free standing lending/TA operations in support of governance improvement

Public Management Public financial management & procurement, monitored by PEFA Administrative & civil service reform Governance in Sectors Transparency & participation Competition in service provision Sector-level corruption issues (EITI, forestry) Civil Society, Media & Oversight Institutions State oversight institutions (parliament, judiciary, SAI) Transparency & participation (FOI, asset declaration, user participation & oversight) Civil society & media Local Governance Community-driven development Local government transparency Downward accountability Private Sector Competitive investment climate Responsible private sector Step 2: Helping Countries- Various ‘Entry-Points’

Different challenges for different sectors

18 The Costs of GAC Challenges at the Sector Level WHO estimates 25% of drugs consumed in poor countries are counterfeit or substandard (Health). Legal logging accounts for less than 25% of annual logging turnover in Indonesia; illegal logging turnover amounts to $5.1B (Forestry). The costs of poor governance of the Roads sector can range from 10% - 40% of sector expenditures annually. TI estimates that at least $400B is lost to corruption in public procurement, adding 20% - 25% to costs; ADB notes that, in Asia, governments have paid 20% to 100% higher for G & S than they otherwise would (Procurement).

Corruption Risk Mapping ROAD MAP Cross Cutting Functions: Process Flow Sector: Value Chain Puts focus on output of sector Puts focus on output of sector Identification of vulnerable points and inter- linkages Identification of vulnerable points and inter- linkages Formulation of practical remedial measures Formulation of practical remedial measures Development of measurable and actionable indicators Development of measurable and actionable indicators

Health Sector: Health Sector: Delivery of Essential Drugs Manufacturing Registration Procurement Distribution Selection Prescription/Disbursement “tailor fit” drug specifications under-inclusion or over-inclusion production of sub-standard drugs biased prescriptions (info asymmetry b/w doctor/pharmacist and patient) lengthy procedures with weak legal framework warehouse theft

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

Forestry Sector: The Life of a Log $2.20 Local logger: $2.20 $20.00 Local broker: $20.00 $ Foreign middle man: $ $ Foreign lumber processor: $ Exporter of sawn timber: $ $1, US trader: $1, From illegal to legal

Forestry Sector: The Life of a Log satellite monitoring local communities/ third party Tracking system: timber cut for export vs. exported lumber (value) IKEA Model: log certification International code of conduct Increase supply thru fast growing trees

Engaging the Private Sector The two faces of the private sector Competitive, productivity-focused firms thrive on a level- playing field Corrupt, rent-seeking firms thrive in the shadows How to support competitive, responsible private sector? Create sound business environments, benchmarked internationally (Doing Business Indicators) Showcase examples & evidence that ‘avoiding corruption is good for business’ (Celtel’s Mohammed Ibrahim) Support initiatives to promote business ethics and voluntary codes of conduct (ICC Code of Conduct, TI’s Business Principles, WEF PACI, UN Global Compact) – and create external verification mechanisms Build coalitions of businesses and other stakeholders for anticorruption (Indonesia Business Link, Makati Business Club, Global Integrity Alliance) Enforce global/regional laws & regulations (OECD Convention, UNCAC)

25 That is all – Thank You Very much for your attention.