Presented to: Fiduciary Forum The World Bank March 24, 2008

1. The GAC Implementation Plan Implications for PFM & Fiduciary Work Presented to: Fiduciary Forum The World Bank March 24, 2008 Presented by: Sanjay Pradhan Director, PREM Public Sector Governance The World Bank

2. Governance is Core to Everything We Do • It is about health services being delivered properly • It is about teachersshowing 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 – But It is the Main Business of PFM Staff

3. GAC: 5 Key Messages for Fiduciary Forum • GAC aims to help countries build more capable and accountable states – it is about strengthening country systems • “Strengthen, rather than bypass, country systems”: GAC is not about ring-fencing, in light of DIR findings – it is about strengthening domestic capacity and accountability • Stay engaged even in most poorly governed settings – identify, mitigate and monitor risk, not avoid risk • Better national institutions are the most effective and long-term solution to mitigating fiduciary risk for all public money, including from the Bank • Helping countries improve PFM is at the core of GAC

4. GAC: Implications for PFM & Fiduciary Work Global Level Collaborate with development partners, and address transnational issues – e.g., PEFA, OECD-DAC Procurement, StAR Country Level Help improve PFM systems in countries Project Level Combat corruption in operations – assess & mitigate risk, use project interventions to strengthen country systems

5. PFM is at the Core of GAC Public Management Public financial management & procurement Administrative & Civil Service Reform Private Sector Competitive investment climate Responsible private sector Civil Society, Media & Oversight Institutions State oversight institutions (parliament, judiciary, SAI) Transparency & participation (right to information, user participation) Civil society & media Local Governance Community-driven development Local government transparency Downward accountability Governance in Sectors Transparency & participation Competition in service provision Sector-level corruption issues (EITI, forestry)

6. Improving PFM Systems: Successes & Challenges • Bank lending for PFM (project lending + DPLs) rose from $127 m per year during FY90-99 to $912 m per year during FY00-06, now 81% of lending for public sector reform • Two-thirds of all countries that borrowed for PFM show improvement in this area – IEG project ratings show a success rate of 85 percent • Some indicators of success: • Development & use of PEFA indicators in 70 countries • Better budget preparation (Mali), treasury & cash management (Guatemala) • Automated systems for financial accounting (Burkina Faso) • More effective internal audit (Kenya), SAI (Senegal) • But in most countries, PFM systems are still quite weak -- less than 50 percent of PEFA benchmarks met • Need to move from diagnosis to action & results on the ground

7. Frontier Areas for PFM & Fiduciary Work • Targeting Key Gaps in PFM Performance (PEFA) • Mapping Corruption Vulnerabilities (Value-Chain & Process Flow Analysis) • Improving PFM Systems & Mitigating Risk: • Sequencing – A Platform Approach • Strengthening Transparency & Oversight • Managing Political Economy of Reforms

8. 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.

9. Sequencing – A Platform Approach Platform 4 Integration of accountability and review processes for both finance and performance management Cambodia – Sequence of Platforms Enables more accountability for performance management Enables focus on what is done with money Platform 3 Improved linkage of priorities and service targets to budget planning and implementation Broad Activities Enables a basis for accountability Platform 2 Improved internal control and public access to key fiscal information to hold managers accountable • Full design of FMIS • Develop IT • Management • Strategy • Initial design of asset register Platform 1 A credible budget delivering a reliable and predictable resource to budget managers Broad Activities • Re-design budget cycle (e.g. MTEF) • Pilot program based budgeting & budget analysis • Further fiscal • Decentralization Broad Activities • Re-design • Budgeting • Classification system • Initial design of FMIS for core business processes • Strengthen external audit and define internal audit function Broad Activities • Integration of budget (recurrent & capital budgets) • Strengthen macro and revenue • Forecasting • Streamline spending processes 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

10. Strengthening Demand for Public Financial Accountability Strengthening Public Accounts Committees Kenya, Ghana, India Strengthening Supreme Audit Institutions Hungary Civil Society & Media Oversight Philippines, Slovakia Public Expenditure Tracking & Information CampaignsMadagascar, Peru Participative Budgeting Puerto Alegra, Brazil

11. Mapping Corruption 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

12. Estimates inconsistent w/ market prices Restricted advertisement Requirements vague, unrelated Subjective notional point system Arbitrary post-qualification Stages of the Procurement Process & Flags 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. Procurement Reforms: Increasing Competition & Transparency Engaging CSOs: Philippines E-Procurement: 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 & contracts • 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

15. 1 Entrenched Corruption Networks 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

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

17. Conclusion • GAC aims to strengthen country systems • Addresses fiduciary risk to all public money • PFM is at the core of GAC • Frontier Challenges: • Assessing PFM Performance & Corruption Risk • Mitigating Risk: Transparency, Oversight, Coalitions • Bank Staffing & Teams: • Big Push Required on Procurement Systems Reform • Integrated Teams: FM, Procurement, PREM

18. Q&A