Governance & Human Development

1. Governance & Human Development Governance & Accountability In Human Development HD Learning Week Washington, DC Danny Leipziger Vice President and Head of Network Poverty Reduction and Economic Management November 10, 2008 The World Bank

2. Six Key Messages 1 Governance is a key aspect of poverty-reduction & service delivery 2 Governance & anticorruption have come a long way: PREM  “Everybody’s Business” 3 Sector governance – including HD – is at the core of GAC: Tackling leakages, mapping vulnerabilities, mitigating risks 4 Transparency, community monitoring, accountability & expenditure tracking can improve results & service delivery 5 Public sector management (PFM, procurement, civil service reform, tax) strengthens systems for everyone’s benefit 6 The GAC Strategy: There is much we can do together

3. Public sector governance refers to the manner in which public officials and public institutions acquire and exercise the authority to provide and manage public goods and services, including the delivery of basic social services and infrastructure and a sound investment climate • Corruption is only one symptom of poor governance: others include poor quality of public services, insecure property rights and ineffectual law enforcement • Extensive research over the last 15 years shows that the quality of governance has a significant impact on growth and poverty reduction • For many of the Bank’s client countries, improving governance is crucial for sustained development

4. Revival of political economy in development • Classical economists including Adam Smith and John Stuart Mill recognized the importance of political institutions and effective government for development • But these topics were largely ignored until the 1980s, when new work in economic history and political economy (e.g. by Olson and Bates) argued that • Disruption of “sclerotic distributional coalitions” facilitates rapid growth • Lack of predictability in policy making hampers development • Organized vested interests within countries are able to facilitate a disproportional transfer of resources from unorganized to organized sectors

5. Governance is core to everything we do … • It is about health services being delivered properly • It is about teachers showing up to school • It is about the investment climate being predictable • It is about less corruption in procurement • It is about accountability in the use of public resources Governance is Everybody’s Business

6. Governance definition & framework • Governance: The manner in which the state exercises its authority for the public good, depends on interaction between: • Stakeholders – leaders, political parties, bureaucracy, parliament, judiciary, private sector, civil society, media – and their interests • Capacity – human, technical, financial – of stakeholders to perform their role • Incentives & Accountability – rules & norms that provide incentives, rewards & sanctions to act in the public interest • Outcomes of Governance Systems: Corruption, quality of service delivery, investment climate • Corruption: is an outcome of poor governance

7. Good governance is pro-poor 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 An increase in the quality of governance (measured by ICRG) by 1 point on the 50 point scale is associated with 0.33% extra income growth for the poorest quintile versus only 0.16% growth for the richest quintile(left graph below) ICRG: International Country Risk Guide

8. Governance System: Actors, Capacities & Accountabilities Citizens/Firms • Political Actors • Political competition, broad-based political parties • Transparency & regulation of party financing • Public Sector Management • Transparent budgeting & procurement • Civil service meritocracy & adequate pay • Accountability for performance in service delivery agencies • Formal Oversight Institutions • Independent judiciary • Legislative oversight • Independent oversight (SAI) • Global initiatives: UN, OECD Convention, anti-money laundering • Civil Society & Media • Free press, FOI • Civil society watchdogs Citizens/Firms Citizens/Firms • Private Sector Interface • Contracting out • Extractive Industry Transparency Initiative • Collective business associations Outcomes:Services, Investment climate, Corruption • Decentralization and Local Participation • Decentralization with downward accountability • Community Driven Development (CDD) • Oversight by parent-teacher associations & user groups Citizens/Firms

9. The Bank began work on governance over a decade ago – a long distance in a brief time GAC 1 Year Progress Report (Oct 2008) State in a Changing World (97) O.P. Mainstreaming AC in CAS (99) Strengthening WBG Engagement on GAC (March 07) Governance Pillar - CDF (98) Strategic Compact (97) Governance Strategy (00) • Diagnostic/Data/ Monitoring Tools • Public Financial Management & Procurement • Administrative & Civil Service Reform • Civil Society Voice, Transparency, & CDD • State Capture • Legal & Judicial Reform JDW “Cancer of Corruption” Speech (10/96) WDR on Institutions 1982 Anti-corruption Strategy (97) Gov/A-C Diagnostics start (98) TI CPI (5/95) Broadening &Mainstreaming The ‘Prohibition’ Era Internal AC unit created in WB (98) 1st set of firms Debarred from WB (99) Board endorses Integrity Strategy (04) GAC Launch with RBZ (Dec 07) Formalization of INT (01) 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

10. GAC: Three key issues for HD • GAC aims to help countries build more capable and accountable states – it is about strengthening country systems • Helping countries improve sector governance (education, health, extractive industries, transport) is at the core of GAC • Tackling absenteeism, leakages, patronage in HD • Strengthening public management, transparency, user participation, competition in school & health systems • In light of DIR findings, GAC is not about ring-fencing or avoiding risk, it is about: • Identifying, mitigating & monitoring risk, and • Strengthening national systems to mitigate risk for all public money, including the Bank

11. Monitoring PFM Performance: HIPC-PEFA Percent of Benchmarks Met by Indicator (2001-2006) Budget comprehensiveness, donor funds on-budget, medium-term perspective, internal audit, relatively weaker areas

12. Procurement process & ‘red flag’ areas Estimates inconsistent w/ market prices Restricted advertisement Requirements vague, unrelated Subjective notional point system Arbitrary post-qualification Procurement Planning No clear criteria for project selection Preparation Advertisement Pre-qualification Bid Evaluation Award of Contract Contract Implementation Specifications & scope of work altered

13. Bid rigging schemes & red flags • “Complementary” bidding • ‘Round robin’ • ‘Divide the pie’ • Coercion • Low balling/ “Change orders” • Bidders have same address or bid price • Wide gap between winner & all others • Winning bidder subcontracts to losers • Qualified bidders do not bid • Lowest bidder later submits substantial change orders

14. MDB Financed Rural School “SC39”, a rural school in South Asia, funded via a multi-donor project … Meanwhile, here’s the actual school some 500 fee away What was behind the wall in the “school”? … Onions!

15. Governance in Health: An illustration • Indicators of Poor Governance: • Absenteeism among health workers typically 35-40% • Patronage or purchase of public positions • Drugs & Supplies: Leakages & high costs • Funds leakage & informal payments • Implications of Governance Reforms: • Stronger internal management & accountability: supervision, transparent procurement, audits • Local control (the 1987 “Bamako” Initiative to decentralize health decision making to local levels; decentralization of health in Ceara, north-east Brazil) • Contracting out to private providers • Community voice & monitoring

16. Mapping Health Sector VulnerabilitiesAddressing Corruption in theDelivery of Essential Drugs … some ways to combat these vulnerable points … Vulnerabilities in … Production of sub-standard drugs Random inspections Manufacturing Monitoring based on transparent & uniform standards (WHO prequal list) Lengthy procedures with weak legal framework Registration Under-inclusion or over-inclusion Media coverage of drug selection committee meetings Selection “Tailor fit” drug specifications Procurement Competition & Transparency Warehouse theft Distribution Tracking systems/third party monitoring Biased prescriptions (info asymmetry between doctor/ pharmacist & patient) Prescription & Disbursement User surveys Source: J. Edgardo Campos and Sanjay Pradhan, The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, The World Bank, 2007

17. The power of transparency & monitoring: Public Expenditure Tracking Surveys (PETS) in Education Dollars in Uganda Equiv. US$ per student 3.5 Over 80% not reaching schools 3.0 Public info campaign 2.5 2.0 1.5 1.0 0.5 0.0 1990 1991 1993 1994 1995 2001 Intended grant Actual grant received by primary school (means) Source: Uganda Public Expenditure Tracking Surveys; Source: Reinikka and Svensson (2001), Reinikka and Svensson (2003a)

18. International PETS evidence: significant share of intended resources do not reach the frontline (Illustrated in prior slide) Source: World Bank (2005) PETS Review

19. Philippines Textbook Delivery Tracking: DeptED & G-Watch Alliance • Reform-minded technocrats in Department of Education requested G-Watch to track production & distribution of textbooks to schools • In 2002, 40% of textbooks disappeared The Partnership for Transparency Fund (PTF, partially funded by the Bank) supported G-Watch effort In 2006, 6,000 Boy & Girl Scouts recruited to monitor delivery at school level Coca-Cola assisted delivery in many communities Results: Successful delivery of over 95% of textbooks, saving hundreds of thousands of dollars

20. 2005 Ad The Textbook Count project: A partnership that includes 6,000 boy/girl scouts, the government, donors, civil society … delivered by Coca Cola trucks

21. Entrenched corruption networks: 1 The Case of Montesinos in Peru Judiciary Civil Society Legislative Branch International Alberto Fujimori State (Bureaucracy) Political Parties Vladimiro Montesinos Media Military Municipal Government Private Sector 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

22. Public Sector Reform is core to our business • PSR lending accounted for $2.3 billion per year from FY00-07 • Public financial management (PFM) is in more than 80% of these operations and accounts for 48% of this spending • Civil service reform is in more than half of these operations and accounts for 33% of PSR spending • Others: tax administration, justice sector, and anti-corruption Source: Public Sector Reform: What Works and Why? An IEG Evaluation of World Bank Support, The World Bank, 2008

23. Cementing the Bank as leader in Public Sector Management • Mainstream political economy into PSM AAA products and project preparation • Roll out reform ‘platforms’ in PFM and extend to civil service reform • Strengthen central finance agencies – our key interlocutor and frequent driver of reform 1. Improve results in LICs and Fragile States • Create a global excellence practice in results-based public management • Roll out peer-learning, with benchmarking 2. Target products to MICs • Improve civil service reform analytics based on internationally accepted set of actionable indicators • Continue to implement PEFA, including second round 3. Monitor for results 4. Strengthen our capacity & knowledge • Strengthen capacity and create career stream to scale up work on country procurement reform • Invest in our thinking and learn from what works and why

24. Improve results in LICs & Fragile States CAS level South Sudan: GAC for CAS diagnostic on Civil Service Reform, Decentralization, Anticorruption Sector level Bangladesh PER Bolivia: IGR on CSR & Decentralization 6 AFR & 4 EAP countries: politics around the value chain in extractive industries (including revenue collection & expenditure) Project level Mongolia, Philippines: Stakeholder Analysis on PFM, AC Mainstream PE into PSM AAA products & project preparation ‘Platforms’ Cambodia – Sequence of Platforms Platform 4 Integration of accountability & review processes for both finance & performance management Enables more accountability for performance management Platform 3 Improved linkage of priorities and service targets to budget planning and implementation Enables focus on what is done with money Platform 2 Improved internal control and public access to key fiscal information to hold managers accountable Enables a basis for account-ability First in Cambodia, a platform-type approach is being rolled out in Sierra Leone, Niger and Uganda Platform 1 A credible budget delivering a reliable and predictable resource to budget managers Source: See “Study of measures used to address weaknesses in Public Financial Management systems in the context of policy-based support,” by Peter Brooke, at www.pefa.org

25. The GAC Strategy From Country Strategies to Development Outcomes Country Strategies (CGAC) Demand Side GAC in Sectors Country Systems GAC in Projects Development Outcomes: Services, Regulations, Control of Corruption

26. Monitor for results Public Expenditure & Financial Accountability (PEFA) Continue roll-out of PEFA PFM Performance Report (PFM-PR) • The PFM-PR provides an overview of the performance of a country’s PFM system • As of November 1, PEFA’s PFMPR has been utilized in more than 100 countries, of which 61 are IDA borrowing countries • Disclosure: 42 assessments are now available on the external website (www.pefa.org) • While the majority of assessments to date have been led by the Bank, 22 other development agencies have participated

27. Fiscal leakages – definitions & impacts • Leakage Definitions • The gap between hypothetical/potential revenues and actual collections • The gap between intended and actual expenditures, e.g., for front-line service delivery units such as schools and clinics • Leakage Impacts • Less resources to meet development objectives through public expenditures and investment • Distortion of expenditure patterns • Distortionary and worsened regressive domestic revenue collection structure • Public capital stock that is lower in quality and quantity Sources of Revenue Leakages Tax Avoidance Tax Evasion Weak Policy Shadow Economy Weak Admin Capacity Corruption Policy

28. What can task managers do to improve efficiency, accountability & governance? Five illustrative areas: Adapted from the Bank’s GAC Strategy, “Strengthening World Bank Group Engagement on Governance & Anticorruption,” March 21, 2007. See: www.worldbank.org/publicsector

29. What can task managers do to improve efficiency, accountability & governance?

30. What can task managers do to improve efficiency, accountability & governance?

31. Q & A The World Bank

32. What can task managers do to improve efficiency, accountability & governance? Vulnerabilities: Identify & manage risks Build-in upstream fiduciary controls in design & implementation; strengthen transparency, oversight, participation & 3rd party monitoring (social accountability) “V Institutions: Strengthen institutional accountability to help public systems deliver Strengthen public financial management, procurement & human resource management systems, & track the use of public expenditures I Politics: Understand the underlying incentives Assess the underlying political economy aspects & drivers of decision-making esp. in the context of a particular operation P”