Corruption in Bosnia and Herzegovina: Impediment to Development

1. Corruption – the development impediment in Bosnia and Herzegovina Boris Divjak, Chair of Board Transparency International BiH Sarajevo 28 October 2005

2. Analysing the causes and effects the existing situation in Bosnia and Herzegovina

3. Problems in BiH 1 Source: Transparency International BiH Corruption Perception Study 2004; sample – 1680 respondents country-wide; door-to-door interviews

4. Problems in BiH 2 Division according to professional status Source: TI BiH, 2002

5. State capture How many officials are involved in corrupt practice? Source: TIBiH, 2004

6. Corrupt institutions Source: TI BiH, 2004.

7. Experience with corruption What do you base your experience with corruption on? Source: TI-BiH Survey, 2002

8. Privatisation is unsuccessful • How do you view SoE privatisation process so far? BiH-wide responses from 2002 and 2004 • Very poor marks given to the process – over ¾ think it unsuccessful Source: TI BiH Corruption Perception Studies 2002 and 2004, sample as indicated

9. Privatisation is corrupt • Privatisation-related corruption on the rise • Over 80% of respondents dissatisfied; think it highly corrupt and do not see benefits Source: TI BiH Corruption Perception Studies 2002 and 2004, sample as indicated

10. Privatisation proceeds misused • Illegal proceeds mostly feeding SoE directors • Party-triangle: SoEs-privatisation agencies-relevant ministries • Covering up corruption by closing the triangle Who benefited privatisation most? (Source: TI BiH, 2002)

11. Politicians gain… • Appointing party members to leading posts in SoEs • Money laundering: depleting the assets and increasing liabilities, i.e. loss-making: management wins • Salaries of politicians: managers and government appointees in executive and supervisory boards • (Public) procurement, purchases etc. conducted by SoEs among the party-related individuals and firms • Subsidies for debt (negative SoE balance) – mismanagement and limitless irresponsible expenditures of SoEs • ‘Rackets’ or ‘voluntary contributions’ to politicians and ruling parties • Tax evasions on all illegal transfers

12. Citizens lose… • Taxes to cover irrational expenditures of SoE management or failure to be profit-making • Taxes to cover subsidies for loss-making • Taxes to cover salaries of the public enterprise staff salaries • Public funds (taxes) used for inefficient procurement • No revenues from privatisation, i.e. sale of state-owned capital • No fresh capital penetrating the market – no new employment generation • Private sector fails to grow – lack of foreign investment and no entrepreneurship growth

13. Other damages – institutional and structural • Administrative barriers – doing business even more complex (do not apply to SoEs) • Poor image of the country abroad and capital shifts to more successful transition economies • More corruption + ever greater centralisation of powers in the hands of a few • Quasi-social policies for external use, covering up state-owned capital theft • Macroeconomic stagnation, widespread poverty, lower living standards • Increasing external debt, unsustainable fiscal policy through enormous public spending • Weak and impotent private sector, which moves to tax evasions as the means of maintaining some market presence in competition with the state-owned sector

14. What is the CPI 2005? • Measures the degree to which corruption is perceived to exist among public officials and politicians. • Composite index, drawing on 16 different polls and surveys from 10 independent institutions carried out among business people and country analysts, including local experts.

15. CPI Objectives • To measure perceptions of public sector corruption among experienced observers (business people, academics and risks analysts). • To enhance comparative understanding of levels of corruption. • To offer a snapshot of the views of decision-makers who influence trade and investment. • To stimulate scientific research and complementary diagnostic analysis on causes and consequences of corruption, both at international and national level. • To create public awareness of corruption – and create a climate for change.

16. CPI Methodology • CPI is a rolling survey of surveys • Minimum of 3 surveys per country • Surveys cover 3 previous years • Country scores on a scale from 10 (very clean) to 0 (very corrupt) • CPI approach is that of a composite perception index combining inter alia: • Center for International Earth Science Information Network (CIESIN) na Univerzitetu Columbia • Economist Intelligence Unit • Freedom House • Institute for Management Development, Lausanne • Merchant International Group • The World Markets Research Centre • World Economic Forum, Global Competitiveness Report ...

17. CPI 2005 – Global ranks Countries perceived as being least corrupt Countries perceived as being most corrupt

18. CPI 2005 – Ranking the region Armenia Benin Bosnia andHerzegovina Gabon India Iran Mali Moldova Tanzania 88-96 position: Source: TI’s 2005 CPI

19. Proposing solutions Next steps in Bosnia and Herzegovina

20. Strengthening institutional framework • Centralising sale of state-owned capital in FBiH (single Agency) • Sale of remaining state-owned capital through stock market and/or transparent tenders for a limited number of SoEs • Prevention of conflict of interest in the interim period and removal from public office or SoE position all those with incompatible functions • Corporate governance – strengthening legal and institutional framework

21. Strengthening rule of law (Preventions and sanctions mechanisms) • Sanctioning individuals who have sold state-owned capital illegally (and not the new owners, unless they have committed a criminal act) • Full processing of the auditors’ reports and sanctions regarding illegitimate depletion of funds as well as loss of profit/revenue • Stock exchange sale as the most transparent prevention of crime in privatisation, incl. introduction of stock market standards that disable mismanagement, misuse of privileged information, position etc.

22. Education and ethics • Secondary education favouring free market principles and understanding of its mechanisms • Corporate governance courses for all stakeholders • Understanding of supreme audit and their reports by the executive and legislative, as well as some media • Broad awareness campaign on the changing structure of capital: strengths and weaknesses and relevant reforms

23. Economic policy and legal framework • Privatisation must be accompanies by a simplified administrative framework for market entry, operations and exit, i.e. investment climate • Introducing flat tax as the only means of combating tax evasions, broadening the basis and creating conditions for lowering the rate in the future incl. regional competitive edge • Control mechanisms which are not repressive, but service-oriented, according to the European standards

24. National Integrity System 1

25. National Integrity System 2 • System which resolves conflict of interest, delegating powers, limits occurrences of personal interest topping public ones • Includes: responsibility, transparency, prevention & sanctions, incl. reform of system and not individual responsibilities • Goal: corruption = high-risk and low-benefit undertaking (prevention above sanctions) • Promotion of public awareness and social values

26. Leading anti-corruption Which institution should lead the anti-corruption efforts? Source: TI BiH, 2004

27. Process so far… • Lists of legal requirements and no institutional responsibilities: deadlines, monitoring, financing? • Subsidiarity principle – the level that is most practical and most efficient operates and not the ‘politically correct’ one • Exit strategy of the international community with a greater ‘ownership’ and takeover of responsibilities • Systemic instead of ad hocsolutions – policies cannot be tailored to individual bad experiences • Interdependence of ‘pillars of integrity’ and strengthening the system simultaneously

28. Thank you! We welcome your questions Transparency International BiH www.ti-bih.org