Draft Sourcebook pyg 6january forupload

SOURCEBOOK

Diagnostics to Assist Preparation of Governance Risk Assessments

Draft December 2008

This Sourcebook does not necessarily reflect the views and policies of the Asian Development Bank or its board of governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. Use of the term “country” does not imply any judgment by the authors or ADB as to the legal or other status of any territorial entity.

The Sourcebook will be finalized after pilot-testing. ADB would welcome any feedback from practicioners on the usefulness of the tools. Please provide comments to [email protected].

For discussion purposes only

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Acknowledgments

The Sourcebook: Diagnostics to Help Prepare Governance Risk Assessments (the Sourcebook) draws heavily from governance diagnostics that various development partners and organizations developed. It is intended to complement the Guidelines for Implementation of ADB’s Second Governance and Anticorruption Action Plan (GACAP II). The Sourcebook offers a compilation of existing governance tools and analytical frameworks to inform and help, where appropriate, the preparation of risk assessments/risk management plans required under GACAP II. Awareness of existing tools and diagnostic studies is expected to facilitate the work of staff and consultants in reviewing what could be useful for governance risk assessments and in determining analytical gaps that they still need to address. The Sourcebook covers the three priority themes of GACAP II─public financial management, public procurement, and combating corruption.

Special acknowledgment goes to the World Bank whose substantial and diverse contributions to governance diagnostics cut across the thematic spectrum of GACAP II. In particular, the value chain analysis introduced in the World Bank publication The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level (J. Edgardo Campos and Sanjay Pradhan (eds.), Poverty Reduction and Economic Management, World Bank, 2007) provides useful tools for systematically identifying corruption vulnerabilities at the sector level.

Sincere thanks go to the Public Expenditure and Financial Accountability (PEFA) Secretariat for its PEFA performance measurement tool, and the Organisation for Economic Co-operation and Development, for its procurement assessment methodology and other related governance studies. Similarly, recognition is given to Transparency International’s national integrity systems diagnostics and to the integrity development review of the Development Academy of the Philippines, which are useful in assessing existing safeguards against corruption at the national and agency levels, respectively. Other valuable contributions to the Sourcebook came from the U4 Anti-Corruption Resource Center and from authors working on similar concerns.

Sandra Nicoll, principal governance specialist of ADB, managed the preparation of the Sourcebook. Brenda M. Katon, ADB consultant, researched and identified relevant governance diagnostics; and reviewed, synthesized, and prepared the summaries in this Sourcebook.

The Sourcebook benefited from the review of various ADB staff: Kathleen Moktan, director of the Governance and Capacity Development Division; Hans van Rijn, governance specialist; and members of ADB’s Governance Community of Practice. J. Edgardo Campos of the World Bank also provided feedback. These valuable contributions are gratefully acknowledged.


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Table of Contents

SECTION 1

Overview of Diagnostic Tools 4

SECTION 2

Public Financial Management 12

SECTION 3

Public Procurement 30

SECTION 4

Combating Corruption

57


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SECTION 1 – OVERVIEW OF DIAGNOSTIC TOOLS


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BACKGROUND 1. The Guidelines for Implementing ADB’s Second Governance and Anticorruption Action Plan (GACAP II) were approved in May 2008. The Guidelines describe the process for implementing GACAP II, and the requirement in the Country Partnership Strategy (CPS) Guidelines1 that CPSs are informed by risk assessments (RAs) and risk management plans (RMPs) for national/subnational government systems in which ADB is engaged, and priority sectors for ADB operations. 2. The Sourcebook: Diagnostics to Help Prepare Governance Risk Assessments (the Sourcebook) has three objectives. It aims to (i) complement the GACAP II Guidelines by offering a compilation of diagnostic tools and analytical frameworks to inform and assist, where appropriate, the preparation of RAs and RMPs required under GACAP II; (ii) present summaries of existing tools for assessing governance systems at various levels to provide a quick overview of these tools and frameworks; and (iii) heighten awareness of available diagnostic studies that could serve as inputs to staff and consultants in making professional judgments of what could usefully inform a risk assessment. Gaps in available analysis can be determined and subsequently addressed when undertaking RAs/RMPs. The Sourcebook is not intended to provide definitive guidelines for conducting RAs/RMPs. Such guidance can be found in the GACAP II Guidelines.2 3. The Sourcebook focuses on the three governance thematic priorities under GACAP II: (i) public financial management (PFM), (ii) public procurement, and (iii) combating corruption through preventive, enforcement, and investigative measures.3 These themes apply to national/subnational levels of government and to ADB priority sectors in developing member countries. The Sourcebook provides information on (i) existing diagnostic studies by development partners, and (ii) analytical frameworks for undertaking risk assessments.

TYPES OF ASSESSMENTS

4. Governance diagnostics are systematic activities to collect data, evidence, and perceptions. They provide information to both government and development partners on (i) the strengths and weaknesses of governance systems, (ii) the risks to which funds channeled through these systems may be exposed, (iii) possible directions and priorities for improving governance systems, and (iv) key issues for dialogue with the government and other stakeholders. 5. Broadly, diagnostic assessments may fall into self-assessment and external assessment. Self-assessment entails a reflective and systematic review by a country/sector/agency of its own governance systems and processes. This type of assessment normally has checklists and indicators to make measurement consistent and comparable. It has a potential for building local capacity by investing in and drawing on local know-how, and for fostering ownership.4 It is also strategic in terms of taking steps to move from a diagnostic 1 ADB. 2007. Country Partnership Strategy Guidelines. Manila.

Available: www.adb.org/documents/Guidelines/CPS-guidelines.pdf 2 ADB. 2008. Guidelines for Implementing ADB’s Second Governance and Anticorruption Action Plan (GACAP II).

Manila. Available: www.adb.org/Documents/Guidelines/GACAP-II-Guidelines.pdf 3 ADB. Second Governance and Anticorruption Action Plan. Manila.

Available: www.adb.org/Documents/Policies/Governance/GACAP-II.pdf 4 Rakner, Lise, and Vibeke Wang. 2007. Governance Assessments and the Paris Declaration. Paper presented

during the United Nations Development Programme seminar in Bergen. September. Available: www.undp.org/oslocentre/docs07/BergenSeminar.pdf


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assessment to the design and implementation of appropriate strategies and programs. Self-assessments, however, may have a potential for bias and may be constrained by insufficient diagnostic capacity. A validation process involving external assessors could contribute to credibility and transparency, and to an agreement on assigned scores and priorities.5 External assessments generally tend to offer greater room for objectivity and analytical rigor. Dialogue between an assessment team and a recipient government provides opportunities for ministries and agencies to communicate, uncover sources of difficulties, and begin working together. Triggering this internal dialogue is an important output of external assessments. 6. Multiple tools are valuable in diagnosis because they uncover different perspectives. The diagnostic exercise can be carried out in a phased manner: (i) analyze broad trends through existing indicators, (ii) identify areas of vulnerability and assess risks, and (iii) prioritize activities in particular sectors or levels of government.

METHODOLOGIES FOR GOVERNANCE DIAGNOSTIC 7. Surveys and interviews may be conducted for both external assessments and self-assessments. Surveys are used in generating sector/subsector diagnosis, as seen in public expenditure tracking surveys, quantitative service delivery surveys, report cards, and investment climate surveys. In the integrity development review, surveys are used to obtain feedback on safeguards against corruption, along with interviews/focus group discussions to assess integrity development. Triangulated diagnostics that involve various key informants (citizens, firms, public officials, etc.) offer multidimensional perspectives and facilitate validation of assessment findings. 8. Aggregate analysis supports a big picture perspective (country and cross-country). It covers the World Bank's worldwide governance indicators, which consist of (i) voice and accountability, (ii) political stability and absence of violence, (iii) government effectiveness, (iv) regulatory quality, (v) rule of law, and (vi) control of corruption.6 It also includes the corruption perceptions index and global corruption barometer of the Transparency International (www.transparency.org), and the global integrity report of the Global Integrity (www.globalintegrity.org). The high level of aggregation of the indices tends to make assessment rather abstract. Nevertheless, the data can serve as a first cut on areas where further analysis is required. Also useful is country profiling that brings together available findings from various diagnostics (www.business-anti-corruption.com/normal.asp?pageid=6).

PUBLIC FINANCIAL MANAGEMENT DIAGNOSTICS 9. Table 1 presents the key strengths and limitations of PFM diagnostic tools described in Section 2: (i) Country Financial Accountability Assessment (CFAA); (ii) Public Expenditure and Financial Accountability (PEFA) Performance Measurement; and (iii) Framework for Assessing and Tracking Corruption Vulnerabilities in Public Financial Management.

5 Public Expenditure and Financial Accountability Working Group. 2005. Supporting Better Country Public Financial

Management Systems. Washington, DC. Available: www.pefa.org 6 Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2008. Governance Matters VII. Washington, DC: World

Bank Institute. Available: www.worldbank.org/wbi/governance


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Table 1: Diagnostic Tools in Public Financial Management

Diagnostic Tool Key Features Country Financial Accountability Assessment or CFAA (World Bank)

• Designed to provide information about the financial management environment in which funds may be disbursed

• Assesses risks to the achievement of a country’s development objectives posed by gaps or weaknesses in public financial management (PFM) arrangements

• Covers (i) budget formulation, (ii) budget execution, (iii) reporting and auditing, and (iv) external scrutiny of public finances

• Provides recommendations and action plans • Informs the design and implementation of a capacity development program • Does not examine the risk that funds will not be well spent; not an audit that

tracks spending • Does not assess the level of sovereign risk (the risk that donor funds might not

be repaid at all or might not be repaid on time)

Public Expenditure and Financial Accountability Performance Measurement (PEFA)

• Looks into six core dimensions: (i) credibility of the budget; (ii) comprehensiveness and transparency; (iii) policy-based budgeting; (iv) predictability and control in budget execution; (v) accounting, recording, and reporting; and (vi) external scrutiny and audit

• Uses information from fiscal and expenditure policy analysis to assess the extent to which the PFM system constitutes an enabling factor for achieving planned budgetary outcomes, such as (i) aggregate fiscal discipline, (ii) strategic resource allocation, and (iii) efficient service delivery

• Primarily a statement of current performance with indicators (benchmarking) • Does not include action plans • Its set of indicators, however, could provide a common platform for dialogue

between government and development partners regarding the current PFM performance, recent progress, and development of an action plan

• The government may carry out an initial self-assessment, development partners and the government may undertake the process jointly, or the government may just provide information

• Does not assess fiduciary risk (e.g., funds are not used for their intended purposes). However, it can be an input to a separate fiduciary risk assessment.

Framework for Assessing and Tracking Corruption Vulnerabilities in Public Financial Management (World Bank)

• Uses a value chain methodology to understanding corruption in PFM, mainly by assessing and tracking vulnerabilities along the chain of budget formulation, budget execution, budget accounting and reporting, and external audit and oversight

• Identifies early warning signals and potential anticorruption strategies • Updating is needed over time, with due regard for changing conditions and new

opportunities for corruption PEFA = public expenditure and financial accountability Sources: (i) World Bank. 2003. Country Financial Accountability Assessment Guidelines to Staff. Washington, DC. Available:

www.countryanalyticwork.net/caw/cawdoclib.nsf/0/FF135D16EB395D6985256D39006C9483/$file/CFAAGuidelines2003.pdf

(ii) Public Expenditure and Financial Accountability Program. 2005. Public Financial Management Performance Measurement Framework. Washington, DC. Available: www.pefa.org

(iii) Allen, Richard, Salvatore Schiavo-Campo, and Thomas Columkill Garrity. 2004. Assessing and Reforming Public Financial Management. Washington, DC: The World Bank. Available: http://go.worldbank.org/T7WH97YN00

(iv) Dorotinsky, William, and Shilpa Pradhan. 2007. Exploring Corruption in Public Financial Management. In The Many Faces of Corruption, edited by J. Edgardo Campos and Sandjay Pradhan. Washington, DC: The World Bank.


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PUBLIC PROCUREMENT DIAGNOSTICS 10. Table 2 presents key features of diagnostic tools for public procurement described in Section 3: (i) Benchmarking and Assessment Methodology for Public Procurement Systems, (ii) Country Procurement Assessment Report (CPAR), (iii) Procurement Capacity Assessment, and (iv) Framework for Assessing and Tracking Corruption Vulnerabilities in Public Procurement.

Table 2: Diagnostic Tools in Public Procurement

Diagnostic Tool Key Features Benchmarking and Assessment Methodology for Public Procurement Systems (OECD-DAC)

• Examines the legislative and regulatory framework, institutional framework and management capacity, procurement operations and market practices, and integrity of the public procurement system, mainly through baseline indicators

• Enables a country to conduct a self-assessment of its procurement system • Its baseline indicators provide a snapshot comparison of the actual system

against the international standards that these indicators represent. • Its compliance/performance indicators deal with how the system actually

operates in practice. • The benchmark assessment is not a substitute for a fiduciary assessment

by a development partner. It does not deliver a procurement risk assessment but can provide analytical inputs to the assessment.

• The indicators alone do not provide a full picture of an inherently complex procurement system

• A full update is needed whenever major changes in the legislation or other substantive elements of the system change

Note: OECD/DAC posts procurement assessment reports on its website at www.oecd.org/dac/effectiveness/procurement. See field testing reports.

Country Procurement Assessment Report (World Bank)

• Provides a comprehensive analysis of a country's procurement system • Assesses national and subnational procurement laws, regulations, and

procedures • Assesses institutional, organizational, and other risks associated with

procurement • Develops a prioritized action plan for institutional improvements • Assesses the participation of the domestic private sector in public

procurement and commercial practices related to procurement

Note: The World Bank discloses country procurement assessment reports, unless the government objects. See country reports at http://go.worldbank.org/6DTBF70FA0

Procurement Capacity Assessment (ADB)

• Reviews risks arising from the general procurement environment • Assesses the procurement capacity of the executing agency • Identifies the strengths and weaknesses of the executing agency and

recommends measures to address identified constraints Framework for Assessing and Tracking Corruption Vulnerabilities in Public Procurement (World Bank)

• Identifies common corruption schemes in public procurement (kickbacks, bid rigging, use of front companies, and misrepresentation)

• Applies the value chain methodology to assessing corruption in procurement along the process chain of project design and procurement planning, advertising, prequalification and bid submission, bid evaluation and award of contract, and contract implementation

• Offers potential actions to reduce corruption risks, which focus on the supply side and demand side of corruption in procurement.


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ADB = Asian Development Bank, OECD–DAC = Organisation for Economic Co-operation and Development –Development Assistance Committee Sources: (i) Organisation for Economic Co-operation and Development. 2006. Methodology for Assessment of National

Procurement Systems. Version 4. Paris. Available: www.oecd.org/dataoecd/1/36/37130136.pdf (ii) OECD/DAC. 2007. Pilot Exercise Progress Reports. Paris. Available: www.oecd.org/dac/effectiveness/procurement (iii) World Bank. 2002. Country Procurement Assessment Report. Washington, DC. Available:

www.countryanalyticwork.net/caw/cawdoclib.nsf/vewMainProductToolkits/0F42E09A92F63AAD85256C5E005EB0EA/$file/preparation+of+CPAR.pdf and http://go.worldbank.org/RZ7CHIRF60

(iv) ADB. 2007. Procurement Capacity Assessment: Executing Agency. Manila. Available: http://mms.adb.org/test/capacity-assessment-guide.pdf (v) Ware, Glenn, Shaun Moss, J. Edgardo Campos, and Gregory Noone. 2007. Corruption in Public Procurement: A

Perennial Challenge. In The Many Faces of Corruption, edited by J. Edgardo Campos and Sandjay Pradhan. Washington, DC: The World Bank.

ANTICORRUPTION DIAGNOSTICS

11. Tools diagnosing vulnerability to corruption may fall broadly into (i) integrity-related assessment, (ii) broad-based analysis, and (iii) value chain analysis.7 Integrity system assessment unlocks a form of diagnosis that provides an understanding of the underlying causes, loopholes, and incentives that feed corrupt practices. Broad-based analysis provides an extensive picture of areas susceptible to corruption. For example, in post-conflict countries, these areas could include reconstruction; procurement; legislation, regulation, and enforcement; and service delivery. In terms of sector diagnosis, it could make use of experiential surveys such as report cards for public service delivery and investment climate surveys involving the private sector; and perception-based surveys (public expenditure tracking in health and in education), among other methods. The value chain analysis identifies specific vulnerabilities in the sector/subsector along the process of translating inputs into outputs. It suggests where vulnerabilities might occur, and offers a menu of potential anticorruption strategies and measures. Table 3 summarizes the key features of these tools; detailed summaries can be found in Section 4.

Table 3: Diagnostic Tools in Anticorruption

Diagnostic Tool

Key Features

Integrity System Assessment

(i) National Integrity System Country Study (Transparency International)

• Considers the whole system, instead of separate institutions, rules and practices, and stand-alone programs

• Provides an understanding of how well the overall system works in practice, a benchmark for further developments, and a basis for cross-country comparisons Note: Completed national integrity system country studies are posted on the web. See the Transparency International’s website at www.transparency.org/policy_research/nis/regional.

(ii) Integrity Development

• Focuses on one agency at a time • Diagnoses the corruption resistance mechanisms in place in an agency and

7 These classifications are used for purposes of the tools included in this volume and are not meant to be rigid.


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Diagnostic Tool

Key Features

Review (Development Academy of the Philippines)

assesses its vulnerabilities to corruption • Provides a corruption prevention and integrity enhancement plan • Multi-method approach • Detailed checklists • Top management support and commitment of the agency are vital

Country Self-Assessment/Stock-taking: Anticorruption (ADB/OECD)

• Provides a comprehensive overview of the country’s existing legal and institutional framework to enhance transparency in the public sector, combat bribery and promote integrity in business operations, and facilitate public involvement in anticorruption efforts

• Helps identify emerging trends and remaining challenges to combating corruption

Note: Completed country reports are posted on the web. See www.oecd.org/corruption/asiapacific.

Value Chain Methodology (World Bank)

• Focuses on results that a sector or process seeks to achieve • Provides a structured picture of vulnerable decision points • Points to key vulnerabilities and remedial measures that could mitigate

corruption risks • Offers a mechanism for developing warning signals/indicators for tracking

the incidence of corruption • Adaptable to various sector/subsector situations • Changes in institutional actors and sector structures can give rise to new

corruption opportunities and risks; initial findings need to be revisited and updated.

ADB = Asian Development Bank, OECD = Organisation for Economic Co-operation and Development. Sources: (i) Transparency International. Various years. National Integrity Systems Country Studies. Berlin.

Available: www.transparency.org/policy_research/nis/regional (ii) Pope, Jeremy. 2000. Confronting Corruption: The Elements of a National Integrity System. Berlin: Transparency

International. Available: www.transparency.org/policy_research/nis (iii) Development Academy of the Philippines. 2007. Pursuing Reforms through Integrity Development. Manila. (iv) ADB/OECD Anti-Corruption Initiative for Asia and the Pacific. 2003. Action Plan Stocktaking Exercise. (v) Campos, J. Edgardo, and Sanjay Pradhan (eds.). 2007. The Many Faces of Corruption: Tracking Vulnerabilities at

the Sector Level. Washington, DC: The World Bank. (vi) U4 Anti-Corruption Resource Center. Various sector and thematic assessments. Bergen. Available:

www.u4.no/themes 12. As shown in Table 4, the value chain methodology has a number of applications that can fit specific situations.

Table 4: Various Applications of the Value Chain Methodology

Application

Examples of Areas that can be Mapped for Corruption Vulnerabilities

(i) Sector/subsector context: sequential stages

• Electricity sector: generation, transmission, and distribution • Pharmaceuticals as a subset of the health sector: manufacturing,

registration, drug selection, procurement, distribution, and prescription and dispensing

(ii) Levels of operation within • Transport sector: national, sector, agency, and project/transaction


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Application

Examples of Areas that can be Mapped for Corruption Vulnerabilities

a sector

levels • Education: policy makers, providers, and beneficiaries

(iii) Interactions in a sector

• Water supply and sanitation sector: (i) public-to-public interactions (policy making and regulation, planning and budgeting, donor financing, fiscal transfer, and management and program design); (ii) public-to-private interactions (tendering and procurement, construction, and operations and maintenance); and (iii) public-to-consumer interactions (construction, operations and maintenance, and payment systems)

(iv) Project cycle context

• Hydropower project: options selection, planning, contracting/bid and evaluation; construction and implementation; and operation and rehabilitation

(v) Process flow

• Public financial management: budget formulation, budget execution, budget accounting and reporting, and external audit and oversight

• Public procurement: design and procurement planning, advertising, prequalification and bid submission, bid evaluation and award of contract, and contract implementation

Source: Extracted from various papers on the value chain analysis.

STRUCTURE OF THE SOURCEBOOK

13. The following sections of this Sourcebook present concise summaries and analytical frameworks of diagnostic tools for assisting and informing preparation of RAs and RMPs as required under GACAP II. The sections are structured following ADB’s three governance thematic priorities: (i) public financial management (Section 2); (ii) public procurement (Section 3); and (iii) combating corruption (Section 4). Relevant sector diagnostics are incorporated in the relevant thematic sections.


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SECTION 2

PUBLIC FINANCIAL MANAGEMENT

Country Financial Accountability Assessment Methodology

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Public Expenditure and Financial Accountability Performance Measurement

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Framework for Assessing and Tracking Corruption Vulnerabilities in Public Financial Management

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COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT METHODOLOGY

A. Background

1. The World Bank’s country financial accountability assessment (CFAA) is a diagnostic tool designed to enhance knowledge of a country’s public financial management (PFM) and accountability arrangements. The CFAA (i) provides information on the state and performance of PFM systems; (ii) assesses risks to the achievement of a country’s development objectives posed by gaps or weaknesses in PFM arrangements; (iii) pinpoints priorities for action; and (iv) informs the design and implementation of capacity building programs.1 B. Scope and Methodology

2. The CFAA addresses the overall quality of a country’s PFM, covering budget development, budget execution and monitoring, reporting and auditing, and external scrutiny of public finances. Government ownership and leadership of the CFAA process, along with open and transparent processes, are vital to ensure that the product is responsive to the country’s development priorities and is positioned in a broader governance context. With the move toward greater use of country PFM systems rather than separate “ring-fenced” systems, the CFAA will increasingly support loan portfolio management and inform decisions on the scope and depth of financial management assessments of implementing entities for individual projects, financial reporting and auditing requirements for the portfolio, and approaches to the supervision of financial aspects of the portfolio. 3. The scope of work to be carried out in each CFAA is determined by the knowledge required. This, in turn, depends on (i) the availability of relevant information on PFM, (ii) the planned resource transfer pattern (including lending volumes, instruments to be used, and the sector and institutional focus of the program), (iii) the views of the government, and (iv) agreements reached with development partners. The scope and level of coverage of the CFAA considers the country’s size, stage of development, and relationship with development partners. 4. Risk Assessment. The CFAA incorporates an assessment of risks to funds that are managed through the PFM system. In particular, the key aspects of risks that are analyzed include (i) non-spending of funds for the purposes set out in the budget, which could indicate unrealistic budgets, inadequate internal controls to allocate funds and adhere to budget limits, and lack of commitment to fiscal discipline; (ii) noncoverage by the budget of significant government activities, which could indicate a risk that budget support from the donor might be diverted to off-budget activities for which there is little transparency; (iii) insufficiency of reliable and timely information on budget execution; and (iv) inconsistency between practices and rules. The risk assessment in the CFAA informs the overall assessment of fiduciary risk to donor funds. 5. CFAA Process. The key steps in the CFAA process are summarized in the subsequent figure.

1 World Bank. 2003. Country Financial Accountability Assessment Guidelines to Staff. Washington, DC. Available:

www.countryanalyticwork.net/caw/cawdoclib.nsf/0/FF135D16EB395D6985256D39006C9483/$file/CFAAGuidelines2003.pdf


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CFAA = country financial accountability assessment, CPAR = country procurement assessment report, PER = public expenditure review, PFM = public financial management. Adapted from the World Bank. 2003. Country Financial Accountability Assessment Guidelines to Staff. Washington, DC. Available: www.countryanalyticwork.net/caw/cawdoclib.nsf/0/FF135D16EB395D6985256D39006C9483/$file/CFAAGuidelines2003.pdf 6. The CFAA includes empirical evidence of what is happening versus what the institutional rules stipulate. Discussions with spending ministries, central agencies, decentralized spending entities, nongovernment organizations, and business groups are helpful in providing information on the operation of the country’s PFM system. 7. After the review, the CFAA team shares the report with country authorities and participating partners, and encourages the government to conduct discussions on the draft report with various stakeholders, including external parties. The team considers these comments carefully, makes appropriate changes to the report, and incorporates an overall government response as a section in the CFAA report, if necessary. This may not be necessary if the government is a full partner in the CFAA and has accepted its conclusions and

Fig. 1: Country Financial Accountability Assessment Process

• Draft the CFAA findings. Discuss with the Government and other partners.

• Prepare an action plan, if appropriate, in consultation with the government.

• Conduct a peer review of the CFAA. • Agree on report disclosure arrangements.

• Existing country reports, country portfolio reviews, governance reviews, policy reviews, CFAA, CPAR, PER, corruption surveys, and other diagnostic studies

• Project financial management assessments and project performance evaluation reports

• International Monetary Fund reports on PFM and fiscal transparency

• Government budget documents and financial statements

• Other related documents from international organizations, development partners, and nongovernment organizations

• Conduct a review of existing and planned diagnostic studies on the country.

• Identify the scope of the financial accountability assessment, timing, and data collection methods.

• Coordinate assessment plans with the government and interested development partners.

• Deploy an initial planning mission. Consider a workshop to explain the CFAA purpose and request country participation.

• Work with government counterparts.

Description

PossibleInformation Sources

Key Steps

• Obtain empirical evidence for the CFAA. • Interact with various groups. • Process and analyze information. • Identify risks to the use of public resources and formulate risk mitigation measures.

• Implement and monitor the action plan.

Follow up the action plan.

Prepare the assessment report.

Identify the issues and assess the situation.

Plan for the assessment.


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recommendations. The government is given an opportunity to reflect in its comments any disagreement between the CFAA team and the government. The team discusses and agrees on disclosure arrangements with the government.2 The CFAAs are not disclosed without the government’s agreement. The country may request that the risk assessment not be made public, or the country director may advise that such disclosure is not appropriate. In such cases, the CFAA team prepares the risk assessment as a separate document. 8. The CFAA action plan focuses on key issues and desired outcomes that are tailored to the country’s needs, and considers existing reform programs agreed among the country and development partners. Recommendations are prioritized and their impact clearly linked to an improved PFM. They may also be classified into short, medium, and long term. The action plan estimates any requirements for technical assistance, capacity development, and financial support. In principle, the government is responsible for coordinating action plans and follow-up work, but a development partner may sometimes need to initiate this action. C. Examples of Risks from PFM

9. Table 1 presents illustrative risks to help the reader understand potential risks from PFM systems. These risks, along with the proposed actions, were drawn from completed CFAA reports of the World Bank. The proposed actions were tailored to country-specific conditions.

Table 1: Examples of Risks and Proposed Actions

Risks Proposed Actions Time Frame for Action

Unpredictable budget execution is likely to severely limit financial accountability.

Implement the accountable financial management framework agreed with the International Monetary Fund to meet essential fiscal transparency standards.

Short to medium term

Administrative and financial weaknesses of the Office of the Auditor General are likely to impede effective scrutiny of public funds.

Provide adequate autonomy and resources. Formulate and implement an institutional development plan for strengthening the Office of the Auditor General, including an external audit work program, risk-based audit practices, organizational structure, and human resources strategy.

Short to medium term

Legislative oversight has been fairly effective but long breaks in the accountability cycle could lead to accumulation of backlog of pending audit reports and undermine the accountability chain.

Build awareness, information sharing, and technical capacity of the review committees in the legislature to improve scrutiny. Amend relevant practices to clear backlogs and allow greater access to the findings of the Public Accounts Committee (PAC). Improve PAC oversight by legislative debate and formal government response on its reports.

Short term

2 The CFAAs appear on the country analytic work website hosted by the World Bank as part of the harmonization

agenda development, subject to government permission on access by different users. Available: www.countryanalyticwork.net


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Weak internal controls could lead to diversion of project funds to unauthorized or unintended uses.

Develop selection criteria and parameters for selection of project managers/coordinators based on technical and managerial competence.

Short term

Enforce a policy about the placement of accounts staff in development projects (e.g., only competent and properly trained staff are placed in development projects; transfers will not be made on an ad hoc basis; and proper hand over and continuity will be assured).

Short term

Harmonize the country’s reporting system to one reporting system that satisfies the requirements of the government and development partners.

Medium term

Source: World Bank. Various years and countries. Country Financial Accountability Assessment. Washington, DC. Available: www.countryanalyticwork.net/ D. Remarks on the CFAA

10. The CFAA is a diagnostic tool for PFM and accountability. It does not provide a pass/fail assessment of a country’s PFM system or define minimum standards for system capabilities and performance. Its main concern is whether or not donor funds are spent on authorized/intended purposes, as expressed in the country’s budget. Moreover, it does not examine developmental risk—the risk that donor funds, as part of the budget flowing through the country’s PFM system, will not be well spent. It does not aim to assess the quality of public spending and the level of financial or sovereign risk (e.g., the risk that donor funds might not be repaid at all or might not be repaid on time). 11. The CFAA typically focuses on national governments. However, it may evaluate the PFM systems of a subnational government that receives direct lending or manages a substantial portion of public expenditures from the national budget. Whether the CFAA can evaluate PFM at the subnational level depends not only on the availability of adequate time and resources but also on the size and capacity of subnational governments. Some subnational governments may have adequate capacity to provide the necessary information on PFM systems and actual revenues and expenditures. Others may lack that capacity. 12. In some countries, nongovernmental organizations (NGOs) may carry out service delivery, and may receive substantial transfers from the national budget. A CFAA is unlikely to be able to analyze the PFM systems of numerous small NGOs. However, where the flow of budget funds to NGOs is significant, the CFAA at a minimum indicates the type and scale of NGO activity. In some cases, it may be possible to obtain some assessment of the quality of NGO financial management through reviews of donor projects involving particular NGOs. 13. In some countries, public enterprises may have a significant impact on the national budget, either through cash subsidies or capital injections received from the budget, or in certain cases, dividends paid to the budget from profitable operations. At a minimum, the CFAA describes the size of the public enterprise sector, its relationship with the national budget, and the general arrangements for government oversight of public enterprise finances. Where public enterprises are significant, the CFAA reviews the extent to which the PFM system provides for performance accountability and transparency. Where guarantees of private enterprise debt may pose a significant fiscal risk, the CFAA discusses them in the risk section.


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PUBLIC EXPENDITURE AND FINANCIAL ACCOUNTABILITY PERFORMANCE MEASUREMENT

A. Background

1. This diagnostic tool assesses the performance of public financial management (PFM) systems, processes, and institutions over time. It was developed by the public expenditure and financial accountability (PEFA) partners,1 in collaboration with the Organisation for Economic Co-operation and Development/Development Assistance Committee (OECD/DAC) Joint Venture on PFM. The main objective is to provide an objective, internationally comparable framework for assessing a country’s PFM system. Information on the PFM weaknesses, in turn, facilitates identification of risks arising from these weaknesses. 2. The PEFA framework, which became operational in 2005, was a response to a number of problems associated with earlier PFM diagnostic tools. These pertained to (i) transactions costs, where many diagnostic instruments placed considerable burden on country governments; (ii) the need for standardizing the assessment of PFM systems, mainly because earlier tools were developed for different purposes and were being applied in different ways; (iii) increasing the coverage of PFM assessments; and (iv) weak government ownership, particularly when PFM assessments were conducted with limited government involvement.2 B. Scope and Methodology 3. The PEFA performance measurement framework focuses on six core dimensions: (i) budget credibility, (ii) comprehensiveness and transparency, (iii) policy-based budgeting, (iv) predictability and control in budget execution, (v) accounting, recording, and reporting, and (vi) external scrutiny and audit (see subsequent Figure). 4. Measuring the performance of these core dimensions involves 31 high-level PFM indicators that focus on the central government, including the related oversight institutions (see Table 1). Operations of other levels of general government and of public enterprises are considered in the performance indicator (PI) set only to the extent they impact the performance of the national PFM system and its linkages to national fiscal policy (refer to PI-8, PI-9, and PI-23). The PIs fall under four categories: (i) PFM system out-turns, which capture the immediate results of the PFM system in terms of actual expenditures and revenues by comparing them to the original approved budget, as well as level of and changes in expenditure arrears; (ii) crosscutting features, which highlight the comprehensiveness and transparency of the PFM system across the entire budget cycle; (iii) budget cycle, which focuses on the performance of the key systems, processes, and institutions within the budget cycle of the central government; and (iv) donor practices, which account for elements of donor practices that impact the performance of the country’s PFM system.3 1 The PEFA is a multi-agency partnership program sponsored by the World Bank, the European Commission, the

International Monetary Fund, the United Kingdom’s Department for International Development, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the Swiss State Secretariat for Economic Affairs, and the Strategic Partnership with Africa.

2 Allen, Richard, Salvatore Schiavo-Campo, and Thomas Columkill Garrity. 2004. Assessing and Reforming Public Financial Management: A New Approach. Washington, DC: The World Bank. Available: http://go.worldbank.org/T7WH97YN00

3 In March 2008, the PEFA secretariat came out with draft guidelines for application of the PEFA performance measurement framework at subnational government level, mainly to ensure appropriate and consistent application of the indicators and a sound basis for interpreting the findings. This draft is available at www.pefa.org.


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Source: PEFA. 2005. Public Financial Management Performance Measurement Framework. Washington, DC. Available: www.pefa.org 5. Each indicator seeks to measure performance of a key PFM element against a scale of A to D, where the highest possible score of A implies that the core element meets the relevant objective.4 The indicators focus mainly on the basic qualities of a PFM system, based on existing good international practices. The discussion of each of the indicators distinguishes 4 For details on the scoring system, please refer to PEFA. 2005. Public Financial Management Performance

Measurement Framework. Washington, DC. Available: www.pefa.org

Framework for Public Financial Management Performance Measurement

Extent to which the existing PFM system supports the achievement of aggregate fiscal discipline, strategic resource allocation, and efficient service delivery

Type of Assessment Provided by the Performance Measurement Framework

Analytical Features

Extent to which PFM systems, processes, and institutions meet the core dimensions of PFM performance

Measurement of the operational performance of the key elements of the PFM system

PFM (public financial management) system support for budgetary outcomes • Aggregate fiscal discipline • Strategic resource allocation • Efficient service delivery

Core dimensions of an open and orderly PFM system • Credibility of the budget • Comprehensiveness and transparency

• Policy-based budgeting • Predictability and control in budget execution

• Accounting, recording, and reporting

• External scrutiny and audit

Indicator-led analysis of the core dimensions of PFM performance


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between the assessment of the present situation (the indicator-led analysis) and a description of the reform measures being introduced to address the identified weaknesses. This is to avoid confusion between what the situation is and what is happening in terms of reforms.

Table 1: Indicator Set for Public Financial Management Performance

Performance Indicator (PI)

Number Indicator Remarks/Description

A. PUBLIC FINANCIAL MANAGEMENT (PFM) OUT-TURNS: Credibility of the Budget

PI-1 Aggregate expenditure out-turn compared to original approved budget

The implementation of the budgeted expenditure is important in supporting the delivery of public services for the year, as expressed in policy statements, output commitments, and work plans.

PI-2 Composition of expenditure out-turn compared to original approved budget

Where the composition of expenditure varies considerably from the original budget, the budget will not be a useful statement of policy intent.

PI-3 Aggregate revenue out-turn compared to original approved budget

A comparison of budgeted and actual revenue provides an overall indication of the quality of revenue forecasting. However, external shocks may occur that could not have been forecast and do not reflect inadequacies in administration. These should be explained in the narrative.

PI-4 Stock and monitoring of expenditure payment arrears

This indicator is concerned with measuring the extent to which there is a stock of arrears, and the extent to which the systemic problem is being brought under control. Also important is the assessment of the existence and completeness of data on arrears, without which no assessment can be made.

B. KEY CROSSCUTTING ISSUES: Comprehensiveness and Transparency

PI-5 Classification of the budget

This indicator assesses the classification system used for formulation, execution, and reporting of the central government’s budget. A robust classification system allows the tracking of spending on the following dimensions: administrative unit, economic, functional, and program.

PI-6 Comprehensiveness of information included in budget documentation

Annual budget documentation, as submitted to the legislature for scrutiny and approval, should allow a complete picture of central government fiscal forecasts, budget proposals, and out-turn of previous years. It should include information on (i) macroeconomic assumptions; (ii) fiscal deficit; (iii) deficit financing; (iv) debt stock; (v) financial assets; (vi) prior year’s budget out-turn; (vii) current year’s budget; (viii) summarized budget data for both revenue and expenditure; and (ix) explanation of the budget implications of new policy initiatives, with estimates of the budgetary impact of all major revenue policy changes and/or some major changes to expenditure programs.

PI-7 Extent of unreported government operations

Annual budget estimates, in-year execution reports, year-end financial statements, and other fiscal reports for the public should cover all budgetary and extra-budgetary activities of central government to allow a complete picture of central government revenue, expenditures across all categories, and financing.

PI-8 Transparency of inter-governmental fiscal relations

Given the increasing tendency for primary service delivery to be managed at subnational government levels, correct interpretation of sectoral resource allocation and actual spending effort require tracking of expenditure information at all levels of government according to sectoral categories. The dimensions to be assessed include (i) transparent and rules-based systems in the horizontal allocation among subnational governments of unconditional and conditional


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transfers from central government; (ii) timeliness of reliable information on subnational governments on their allocations from central government for the coming year; and (iii) extent to which consolidated fiscal data (at least on revenue and expenditure) is collected and reported for general government according to sectoral categories.

PI-9 Oversight of aggregate fiscal risk from other public sector entities

Central government’s monitoring of fiscal risks should enable it to take corrective measures arising from actions of autonomous government agencies, public enterprises, and subnational governments, in a manner consistent with transparency, governance, and accountability arrangements, and the relative responsibilities of central government for the rest of the public sector. The dimensions to be assessed include the extent of central government monitoring of autonomous government agencies and public enterprises and the extent of central government monitoring of the fiscal position of subnational governments.

PI-10 Public access to key fiscal information

Transparency will depend on whether or not information on fiscal plans, positions, and performance of the government is easily accessible to the general public or at least the relevant interest groups. Essential information include annual budget documentation, in-year budget execution reports, year-end financial statements, external audit reports, contract awards, and resources available to primary service units.

C. BUDGET CYCLE

C (i) Policy-Based Budgeting

PI-11 Orderliness and participation in the annual budget process

While the Ministry of Finance is usually the driver of the annual budget formulation process, effective participation by other ministries, departments, and agencies impacts the extent to which the budget will reflect macroeconomic, fiscal, and sector policies. The dimensions to be assessed cover (i) existence of and adherence to a fixed budget calendar; (ii) clarity/comprehensiveness of and political involvement in guiding the preparation of budget submissions; and (iii) timely budget approval by the legislature or similarly mandated body.

PI-12 Multi-year perspective in fiscal planning, expenditure policy, and budgeting

Expenditure policy decisions have multi-year implications, and must be aligned with the availability of resources over the medium term. Multiyear fiscal forecasts of revenue, medium term expenditure aggregates for mandatory expenditure, and potential deficit financing (including reviews of debt sustainability) must be the foundation for policy changes. The dimensions to be assessed include (i) the preparation of multi-year fiscal forecasts and functional allocations; (ii) the scope and frequency of debt sustainability analysis; (iii) existence of sector strategies with multi-year costing of recurrent and investment expenditure; and (iv) linkages between investment budgets and forward expenditure estimates.

C (ii) Predictability and Control in Budget Execution

PI-13 Transparency of taxpayer obligations and liabilities

A good tax collection system encourages compliance and limits individual negotiation of tax liability by ensuring that tax legislation is clear and comprehensive and limits discretionary powers (especially in tax assessments and exemptions) of government entities involved. Taxpayers, moreover, need easy access to user-friendly, comprehensive, and up-to-date information on laws, regulations, and


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procedures. Taxpayers’ ability to contest decisions and assessment made by the revenue administration requires effective complaints/appeals mechanism that guarantees the taxpayer a fair treatment. The dimensions to be assessed include clarity and comprehensiveness of tax liabilities, taxpayer access to information on tax liabilities and administrative procedures, and a functioning tax appeals mechanism.

PI-14 Effectiveness of measures for taxpayer registration and tax assessment

Key areas that must be looked into include controls in the taxpayer registration system, effectiveness of penalties for noncompliance with registration and declaration obligations, and planning and monitoring of tax audit and fraud investigation programs.

PI-15 Effectiveness in collection of tax payments

Accumulation of tax arrears can undermine budgetary out-turns, while the ability to collect tax debt lends credibility to the tax assessment process. Prompt transfer of the collections to the Treasury is essential, along with reconciliation of accounts between tax assessments, collections, arrears records, and receipts by the Treasury.

PI-16 Predictability in the availability of funds for commitment of expenditures

Predictability in the availability of funds is facilitated by effective cash flow planning, monitoring, and management by the Treasury based on regular and reliable forecasts of cash inflows and of major, atypical outflows, which are linked to the budget implementation and commitment plans for individual ministries, departments, and agencies, and incorporates the planned in-year borrowing to ensure adequate liquidity at any time.

PI-17 Recording and management of cash balances, debt, and guarantees

Poor management of debt and guarantees can create unnecessarily high debt service costs and significant fiscal risks. Maintaining a debt data system and regular reporting on the main features of the debt portfolio and its development are critical for ensuring data integrity and related benefits such as accurate debt service budgeting, timely service payments, and well planned debt roll-over.

PI-18 Effectiveness of payroll controls

This indicator assesses the degree of integration and reconciliation between personnel records and payroll data; timeliness of changes to personnel records and the payroll; internal controls of changes to personnel records and payroll; and existence of payroll audits to identify control weaknesses and/or ghost workers.

PI-19 Competition, value for money, and controls in procurement

This indicator focuses on the quality and transparency of the procurement regulatory framework in terms of establishing the use of open and fair competition as the preferred procurement method and defines the alternatives to open competition that may be appropriate when justified in specific, defined situations. It also covers the existence and operation of a procurement complaints mechanism.

PI-20 Effectiveness of internal controls for non-salary expenditure

This indicator looks into the effectiveness of expenditure commitment controls; comprehensiveness, relevance, and understanding of other internal control rules/procedures; and degree of compliance with rules for processing and recording transactions.

PI-21 Effectiveness of internal audit

The assessment includes coverage and quality of the internal audit function; frequency and distribution of reports; and extent of management response to internal audit findings.


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C (iii) Accounting, Recording, and Reporting

PI-22 Timeliness and regularity of accounts reconciliation

Reliable reporting of financial information requires constant checking and verification of the recording practices of accountants. Important aspects cover regularity of bank reconciliations and regularity of reconciliation and clearance of suspense accounts and advances.

PI-23 Availability of information on resources received by service delivery units

This indicator assesses the collection and processing of information to demonstrate the resources that were actually received (in cash and kind) by the most common frontline service delivery units in relation to the overall resources made available to the sector, irrespective of which level of government is responsible for the operation and funding of those units.

PI-24 Quality and timeliness of in-year budget reports

This assesses the scope of reports in terms of coverage and compatibility with budget estimates, timeliness of the issuance of reports, and quality of information.

PI-25 Quality and timeliness of annual financial statements

This indicator looks into the completeness of the financial statements, timeliness of submission of the financial statements, and accounting standards used.

C (iv) External Scrutiny and Audit PI-26 Scope, nature, and

follow up of external audit

This indicator centers on the scope/nature of audit performed, timeliness of submission of audit reports to the legislature, and evidence of follow up on audit recommendations.

PI-27 Legislative scrutiny of the annual budget law

This focuses on the scope of the legislature’s scrutiny; extent to which the legislature’s procedures are well established and respected; adequacy of time for the legislature to respond to budget proposals; and rules for in-year amendments to the budget without ex-ante approval by the legislature.

PI-28 Legislative scrutiny of external budget reports

This indicator covers the timeliness of examination of audit reports by the legislature; extent of hearings on key findings undertaken by the legislature; and issuance of recommended actions by the legislature and implementation by the executive.

D. DONOR PRACTICES D-1 Predictability of direct

budget support This indicator centers on the annual deviation of actual budget support from the forecast provided by the donor agencies and in-year timeliness of donor disbursements.

D-2 Financial information provided by donors for budgeting and reporting on project and program aid

This looks into the completeness and timeliness of budget estimates by donors for project support and frequency and coverage of reporting by donors on actual donor flows for project support.

D-3 Proportion of aid that is managed by use of national procedures

This indicator probes into the overall proportion of aid funds to central government that are managed through national procedures. The requirement that national authorities use different (donor-specific) procedures for the management of aid funds diverts capacity away from managing the national systems.

Source: Condensed from PEFA. 2005. Public Financial Management Performance Measurement Framework. Washington, DC. Available: www.pefa.org

6. PFM Performance Report. The PFM performance report is a concise document, not exceeding 35 pages. It aims to provide a comprehensive and integrated assessment of PFM performance of a country based on an indicator-led analysis. Country reports may be downloaded from www.pefa.org.


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C. Illustrative Links between the PFM System and Budgetary Outcomes 7. Table 2 provides examples of links between the PFM system dimensions and budgetary outcomes. It shows how poor PFM performance affects aggregate fiscal discipline, strategic resource allocation, and service delivery.

Table 2: Links between the PFM System Dimensions and Budgetary Outcomes

Budgetary Outcomes Dimension Aggregate Fiscal

Discipline Strategic Resource

Allocation Efficient Service Delivery

Budget credibility An unrealistic budget is likely to overshoot the deficit target or increase the level of arrears. This can arise from over optimistic revenue forecasts, under budgeting of non-discretionary expenditures, and revenue leakages.

A non-credible budget may lead to shortfalls in funding priority expenditures.

Noncompliance with the budget may lead to shifts across expenditure categories, reflecting personal preferences rather than efficiency of service delivery.

Comprehensiveness and transparency

Activities that take place without reference to the fiscal targets are likely to increase the risk of unsustainable liabilities for the government.

Extra-budgetary funds could undermine the efficiency of strategic planning against government priorities. Lack of transparency limits the capacity of the legislature, media, and civil society to assess the extent to which the government is implementing policy priorities.

Lack of comprehensiveness is likely to increase waste of resources and decrease the provision of services. It may also facilitate patronage and corrupt practices by limiting the scrutiny of operations, expenditures, and procurement processes not integrated in budget management and reporting.

Policy-based budgeting

Limited integration of medium-term implications of fiscal decisions (spending and revenue decisions, approval of guarantees and entitlement programs, etc.) in the budget process can lead to unsustainable policies.

The lack of a medium-term perspective could undermine allocation decisions. The costs of a new policy initiative may be systematically underestimated.

The lack of multi-year perspective may contribute to inadequate planning of the recurrent costs of investment decisions and of the funding for multi-year procurement.

Predictability and control in budget execution

Poor synchronization of cash inflows, liquidity, and outflows may weaken fiscal management. Weak control arrangements may allow expenditures in excess of

Disorderly budget execution could lead to unplanned reallocations and reduce resource availability for priorities. Weak control arrangements may allow unauthorized expenditures

Lack of predictability in resource flows undermines the ability of front-line service delivery units to plan and use those resources in a timely and efficient manner. Inadequate controls of payrolls, procurement, and expenditure processes


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Budgetary Outcomes Dimension Aggregate Fiscal

Discipline Strategic Resource

Allocation Efficient Service Delivery

budget or revenue shortfalls, leading to higher deficit, debt levels or arrears.

and fraudulent payments. may create opportunities for leakages and corrupt practices.

Accounting, recording, and reporting

Untimely and inadequate information on revenue forecasting and collection, existing liquidity levels, and expenditure flows constrain the capacity of government to decide and control budget totals, and to allow management for long-term fiscal sustainability and affordability of policies.

A lack of information on program costs and resource uses could weaken the ability to allocate resources to priority expenditures.

Inadequate records would reduce the availability of evidence that is required for effective audit and oversight of the use of funds and offer opportunities for unauthorized resource uses.

External scrutiny and audit

Limited scrutiny of public finances may reduce the pressure on the government to respect fiscal targets and fiscal sustainability issues.

Limited scrutiny is likely to reduce the pressure on the government to allocate and execute the budget in line with its stated policies.

Limited scrutiny may reduce the extent to which government is held accountable for efficient resource management.

Source: PEFA. 2005. Public Financial Management Performance Measurement Framework. Washington, DC. Available: www.pefa.org

D. Remarks on the PFM Performance Measurement Methodology 8. The PFM performance framework analyzes the extent to which the PFM system supports the overall achievement of budgetary outcomes. It provides an understanding of why the weaknesses identified in PFM performance matter for a given country. It uses information from fiscal and expenditure policy analysis to assess the extent to which the PFM system constitutes an enabling factor for achieving planned budgetary outcomes. The assessment of fiduciary risk (e.g., funds are not used for their intended purposes) is not an intended use of the PEFA framework. At most, the framework may be used as an input to a separate fiduciary risk assessment. 9. The PFM performance measurement report is essentially a statement of current PFM performance. It does not include action plans or recommendations for reforms. Nevertheless, it can open up discussions around potential areas for reform.


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FRAMEWORK FOR ASSESSING AND TRACKING CORRUPTION VULNERABILITIES IN PUBLIC FINANCIAL MANAGEMENT

A. Background 1. This summary provides a framework for understanding corruption in relation to public financial management (PFM), for assessing vulnerabilities to corruption, and for designing options to mitigate corruption risks. Systemic factors that increase the risk of corruption generally include (i) weak capacity, (ii) inadequate internal controls, (iii) limited transparency, (iv) poor management control and oversight, and (v) weak external accountability in public spending. Corruption in PFM diverts scarce resources away from public purposes, undermines the ability of governments to achieve their development agenda, directly affects spending on priority sectors, and can have an adverse impact on growth. B. Scope and Methodology 2. The value chain methodology is a means of assessing and tracking corruption vulnerabilities at various stages along the process of translating inputs to outputs. In PFM, the four generic stages are (i) budget formulation, (ii) budget execution, (iii) accounting and reporting, and (iv) external audit and oversight. The prevailing balance of interest, incentives, and institutional norms affects all stages of the PFM process. 3. Budget formulation takes place in a political, policy, regulatory, and institutional context. The executive has a major role in drafting the budget and presenting the budget proposal to the legislature. The extent of legislative involvement depends on the constitutional nature of the state itself. The constitutional form of government defines the legislative power to amend the budget, the veto power of the president, and the power of the legislature to override the budget. Legislatures in presidential systems are designed to perform a more significant role in budget formulation than those in parliamentary systems, where the executive by definition commands the majority in the parliament. Legislative influence over the budget is affected by the electoral system and the number and nature of political parties (strong parties, coalition governments). Corruption during budget formulation is primarily grand or political corruption and is influenced by the distribution of budgetary powers between the executive and the legislature. 4. The budget execution process varies across countries but it generally covers cash management, procurement, and revenue management. Cash management includes (i) the commitment stage, when purchase orders are placed or contracts signed; (ii) the verification stage, when the spending agencies confirm the delivery of the goods and check the bill; (iii) payment authorization, in which a public accountant allows the payment; and (iv) the payment stage, when the bill is paid by cash, check, or electronic transfers. Budget execution is the most fertile ground for corrupt activities because resources actually flow and assets change hands during this stage. 5. Accurate, timely, and transparent record keeping, accounting, and reporting of revenue and expenditure information is essential for enforcing accountability in the budget process. Although budget accounting and reporting do not generally offer direct opportunities for corruption, corruption during the budget execution stage is often detected through strong accounting and reporting systems. Intentional disregard for accuracy and comprehensiveness can obscure fraudulent activity, impede auditing, and restrict management control and oversight.


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6. External audit and oversight are important in promoting fiscal responsibility. Corruption is possible in the face of undue political influence over external accountability institutions that leads to underreporting of fraudulent practices and inadequate investigation into corruption allegations. Civil society, including the media, can help uphold accountability in the PFM process. 7. The subsequent figure illustrates a generic application of the value chain methodology by summarizing the PFM stages, the decision points along the process flow that are vulnerable to corruption, the early warning signals, and potential anticorruption strategies. The examples given in this Figure are not exhaustive. They must be tailored subsequently to the country-specific PFM context. Essentially, three basic steps are involved in the value chain methodology: (i) identify vulnerable points along the PFM process flow; (ii) diagnose the situation and probe into the underlying causes; and (iii) design and implement anticorruption options.1 8. Step 1: Identify vulnerable points along the PFM process. Functioning PFM systems are part of good governance. In this regard, the public expenditure and financial accountability (PEFA) assessment tool is a possible take-off point for identifying weaknesses in management control and oversight, internal transparency, and internal control. PEFA indicators do not directly measure corruption in PFM but they pinpoint flaws in public resource management. Some examples of decision points that are susceptible to corruption include (i) misuse of discretionary power by the executive, (ii) unrestrained legislative involvement in the budget process, (iii) discretion in off-budget accounts that circumvents disciplinary controls, (iv) manipulation of cash allocations to favor specific groups, (v) manipulation of budget reports, (vi) noncompliance with accounting procedures, (vii) political influence over external accountability institutions; and (viii) external interference in investigations of fraudulent practices. 9. Step 2: Diagnose the situation and probe into the underlying causes. When using the value chain methodology, it is important to distinguish between corruption, and a range of institutional weaknesses that foster inefficiency. For example, weak capacity could be responsible for poor budget formulation and external audit, rather than corruption. Early warning signals at various stages of the PFM process, as enumerated in the subsequent Figure, need to be probed further. A review of the decision making process, case analysis of incident cases, and triangulated diagnostics are necessary before drawing any conclusion. The response to the situation will differ depending on the underlying cause. 10. Step 3: Design and implement anticorruption options. Reducing the risk of corruption in PFM calls for the creation of robust public finance systems, which are open to internal and external scrutiny and which minimize opportunities for corruption and maximize detection and remediation. A two-pronged strategy may consist of: (i) strengthening public resource management, and (ii) strengthening external checks and balances. The Table below provides details. A useful guide to sequencing PFM reforms in low-capacity settings is the

1 Details were drawn from Dorotinsky, William and Shilpa Pradhan. 2007. Exploring Corruption in Public Financial

Management. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.


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Budget Formulation • Review of prior year spending • Policy/ objective setting • Planning future spending • Drafting budget document

Decision Points Vulnerable to

Corruption

A Framework for Assessing and Tracking Corruption Vulnerabilities in Public Financial Management (PFM)

• Weak controls on revenue and expenditure management

• Poor cash planning • Collusive administrative reductions

in tax liability • Selective enforcement of tax

obligations or unjustified writing off of tax arrears

• Weak reward and penalty structures

• Weak procurement system • Absence of management oversight

and review of payment and procurement practices

Strengthen public resource management • Capacity development

(record keeping, reporting, and accounting systems; expenditure tracking)

• Internal transparency • Internal control • Management control

• Nontransparent systems of decision making

• Lack of transparency in revenue estimation and collection

• Lack of comprehensiveness of resources and expenditures; underspecified plans for using the funds

• Systemic overestimation of revenues during budget formulation

• Unilateral executive decision to approve spending through in-year adjustments without reporting

Budget Accounting and Reporting • In-year reporting • Year-end reporting • Accounting and recording

External Audit and Oversight • External audit • Legislative review • Civil society involvement

Examples of EarlyWarning Signals

PotentialAnticorruption Strategy

• Misuse of discretionary power by the executive • Unrestrained legislative involvement in the budget process • Budget allocation based on political affiliations • Discretion in off-budget accounts that circumvents disciplinary controls

PFM Process

• Underreporting of fraudulent practices

• Poor investigation into corruption allegations

• Non-enforcement of penalties for fraudulent practices

Budget Execution • Budget implementation • Managing resources • Modifying the budget • Collecting revenues, paying • Procuring goods and services

• Weak accounting systems and record keeping practices

• Intentional disregard for accuracy • Lack of comprehensiveness of in-

year and year-end fiscal reports • Irregularities in reconciliation

processes between public bank account data held by commercial and central banks and accounting records

Strengthen external checks and balances • Public access to regular, accurate, and timely fiscal information

• Strengthening of legislative committees, legislative audit, and research organizations

• Allowing civil society and media to participate in the budget process

• Deployment of independent external audit institutions as watchdogs

• Independent judiciaries • Independent anticorruption commission

Adapted from William Dorotinsky and Shilpa Pradhan. 2007. Exploring Corruption in Public Financial Management. In The Many Faces of Corruption, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

• Discretion by officials in budget spending • Manipulation by officials of the information to be disseminated • Manipulation of cash allocations to favor specific line ministries/agencies from which kickbacks may be arranged

• Manipulation of budget reports • Noncompliance with accounting procedures

• Undue political influence over external accountability institutions • Interference in investigations


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platform approach, wherein each platform focuses on an improved outcome. The entry point should focus on the weakest link and build on the improved outcome to strengthen other PFM dimensions. For example, in developing countries with overall PFM weaknesses, strengthening capacity and internal controls could come before increasing transparency and accountability.

Potential Corruption Risk Mitigation Measures in Public Finance Management

Type of Intervention

Potential Measure Remarks

(i) Strengthening

public resource management

Capacity development Activities that strengthen the capacity of PFM systems include hiring qualified staff; implementing competitive wage levels; training existing and new staff on budget issues and ethical conduct; implementing a robust classification system that allows tracking of expenditures; improving budget and process comprehensiveness; and progressively implementing a more purpose-oriented budget.

Internal transparency Improving internal transparency should aim to increase frequency of in-year fiscal reports, accuracy of fiscal reports, timeliness and accuracy of year-end fiscal reports, comprehensiveness of accounting and reporting, user-friendliness of report formats, and timely report dissemination.

Internal control Internal control refers to procedures to streamline processes and prevent or detect improper use of funds. Typical activities include formally recorded transaction approvals, authorizations, verifications, reconciliations, reviews of performance, security of assets, segregation of duties, and information control systems. Others cover measures for taxpayer registration and tax assessment, payroll controls, internal controls for non-salary expenditure, procedures for timely and regular accounts reconciliation, clearly defined and simple audit standards, increased authority for internal audit bodies, strengthened payroll audits, and automated payment systems.

Management control and oversight

An initial step in reducing potential corruption is management oversight of budgeted expenditure, deviations from the approved budget for expenditures and revenues, expenditure payment arrears, or aggregate fiscal risk from public sector entities. Possible activities include (i) detection of fraudulent practices and responding to fraud; (ii) instituting procedures to follow up on audit findings and recommendations; (iii) strengthening planning and monitoring of tax, expenditure and payroll audit, and fraud investigation programs; and (iv) implementing procedures to hold fraudulent behavior to account.

(ii) Strengthening checks and

Increasing external transparency and

Transparency of budget information includes access to budgetary documents, in-year financial reports, and year-


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balances capacity of external stakeholders

end financial reports. Public access to regular, accurate, and timely fiscal information in easily understandable formats is essential for effective legislative and civil society engagement. Strengthening legislative committees, legislative audit, and research organizations and establishing a well-structured budget that allows sufficient time for legislative engagement during policy-level decision making are possible ways of improving legislative capacity for participation in the budget process. Moreover, awareness, understanding, and capacity of civil society and media to participate in the budget process must be increased.

Strengthening external accountability mechanisms

Factors that enable legislative committees to exercise ex post scrutiny of audit findings and improve legislative oversight of budget implementation include a broad mandate to cover past, current, and committed expenditures; freedom to identify expenditures for scrutiny without interference; capacity for detailed analysis and reporting; and authority to make recommendations and publish conclusions. Developing the capacity of external audit institutions as watchdogs requires (i) clear mandates free from interference; (ii) recruitment of high-caliber auditors; (iii) competitive compensation; (iv) adequate training for audit staff; (v) access to information; and (vi) audit control and quality assurance mechanisms for auditing. Independent judiciaries and anticorruption commissions, along with clear laws, are also important in reducing corruption. Exposure by media of corrupt activities and pubic demand for effective follow-up, likewise, are vital.

Source: Details were drawn from Dorotinsky, William and Shilpa Pradhan. 2007. Exploring Corruption in Public Financial Management. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

C. Remarks on the Value Chain Methodology 11. The value chain methodology offers several advantages: (i) it is results-oriented; (ii) it highlights key vulnerabilities along the chain as well as measures for mitigating corruption risks; and (iii) it offers a convenient method for developing warning signals for tracking corruption. This line of inquiry is adaptable to differing country situations. 12. To carry out a value chain assessment, a combination of primary and secondary research is needed. Information may be collected through interviews with officials and other groups, review of existing PFM diagnostic studies to identify weaknesses in the PFM system, and other means. Other complementary tools may include case analysis, surveys, and triangulated diagnostics. Over time, the value chain analysis needs to be reviewed, with due regard for changing conditions that could trigger new opportunities for corruption.


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SECTION III:

PUBLIC PROCUREMENT

Benchmarking and Assessment Methodology for Public Procurement Systems

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Country Procurement Assessment Methodology

39

Procurement Capacity Assessment: Executing Agency 44

Framework for Assessing and Tracking Corruption Vulnerabilities in Public Procurement

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BENCHMARKING AND ASSESSMENT METHODOLOGY FOR PUBLIC PROCUREMENT SYSTEMS

A. Background 1. This describes an indicator-based methodology for benchmarking and assessing national procurement systems. It was developed jointly by developing countries and multilateral/bilateral donors under the auspices of the Organisation for Economic Co-operation and Development/Development Assistance Committee (OECD/DAC) and the World Bank Procurement Round Table Initiative.1 Although these indicators are meant for assessing national procurement systems, they can be adapted to subnational or agency level operations. The procurement assessment enables a country to conduct a self-assessment of its procurement system to determine strengths and weaknesses. It also assists development partners to carry out joint or external assessment of a country’s procurement system, develop strategies for capacity development, and mitigate risks in operations being considered for funding. B. Scope and Methodology 2. The subsequent Figure presents the primary steps in procurement assessment: (i) establish the purpose and scope of the procurement assessment; (ii) plan for and conduct the assessment; (iii) prepare the procurement assessment report; (iv) follow up the status of recommended actions; and (v) update the information on procurement systems. In this assessment, the OECD/DAC indicators fall into two types: (i) baseline indicators (BLIs), which provide a snapshot comparison of the actual system against the international standards that the BLIs represent; and (ii) compliance/performance indicators (CPIs), which deal with how the system actually operates. 3. Baseline Indicators. The BLIs address four pillars: (i) legislative and regulatory framework, (ii) institutional framework and management capacity, (iii) procurement operations and market practices, and (iv) integrity and transparency of the public procurement system. Each pillar has a number of indicators and sub-indicators (see Table 1). The rating system ranges from 0 to 3 for each baseline sub-indicator, where 3 represents the highest possible score. The methodology includes numeric scoring against defined criteria.2 4. Compliance/Performance Indicators. The CPIs are useful for identifying areas where compliance or performance is weak, and when a more in-depth review of deficiencies and their likely causes may be warranted. The short term objective is to find out the degree to which the system is following its own regulations or what the perception of compliance is in those cases where the indicator cannot be measured in quantitative terms. Table 2 enumerates the CPIs. The use of these CPIs will need to be determined on a country basis, with due regard for the specific capacities and issues that exist in the country and the decisions of those participating in the assessment. The CPIs may also be seen as a critical aspect of monitoring the effectiveness of changes meant to address weaknesses in the overall system. The key issue is the provision of reliable, transparent, and timely information. Governments and development partners should routinely validate financial, project, and contractual data. 1 OECD. 2006. Methodology for Assessment of National Procurement Systems. Version 4. Paris.

Available: www.oecd.org/dataoecd/1/36/37130136.pdf 2 For details on rating each indicator, please see www.oecd.org/dataoecd/1/36/37130136.pdf


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Adapted from OECD. 2006. Methodology for Assessment of National Procurement Systems. Version 4. Paris.

Available: www.oecd.org/dataoecd/1/36/37130136.pdf

Procurement Assessment Process

• Provide a learning and capacity development opportunity for government and development partners alike. Present an evaluation of the procurement system and of the status of indicators assessed.

• Identify risks from systemic weaknesses.

Baseline indicators• Procurement-related

acts, decrees, and regulations

• Information on systems and mechanisms in place

Compliance/performance indicators • Representative sample

of cases • Surveys/interviews of

participants in the procurement process

• Procurement statistics • Audit and other reports

• Decide on the rationale for and scope of the procurement assessment

• Identify the set of procurement indicators to be assessed: baseline indicators and/or compliance/performance indicators.

Description


• Update the assessment of the procurement system. Conduct a full update when major changes in legislation and in other substantive elements of the system occur.

Key Steps

• Coordinate with the government and interested development partners.

• Recruit and deploy procurement specialists. Determine data requirements and data collection techniques.

• Gather, process, and analyze data on the baseline procurement indicators.

• Determine which compliance/performance indicators need to be verified and/or probed further.

• Monitor the progress of system improvements.

Update the information on procurement systems

Follow up the status of recommended

actions

Prepare the procurement assessment report

Plan for and conduct the assessment

Establish the purpose and scope of the procurement

assessment


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Table 1: Public Procurement Baseline Indicators

Pillar I: Legislative and Regulatory Framework Indicator 1. Public procurement legislative and regulatory framework achieves the agreed standards and complies with applicable obligations.

Sub-indicators: ((i) scope of application and coverage of the legislative and regulatory framework; (ii) procurement methods; (iii) advertising rules and time limits; (iv) rules on participation; (v) tender documentation and technical specifications; (vi) tender evaluation and award criteria; (vii) submission, receipt, and opening of tenders; and (viii) complaints.

Indicator 2. Existence of implementing regulations and documentation.

Sub-indicators: ((i) implementing regulations that provide defined processes and procedures not included in higher-level legislation; (ii) model tender documents for goods, works, and services; (iii) procedures for prequalification; (iv) procedures suitable for contracting for services or other requirements in which technical capacity is a key criterion; (v) user’s guide or manual for contracting entities; and (vi) General Conditions of Contracts for public sector contracts covering goods, works, and services consistent with national requirements and, when applicable, international requirements.

Pillar II: Institutional Framework and Management Capacity Indicator 3. The public procurement system is mainstreamed and well integrated into the public sector governance system.

Sub-indicators: ((i) procurement planning and associated expenditures are part of the budget formulation process and contribute to multiyear planning; (ii) budget law and financial procedures support timely procurement, contract execution, and payment; (iii) no initiation of procurement actions without existing budget appropriations; and (iv) systematic completion reports are prepared for certification of budget execution and for reconciliation of delivery with budget programming.

Indicator 4. The country has a functional normative/regulatory body.

Sub-indicators: ((i) the status and basis for the normative/regulatory body is covered in the legislative and regulatory framework; (ii) the body has a defined set of responsibilities; (iii) the body’s organization, funding, staffing, and level of independence and authority (formal power) to exercise its duties should be sufficient and consistent with the responsibilities; and (iv) the responsibilities should also provide for separation and clarity so as to avoid conflict of interest and direct involvement in the execution of procurement transactions.

Indicator 5. Existence of institutional development capacity.

Sub-indicators: ((i) the country has a system for collecting and disseminating procurement information, including tender invitations, requests for proposals, and contract award information; (ii) the country has systems and procedures for collecting and monitoring national procurement statistics; (iii) a sustainable strategy and training capacity exists to provide training, advice, and assistance to develop the capacity of government and private sector participants to understand the rules and regulations and how they should be implemented; and (iv) quality control standards are disseminated and used to evaluate staff performance and address capacity development issues.

Pillar III: Procurement Operations and Market Practices Indicator 6. The country’s procurement operations and practices are efficient.

Sub-indicators: ((i) the level of procurement competence among government officials within the entity is consistent with their procurement responsibilities; (ii) the procurement training and information programs for government officials and for private sector participants are consistent with demand; (iii) there are established norms for the safekeeping of records and documents related to transactions and contract management; and (iv) there are provisions for delegating authority to others who have the capacity to exercise responsibilities.


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Indicator 7. Functionality of the public procurement market.

Sub-indicators: (i) there are effective mechanisms for partnerships between the public and private sector; (ii) private sector institutions are well organized and able to facilitate access to the market; and (iii) there are no major systemic constraints (e.g.,, inadequate access to credit, contracting practices, etc.) inhibiting the private sector’s capacity to access the procurement market.

Indicator 8. Existence of contract administration and dispute resolution provisions

Sub-indicators: (i) procedures are clearly defined for undertaking contract administration responsibilities that include inspection and acceptance procedures, quality control procedures, and methods to review and issue contract amendments in a timely manner; (ii) contracts include dispute resolution procedures that provide for an efficient and fair process to resolve disputes arising during the performance of the contract; and (iii) procedures exist to enforce the outcome of the dispute resolution process.

Pillar IV: Integrity and Transparency of the Public Procurement System Indicator 9. The country has effective control and audit systems.

Sub-indicators: (i) a legal framework, organization, policy, and procedures for internal and external control and audit of public procurement operations are in place to provide a functioning control framework; (ii) enforcement and follow-up on findings and recommendations of the control framework provide an environment that fosters compliance; (iii) the internal control system provides timely information on compliance to enable management action; (iv) the internal control systems are sufficiently defined to allow performance audits to be conducted; and (v) auditors are sufficiently informed about procurement requirements and control systems to conduct quality audits that contribute to compliance.

Indicator 10. Efficiency of the appeals mechanism

Sub-indicators: (i) decisions are deliberated based on available information, and the final decision can be reviewed and ruled upon by a body (or authority) with enforcement capacity under the law; (ii) the complaint review system has the capacity to handle complaints efficiently and a means to enforce the remedy imposed; (iii) the system operates in a fair manner, with outcomes of decisions balanced and justified on the basis of available information; (iv) decisions are published and made available to all interested parties and to the public; and (e) the system ensures that the complaint review body has full authority and independence for resolution of complaints.

Indicator 11. Degree of access to information

Sub-indicators: (i) information is published and distributed through available media with support from information technology when feasible.

Indicator 12. The country has ethics and anticorruption measures in place.

Sub-indicators: (i) the legal and regulatory framework for procurement, including tender and contract documents, has provisions addressing corruption, fraud, conflict of interest, and unethical behavior, and sets out (either directly or by reference to other laws) the actions that can be taken with regard to such behavior; (ii) the legal system defines responsibilities, accountabilities, and penalties for individuals and firms found to have engaged in fraudulent or corrupt practices; (iii) evidence of enforcement of rulings and penalties exists; (iv) special measures exist to prevent and detect fraud and corruption in public procurement; (v) stakeholders (private sector, civil society, and ultimate beneficiaries of procurement/end-users) support the creation of a procurement market known for its integrity and ethical behavior; (vi) the country should have in place a secure mechanism for reporting fraudulent, corrupt, or unethical behavior; and (vii) existence of Codes of Conduct/Codes of Ethics for participants involved in aspects of the public financial management systems that also provide for disclosure for those in decision making positions.

Source: OECD. 2006. Methodology for Assessment of National Procurement Systems. Version 4. Paris. Available: www.oecd.org/dataoecd/1/36/37130136.pdf


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Table 2: Selected Baseline Indicators Associated with Compliance/Performance Indicators

Selected Baseline Indicator/Sub-

indicator Compliance/Performance Indicator

Suggested Source of

Information 1) The public procurement legislative

and regulatory framework

1b) Procurement methods Percentage of procurement subject to the

legislative framework being assessed (in volume and in number of contracts) carried out through open tendering

Aggregate procurement statistics

1c) Advertising rules and time limits Percentage of invitations for open tenders publicly advertised Average number of days between tender advertisement and tender opening

Sample of procurement cases

1d) Rules on participation Percentage of open tender documents that include provisions limiting participation for reasons other than qualifications or acceptable exclusions

Sample of procurement cases Surveys of trade and professional associations

1e) Tender documentation and technical specifications

Percentage of tenders rejected in each process


1f) Tender evaluation and award criteria

Percentage of tenders, including nonquantifiable or subjective evaluation


Public perception of confidentiality of tender evaluation process

Survey/interviews with participants in the procurement process

1g) Submission, receipt, and opening of tenders

Percentage of tenders opened publicly and recorded


1h) Complaints system structure and sequence

Percentage of cases resolved within the terms established in the legal framework

Statistics on complaint resolution

2) Implementing Regulations and Documentation

2b) Model tender documents for goods, works, and services

Percentage of tenders that use model tender documents or clauses


2c) Procedures for prequalification Percentage of cases where prequalification was used appropriately as described in the legal framework Percentage of cases that used objective pass/fail prequalification criteria as opposed to subjective qualitative ones

Sample of procurement cases subject to prequalification

2f) Existence and coverage of General Conditions of Contracts (GCC) for public sector contracts

Percentage of tenders that use the GCC, standard clauses, or templates, as applicable


3) Integration and mainstreaming of the public procurement system into the public governance system

3b) Budget law and financial procedures support timely procurement, contract execution, and payment.

Percentage of late payments (exceeding the contractually specified payment schedule)


3d) Systematic completion reports are prepared for certification of budget execution and for reconciliation of delivery with budget programming.

Percentage of major contracts without completion reports

Sample of procurement cases National budget office information


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4) Normative and regulatory functions

4c) Adequacy of organization,

funding, staffing, and level of independence and authority (formal power) to exercise duties

Percentage of those surveyed that perceive procurement as being performed competently and independently

Survey or interviews with participants in the procurement processes

4d) Separation and clarity of responsibilities to avoid conflict of interest in the execution of procurement transactions

Percentage of those surveyed that perceive the regulatory function to be free from conflict of interest

Survey or interviews with participants in the procurement process

5) Institutional development capacity 5b) Systems and procedures for

collecting and monitoring national procurement statistics

Age of information Review of posted information to determine timeliness and accuracy

5c) Sustainable strategy and training capacity for procurement

Number of staff involved in procurement in the central government that receives formal training in the year Average waiting time to get in a formal training event

Review of annual training statistics

6) Efficiency of procurement operations and practices

Average number of days for the procurement cycle from tender advertisement to contract award


6c) Norms for the safekeeping of records and documents related to transactions and contract management

Percentage of contracts found with incomplete records being retained


7) Functionality of the public procurement market

7a) Effective mechanisms for partnerships between the public and private sector

Opinion on effectiveness of mechanisms to engage with relevant organizations or agencies

Survey or interviews with participants in the procurement process

7b) Private sector institutions are well organized and able to access the market

Average number of tenders submitted in each process

8) Existence of contract administration and dispute resolution provisions

8a) Procedures are clearly defined for undertaking contract administration responsibilities.

Percentage of contracts containing such provisions Evidence in contracts surveyed that contract administration is timely


8b) Contracts include adequate dispute resolution provisions.

Percentage of contracts that include adequate dispute resolution provisions


9) Effectiveness of control and audit systems

9b) Enforcement and follow-up on findings and recommendations

Number of recommendations pending after 1 year

Review of audit reports and status of recommended actions

9c) The internal control system provides timely information on compliance to enable management action.

Number of qualified opinions from external auditors due to critical internal control weaknesses and recommendations referring to internal controls that remain outstanding

Review of audit reports and status of recommended actions

9d) The internal control systems are sufficiently defined to allow performance audits to be conducted.

Percentage of agencies reviewed with written internal control procedures

Review of audit reports to determine use of performance auditing


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10) Efficiency of appeals mechanism

10b) Capacity of the system for handling and enforcing decisions on complaints

Percentage of complaints processed within the time limit in the legal framework Percentage of decisions taken that are enforced

Statistics of the complaints review system

10c) Fairness of the complaints system

Percentage of favorable opinions Survey or interviews with participants in the procurement process

12) Anticorruption measures

12c) Evidence of enforcement of rulings and penalties

Percentage of cases that result in sanctions or penalties

Statistics on prosecution of corruption cases

12d) Effectiveness of the anticorruption measures on public procurement

Percentage of favorable opinions by the public on the effectiveness of anticorruption measures

Surveys or interviews with citizens and other stakeholders

Source: OECD. 2006. Methodology for Assessment of National Procurement Systems. Version 4. Paris. Available: www.oecd.org/dataoecd/1/36/37130136.pdf

C. Examples of Risks from Public Procurement Using the OECD/DAC Indicators 5. Table 3 presents examples of risks from public procurement, which were drawn from public procurement assessments that used the OECD/DAC indicators.3 The proposed measures to reduce risks are also given below.

Table 3: Examples of Risks from Public Procurement and Proposed Actions

Risks from Public Procurement

Proposed Actions

The absence of established norms for the safekeeping of records hampers document retention for the conduct of procurement audits or for investigating and prosecuting cases of procurement-related fraud and corruption. - pertains to Indicator 6: Efficiency of procurement

operations and practice

Include in the proposed capacity development plan a program for the establishment of policies and procedures for record keeping and management for procurement, contract and financial management- related transactions for government agencies.

Multiple constraints hinder private sector access to the public procurement market: tedious payment processes, difficulties in securing licenses and permits, etc. - pertains to Indicator 7: Functionality of the public

procurement market

Review systemic constraints. Streamline procedures.

Irregular and reactive procurement performance audits tend to address specific transactions rather than broader systemic issues on operations and practices by agencies The absence of an institutionalized internal control mechanism within agencies precludes effective audit. - pertains to Indicator 9: Effective control and audit

systems

Enforce regular performance audits. Establish internal audit units within procuring entities with clearly defined functions and procedures.

3 For examples of pilot exercises in public procurement assessment.

Available: www.oecd.org/dac/effectiveness/procurement.


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The absence of an administrative complaint review body that has full authority and independence obstructs resolution of complaints. - pertains to Indicator 10: Efficiency of the appeals

mechanism

Review policies and procedures for procurement-related complaints and appeals, including the following options: (i) study the good practices of other countries; (ii) create an independent administrative review body; and (iii) tap an existing administrative body with the appropriate mandate.

Source: OECD/DAC. 2007. Pilot Exercise Progress Reports. Paris. Available: www.oecd.org/dac/effectiveness/procurement

D. Remarks on the Benchmarking and Assessment Methodology of OECD/DAC for

Public Procurement Systems 6. The application of the procurement assessment methodology for the first time creates a baseline that allows a continuous monitoring of progress of system improvements. However, as a minimum, a full update of the assessment should be performed whenever major changes in the legislation or other substantive elements of the system change. The benchmark assessment is not a substitute for a fiduciary assessment. It does not deliver a risk assessment but can provide a useful input to procurement diagnostics. The indicators alone cannot give a full picture of how a comprehensive procurement system operates. Indicators should be used as a tool for identifying the system’s strengths and weaknesses and as support for a more thorough analysis to be carried out by assessors. The application of the BLIs is based on a review of the existing regulatory framework and the institutional and operational arrangements, while the application of the CPIs relies on data obtained from a representative sample of contracts and information obtained through interviews and surveys. Participants in the interviews or surveys may include professional associations, civil society representatives, government officials, and other entities involved in the procurement process. The BLI is a large data gathering and analysis exercise. The CPI lends itself more to workshops and similar approaches to obtain people’s views and inputs, and tends to be more qualitative and diagnostic. 7. Advanced planning is necessary for data collection arrangements and identification of participants in surveys or interviews. It is more imperative if the assessment will be sponsored jointly by the government and interested development partners to enable proper coordination, agreement on the extent to which specific CPI data will be collected, and selection of data collection techniques. The availability, reliability, and integrity of records need careful consideration during the planning phase. 8. The application of indicators allows for subjective professional judgments by the assessor. Subjectivity cannot be fully eliminated from the exercise but needs to be minimized to ensure that assessments carried out by different assessors maintain reasonable consistency and comparability for analytical purposes. Assessors, if external to the government, should work with a counterpart team of the government to facilitate access to information and logistical support. If the assessment is done by the government as a self-assessment exercise, a verification process involving the government, active development partners that are interested in the procurement system, and other stakeholders will contribute to the transparency and credibility of the process. The verification exercise is critical. It provides an opportunity to agree on assigned scores, priorities, and a shared strategy towards capacity development to address systemic weaknesses.


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COUNTRY PROCUREMENT ASSESSMENT METHODOLOGY

A. Background 1. This summary describes a methodology for a country procurement assessment. This assessment aims to (i) provide a comprehensive analysis of the country’s public sector procurement system and how well it works in practice; (ii) assess institutional, organizational, and other risks associated with procurement; (iii) develop a prioritized action plan to bring about institutional improvements; and (iv) assess the participation of the domestic private sector in public procurement and commercial practices related to public procurement.1 B. Scope and Methodology 2. A country’s public procurement system is comprised of the following basic elements: (i) legal framework, (ii) trade practices, (iii) financial framework, (iv) procurement organization, (v) procurement training system/institutions, (vi) procurement procedures, (vii) decision making authority, (viii) anticorruption initiatives and programs, and (ix) private sector commercial regulations and practices. 3. A public procurement system may be generally well functioning if it achieves the objectives of transparency, competition, economy and efficiency, fairness, and accountability. Table 1 enumerates some basic elements of a well functioning public procurement system.

Table 1: Basic Elements of a Well Functioning Public Procurement System

Element

Description

(i) A clear, comprehensive, and transparent legal framework

Presence of legal rules that are easily identifiable and that govern all aspects of the procurement process. At a minimum, such rules should provide for wide advertising of bidding opportunities, maintenance of records related to the procurement process, pre-disclosure of all criteria for contract award, contract award based on objective criteria, public bid opening, access to a bidder complaints review mechanism, and disclosure of the results of the procurement process.

(ii) Clarity on functional responsibilities and accountabilities

Definition of (i) those who have responsibilities for implementing procurement including preparation of bid documents and the decision on contract award; (ii) who in the buying entities bears primary responsibility for proper application of the procurement rules; and (iii) means of enforcing these responsibilities and accountabilities including the application of appropriate sanctions.

(iii) An institutional framework that differentiates between those who carry out the procurement function and those who have oversight responsibilities

Existence of an agency responsible for overall procurement policy formulation and the authority to exercise oversight regarding proper application of the procurement rules and regulations. Attributes include functional independence and authority to enable it to oversee procurement in the entire public sector, lack of involvement in internal operational procurement matters in the buying entities, and an adequate budget and staff to enable it to carry out its responsibilities effectively.

1 World Bank. 2002. Country Procurement Assessment Report. Washington, DC. Available:

www.countryanalyticwork.net/caw/cawdoclib.nsf/vewMainProductToolkits/0F42E09A92F63AAD85256C5E005EB0EA/$file/preparation+of+CPAR.pdf and http://go.worldbank.org/RZ7CHIRF60


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Element

Description

(iv) Robust mechanisms for enforcement

Rules are actually enforced. The means of enforcing them include (i) the right to audit the procurement process, and (ii) a bidder complaints review mechanism in which bidders have confidence.

(v) A well trained procurement staff Staff members possess the technical proficiency to implement the procurement function. The existence of a continuous, focused, and targeted training program is mandatory.

Source: World Bank. 2002. Country Procurement Assessment Report. Washington, DC. Available: http://go.worldbank.org/RZ7CHIRF60

4. While the official regulations and procedures may be sound, the assessment must examine their application and enforcement, which may deviate from official pronouncements. Poor dissemination of rules, inadequate personnel training, weak enforcement, failure to maintain records, endemic corruption, and other factors create risks that can undermine an otherwise seemingly adequate system. 5. Risk Assessment. A key feature of the country procurement assessment report (CPAR) is the review of the different risks associated with the country’s procurement system. Poor procurement quality often results from underlying factors inherent in the public sector, such as (i) the degree to which high levels of government promote a culture of accountability, (ii) the status of the public sector procurement profession, (iii) the salary structure of public sector procurement professionals versus the private sector, (iv) the degree to which procurement organizations are free from political interference, (v) the existence of honest and capable procurement staff, and (vi) the presence of clear written standards, procedures, and delegations of authority and responsibility. These issues may be sensitive to the government but they must be examined in detail because most often, they pose barriers to good quality procurement in practice and have a direct bearing on risks from public procurement. For example, possible risks that can occur are loss of economy, procurement inefficiency, and inequitable treatment of suppliers and contractors, particularly when the tenders awarded do not represent the best value for money and when responsible parties have double standards in dealing with contractors and suppliers. Contributory factors to these could be lack of competition, weak procurement planning, and practice of preferential treatment beyond that provided for in the law, among others. 6. A country procurement assessment also helps determine the extent to which factors evident in the country’s public procurement system will affect the donor’s portfolio. The main concern is to ensure that funds are used efficiently and transparently for the intended purpose. The use of ex post procurement reviews as well as experience with procurement under donor-financed projects provides essential inputs to an overall risk assessment based on actual performance data. The assessment indicates whether the risks are high, medium, or low. It guides decisions regarding the nature and intensity of donor supervision of procurement in the country and contributes information that can be linked to specific instruments to support implementation of key recommendations. The subsequent Figure summarizes the key steps in the country procurement assessment, along with possible information sources.


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Adapted from the World Bank. 2002. Country Procurement Assessment Report. Washington, DC. Available: http://go.worldbank.org/RZ7CHIRF60 7. A strong analytical framework, supported by sound empirical data tailored to the specific country context, is a prerequisite for producing a CPAR. Attention is given to (i) the use of quantitative information, ex post procurement reviews, perception surveys, and consultations with various groups to assess the actual performance of the country’s procurement system; (ii) a detailed institutional analysis of key government ministries and agencies in the performance of public procurement responsibilities, their strengths and weaknesses, priority capacity development needs, the governance environment in which they operate, and the incentives needed to improve performance; (iii) a report that is concise, logical, reads well, and is not excessively technical, providing a clear message that can be understood and accepted by non-technical decision makers in the counterpart Government and within the donor agency; (iv) a risk assessment and a proposed risk management strategy; and (v) a detailed action plan,

Country Procurement Assessment Process

• Draft the findings on the procurement system.

• Identify flexible options for improving the procurement system in consultation with the government.

• Previous country procurement assessment reports, country portfolio reviews, and sector studies

• Procurement laws and regulations

• International/regional agreements

• Interviews with Bank staff, government officials, procurement practitioners, contractors, suppliers, and training institutions

• Interviews with industry representatives and with local standards organizations, customs officials, and insurance companies

• Review other existing and planned diagnostic studies on the country.

• Identify the scope of the procurement assessment, parameters to be assessed, timing, and data collection methods.

• Coordinate assessment plans with the government and interested development partners.

• Recruit and deploy the procurement assessment team. Work with government counterparts.

Description


Key Steps

• Gather, process, and analyze information on the written legal and technical framework for the public procurement system and compare with actual practices.

• Identify risks from public procurement, along with risk mitigation measures.

• Monitor the progress of implementing the action plan.

Follow up the action plan.

Prepare the country procurement

assessment report.

Assess the procurement

system.

Plan for the procurement

assessment.


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which prioritizes recommendations, assesses the political feasibility of the main recommendations, and is linked to the country assistance strategy. 8. A sound and effective public procurement improvement program is likely to start by revising the existing procurements laws and regulations or by introducing an entirely new legal framework in countries where there were no pre-existing rules. It may also include downstream work such as the strengthening of institutions overseeing procurement, the organization of a procurement monitoring system and the training of government procurement staff in enforcing new rules, preparing standard procurement documentation, and recording procurement data. However, financing these complementary activities could be considered only when there is a sound legal framework in place or an agreement on the proposed law and regulations. The timing of actions, identification of responsibilities, financing, and other key decisions are part of developing and monitoring an implementation strategy that must be done in close consultation with the government. The action plan in the CPAR should be flexible, providing options to the government for the development of an implementation strategy. 9. A monitoring and evaluation system, with appropriate benchmark indicators, is essential to tracking the implementation of the agreed action plan. Putting in place an electronic monitoring system, which is accessible outside of government ministries and agencies, is a way to monitor improvements in the indicators. C. Examples of Procurement Risks and Proposed Measures 10. For illustrative purposes, Table 2 presents risks from public procurement and proposed measures to reduce risks. These examples were drawn from completed CPARs of the World Bank, wherein the assessment teams duly considered country-specific settings in drawing up the proposed measures.

Table 2: Examples of Procurement Risks and Proposed Actions

Risks Examples of Proposed Actions Time Frame for Action Inefficiencies and nontransparency in existing procurement systems pose a major risk.

Issue guidelines requiring (i) preparation of procurement plans, (ii) adoption of realistic targets, (iii) use of bidding documents with clear post-qualification requirements, (iv) advertisement of contracts, (v) prompt payment to contractors and suppliers, and (vi) inclusion of technically competent staff in evaluation committees. Provide advisors to mentor public procurement staff.

Short term Short term

Establish a cadre of procurement specialists. Develop a comprehensive set of tools to facilitate implementation of revised procurement system (e.g., e-procurement strategy, manuals, etc.)

Medium term Medium term


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Risks Examples of Proposed Actions Time Frame for Action Implement efficient, secure, and transparent procurement record management systems.

Medium term

Irregularities in public procurement practices undermine effective use of scarce public funds and quality of works.

Conduct information campaign about avenues for disclosing violations of procurement procedures. Enforce ethical standards. Establish hotlines for reporting misconduct.

Short term Short term

Increase support to oversight, audit, and investigative bodies. Implement debarment of firms and individuals involved in fraudulent practices. Introduce appropriate legislation (whistle-blower protection, freedom of information, etc.)

Medium term to long term Medium term Medium term

Source: World Bank. Various years and countries. Country Procurement Assessment Report. Washington, DC. Available: http://go.worldbank.org/6DTBF70FA0 and www.countryanalyticwork.net/

D. Additional Remarks on the CPAR 11. To ensure country ownership, the CPAR is launched with the agreement of the government and often involves its active participation. At the outset, there is an explicit understanding that the results are intended to form the basis for agreed action programs if the CPAR indicates significant deficiencies in the existing system. Ultimately, the country must decide what actions it will take. Its participation is essential in defining the scope of the assessment, scheduling various activities, collecting and analyzing the data needed, and preparing the final report. Useful techniques in obtaining government support include (i) discussing the positive economic benefits, (ii) providing data that can demonstrate inefficiencies in the existing system, (iii) making use of the country’s interest in joining international treaty agreements, and (iv) benefits that may be available under existing or planned lending. 12. A country’s legal, regulatory, and financial framework for procurement may be broadly uniform and applicable for all organizations at the same level in government but actual practices and performance may also vary widely among these same organizations. The CPAR team reviews a representative sampling of organizations with the most important procurement responsibilities in infrastructure, social services, and public sector administration. The data and interviews are kept separate for each organization but the analysis looks for performance patterns across organizations as well as characteristics within each entity. The CPAR is given to government for review, followed by discussions of the findings and recommendations between government and the CPAR team. The objective is to agree on the specific scope of actions to be taken, a time frame for their implementation, and the responsibilities for coordination and execution of the program. The World Bank publicly discloses the CPARs unless governments object.


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PROCUREMENT CAPACITY ASSESSMENT: EXECUTING AGENCY A. Background 1. The Asian Development Bank (ADB) requires an assessment of the capacity of the executing agency (EA) to procure goods, works, and consulting services as part of project processing.1 The purpose is to (i) identify levels of reputational risk to ADB and its borrowers and put in place appropriate prior review and process thresholds to mitigate the risk balanced with the needs for operational efficiency; (ii) identify any implementation risks present in terms of procurement resources, structure, and process and propose mitigating measures; and (iii) build on the existing base for procurement capacity, legislative environment, and processes. B. Scope 2. The capacity assessment takes off from an assessment of the general procurement environment and a questionnaire to be completed by the EA that covers agency resource assessment; procurement processes, goods, and works; procurement of consulting services; process control and oversight; and record keeping. Table 1 provides a set of questions for the general procurement environment assessment. ADB undertakes this assessment independently of the borrower and the EA.

Table 1: General Procurement Environment Assessment Questions for Assessing Procurement Risks: 1. Is there a procurement law?

The answer is a simple yes or no, i.e., is there a single law governing procurement which is representative of best practice or is procurement governed through various laws, decrees, etc? Assess this as either “high” or “low” risk.

2. Are the laws and regulations clear and concise? high = no single law; average = the law is complex and difficult to follow; low = the law is easy to follow 3. What does the law (or regulations applicable to procurement) cover?

low = there is a single law that covers drafting and use of standard bidding documents evaluation, contracting, up to management of contracts including payment, warranty, and defects liability periods. (The less the procurement process is covered, the higher the risk).

high = there is no single law 4. Does the law cover the procurement of consulting services? high = consulting services are not covered or there is no law; low = consulting services are covered 5. Does the law differentiate between processes for consulting services and goods/works?

high = there is no law, or it applies the same processes to consulting services as for goods and works average = there is some differentiation but the processes are similar low = consulting services are dealt with separately

6. Does the law require advertisement of all procurement opportunities? low = for all procurement above $25,000; average = all above $100,000; high = no advertisement or advertisement at a higher threshold than $100,000

7. Are contract awards advertised? The same thresholds as stated at item # 6 should be applied. 8. Are there restrictions on goods, works, and services on the basis of origin?

high = procurement is limited to solely national origin; average = there are restrictions or a national preference scheme; low = none

1 ADB. 2007. Guide to Executing Agency Procurement Capacity Assessment. Manila. Available: http://mms.adb.org/test/capacity-assessment-guide.pdf


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Questions for Assessing Procurement Risks: 9. Does the law or relevant legislation and regulation provide acceptable provision for the participation of

state-owned enterprises (SOE)? low = only if the SOE is legally and financially autonomous and not a dependent agency of the

purchaser high = otherwise

10. Are there restrictions on the nationality of bidders and consulting firms invited? high = procurement is limited to solely national firms and individuals; average = there are restrictions or a national preference scheme; low = none

11. Are foreign bidders and consultants forced to offer through or with local partners? high = yes; average = in certain circumstances; low = never

12. Is there a domestic preference scheme? high = across the board; average = applicable in limited circumstances; low = none

13. Is there a national standard mandated for use for quality control purposes? low = with direct, accessible international equivalent; high = without international equivalents

14. Are any agencies exempt from the law (i.e., security forces)? high = yes; also if any types of goods are exempt from parts of the law such as medicines, textbooks, or any other commodities; low = otherwise

15. Is the default method for procurement open competition? high = no; low = yes

16. Is open procurement easily avoided? high = the procurement law allows avoidance of open procurement above the national threshold

based on circumstances that are not in response to natural disasters average = open procurement can be avoided by senior management decision low = avoidance requires approval of an oversight agency

17. Do the rules and regulations require prequalification? low = only for complex contracts; average = no contracts; high = all contracts

18. Do the rules and regulations require registration? high = yes; average = only for specialist goods (medicines); low = no registration

19. Are there systematic procurement process audits? low = yes; average = only financial audits; high = none

20. Is there a procurement manual or guide? low = a single procurement manual or guide; average = manual exists but out of date/not in wide use; high = none

21. Do the laws and regulations mandate the use of standard documents? low = there are documents for goods, works, and consultants services; average = just for 2 of the 3; high = only 1 or none

22. Have the standard bidding documents been approved for use on projects? low = yes; average = some but not all; high = no

23. Do the regulations require the collection of nationwide statistics on procurement? low = yes; average = yes but data are not collected or used; high = no

24. Is consolidated historical procurement data available to the public? low = yes; average = too much or too little; high = no

25. Do the procurement laws and regulations contain provisions for dealing with misconduct? low = yes; high = no

26. Is fraud and corruption in procurement regarded as a criminal act? low = yes; high = no

27. Have there been prosecutions for fraud and corruption? low = there have been successful prosecutions; average = prosecutions seem to focus on low grade junior staff; high = none

28. Is there an alternative disputes resolution process independent of government and courts? low = there is an arbitration law and independent process; average = the standard contracts use ICC or similar dispute resolution; high = arbitration is through the courts or can be overturned by courts

29. Does the law allow for sovereign immunity to the executive agency for claims against it? low = plaintiffs can sue the government for contractual nonperformance; high = plaintiffs cannot do so


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Questions for Assessing Procurement Risks: 30. Do the regulations allow for blacklisting (disbarment) of firms and individuals?

low = there is a blacklisting process or the process is transparent is transparent and equitable and undertaken by an independent oversight agency

average = there is a process and it is administered by a single line agency such as finance high = administered by the executing agency

31. Which body oversees procurement? low = independent body reporting to the elected body; average = single body reporting to the cabinet; high = no existing body or body reports to a single state agency such as the Prime Minister or finance

minister 32. What powers does the oversight body have?

low = the body can impose administrative sanctions on an executing agency and overturn contract awards including ministerial decisions

average = the body can impose sanctions through the head of the executing agency high = the body can only recommend action 33. Is there a nationwide procurement training plan? low = procurement plan is assessed and planned for nationwide; average = delegated to line agencies; high = no strategy or plan 34. Is there a procurement accreditation or professionalization program?

low = externally recognized program; average = government sponsored program; high = none 35. Are major projects identified within an agency’s appropriation or budget?

low = yes; average = no, but a system is in place for the ring-fencing of project funds; high = neither 36. Is the procurement cycle tied to an annual budgeting cycle, i.e., can procurement activity only

commence once a budget is approved? low = no, a medium expenditure framework is in place; average = activity may start up but excluding contract award; high = yes, tied to an annual budget

37. Once an appropriation or budget is approved, will funds be placed with the executing agency or can the executing agency draw them down at will?

low = yes; high = additional controls are imposed (i.e., cash release system) 38. Can an executing agency draw directly from a loan or imprest account or will it spend budgeted funds

with the borrower claiming reimbursement? low = draws directly; high = from budgeted funds

39. When an executing agency is implementing a project using funds from the national budget, has a delay in funding significantly delayed procurement?

low = no or not applicable; high = yes Source: ADB. 2007. Guide to Executing Agency Procurement Capacity Assessment. Manila. Available: http://mms.adb.org/test/capacity-assessment-guide.pdf 3. When an agency has the capacity to undertake procurement efficiently, it will contribute to overall project objectives. Table 2 shows a set of questions to assess EA procurement capacity. The EA is required to respond to these questions. EA responses inform rather than determine ADB’s assessment.

Table 2: Executing Agency Capacity Assessment Questionnaire

Questions Response

Part A. General Agency Resource Assessment 1. Is there a procurement department? 2. What procurement does it undertake? 3. Are the staff provided with written job descriptions? 4. How many years experience does the head of the procurement unit have in a

direct procurement role?

5. How many staff in the procurement department are: (i) Full time? (ii) Part time?


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Questions Response (iii) Seconded?

6. At what level does the department report (to the head of agency, deputy, etc.)? 7. Do the staff who will be involved with the procurement have English language

skills sufficient to undertake international procurement?

8. Are the number and qualification of the staff sufficient to undertake the proposed procurement?

9. Does the unit have adequate facilities such as computers, internet connections, photocopy facilities, printers, etc. to undertake the proposed procurement?

10. Is there a procurement training program? Part B. Agency Procurement Processes, Goods, and Works 1. Has the agency undertaken foreign-assisted procurement of goods or works

recently (last 12 months, or last 36 months)? If yes, by whom and what project?

2. If the above is yes, what are the major challenges? 3. Is there a procurement manual for goods and works? 4. If there is a manual, is it up to date? Does it cover foreign-assisted

procurement?

5. Is there a systematic process to identify procurement requirements (1 year or more)?

6. Who drafts the specifications? 7. Who approves the specifications? 8. Are there standard bidding documents in use and have they been approved for

use on ADB-funded projects?

9. Who drafts the bidding documents? 10. Who manages the sale of the document? 11. Are all queries from bidders replied to in writing? 12. Is there a minimum period for preparation of bids? If yes, how long? 13. Does the bidding document state the date and time of opening? How close is it

to the deadline for submission?

14. Is the opening public? 15. Can late bids be accepted? 16. Can bids be rejected at opening? 17. Are minutes taken? 18. Who may have a copy of the minutes? 19. Are the minutes free of charge? 20. Who undertakes the evaluation (individual, permanent committee, ad hoc

committee)?

21. What are the qualifications of the evaluators in respect to procurement and the goods and works under evaluation?

22. Is the decision of the evaluators final or is the evaluation subject to additional approvals?

23. Using at least three real examples, how long is the period between the issue of the invitation for bids and contract effectiveness?

24. Are there processes in place for the collection and clearance of cargo through ports of entry?

25. Are there established goods receiving procedures? 26. Are goods received recorded as assets or inventory in a register or similar? 27. Is the agency/procurement department familiar with letters of credit? 28. Does the procurement department register and track warranty and latent

defects liability periods?

Part C. Agency Procurement Processes, Consulting Services 1. Has the agency undertaken foreign-assisted procurement of consulting services

recently (last 12 months, or last 36 months)?

2. If the above is yes, what are the major challenges?


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Questions Response 3. Is there a procurement process manual for consulting services procurement? 4. Is the manual up to date? Does it cover foreign-assisted projects? 5. Who identifies the need for consulting services requirements? 6. Who drafts the terms of reference (TOR)? 7. Does the TOR follow a standard format such as background, tasks, inputs,

objectives, and outputs?

8. Who prepares the request for proposals? 9. Are assignments advertised and expressions of interest called for? 10. Is a consultant’s selection committee formed with appropriate individuals in

terms of procurement and technical expertise?

11. What criteria are used to evaluate the expressions of interest? 12. Historically, what is the most common method used (QCBS, QBS, etc.)? 13. Do firms have to pay for the proposal document? 14. Do the evaluative criteria follow a predetermined structure? Are they detailed in

the request for proposal?

15. Are the pre-proposal visits and meetings arranged? 16. Are minutes prepared and circulated after pre-proposal meetings? 17. To whom are minutes distributed? 18. Are all queries from consultants answered in writing? 19. Are the financial and technical proposals in separate envelopes? 20. Are proposal securities required? 21. Are technical proposals opened in public? 22. Do the financial proposals remain sealed until technical evaluation is

completed?

23. Are minutes of technical opening distributed? 24. Who determines the final technical ranking and how? 25. Are the technical scores published and sent to all firms? 26. Is the financial proposal opening public? 27. Are there minutes taken and distributed of financial proposal opening? 28. How is the financial evaluation completed? 29. Are face-to-face contract negotiations held? 30. How long after the financial evaluation is the selected firm to negotiate? 31. What is the usual basis for negotiation? 32. Are minutes of negotiation taken and signed? 33. How long after negotiations until the contract is signed? 34. Are advance payments made? 35. Is there an evaluation system for measuring the outputs of consultants? Part D. Process Oversight and Control 1. Is there a standard statement of ethics? Are those involved in procurement

required to formally commit to it?

2. Are those involved in procurement required to declare any potential conflict of interest and remove themselves from the procurement process?

3. Is the commencement of procurement dependent on external approvals (formal or de facto) outside of the budgeting process?

4. Who approves procurement transactions? Do they have procurement experience and qualifications?

5. Which of the following actions require approval outside of the procurement unit or a permanent evaluation committee? Who grants the approval?

(i) Bidding document, invitation to prequalify or request for proposal (ii) Advertisement of an invitation for bids, pre-qualification or call for

expressions of interest

(iii) Evaluation reports (iv) Notice of award


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Questions Response (v) Invitation to consultants to negotiate (vi) Contracts

6. Is contractual performance systematically monitored and reported upon? 7. Does the agency monitor and track its contractual payment obligations? 8. On average, how long is it between receiving a firm’s invoice and making

payment?

9. What is the standard period for payment included in contracts? 10. When payment is late, are the beneficiaries paid interest? 11. Are payments authorized by the same individuals empowered to approve

invitation documents, evaluations, and contracts?

12. Is there a written auditable trail of procurement decisions attributable to individuals and committees?

13. Are procurement decisions and disputes supported by written narratives such as minutes of evaluation, minutes of negotiation, notices of default/withheld payment?

14. Is there a formal nonjudicial mechanism for dealing with complaints? 15. Is a complaints resolution mechanism described in national procurement

documents?

Part E. Record Keeping 1. Is there a referencing system for procurement files? 2. Are original contracts secured in a fire and theft proof location? 3. Are copies of bids or proposals retained with the evaluation? 4. Are copies of the original advertisements retained with the pre-contract papers? 5. Is there a single contract file with a copy of the contract and all subsequent

contractual correspondence?

6. Are copies of invoices included with contract papers? 7. For what periods are records kept? ADB = Asian Development Bank Source: ADB. 2007. Guide to Executing Agency Procurement Capacity Assessment. Manila. Available: http://mms.adb.org/test/capacity-assessment-guide.pdf 4. The findings on the general procurement environment and the capacity of the EA provide inputs to the procurement capacity assessment report. Such report highlights procurement capacity strengths and weaknesses and recommends specific actions to address identified constraints.


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FRAMEWORK FOR ASSESSING AND TRACKING CORRUPTION VULNERABILITIES IN PUBLIC PROCUREMENT

A. Background 1. This summary presents a methodology for assessing and tracking areas that are susceptible to corruption in public procurement and identifies potential options to reduce corruption risks. Corruption risks tend to be high in countries where the existing legislative, regulatory, and institutional frameworks for limiting the discretionary aspects of public procurement are weak. Wide discretion, weak accountability, little or no transparency, and the monopoly of power tend to increase opportunities for corruption. The most common procurement corruption schemes are (i) kickbacks, (ii) bid rigging, (iii) use of front or shell companies, and (iv) misrepresentation. Table 1 summarizes these schemes, along with the corresponding warning signals/red flags, to draw attention to potentially corrupt procurement practices.

Table 1: Common Corruption Schemes in Public Procurement

Scheme Description Form Red Flags/Warning Signals Kickbacks A local agent,

representative, or joint venture partner of a foreign company with good connections to the parties involved acts as an intermediary in bidding for public contracts. Bidders buy influence over the procurement decision making process and solicit direct and immediate rewards by paying government officials who influence the awarding of the contract.

Commission-sharing agreements

• Award of repeated contracts to the same supplier without competition, often above market prices

• Unnecessary involvement of a local agent/middleman

• Acceptance by procurement officials of inappropriate gratuities from bidders or their local agents

• Unexplained wealth of procurement officials

• Government officials are known for demanding or accepting bribes

• Recurrent contract awards to a favored contractor despite underdelivery or poor performance

• Existence of close personal relationships between suppliers or local agents and government officials with authority over public procurement

• Former government officials act as suppliers to a public sector institution.

• Qualified bidders do not bid, especially if they initially took steps to bid, such as applying to prequalify.

Bid rigging

Bid rigging occurs when a competitive public tender is manipulated in such a way that a preselected bidder wins the tender. Manipulation may occur with or without the knowledge of the public officials.

Bid suppression • Competitors agree not to bid

or are coerced by another bidder or, in some cases, by a public official, into not bidding or withdrawing a previously submitted bid, so that a designated bidder will win.

• In return, the nonbidder/s may receive a subcontract to the winning bidder or a payoff for not bidding.

• Qualified bidders do not bid, especially if they

initially took steps to bid, such as applying to prequalify.

Complementary bidding • Co-conspirators submit token

bids that are intentionally high or that deliberately fail to meet all of the requirements of the tender to allow a

• All bids are substantially higher than (i) the procuring entity’s cost estimate of the contract or (ii) comparable bids by the same bidders for similar work.


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Scheme Description Form Red Flags/Warning Signals favored bidder to win.

• The losing bidders are compensated by the winning bidder.

Bid rotation • Co-conspirators submit bids,

but by agreement they take turns being the low bidder on a series of related contracts.

Customer or market allocation • Co-conspirators agree to

divide up customers or geographical areas. They do not bid against each other or submit only complementary bids.

• A winning bidder subcontracts performance of part of the contracted works to one or more losing bidders with or without the client’s knowledge.

Lowballing • The designated company

submits the lowest bid with the understanding of the public official responsible for awarding the contract that, once awarded, the contract will subsequently be amended and the contract price increased to enable the winning bidder to complete the work and to inflate his profit margin. Part of this margin may be shared with the official.

• Officials approve change orders after the bidding, which materially change the contract price.

Use of front or shell companies

Corrupt officials commonly use front or shell companies, generally in conjunction with other schemes such as kickbacks to disguise their illegal influence over contract awards for which they are formally responsible. This scheme enables a corrupt public official to rig the tender and to exert influence over other genuine bidders to ensure that his front company wins the contract and he enjoys the resulting illegal gain. Alternatively, a front company may appear as a subcontractor to a prime contractor and actually function as a broker between the prime contractor and the corrupt public official. The subcontract camouflages the kickback paid by the prime contractor to the public official, but no real performance is rendered under the subcontract.

• Previously unknown companies, with no track record of implementing government contracts, serve as subcontractors to foreign or local prime contractors on a project.

• A subcontractor company is registered in a secrecy jurisdiction.

• Payments are made against invoices to accounts held by companies registered in a secrecy jurisdiction.

• The subcontractor company has an opaque ownership structure.

• The owners of the subcontractor company are listed as law firms or as incorporation agents, rather than named as individuals to hide the identity of the individuals who benefit financially from the company’s business operations.

• The subcontractor lacks visible corporate facilities.

• The phone number provided by the subcontractor company is a personal residence or an answering service.

• Companies winning sizable or recurrent government contracts have opaque ownership structures.

• Family members of senior government officials hold ownership or management roles in companies that win government contracts.

• Government officials have recurrent appearances at company headquarters.


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Scheme Description Form Red Flags/Warning Signals

Misrepresentation

Public officials may subvert public procurement procedures by misrepresenting facts. They may collude with a favored bidder to enable that bidder to win a contract resulting from a public tender that it would not have won had the rules of the tender been correctly applied.

• The procuring entity fails to keep written minutes of the public bid opening meeting.

• The minutes of the public bid opening meeting are not signed in their original form by all bid opening committee members or by the representatives of the bidders who attended the bid opening.

• There is a time delay between the public bid opening and the dissemination of the minutes of the bid opening to all the bidders.

• The procuring entity fails to keep adequate written records of the procurement process.

• The bids submitted contain written corrections, deletions, or alterations of key information in the bid, such as prices or the bid validity period.

Condensed from Glenn Ware, Shaun Moss, J. Edgardo Campos, and Gregory Noone. 2007. Corruption in Public Procurement. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

B. Scope and Methodology 2. The value chain methodology is a means of assessing and tracking corruption vulnerabilities at various stages along the process of translating inputs to outputs. Essentially, three basic steps are involved in the value chain methodology: (i) identify vulnerable points along the procurement process flow; (ii) diagnose the situation and probe into the underlying causes; and (iii) design and implement anticorruption options.2 The subsequent figure presents a generic process flow value chain for the procurement process, the decision points along the process flow that are vulnerable to corruption, the early warning signals, and some corruption risk mitigation measures. The examples given in this figure are not exhaustive. They are meant to be tailored to the country-specific context of public procurement.

2 Details were drawn from Glenn Ware, Shaun Moss, J. Edgardo Campos, and Gregory Noone. 2007. Corruption in

Public Procurement: A Perennial Challenge. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.


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Project

Design and Procurement

Planning

Decision Points Vulnerable to

Corruption

A Framework for Assessing and Tracking Corruption Vulnerabilities in Public Procurement

• Deliberately exclusive prequalification requirements • Voluminous administrative documentation to prequalify • No clear instructions on how bidders should prepare their bids or structure bid prices • Nondisclosure to bidders of evaluation criteria • Favored bidders are informed of the estimated contract cost • Last-minute switching of the location for bid submission/bid opening • Bids are not opened in public

Supply Side • E-procurement • Forensic audits • Selective

sanctioning: leveraging investigative and enforcement capacity

• Unclear project selection criteria • No plan for international tenders

(for high-value procurement contracts)

• No built-in anticorruption plan • Inconsistency of cost estimates

with market rates • Disregard for least-cost solutions

Prequalifi-cation and

Bid Submission

Bid

Evaluation and Award of

Contract

Contract

Implement-ation

Examples of EarlyWarning Signals

Potential Responses/Risk

Mitigation Measures

• Manipulation by vested interests of procurement plans • Political interference in project selection

• Non-advertisement/restriction of invitation to bid to media of limited circulation • Posting on the web but access to the website is controlled by a password • High-value contract is not advertised internationally • Incomplete information in the invitation to bid • Invitation to bid is published 3−4 days before the deadline

Procure-ment

Process

• Altered contract specifications after contract award • Untimely progress payments • Insufficient verification of scope of work and physical inspections • Unreasonable cost overruns

Advertising

• Altered bid evaluation criteria • Intervention by public officials/

politicians/vested interests • Qualified bidders drop out as the

bidding process progresses • Weak explanation for disqualifying

the lowest bidder • Unreasonable delays in contract

negotiation/execution

Demand Side • External monitoring • Reporting and access to information • Information-sharing and collective action • Norms and conventions to address cross-border corruption

Adapted from G. Ware, S. Moss, J. E. Campos, and G. Noone. 2007. Corruption in Public Procurement: A Perennial Challenge. In The Many Faces of Corruption, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

• Discretion by officials in the manner of advertising bid invitations • Manipulation by officials of the information to be disseminated

• Manipulation of prequalification requirements • Bid rigging/collusion • Manipulation of bid openings

• Manipulation of bid evaluation • Collusion • Imposition by officials of informal conditions on bidders/kickbacks

• Deviation from original bid documents • Complicated processing of claims/payments


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3. When applying the value chain methodology, it is important to distinguish between corruption and a range of institutional weaknesses that lead to inefficiency. For example, weak capacity could be responsible for poor planning or poor implementation, rather than corruption. Agencies may identify projects and overestimate their cost, leading to inefficiency. A review of the decision making process, case analysis of incident cases, triangulation, and other diagnostic tools are necessary before drawing any conclusion. The response to the situation will differ depending on the underlying cause. Red flags are useful as warning signals but they do not necessarily constitute actionable evidence on corruption. The challenge is to assess which red flags are actionable and pursue those that are likely to prevent the larger diversion of funds. This includes increased communication with investigative units in the government and in donor agencies. 4. During the project design stage, red flags may include (i) unclear project selection criteria, (ii) lack of a plan for international tenders, specifically for high-value procurement contracts, (iii) absence of a built-in anticorruption plan, (iv) inconsistency of cost estimates with market rates, and (v) disregard for least-cost solutions. Project distortion by politicians at the outset may lead to bid rigging or collusion in later stages that can divert funds to political and other unintended uses. The most important stage of public procurement is the evaluation of bids. The transparency, integrity, and reliability of the process depend on how clearly the bid evaluation criteria were originally expressed in the bidding documents and whether or not those criteria were applied during the selection process. Some evaluation systems allow public officials discretion in decision making. Although price is the most widely used evaluation criterion, non-price criteria are also used, such as the availability of after-sales service and spare parts, delivery time, payment schedule, costs of operating the equipment, training, safety, and environmental impact. The extent to which these non-price criteria are quantified often dictates the extent to which the evaluation process is prone to undue or corrupt influence. The most vulnerable systems are those that convert evaluation criteria into points, which are awarded to each bid based on the evaluators’ subjective assessment. Another vulnerable point is postqualification. The most qualified and cost-effective bidder may be prevented from receiving the award because of the intervention of vested interests. When this happens, the price of delivery may increase and quality may decrease due to corrupt practices. 5. A two-pronged approach to reducing corruption risks in public procurement can be effective: (i) supply side, which calls for improving internal processes, and (ii) demand side, which strengthens and complements internal processes. Table 2 provides details on each potential risk mitigation measure.

Table 2: Details on Potential Corruption Risk Mitigation Measures



(i) Supply side E-procurement The use of information and communication technologies

is a promising innovation that can increase competition, enhance transparency, reduce administrative costs, improve government efficiency, and reduce collusion.

However, information and communication technologies can improve performance and reduce corruption only if systemic problems are addressed adequately: (i) laws and regulations governing procurement need to be


55



simplified; (ii) management systems have to be streamlined to enhance transparency, accountability, and efficiency, and procurement staff need to be trained in operating these systems; (iii) implementation rules and practices for procurement have to be standardized; (iv) procurement officials have to adopt more businesslike attitudes in managing the procurement process, such as efficiency in inventory management, fairness in contract management, and ethical practices; and (v) adequate oversight mechanisms have to be put in place.

Forensic audits Forensic audits should drive the auditors to “look behind

the paper” and verify that invoices submitted by contractors are authentic, or that material noted on the invoices has been delivered or installed. Such verification includes site visits to determine if contractors are front enterprises or not.

Selective sanctioning Effective enforcement increases the risk of punishment.

There must be a system in place that can competently receive a complaint, conduct an investigation, pursue a prosecution, provide for mechanisms for adjudication or convictions, and devise remedies.

Voluntary disclosure

programs These programs allow contractors to report fraud and corruption in their operations. Under such programs, a contractor that makes a complete, timely, and truthful disclosure would not be barred from bidding on future business contracts.

(ii) Demand side External monitoring Independent compliance monitors—governance experts

retained by private sector companies or appointed by government regulators to monitor crucial control functions—are emerging as critical players performing oversight functions for controlling fraud and corruption. Reputable associations of contractors or civil engineers, a local/regional university, a nongovernment organization with a focus on anticorruption, or a religious organization with similar monitoring skills could be given observer status on bids and awards committees. Integrity pacts illustrate another avenue for monitoring the procurement process. They comprise a formal agreement between the government procurement agency and the bidders, in which participants pledge not to pay, offer, demand or accept bribes, or collude with competitors to obtain a contract, or while carrying it out. A third party monitor is engaged to oversee the proper implementation of the mutual agreement.

Reporting and access

to information The media and international nongovernment organizations have a critical role in monitoring and


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exposing corruption. Complementary national legislation should include a freedom of information act that allows the citizenry, watchdog groups, and the media access to the information they need to find out which firms are getting contracts under what terms and what the value of the contract is.

Information sharing

and collective action The establishment of a transnational corruption information sharing center could process information that would be useful in business and loan decisions, investigations, and assistance with national law enforcement efforts. The shared information would also be useful in collective action that could be imposed on corrupt regimes, corporations, and individuals. However, bureaucratic and political obstacles are likely to occur. These might be overcome if information were widely shared among international financial institutions, and if each retained the right to autonomously review the findings of other institutions and make independent assessments.

Norms and

conventions to address cross-border corruption

The evolving international trends in reducing corruption and fraud in the public procurement process include harmonization of norms, standards, practices, and vocabulary—all of which foster greater transparency and predictability in the procurement process. Another critical effort is the continued emergence of regional and international anticorruption conventions.

Source: Drawn from Glenn Ware, Shaun Moss, J. Edgardo Campos, and Gregory Noone. 2007. Corruption in Public Procurement. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

C. Remarks on the Value Chain Methodology 6. The value chain methodology offers several advantages: (i) it is results-oriented; (ii) it provides a structured picture of decision points along corruption-prone levels; (iii) it highlights key vulnerabilities as well as measures for reducing corruption risks; and (iv) it offers a convenient method for developing warning signals for tracking corruption. This line of inquiry is adaptable to differing country situations. The users of this methodology could combine data collection techniques and diagnostic tools to assess corruption risks. Information may be collected through database search (high volume purchases, improper change orders, or unusual approval patterns); interviews with officials, losing bidders, and other groups; inspections; and review of audit reports and related studies. However, the value chain analysis needs to be updated over time, given institutional changes that could give rise to new opportunities for corruption.


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SECTION IV:

COMBATING CORRUPTION

A. Integrity System Assessments

58

B. Country Self-Assessment/Stocktaking: Anticorruption 72

C. Value Chain Analysis—Assessing Corruption Risks at Sector Level

76

D. Other Corruption Risks Frameworks

109


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INTEGRITY SYSTEM ASSESSMENTS

• National Integrity System Study 59

• Integrity Development Review: Agency Level

62


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NATIONAL INTEGRITY SYSTEM STUDY

A. Background 1. This summary examines the key features of a national integrity system (NIS) study.1 As part of a holistic approach to combating corruption, Transparency International developed the NIS, which encompasses the key institutions and pillars that contribute to integrity, transparency, and accountability in a country. The ultimate objective is to make corruption a high-risk and low-return undertaking, given the broader struggle for creating effective, efficient, and fair governments. The NIS approach unlocks a form of diagnosis that considers the whole system, instead of separate institutions, rules and practices, and stand-alone programs. The point of entry of anticorruption efforts is gaining an understanding of the underlying causes, loopholes, and incentives that feed corrupt practices at any level. The NIS, through its constituent parts, offers options for introducing system improvements to support good governance. B. Scope and Methodology 2. The NIS consists of the following pillars: (i) executive, (ii) legislature, (iii) political parties, (iv) electoral commission, (v) supreme audit institution, (vi) judiciary, (vii) civil service/public sector agencies, (viii) law enforcement agencies, (ix) public contracting system, (x) ombudsman/government anticorruption agency, (xi) media, (xii) civil society, (xiii) business sector, (xiv) regional and local government, and (xv) international institutions Each pillar is examined through seven information categories summarized in Table 1 below.

Table 1: Information to be Examined under Each Pillar2 • Role of the pillar (legal/regulatory framework, independence/autonomy, and stated or inferred

responsibilities) • Resources/structure (size, budget, and funding sources of the institution) • Accountability (reporting lines and role of the public in consultation and oversight) • Integrity mechanisms (codes of conduct and rules on conflict of interest, gifts and hospitality, and

post-employment restrictions) • Transparency (rules on disclosure, reporting requirements, and access to

procedures/documentation) • Complaints/enforcement mechanisms (provisions for whistle-blowing, sanctions, and redress

mechanisms) • Relationship to other pillars (extent to which the institution is a key part of the national integrity

system and nature of interaction with other pillars) Source: Adapted from Transparency International. 2005. National Integrity Systems. Berlin.

Available: www.transparency.org/policy_research/nis/methodology

3. During the conduct of the NIS, these pillars need to be tailored to the country context. For example, in some countries the monarchy or the military may play a central role. In others, some pillars may not exist.

1 Drawn from Pope, Jeremy. 2000. Confronting Corruption: The Elements of a National Integrity System. Berlin.

Available: www.transparency.org/publications/sourcebook 2 The guide questions for probing into each information category are available at

www.transparency.org/policy_research/nis/methodology (about 21 pages).


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4. The NIS evaluation study (i) evaluates the formal framework for the NIS pillars; and (ii) reviews what actually happens in practice, focusing on deviations from the formal legal or regulatory provisions. The formal provisions for the NIS may be weak, but certain pillars may function well anyway. An explanation must be provided for the robustness of the system despite inadequate rules. 5. The NIS study provides (i) an understanding of how well the overall system works in practice, (ii) a benchmark for measuring further developments, and (iii) a basis for cross-country comparisons. The benchmark serves as a starting point for signaling areas requiring priority action, and forms a basis from which stakeholders may assess existing anticorruption initiatives. It helps explain which pillars are mutually supportive, what factors support or inhibit effectiveness, and what is required to support overall NIS development. Cross-country comparisons offer an empirical tool that adds to the understanding of strong or weak performers. Within regions, the results can create learning opportunities. 6. The NIS study is based on objective and subjective sources of data, which include legislation, government and nongovernment reports, corruption diagnostics, academic analysis, investigative journalism by media, expert interviews, and focus group discussions. Desk research and field research are undertaken. In-country organizations, generally national chapters of Transparency International, or independent country experts in governance and anticorruption usually conduct the NIS studies. At least one independent expert serves as a referee for each country study. 7. Focus groups are convened including governance and anticorruption experts drawn from government, the private sector, the professions (lawyers, accountants, and engineers), media, civil society, and international organizations. Stakeholders inform the evaluation of the NIS and comment on the draft NIS study. Stakeholder consultation is crucial for formulating the priorities and sections of the country study. C. Corruption Risk Mitigation 8. The elements of a serious anticorruption effort include (i) a clear commitment by political leaders to fight corruption wherever it occurs and to submit themselves to scrutiny; (ii) primary emphasis on prevention of future corruption and on changing systems, rather than witch-hunts, (iii) the adoption of comprehensive anticorruption legislation implemented by agencies of manifest integrity (including investigators, prosecutors, and adjudicators); (iv) the identification of government activities most prone to corruption and a review of both substantive law and administrative procedures; (v) a program to ensure that salaries of civil servants and political leaders adequately reflect the responsibilities of their posts and are comparable as possible with those in the private sector; (vi) a study of legal and administrative remedies to ensure that they provide adequate deterrence; (vii) a partnership between government and civil society, including the private sector; (viii) making corruption a "high-risk" and "low-profit" undertaking (increasing the risk of being detected and the likelihood of appropriate punishment); and (ix) developing a change management scenario. 9. The discretionary power of public officials and the corresponding opportunities for abuse of power can be reduced through a broad set of changes aimed at improving public programs. These changes seek to streamline business transactions, improve people's access to public services, and diminish the incentive to pay bribes. Simplifying programs and procedures to make them more efficient can reduce opportunities for delays and discretion. When discretion must be retained, officials should be given clear, written guidelines on the exercise of their


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duties. The process itself must be transparent. Table 2 below presents examples of measures for mitigating corruption risks. Such measures are merely illustrative. They need to be tailored to country-specific situations.

Table 2: Examples of Corruption Risk Mitigation Measures • Establish an open, competitive, and transparent procurement system • Develop internal financial management systems that ensure controls over resource uses • Develop and implement strategies that create a firm ethical basis for public administration • Open up government to make most official information accessible to the public, and foster positive

and open relationships between government agencies and the press • Monitor the assets, incomes, and liabilities of public officials • Review and enforce regulations on conflict of interest • Introduce appropriate restrictions on post-public employment in the private sector • Require government officials to report and record gifts, hospitality, and political donations received • Poll the public on is perceptions of government service delivery • Provide channels for complaints • Encourage professional bodies (accountants, auditors, lawyers) to declare that participation in

corrupt activities (including money laundering) is unprofessional conduct and that corrupt members will be liable to disbarment

• Build anticorruption coalitions • Strengthen oversight, audit, and investigative bodies

Source: Pope, Jeremy. 2000. Confronting Corruption: The Elements of a National Integrity System. Berlin. Available: www.transparency.org/publications/sourcebook

10. A common denominator in anticorruption efforts is the presence of public support. People need to understand the seriousness of corruption and what can be done about it. Civil society groups, in partnership with the government and the private sector, have an important role in raising public awareness of the harm associated with corruption. There is a need to determine public perception about existing corruption levels and where corruption takes place to provide a baseline against which the progress of anticorruption efforts can be gauged. The legal and administrative environment should provide for a free press, aided by a freedom of information legislation that provides citizens and the media access to government information. Creating or strengthening independent bodies (Office of the Ombudsman, Office of the Auditor-General, Elections Commission, judiciary, etc.) is vital for upholding accountability, transparency, and rule of law. 11. Fighting corruption is a long-term process. It must be openly supported from the top, and reinforced by ethical conduct at all levels. A coherent strategy must address several fronts. Where the country will not be able to do everything simultaneously, it is vital to identify where the greatest problems lie and to tackle issues where there is most added value, with due regard for timing and sequencing. D. Further Remarks on the NIS 12. Completed NIS country studies are available at www.transparency.org/policy_research/nis/regional. These studies complement global indices and surveys, such as the corruption perceptions index, bribe payers’ index, and global corruption barometer, as well as national surveys. They provide insight into specific country practices, constraints, and potential measures to reduce corruption risks.


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INTEGRITY DEVELOPMENT REVIEW A. Background 1. This paper summarizes the key features of an integrity development review (IDR), a guided self-assessment that diagnoses an agency’s corruption resistance mechanisms and its vulnerabilities to corruption.1 The IDR builds on the corruption resistance review developed by the Independent Commission against Corruption of New South Wales and the corruption vulnerability assessment tool developed by the United States Office of Budget and Management The corruption resistance review enables agencies to assess their level of corruption resistance and progressively develop and implement corruption prevention measures. The corruption vulnerability assessment determines the susceptibility of agency systems to corruption and adequacy of safeguards to forestall wrongdoing. The Development Academy of the Philippines brought these two components together in developing the IDR.2 B. Scope and Methodology 2. Integrity development aims to integrate corruption resistance strategies into the various aspects of agency operations so that contributory factors to corrupt behavior can be curbed. Moreover, it seeks to strengthen the agency’s capability to detect and penalize corrupt and/or unethical behavior, and to establish benchmarks by which agency performance and results of anticorruption programs can be monitored. Table 1 shows the IDR’s two complementary tools: (i) corruption resistance review and (ii) corruption vulnerability assessment.

Table 1: Integrity Development Review Tools

Tool

Objectives

1. Corruption resistance review • Integrity development assessment • Self-assess systems integrity and review

relevant policies and procedures • Survey of employees • Assess deployment of integrity building

measures and generate feedback from employees

2. Corruption vulnerability assessment

• Process mapping • Understand agency procedures • Risk assessment • Identify factors that induce deceit,

malfeasance, or abuse of power or position for private gain

• Evaluation of controls and safeguards • Assess the adequacy of means in addressing risks

Source: Development Academy of the Philippines. 2007. Integrity Development Review: Do-it-Yourself Handbook. Manila.

1 Details were drawn from the Development Academy of the Philippines. 2007. Integrity Development Review: Do-it-

Yourself Handbook. Manila. 2 The IDR Handbook was a product of a project on Pursuing Reform through Integrity Development, implemented

from 2003 to 2004 with assistance from the United States Agency for International Development (covering three Philippine government agencies) and then from 2005 to 2007 with support from the European Commission (covering 16 Philippine government agencies). The handbook was updated in 2007.


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1. Corruption Resistance Review 3. As an IDR tool, the corruption resistance review aims to enhance systems integrity and develop integrity in the workplace. The figure below presents the 10 organizational dimensions that work together to influence an organization’s integrity and resistance to corruption: (i) leadership, (ii) code of conduct, (iii) gifts/benefits policy, (iv) human resource management, (v) performance management, (vi) procurement management, (vii) whistle-blowing, internal reporting, and investigation, (viii) corruption risk management, (ix) financial management, and (x) interface with the external environment.

4. At the heart of an organization is the individual, and installing systems and procedures can influence the individual’s behavior. Within the agency, leadership sets the tone. Leaders can serve as models of ethical conduct and steer employees towards integrity-building practices. Appropriate codes of conduct in the exercise of authority, conflict of interest, and acceptance of gifts and benefits can define boundaries between desirable and undesirable behavior in the agency. The code of conduct, when made known to employees, clients, and

Whistle-blowing, Internal Reporting, and Investigation

Procurement Management

Corruption Risk Management

Leadership Code of Conduct Gifts/Benefits Policy Financial

Management Performance Management

Human Resource Management

Interface with the External Environment

Organizational Dimensions

INDIVIDUAL

ORGANIZATION

ENVIRONMENT

Source: Development Academy of the Philippines. 2007. Integrity Development Review: Do-it-Yourself Handbook. Manila.


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suppliers and when paired with appropriate and applied sanctions, can help deter corrupt behavior. 5. At the level of the organization, systems and mechanisms for human resource management, performance management, financial management, and various systems and procedures can incorporate policies and guidelines that reinforce the agency’s resistance to corruption. Instituting mechanisms for internal reporting and investigation of corrupt behavior helps increase the probability of detection. Corruption risk management in sensitive functions can identify susceptible areas where safeguards and controls should be tightened. 6. Managing the interface of the agency with its environment addresses corruption risks arising from gift acceptance, unclear and inadequate information about the agency’s transactions, and corrupt behavior of officials. Agencies may use the IDR framework to assess their anticorruption efforts and to identify measures that can improve these efforts.

(i) Integrity Development Assessment 7. The integrity development assessment helps the agency identify the necessary steps in achieving a certain level of systems integrity, mainly though defined standards/levels for each of the 10 organizational dimensions. A five-point scale is used to assess each dimension, where 1 is the lowest level and 5 the highest level. Measures under level 1 represent the minimum standard of having a written policy or procedure for a particular dimension. Level 2 measures denote the deployment of the written policies or procedures to the employees, which include providing access to information and training. Measures under level 3 signify consistent enforcement of integrity building policies and procedures. Enforcement means that the system with designated personnel is in place, the employees use the system, and the results of which are considered in decision making. These measures also indicate the use of incentives and disincentives/sanctions. Integrating an incentive/disincentive system reinforces good practices in agency operations and helps build a culture of integrity. Level 4 measures pertain to the integration of organizational systems and processes in the agency. Level 5 measures correspond to good practices and cycles of improvement, especially in system monitoring and evaluation. They suggest robustness of systems and controls against corruption. The subsequent tables provide detailed descriptions of each level. 8. Leadership. Senior leaders and officials are important in setting values and directions and in promoting and rewarding good governance. Resoluteness of leadership contributes to the success of corruption prevention efforts. Table 1 presents the system for rating leadership in an IDR context.

Table 1: Leadership

Rating Levels of Achievement 1 • Senior leaders set organizational values, short and longer-term directions, and performance

expectations. • Senior leaders articulate the importance of everyone in the organization to be ethical in his/her

behavior and in dealing with all stakeholders. • Senior leaders have clearly defined authorities and accountabilities.

2 • Senior leaders deploy organizational values, short and longer-term directions, and performance expectations.

• Senior leaders take proactive steps to discourage staff from engaging in corrupt practices.

3 • Senior leaders have specific responsibilities for prevention and detection of corruption. • Senior leaders are trained in corruption prevention and detection.


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Rating Levels of Achievement 4 • The practices and performance of senior leaders in preventing and detecting corruption are

reviewed/evaluated regularly. • Decisions/actions of senior leaders are randomly checked for possible abuse of authority/

discretion and conflict of interest. • Integrity enhancement/corruption prevention is integrated in management functions.

5 • The agency reviews the effectiveness of its leadership organization in enhancing integrity in the organization.

• The results of the review are used to strengthen the agency’s leadership organization and system. 9. Code of Conduct. A code of conduct sets the standards of behavior expected of officials and staff. It is not an end in itself. To be effective, it must be communicated, taught to all agency personnel, and integrated into various aspects of agency operations (Table 2).

Table 2: Code of Conduct

Rating Levels of Achievement 1 • The agency has a general code of conduct.

• The agency monitors annual submission of the Statement of Assets and Liabilities and Net Worth and disclosures of business interest and financial connection.

2 • The agency has a customized code of conduct, which has concrete examples of ethically acceptable/non-acceptable practices and situations of conflicts of interest that are relevant to the different types of work carried out by the agency.

• There is a program for promotion (e.g., orientation) of the agency code of conduct. 3 • The agency code of conduct is enforced consistently, with managers having clear tasks of

promoting and monitoring compliance. • Violations of the agency code of conduct are sanctioned. Rewards are given to employees who

consistently exhibit behavior consistent with the agency code of conduct. 4 • The agency code of conduct has been integrated into key systems and critical functions (e.g.,

applicable provisions of the code of conduct are included in contracts with external parties). • Employees’ record of adherence to or violation of the code of conduct is used as a basis for

promotion. • Disclosures of employees from the Statement of Assets and Liabilities and Net Worth are analyzed

and appropriate actions are taken. 5 • The agency code of conduct is reviewed regularly for effectiveness in preventing corruption and in

specifying and promoting the desired behavior of employees. • The results of the review are used to strengthen the agency’s code of conduct.

10. Gifts and Benefits Policy. Gifts and benefits are offered innocently or solicited as bribes. Acceptance of a gift or benefit can create a sense of obligation that may compromise the recipient’s honesty and impartiality. An agency needs to have policies and procedures in place to deal with gifts and benefits and to enforce them accordingly (Table 3).

Table 3: Gifts and Benefits Policy

Rating Levels of Achievement 1 • The agency has a written policy on solicitation and acceptance of gifts with relevant examples.

• The agency has written guidelines for donations. The agency has a written policy on offers of bribes.

2 • The agency has a program on the promotion of the policy of solicitation and acceptance of gifts, for both internal and external stakeholders.

• The agency has a registry for gifts, donations, and institutional tokens. 3 • The policy on solicitation and acceptance of gifts is enforced consistently, with managers having

clear tasks of promotion and monitoring compliance. • The gifts and benefits received and documented are disposed of according to procedures defined

in the agency policy. • Rewards are given to those who report offers of bribes. • Sanctions are applied to officials and staff who fail to comply with the policy.


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Rating Levels of Achievement 4 • The registry of gifts is available for examination by internal and external stakeholders.

• The gifts in register and reported bribes are reviewed regularly and examined vis-à-vis decisions and treatment of the agency’s stakeholders.

5 • The agency’s policy on solicitation and acceptance of gifts is reviewed regularly for effectiveness. • The results of the review are used to tighten the agency’s policy on solicitation and acceptance of

gifts and benefits. 11. Human Resource Management: Recruitment, Selection, and Movement of Personnel. The recruitment process provides the agency an opportunity to screen incoming employees for likelihood of corrupt behavior and conflict of interest. The agency should be wary of nepotism or favoritism and ensure merit-based selection and promotion procedures. Upon entry, relevant interventions for new recruits include orientation on the code of conduct and work standards and training in corruption prevention and risk management. The promotion system can help sanction corrupt behavior and reward people who comply with the agency’s integrity measures (Table 4).

Table 4: Human Resource Management

Rating Levels of Achievement 1 • The agency has a written guideline for recruitment and promotion of personnel.

• The agency has a Selection Board and Promotions Board with rank and file representatives. • The agency has a complete set of job descriptions and qualification standards for all positions.

2 • The agency guidelines for recruitment and promotion are disseminated proactively. • Members of the Boards and relevant personnel undergo orientation on the agency’s recruitment

and promotion policies and processes. 3 • The policies/guidelines on recruitment and promotion are enforced consistently (e.g., personnel

appointments are issued based on the provisions of the agency merit selection and promotions plan; policy on outside employment; blacklisting of erring personnel).

• The agency employs measures to prevent entry of corrupt employees (e.g., potential conflicts of interest are considered, background investigation is conducted).

• The agency keeps records of meetings and decisions of the Boards. • The agency has a mechanism to shield recruitment, placement, and promotion of personnel from

political intervention. 4 • The results of performance evaluations and complaints involving moral turpitude are considered in

the placement and promotion of employees. • Basis for decisions on promotion and movement of personnel that deviate from the

recommendations of the Boards are documented. • The agency has a post employment policy for resigning/retiring personnel. • The agency conducts random checks of the decisions of the Boards.

5 • The outcomes of personnel recruitment, selection, and promotion are reviewed regularly. • The agency’s merit selection/promotion plan is reviewed regularly for effectiveness in enhancing

integrity and preventing corruption. • The results of the review are used to enhance the integrity of personnel recruitment, selection, and

promotion processes. 12. Performance Management. One way of aligning individual and organizational interests is to clarify the agency’s vision, mission, and goals. Performance management ensures that agency goals are met because regular monitoring can increase the likelihood of detecting employee activities. It can also address possible negligence at duty and contribute to building resistance to corruption if the system provides incentives for honest behavior and disincentives for unethical behavior (Table 5).


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Table 5: Performance Management

Rating Levels of Achievement 1 • The agency has set organizational goals, annual targets, and performance indicators.

• Performance targets and work plans at unit and individual levels are based on the agency’s goals. 2 • The agency has a performance management system in place.

• Managers and supervisors are trained in performance evaluation and management. • The basis of performance evaluation is made known to all employees.

3 • The agency prepares reports regularly (e.g., annual report to assess accomplishment of its goals and targets.

• The agency evaluates individual performance regularly. Individuals are made to report their accomplishments vis-à-vis goals and targets.

• The agency consistently rewards good performance and sanctions poor performance and negligence of duty.

• Agency annual reports are made available to the public to account for what the agency has accomplished vis-à-vis its targets.

4 • The agency links staff performance ratings with the attainment of targets and level of performance. • Levels of agency and individual performance are analyzed in relation to corruption incidence in the

agency. 5 • The agency reviews the effectiveness of its performance management system regularly in

preventing corruption and enhancing integrity. • The results of the review are used to improve the agency’s performance evaluation and

management system. 13. Procurement Management. A poorly managed procurement system opens risks of corruption and resource waste due to poor quality of goods and overpricing. Risk factors include conflict of interest, bribery, extortion by public officials, and noncompliance with procedures. Open, objective, and transparent bidding, awarding of contracts, and delivery and inspection procedures are vital to ensure the integrity of the agency’s procurement (Table 6).

Table 6: Procurement Management

Rating Levels of Achievement 1 • The agency has adopted the required procurement management system.

• The agency has an annual procurement plan. • Third party observers are invited to witness the procurement process (e.g., eligibility screening,

pre-bid conference, opening of bids, and bidding evaluation). 2 • The agency has written procedures on the different modes of procurement, specifying checkpoints

for receiving and inspecting goods and services procured. • Members of the Bids and Awards Committee (BAC) and other relevant personnel are trained in the

procurement law and the different modes and processes of procurement. • BAC members are made to disclose potential conflict of interest in all transactions. • The agency has a centralized database of prices and suppliers of frequently procured items.

3 • The agency keeps records of BAC decisions and minutes of meetings. • The agency strictly monitors the performance of suppliers and contractors against obligations

(e.g., adherence to budget, price, time factors, and quality standards). • The agency consistently applies sanctions and penalties to non-performing suppliers.

4 • Blacklisting of suppliers and contractors is practiced and shared with other government agencies. • Agency estimates are reviewed to reflect current/best market prices from government e-

procurement service. Controls are instituted to ensure that specifications are not skewed or tailor-fitted to favor specific bidders.

• The agency code of conduct is integrated into the bidding documents. • BAC decisions and other procurement decisions are audited.

5 • The agency plans its procurement based on its pattern of purchasing and consumption. • The agency regularly evaluates the effectiveness of its procurement management system in

preventing corruption and enhancing integrity. • The results are used to strengthen the agency’s procurement management system.


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14. Financial Management. In general, any financial transaction is susceptible to corruption. Issuing and receiving payments represent a temptation for opportunistic and potentially corrupt individuals, especially if the transaction is in cash. While cash taking might represent only low value transactions and comprise only a small proportion of an organization’s budget, these transactions can represent substantial amounts annually. Even under a situation of inadequate funding, wasteful use of finances can take place due to loose controls, arbitrary budget setting, and resource misallocation. Table 7 shows the rating system for financial management.

Table 7: Financial Management

Rating Levels of Achievement 1 • The agency adopts the prescribed government budgeting and accounting guidelines.

• The agency has established control systems to ensure that its financial resources are protected. • Financial accountabilities of officials and employees are defined.

2 • Budgeting and accounting guidelines and processes are defined, approved, and disseminated to all concerned units.

• The agency takes proactive steps to make all officials and employees aware of their obligations not to use the agency’s financial resources for private purposes.

• Management and relevant personnel are trained in budgeting, accounting, and financial management.

3 • The agency enforces budgeting and accounting policies and guidelines (e.g., regular conduct of reconciliation, immediate liquidation of cash advances, and immediate remittance of collections).

• The agency prepares financial reports regularly containing actual expenditures versus budget and explanation for variance; statement of income versus target collection and explanation for variance; etc.).

• The agency provides full audit trail for major financial transactions. Random audits are carried out, with reports and recommendations for action provided to management. Appropriate follow-up actions are taken on any findings.

4 • The agency’s computerized systems have been integrated and provided with security (e.g., access codes) to ensure that fraud and financial risks are minimized, if not eliminated.

• The agency’s financial performance is analyzed vis-à-vis accomplishment of its physical targets to assess the organization’s cost-effectiveness.

• Audit findings are immediately acted upon and resolved by management. • The agency’s financial reports are published/made available for public inspection.

5 • The agency’s financial controls/systems are reviewed regularly to ensure effectiveness in preventing corruption and enhancing integrity.

• The results of the review are used to strengthen the agency’s financial management system. 15. Whistle-blowing, Internal Reporting, and Investigation. Whistle-blowing should be encouraged in every agency. It is a fast way of detecting corruption but is often difficult for officials/staff to do. Harassment of the whistle-blower can occur, if not a complete reversal of the case where the whistle-blower ends up victimized. Incentives and protection are therefore necessary to encourage employees to report corrupt behavior or practices (Table 8). Protected disclosures and easy procedures for internal reporting and a good witness protection scheme should be established within the agency. 16. Corruption Risk Management. Corruption risks are embedded in an agency’s systems and procedures. Corruption risk management provides a scrutiny of an agency’s operations, systems, and performance to identify risks and opportunities for corruption. Once risks are


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identified, a risk management plan can be drawn and controls3 can be put in place to reduce their likelihood of occurrence (Table 9).

Table 8: Whistle-blowing, Internal Reporting, and Investigation

Rating Levels of Achievement 1 • The agency has a written policy or guideline on internal reporting and investigation of information

and reports of corruption or unethical behavior. The policy/guideline has provisions on protection of those who report corruption.

• The policy/guideline specifies what constitutes corrupt and unethical behavior and the procedures and responsibilities for reporting.

• Roles and responsibilities of staff involved in investigation are defined clearly. 2 • The agency disseminates the policy on internal reporting and investigation to all employees.

• Employees are trained in how to report corruption. • Relevant personnel receive training in handling and investigating reports of corruption.

3 • The agency initiates investigations of reported corruption and tracks complaints/cases until final action is taken.

• The agency keeps full and complete records of all reports. • The agency protects employees who report corrupt behavior/suspicions of corruption. • The agency protects the rights of suspected individuals when investigating reports of corruption.

4 • The agency regularly monitors progress and outcomes of every investigation. • The agency imposes appropriate sanctions on erring employees and officials (including those who

submit malicious reports). • The agency reviews and analyzes reports and statistics on incidence of corruption to identify

patterns, which could indicate weaknesses in the agency’s systems. 5 • The agency assesses regularly the effectiveness of the internal reporting and investigation system

in preventing corruption and enhancing integrity. • The results of the review are used to strengthen the system of internal reporting and investigation.

Table 9: Corruption Risk Assessment

Rating Levels of Achievement

1 • The agency recognizes the role of internal audit in the prevention and detection of fraud and corruption.

• The agency has identified its high-risk operations and functions. 2 • The agency proactively undertakes assessment of corruption risk areas.

• Relevant agency personnel are trained in corruption risk assessment and corruption prevention planning.

• The results of corruption risk assessments are reported to management. Corruption and fraud risks identified are made known to employees.

3 • The agency develops and implements a corruption risk management/corruption prevention plan to address identified risks.

• Time and resources are allocated, and managers are given clear tasks of implementing and monitoring the corruption risk management plan.

• Employees are encouraged and rewarded for identifying responses to corruption risks. 4 • The agency’s corruption prevention plan is supported/integrated in the corporate plan and other

management plans. • Corruption prevention focus is incorporated in management functions, policies, systems, and

procedures of the agency. 5 • The agency’s approach to corruption risk management is reviewed regularly for effectiveness in

detecting and preventing corruption. • Evaluation results are used to enhance integrity measures and corruption prevention strategies.

3 Controls for corruption can be (i) preventive (to thwart corruption before it occurs); (ii) detective (to spot corruption

when it occurs such that timely and appropriate action can be taken); and (iii) corrective (to provide remedial measures after corruption is discovered).


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17. Interface with the External Environment. The manner by which an agency interacts with its external environment (the general public, officials, and employees of government, private sector, and other stakeholders) is important in preventing corruption. Managing the external environment involves promoting the agency-established process of doing business, clarifying conditions of engagements, and responding to client needs (Table 10). Effective management helps raise the accountability of personnel involved in transacting business with the public and improve the public’s perception of the integrity and responsiveness of the agency.

Table 10: Interface with the External Environment

Rating Levels of Achievement 1 • The agency has established an information system to inform the public of its services, policies,

rules, and procedures. • The agency has a policy on disclosure of information to the public.

2 • The agency disseminates information on its services, policies, systems, and procedures to the transacting public. Procedures for frontline transactions (standard processing time, fees, persons responsible, specification of the transacting area, etc.) are posted in public areas.

• The agency employs systems to avoid long queues and prevent “facilitators” of transactions.

3 • The agency has a mechanism to check that the published rules, procedures, and standards are being met (e.g., client complaints/feedback mechanisms, service charter).

• Relevant personnel are given training in how to handle and resolve complaints. • Managers monitor compliance with service standards and ensure that transactions are isolated

from undue interference (e.g., patronage and bribery).

4 • The agency has a full and complete record of complaints and feedback from clients. Complaints and feedback from clients are analyzed to identify possible incidence of corruption.

• Records of releases of information are examined. Results of analysis are correlated with incidence of corruption.

• The agency has a mechanism to provide redress for failure to comply with its service guarantees.

5 • The agency reviews regularly its system of managing interface with the external environment for effectiveness in preventing corruption and enhancing integrity.

• The results of the review are used to strengthen the policies/systems on disclosure of information, service delivery, and in dealing with external parties.

(ii) Survey of Employees

18. The second stage of the corruption resistance review is the conduct of a random sample survey that covers the broadest possible cross-section of employees. It is an instrument for benchmarking and monitoring agency efforts in corruption prevention as perceived by the employees. The IDR assessors can use the survey for validating the integrity development assessment. The specific objectives of the survey are (i) to detect the operationalization and deployment of integrity building measures in the agency; and (ii) to generate feedback from employees on their experience with integrity building measures, clarity of guidelines and procedures (particularly of safeguards against corruption), effectiveness of corruption prevention measures, and suggestions for improvement. The survey focuses on the 10 organizational dimensions, organizational culture, types of corruption, and attitudes to corruption reporting.

2. Corruption Vulnerability Assessment 19. The corruption vulnerability assessment is a tool to determine the susceptibility of systems to corruption and assess the adequacy of safeguards to prevent corruption. It involves


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several activities: (i) identification of high risk functions, programs, and activities, (ii) process mapping/value chain analysis, (iii) risk assessment, (iv) evaluation of the adequacy of existing safeguards, and (v) identification of measures to mitigate corruption risks. 20. Examples of conditions vulnerable to corruption include discretionary powers, large budget, functions with inherent risks (regulation, taxation, provision of public goods and services, etc.), large payoffs, and low probability of being caught. Assessment of the likelihood of occurrence, significance of consequences, and adequacy of existing measures facilitates identification of the most vulnerable areas, along with the formulation and implementation of proposed risk mitigation measures. C. Sample IDR Recommendations 21. Some examples of recommendations arising from the IDR are (i) formulation and promotion of customized agency codes of conduct, including a clear-cut policy on solicitation and acceptance of gifts by public officials and conflict of interest; (ii) issuance of clear guidelines on whistle-blowing, reporting, and internal investigation of corruption, complemented by whistle-blower protection and strengthening of investigative bodies; (iii) capacity development programs in collaboration with investigative bodies; (iv) publication of blacklisted suppliers/contractors; (v) e-procurement; (vi) adherence to the procurement manual; (vii) issuance of guidelines to prevent political interference in recruitment and promotion of personnel; (viii) tighter personnel recruitment through the development of competency requirements and conduct of background investigations; (ix) strengthening of internal audit; and (x) development of Service Charters, which circumscribe discretion of public officials by publishing service guarantees (procedures, transaction times, fees, contact persons, and schedules) and prevent extortion by informing citizens of their rights. D. Additional Remarks on the IDR Tools 22. Depending on its resources and requirements, an agency may opt to use the corruption resistance review only, which provides a quick scan of integrity building and corruption prevention measures in agency operations. The integrity development assessment, which is a tool in the corruption resistance review, is best used when the agency wants an overview of its anticorruption efforts and is uncertain about its weaknesses in tackling corruption. Information may be gathered from focus group discussions, stakeholder interviews, and document review. 23. The corruption vulnerability assessment is a detailed scan of risks in carrying out the agency’s functions and evaluates the adequacy of safeguards in managing identified risks. It relies mainly on key informant interviews and observation of processes. It is best used when the agency wants to look into specific activities and has an understanding of the extent of corruption within the agency. A more comprehensive picture, however, may be obtained by using both the integrity development assessment and the corruption vulnerability assessment because they complement each other. Overall, the IDR provides a sense of the agency position in terms of its anticorruption measures and upholds the agency’s responsibility for cleaning its own house.


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COUNTRY SELF-ASSESSMENT AND STOCKTAKING: ANTICORRUPTION A. Background 1. The Anti-Corruption Initiative for Asia and the Pacific (the initiative) emerged in 1999 as a joint effort of several countries of Asia and the Pacific, the Asian Development Bank (ADB), and the Organisation for Economic Co-operation and Development (OECD). Under the initiative, the action plan sets anticorruption standards and helps bring about changes in the region’s anticorruption landscape. It encourages the establishment of effective and transparent systems for public service, strong anti-bribery action and promotion of integrity in business operations, and the support of active involvement of the civil society. Its implementation and review mechanisms support the objectives of the United Nations Convention against Corruption and the OECD Anti-Bribery Convention in Asia-Pacific. To date, 28 countries and economies from Asia and the Pacific have endorsed the Action Plan and have agreed on implementation mechanisms to achieve its anticorruption standards. 2. This summary looks into country self-assessment and stocktaking. It is the primary tool of the Initiative to assess the progress of members in implementing the standards and objectives of the action plan. B. Country Self-Assessment/Stocktaking Tool: Key Features and Steps Involved 3. Country self-assessment/stocktaking aims to gain a comprehensive and structured overview of the country’s existing legal and institutional framework to enhance transparency in the public sector, combat bribery and promote transparency in business operations, and facilitate public involvement in the fight against corruption. It provides member countries an opportunity to present their respective policies, legal frameworks, and institutional arrangements as well as to exchange experience. The results of the stocktaking exercise enable participating countries to understand challenges to fighting corruption, assess difficulties in implementing policies, and learn from the solutions found by other countries. They also help identify emerging trends and remaining challenges to combating corruption. 4. To ensure consistency in the structure of the reports and facilitate information exchange, each member country uses a prescribed template for the country self-assessment.1 This guides the report presentation and helps focus the discussion on key items on which participants wish to seek the view or advice of group members. Members of the Advisory Group2 and experts from relevant departments of ADB and OECD provide input to assessments and discussions. Complementing the stocktaking process is the conduct of continuing research to keep abreast of emerging trends and priorities (www.oecd.org/corruption/asiapacific/resources). 5. Country self-assessment/stocktaking is structured along the three pillars of the action plan: (i) developing effective and transparent systems for public service, (ii) strengthening anti-bribery actions and promoting integrity in business operations, and (iii) supporting active public involvement. The table below presents the scope of country self-assessment by pillar.

1 ADB/OECD Anti-Corruption Initiative for Asia and the Pacific. 2003. Action Plan Stocktaking Exercise. 2 The Advisory Group includes donors, civil society representatives, business organizations, and other constituencies

that support the Initiative. It assists the Steering Group by providing technical advice and helps mobilize resources.


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Scope of Country Self-Assessment/Stocktaking by Pillar

Pillar Action Plan Objective and Specific Areas Covered

Pillar 1: Developing Effective and Transparent Systems for Public Service A. Integrity in Public Service 1. Establish systems of government hiring of public officials

that assure openness, equity, and efficiency and promote hiring of individuals of the highest levels of competence and integrity through

(i) Systems for compensation adequate to sustain appropriate livelihood and according to the level of the economy of the country

(ii) Systems for transparent hiring and promotion to help abuses of patronage, nepotism, and favoritism; help foster the creation of an independent civil service; and promote a proper balance between political and career appointments

(iii) Appropriate oversight of discretionary decisions and of personnel with authority to make discretionary decisions

(iv) Personnel systems that include regular and timely rotation of assignments to reduce insularity that could foster corruption

2. Establish ethical and administrative codes of conduct that proscribe conflicts of interest, ensure the proper use of public resources, and promote the highest levels of professionalism and integrity through

(i) Prohibitions or restrictions governing conflicts of interest (ii) Systems to promote transparency through disclosure and/or

monitoring of, for example, personal assets and liabilities (iii) Sound administrative systems which ensure that contact

between government officials and business service users, notably in the area of taxation, customs, and other corruption-prone areas, are free from undue and improper influence

(iv) Promotion of codes of conduct with due regard for existing relevant international standards as well as each country’s traditional cultural standards, and regular education, training, and supervision of officials to ensure proper understanding of their responsibilities

(v) Measures which ensure that officials report acts of corruption and which protect the safety and professional status of those who do

B. Accountability and Transparency

Safeguard accountability of public service through effective legal frameworks, management practices, and auditing procedures through

(i) Measures and systems to promote fiscal transparency (ii) Adoption of existing relevant international standards and

practices for regulation and supervision of financial institutions (iii) Appropriate auditing procedures applicable to public

administration and the public sector, and measures and systems to provide timely public reporting on performance and decision making

(iv) Appropriate transparent procedures for public procurement that promote fair competition and deter corrupt activity, and adequate simplified administration procedures

(v) Enhancing institutions for public scrutiny and oversight


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(vi) Systems for information availability including on issues such as application processing procedures, funding of political parties, and electoral campaigns and expenditure

(vii) Simplification of the regulatory environment by abolishing overlapping, ambiguous, or excessive regulations that burden business

Pillar 2: Strengthening Anti-Bribery Actions and Promoting Integrity in Business Operations A. Effective Prevention,

Investigation, and Prosecution Take effective measures to actively combat bribery by

(i) Ensuring the existence of legislation with dissuasive sanctions that effectively and actively combat the offence of bribery of public officials

(ii) Ensuring the existence and effective enforcement of anti-money–laundering legislation that provide for substantial criminal penalties for the laundering of the proceeds of corruption and crime consistent with the law of each country

(iii) Ensuring the existence and enforcement of rules so that bribery offences are thoroughly investigated and prosecuted by competent authorities; empowerment of authorities to order availability/seizure of bank, financial or commercial records and lifting of secret bank information

(iv) Strengthening of investigative and prosecutorial capacities by fostering interagency cooperation, by ensuring that investigation and prosecution are free from improper influence and have effective means for gathering evidence, by protecting those persons helping the authorities in combating corruption, and by providing appropriate training and financial resources

(v) Strengthening bilateral and multilateral cooperation in investigations and other legal proceedings by developing systems which—in accordance with domestic legislation—enhance:

(a) effective exchange of information and evidence (b) extradition where expedient, and (c) cooperation in searching and discovering of forfeitable

assets as well as prompt international seizure and repatriation of these forfeitable assets

B. Corporate Responsibility and Accountability

Take effective means to promote corporate responsibility and accountability based on existing relevant international standards through

(i) Promotion of good corporate governance, which could provide for adequate internal company controls such as codes of conduct, the establishment of channels for communication, the protection of employees reporting corruption, and staff training

(ii) The existence and the effective enforcement of legislation to eliminate any indirect support of bribery such as tax deductibility of bribes

(iii) The existence and thorough implementation of legislation

requiring transparent company accounts and providing for effective, proportionate, and dissuasive penalties for


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omissions and falsifications for purposes of bribing a public official, or hiding such bribery, in respect of books, records, accounts, and financial statements of companies

(iv) Review of laws and regulations governing public licenses, government procurement contracts or other public undertakings, so that access to public sector contracts could be denied as a sanction for bribery of pubic officials

Pillar 3: Supporting Active Public Involvement A. Public Discussion of Corruption Take effective measures to encourage public discussion of

corruption through (i) Initiation of public awareness campaigns at different levels (ii) Support for non-governmental organizations that promote

integrity and combat corruption by, for example, raising awareness of corruption and its costs, mobilizing citizen support for clean government, and documenting and reporting cases of corruption

(iii) Preparation and /or implementation of education programs aimed at creating an anticorruption culture

B. Access to Information Ensure that the general public and the media have freedom to receive and impart public information and in particular information on corruption matters in accordance with domestic law and in a manner that would not compromise the operational effectiveness of the administration or, in any other way, be detrimental to the interest of governmental agencies and individuals, through:

(i) Establishment of public reporting requirements for justice and other governmental agencies that include disclosure about efforts to promote integrity and accountability and combat corruption

(ii) Implementation of measures providing for a meaningful public right of access to appropriate information

C. Public Participation Encourage public participation in anticorruption activities, in particular through:

(i) Cooperative relationships with civil society groups such as chambers of commerce, professional associations, nongovernmental organizations, labor unions, housing associations, the media, and other organizations

(ii) Protection of whistleblowers (iii) Involvement of nongovernmental organizations in monitoring

public sector programs and activities. Source: ADB/OECD Anti-Corruption Initiative for Asia and the Pacific. 2003. Action Plan Stocktaking Exercise. C. Website for Completed Country Self-Assessment/Stocktaking Reports 6. Self-assessment/stocktaking reports by country may be downloaded from the Initiative’s website: www.oecd.org/corruption/asiapacific. Over time, the Initiative has catalyzed anticorruption improvements in member countries. Various achievements have resulted from a common learning process under the Initiative’s umbrella, boosted by open dialogue, policy analysis, thematic reviews, capacity development, and partnership building for fighting corruption.


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VALUE CHAIN ANALYSIS − ASSESSING CORRUPTION RISKS AT SECTOR LEVEL

• Framework for Assessing and Tracking Corruption

Vulnerabilities in the Transport Sector

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• Framework for Assessing and Tracking Corruption Vulnerabilities in the Water Supply and Sanitation Sector

85

• Framework for Assessing and Tracking Corruption Vulnerabilities in the Electricity Sector

91

• Framework for Assessing Corruption Risks in the Hydropower Project Cycle

97

• Framework for Assessing Corruption Risks in the Education Sector

100

• Framework for Assessing and Tracking Corruption Vulnerabilities in Pharmaceuticals: a Health Subsector

105


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FRAMEWORK FOR ASSESSING AND TRACKING CORRUPTION VULNERABILITIES IN THE TRANSPORT SECTOR

A. Background 1. This summary presents a methodology for assessing and tracking areas that are prone to corruption in the transport sector and identifies possible options for reducing corruption risks. The transport sector tends to be vulnerable to corrupt practices mainly due to (i) large budgets for transport infrastructure, which can comprise 10%−20% of a country’s national budget, (ii) multiple points of entry at central and local levels involving permits and contracts for goods and services, which lend themselves to corruption, and (iii) weak business processes and control systems. An understanding of the widespread modes of corruption in the transport sector is fundamental to formulating sector strategies and establishing operational practices for anticorruption work. Corrupted construction is often substandard, reducing project sustainability and increasing the need for maintenance and rehabilitation. 2. A basic corruption typology in the transport sector comprises state capture and administrative corruption.1 Corruption ranges from improper influence over budgetary allocation and investment choices to various activities that extract something of value, in return for a public good, concession, or lease. Corrupt activities prevalent in the transport sector include bribes, kickbacks, collusion, bid rigging, and fraud (Table 1).

Table 1: Corrupt Activities Prevalent in the Transport Sector

Corrupt Activity Description Bribe Payment to a government official for any type of favor, offered by firms to (i) be

short listed or prequalified, (ii) win contracts, (iii) approve contract amendments and extensions, (iv) influence auditors, (v) induce site inspectors to compromise their judgment regarding quality and completion of civil works, and (vi) avoid cancellation of contracts for poor performance.

Kickbacks Payment made by a successful bidder to a third party as a result of an arrangement made prior to bidding. Typically regarded as a share of proceeds from a bid that has been padded sufficiently to cover the payoffs and kickbacks to the parties involved.

Collusion Agreements among bidders to manipulate the bidding process or its results in a manner that is mutually satisfactory. Public officials may orchestrate or be involved in the collusion in return for a bribe. Collusion often involves bid rigging.

Bid rigging Actions that influence a bid price in a noncompetitive way to achieve a prearranged objective. All forms of bid rigging include some type of information or procedural asymmetry to tip the scale in favor of a contractor or a consortium. Two common forms are manipulation of bid specifications and sole-source contracts, both of which unfairly exclude competition. In bid rigging involving collusion, parts of a bid may be deliberately raised to create a losing bid. The winning bid may be set above the known cost estimate

1 State capture involves the manipulation of rules, laws, policies, and public entities other than for their intended

purposes for private or political gain. It is often associated with grand corruption because it involves the wholesale distortion or exploitation of public entities, elections, or broad government functions such as national budgetary processes. Administrative corruption involves the manipulation of specific transactions. It includes pilferage of materials and equipment; manipulation of contracts for works, goods, or services; or award of concessions for private sector operation of rail, port, air, or road facilities and services.


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Corrupt Activity Description (“highball”) to finance kickbacks after award. In collusive bid rigging, contractors may submit a “lowball” bid, where the price is set low to win the contract, only to be increased after the contract awarding through change orders or addenda, often with the help of officials.

Fraud Illicit documentary practices to subvert qualification requirements, such as commercial registration or financial capacity, or to cover up poor performance and corrupt practices, such as billing for works never performed, failing to meet contract specifications for road construction, and inflated billing for goods and services, among other actions. Fraud by public officials includes diverting projects assets such as computers or vehicles, documenting ghost employees, and setting up companies (to create the illusion of competition or conceal the identity of the principal owners or beneficiaries for taxation avoidance, usually working in concert with selected complicit firms).

Source: Paterson, William, and Pinki Chaudhuri. 2007. Making Inroads on Corruption in the Transport Sector through Control and Prevention. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

B. Scope and Methodology 3. The value chain methodology is a means of assessing and tracking corruption vulnerabilities at various stages/levels along the process of translating inputs to outputs. In the transport sector, the delivery of facilities and services generally involves four core levels: (i) national, (ii) sector, (iii) agency, and (iv) transaction/project. The subsequent figure illustrates the application of this methodology by presenting a generic value chain, the decision points along the chain that are vulnerable to corruption, the red flags (warning signals), and some anticorruption measures. The examples given in this figure are not exhaustive. They are meant to be tailored to the country-specific governance and sector context during the actual assessment and tracking of corruption vulnerabilities. Essentially, the value chain methodology comprises three primary steps: (i) identify vulnerable points along the value chain; (ii) diagnose the situation and the underlying causes; and (iii) design and implement anticorruption options.2 4. Step 1: Identify vulnerable points along the value chain. In the transport sector, some examples of vulnerable points include (i) policies and investment choices, (ii) resource allocation and use (funds, personnel, etc.), (iii) design and bidding of facilities and services, and (iv) operations. At the national and sector levels, political and other vested interests may interfere in resource allocation. New investments may be favored over maintenance because they offer larger opportunities to cream off or divert funds. The government may give bilateral concessions to favored entities to provide access to scarce natural resources, or in return for investment in a major transport asset (construction of a port, airport, or highway), or for supply of particular commodities (rail cars or aircraft). Top-level decisions may be made without rigorous analysis and public consultations. Some red flags/warning signals may include (i) disregard for objective planning criteria, forecast of needs, or expected rates of return; (ii) aggressive lobbying by vested interests; and (iii) opaque procedures for securing clearances and permits (see para 11 of this summary on exercising caution in interpreting red flags).

2 Details were drawn from Paterson, William, and Pinki Chaudhuri. 2007. Making Inroads on Corruption in the

Transport Sector through Control and Prevention. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

For discuss purpose only

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National

A Framework for Assessing and Tracking Corruption Vulnerabilities in the Transport Sector

Examples of Decision Points Vulnerable to Corruption

Levels

Policy

• Disregard for objective planning criteria

• Aggressive lobbying by corporate entities to shape legislation/ policies

• Bilateral concessions • Unclear procedures for licensing and permits

Operations

• Project design irregularity • Information asymmetry to conceal

corruption/tip-offs • Unexplained delays and bidding

irregularities • Inconsistent application of

prequalification/eligibility screening

Sector

Adapted from Paterson, William, and Pinki Chaudhuri. 2007. Making Inroads on Corruption in the Transport Sector through Control and Prevention. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

Resource Allocation/Use

• Manipulation by vested interests of policy directions • Manipulation by politicians and government officials of investment choices

Design and Bidding of Facilities and Services

• Nontransparent earmarking and spending of funds

• Weak electoral laws • Weak link between

planning and budgeting • Vague and

nontransparent guidelines • Non merit-based personnel appointments

• Weak control system • Lax inspection and

supervision • Proliferation of change

orders/amendments • Long payment delays to

contractors/suppliers

• Politicization of personnel appointments • Overreporting of road and bridge inventory to obtain higher maintenance funds • Revenue collection leakage

Red Flags/ Indicators

• Discretionary issuance by sector officials of licenses for transport operations/ services

• Political influence over budgetary allocation • Diversion of road funds to political party funding

• Imposition of informal conditions • Kickbacks by officials/project management • Restriction of calls for tender • Bid rigging/collusion/fraud • Manipulation of technical evaluation • Deviation from original bid documents

• Unexplained/frequent emergency maintenance • Theft of materials and equipment • Misuse of heavy equipment

• Overdesign of facility by consultants • Project cost overestimation • Downplaying of adverse project impacts • Overstatement of project benefits • Specification bias for certain trade names/equipment

Potential Responses/ Risk Mitigation Measures

Diagnostic studies Dialogue Public access to information

Procedure codification

Objective and transparent budgetary allocation rules

Procedure codification Legal amendments/reforms Independent audits

E-procurement/procurement monitors Integrity pacts Debarment of offenders/blacklisting Complaints hotline Pressure from international agencies

Fiduciary controls Independent audits by ombudsman or auditor general

Penalties for offenders Third party oversight

Agency

Project/

Transaction

• Discretionary sector spending • Political influence over personnel appointments • Resource allocation by sector officials to politically favored regions

• Theft of materials/equipment • Unexplained emergency expenses • Complicated processing of claims/payments • Compromised certification of quality assurance

• Pilfering of materials and equipment • Use of heavy equipment for private purposes

80 For discussion purposes only

5. Other vulnerable points include diversion of transport revenues to political party funding, particularly when electoral laws are weak, and allocation of funds to politically favored regions. Moreover, information may be manipulated for budgetary purposes. For example, the road and bridge inventory may be overreported to obtain larger budget allocations. Local roads may be reclassified as national roads to qualify for a larger maintenance fund than would otherwise be warranted on functional grounds. Personnel appointments may be used as rewards for cooperation with corrupt practices. 6. At the agency level, corrupt practices generally thrive on weak internal controls and processes, and on an alliance/network of cooperating agents. Fund transfers between offices may be destined for a local office where scrutiny and control are lax, or they may be billed to tasks that are plausible but typically not measured—safety repairs, routine repairs, landslide removal, earthworks, and emergency maintenance. Payments may be made to local officials or agents, or expense claims may be represented in return for fraudulent documentation. Other practices may involve the use of agency or public assets for nonpublic purposes or renting out equipment in return for non-documented receipts. Theft of materials from warehouses and quarries, where bulk materials are rarely inventoried, is another corrupt practice, along with revenue collection leakage (from traffic or vehicle infringements, toll, registration, and testing). 7. At the project level, corruption may take several forms: (i) overdesign by consultants of a facility if their fee is based on a percentage of project cost; (ii) biased decision for a project option that could involve higher income from design and supervision services downstream; and (iii) deliberate understatement of adverse project impacts, or overstatement of traffic demand and similar benefits to influence project feasibility. In relation to bidding, agency officials may inflate the project cost estimate with the knowledge that the output/service can be provided at a lower cost and the margin subsequently distributed as kickbacks. Alternatively, the project cost can be underestimated to facilitate project authorization, only to be increased later through variations or cost overruns. 8. In procuring materials and equipment, corrupt officials may collude with contractors to specify requirements that favor a certain contractor in terms of access rights, proprietary rights, or location, often in return for kickbacks. Information asymmetry may also be deliberately created by tipping off favored contractors to permit the submission of an alternative high bid, with options that may be used during evaluation to override the specifications. Or tip-offs may be provided regarding incomplete information inserted deliberately into the specifications and, in the process, enable the firm to disregard an onerous condition in its bid and submit a winning low bid. 9. During bidding, several corrupt practices may take place: (i) bid rigging, (ii) collusion, (iii) inconsistent application of eligibility screening criteria, (iv) circumvention of regulations involving contract packaging and bid invitations, (v) reading out false prices at bid openings, and (vi) ex post change orders. Some indicators of bid rigging include selection of unqualified contractors, unreasonable prequalification requirements, unreasonably short time to submit bids, and selection of other than the lowest qualified bidder followed by a change order increasing the price or project scope. 10. During implementation, red flags may include a proliferation of change orders/amendments, long payment delays to contractors and suppliers, lax inspection and supervision, and weak control systems. The proliferation of change orders is a mode for generating kickbacks, which may be used to enrich a different set of people from those involved in the original award, especially if the project staff, management, or local officials have changed


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in the interim. Bribes may be sought for processing claims for payment after certification of quantities and quality of works, goods, or services. Long payment delays could indicate negotiations for a bribe. The multiple layers of approval may provide more opportunity to extract rents to expedite processing than short, focused approvals. Some payment delays, however, reflect long approval paths and slow manual procedures or inefficiency, rather than corruption. 11. Step 2: Diagnose the situation and probe into the underlying causes. It is vital to distinguish between corruption and a range of institutional weaknesses that result in waste and inefficiency. Corrupt practices in the transport sector thrive in an environment of weak institutions, but not all such instances result in corrupt activity. For example, agencies may inflate their needs, distort priorities, or identify and cost programs/projects inaccurately, leading to inefficiency. Poor planning or poor implementation resulting in delays could occur because of weak capacity. An in-depth analysis of the decision making process, case analysis of incident cases, a review of related studies, triangulation, and other diagnostic tools are necessary before arriving at conclusions. The remedy may differ depending on whether or not the source of the problem is incompetence or corruption. Governance issues exist in the transport sector, which are often associated with arbitrariness in decision making, discretionary spending of public funds, poorly defined mandates, absence of appropriate business processes, weak procurement mechanisms, weak oversight capacity, and inadequate audit systems, among others. There is a close nexus between state capture, governance failure, and administrative corruption. 12. Red flags are useful in calling attention to hotspots; however, they do not necessarily constitute actionable evidence. The challenge is to identify a range of red flags, assess which ones are actionable, and pursue those that are likely to prevent the larger diversion of funds. This includes increased communication with investigative units in the government and in donor agencies. 13. Step 3: Design and implement anticorruption options. This section outlines a two-pronged strategy of prevention and control, guided by the long-term goal of increasing the resilience of the transport sector to corruption and reducing corrupt activities. In a prevention framework, the interventions are ex ante, using strategies, policies, and tools that seek to preempt and deter corrupt acts based on the mapping of risks and vulnerabilities. Combating corruption will need to halt the current flow of corrupt activity while improving overall sector governance. In a control paradigm, the aim is to rigorously confront, prosecute, and punish corrupt acts. Ex post interventions help confront acts that are suspected—either while in progress or once they have been alleged, investigated, or proven. Table 2 illustrates some corruption prevention and control options for the transport sector.

Table 2: Prevention and Control Options for the Transport Sector

Level Preventive Options (Ex Ante Interventions) Control Options (Ex Post Interventions) State capture Carry out dialogue and possible remedies at

the country partnership strategy level. Take strong, coordinated donor action and

sanctions in event of country- or sector-level scandal.

Reduce discretionary spending of revenues. Bring donor pressure to investigate appropriately.

Adopt improved, objective, and transparent national budgetary allocation rules.

Engage in damage control, restore perception of integrity, and send strong message of due process.


Level Preventive Options (Ex Ante Interventions) Control Options (Ex Post Interventions)

Reduce areas of discretion with good rule making.

Publicize trials and enforce court orders.

Earmark revenues for special purpose entities.

Increase civil society participation. Adopt appropriate legal reforms. Restructure the sector to allow for incentive-

based reforms; reward reform-oriented staff, entities, and activities.

Improve pubic access to information. Increase judicial independence, reform, and

accountability.

Conduct anticorruption campaigns. Agency Modernize business planning and fiduciary

tools. Investigate staff and firms.

Improve human resource development and management.

Prosecute all parties involved.

Reform the procurement system and automate processes.

Establish, review, or update institutional anticorruption plan.

Establish integrity indicators, collect baseline data, and monitor outcomes.

Review agency processes based on integrity indicators.

Upgrade information technology. Train employees and raise awareness. Plan and implement institutional

anticorruption programs.

Set up complaints hotline at agency. Transaction/ Project

Install effective internal fiduciary and audit controls.

Train staff to detect suspicious activity

Implement project management and supervision controls.

Coordinate project teams and investigative teams

Set up project audits by ombudsman or auditor general.

Conduct rigorous investigations to collect evidence.

Establish project monitoring. Follow up with due process and trials.

Forge integrity pacts with private firms. Apply criminal and professional sanctions such as debarment of firms and blacklisting.

Solicit civil society oversight.

Train staff in basic investigative requirements. Source: Paterson, William, and Pinki Chaudhuri. 2007. Making Inroads on Corruption in the Transport Sector through

Control and Prevention. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

14. A preventive strategy for fighting corruption focuses on strengthening the governance environment along the value chain, with due regard for prevalent risks in a specific situation. The key factors that engender good governance are transparency, accountability, and efficiency. Transparency is enhanced through the power of information and communications technology, mechanisms for sharing and revealing information, and incentive structures. The power of data for demonstrating what was intended and what was actually delivered, whether costs are reasonable or high, and whether qualifications are fraudulent or not lies at the core of reducing discretion and ambiguity. Internet-based tools, clear guidelines, computerized


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applications for procurement, procurement monitors, and independent procurement agents are important. A computerized registry of civil works contractors could improve the integrity of prequalification processes. The legal, commercial, and financial data of firms in the database can be compared with the qualifications profile of a project, and a list of eligible/non-eligible firms generated. Another measure for enhancing transparency is the use of nonagency persons as monitors to introduce an independent review of compliance of processes with the guidelines. In extreme corruption cases, an independent procurement agent may be appointed, but it represents a departure from the principles of internal capacity and ownership. 15. Accountability is enhanced through formal legal and judicial institutions, voice of citizens and users outside the public sector, and internal drivers such as incentives. Sector efficiency is enhanced when firms compete openly, institutional operations have been reformed, and external markets provide a higher incentive than local rewards. Tools for promoting accountability include (i) financial audit, (ii) technical audit, (iii) fiduciary review, and (iv) third party monitoring. A financial audit refers to the inspection of accounts to determine whether or not all funds and assets have been used for their legitimate and intended purpose and are fully accounted for. A technical audit determines if the provision of assets and services was consistent with the intended purpose and with the quantity, quality, and location or disposition specified. A fiduciary review is a comprehensive independent review of an implementing agency’s procurement, financial management, and project management processes, including their internal controls and oversight, and is typically carried out by a multidisciplinary team of specialists with extensive participation by government officials. Third party monitoring is a continuous mechanism for monitoring the execution of sector expenditures, including the procurement and implementation of projects, usually conducted by a public agency external to the implementing agency, a civil society group, or a private agent employed by the government in an independent role. Third party monitoring may include the appointment of an independent observer to attend bid openings, observe bid evaluation, or participate in technical audit inspections; and outsourced monitoring by monitors trained in fraud detection and financial forensics. 16. An agency can also be held accountable for its performance through a report card, in which transport users express their sentiments about efficiency and organizational capacity issues that can have an impact on certain forms of corruption, such as redirection of funds, underdelivery of goods and services, and overpricing. In the road subsector, the road social contract addresses public accountability and transparency. The road agency holds itself accountable to road users for efficient expenditure management and road service conditions through a published annual compact with a representative civil society group. The process could also be applied to a road fund, through the annual report and a memorandum of understanding between the fund’s oversight board and a representative civil society group. 17. At any point along the value chain, incentives to engage in corrupt practices generally drive the choices. To break a pattern of corrupt behavior, the risks and costs of corrupt behavior must outweigh its rewards. At the national level, any personal gain a politician may receive by arguing for an inappropriate budgetary allocation can be counterbalanced by calling attention to the cost of losing votes or reputation among his constituents. A strong media or civil society voice could make information available on the socioeconomic benefits of alternative transport allocations or reveal “white elephant’ projects sponsored by the politician. At the transport agency level, changing incentives to reduce corruption requires the strengthening of internal controls, enforcing penalties for violation of controls, appointing staff of integrity to critical positions, rotating staff to avoid formation of collusive alliances, and providing whistle-blower protection. At the transaction level, incentives can be improved by emphasizing transparency,


reducing discretion, speeding up the processing time to limit the risks of deal negotiation, and discouraging any interaction of staff with interested stakeholders (bidders, politicians, or local authorities). For individuals, the opportunity to report malpractice to a hotline or ombudsman in confidence is essential to counter the likelihood of threats and reprisals. Where the funds changing hands are substantial, forfeiture of assets, loss of employment, and forfeiture of pension may be necessary. For a firm bidding for a contract, the price may become too high if the sanctions imposed for collusion, such as prolonged blacklisting, imply a substantial loss of its regular income. 18. Where an elite faction or oligarchy dominates a corrupt culture, a combination of powerful measures may be required: (i) benchmarking of prices or independent verification of agency estimates to reveal the markup, (ii) strict adherence to open competition and to the protection of contesting firms, (iii) support by a monitoring power approaching or exceeding that of the elite (civil society, international norms, or intervention of an international organization), (iv) a credible anticorruption commission, and (v) integrity pacts. International drivers such as international financing and trade agencies can exert significant influence on the integrity and efficiency of the transport sector. Regulatory reform in transport logistics ahead of accession to the World Trade Organization can reduce corruption losses due to pilferage, bribes, and fraud. 19. Aggressive enforcement of sanctions against corrupt officials and contractors, such as blacklisting and debarment, has been undertaken by a number of transport agencies and donors. The effectiveness of sanctions will depend on the country’s broader legal and judicial framework and the type of legal, judicial, and procurement reforms the government is willing to implement. Sector-related amendments and adjustments in laws, regulations, and procedures that seek to plug loopholes in the country’s enforcement structure are crucial. The complexity of corruption in the transport sector implies that reducing corruption may take time as anticorruption plans are developed, implemented, and mainstreamed. Where corruption is endemic, a menu of stronger preventive measures is necessary in the short and medium terms, together with active prosecution efforts. C. Remarks on the Value Chain Methodology 20. The value chain methodology offers several advantages for the transport sector: (i) it focuses on results that a sector seeks to achieve; (ii) it provides a structured picture of decision points along corruption-prone levels; (iii) it highlights key vulnerabilities as well as measures that could prevent and control corruption; and (iv) it offers a convenient method for developing warning signals for tracking the occurrence of corruption. This line of inquiry is flexible and adaptable to differing country situations. 21. The users of this methodology could combine data collection techniques and diagnostic tools to assess corruption risks. Information may be collected through database search (improper change orders, high volume purchases, or unusual approval patterns); interviews with officials, losing bidders, and other groups; and review of audit reports and related studies. Other complementary tools may include case analysis, surveys, and triangulated diagnostics. A close interaction between transport sector specialists and governance specialists is crucial for carrying out diagnostics. There is also room for developing and upgrading technical expertise in fighting corruption, and generating a menu of preventive and control measures that correspond to given corruption risks. The value chain analysis of the sector needs to be reviewed and updated, given changes in institutional actors and sector structures that could give rise to new corruption opportunities and risks.


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ASSESSING AND TRACKING CORRUPTION VULNERABILITIES IN THE WATER SUPPLY AND SANITATION SECTOR

A. Background 1. This summary presents the dimensions of corruption in the water supply and sanitation sector.1 It sets out in a structured framework the range of corrupt practices prevalent in the sector, and links these practices to a menu of existing solutions. The corruption that occurs in the water supply and sanitation sector can generally be understood in terms of (i) bureaucratic or petty corruption, in which a vast number of officials extract small bribes and favors; (ii) grand corruption, involving the misuse of vast amounts of public funds by a relatively small number of officials; and (iii) state capture, seen in the collusion between public and private actors for private benefit. These corrupt practices, big and small, take the form of abuse of resources—theft and embezzlement from budgets and revenues, corruption in procurement, administrative corruption in payment systems, and corruption at the point of service delivery. 2. In general, systems that are prone to corruption are marked by (i) private and public monopolies, combined with weak or nonexistent checks and balances, poor transparency of decision making, and restricted access to information; (ii) discretionary decision making; (iii) lack of accountability and weak systems of oversight and enforcement; and (iv) soft social control systems that provide a breeding ground for acceptance of corrupt activities.2 Substantial inflows of funds for constructing water supply facilities, political interference, and the complexity of sector stakeholders and institutions also contribute to the vulnerability of the water supply and sanitation sector to corruption. B. Scope and Methodology 3. The value chain methodology is a means of assessing and tracking corruption vulnerabilities at various stages along the process of translating inputs to outputs. In the water supply and sanitation sector, these stages can be defined as (i) policy making and regulation, (ii) budgeting and planning, (iii) financing, (iv) program design and management, (v) tendering and procurement, (vi) construction, (vii) operation and maintenance, and (viii) payment for services. Along the value chain, the corrupt interactions may be classified into public-to-public, public-to-private, and public-to-consumer. Unbundling and differentiating types of sector corruption can help plot shifts in corrupt activities within the sector. 4. Public-to-Public Interactions. Public-to-public corrupt practices are often seen in policy making and regulatory functions. Politicians and officials responsible for water sector policies may set up opportunities for rent seeking by influencing the focus of policy and investment priorities. Politicians and other stakeholders may pay regulators to formulate biased standards and regulations or to allow projects to bypass established standards or procedures. During planning and budgeting, sector investments that guarantee higher levels of personal return are favored over those that do not. In some countries, fiscal transfer systems present a series of opportunities for fraud and extraction of funds from the system, as well as extortion by public departments and units that have funding approval authority for spending. Corruption between tiers of government frequently concerns personnel management: bribes paid for promotions, appointments, transfers, and a multitude of perks. These practices lie at the core of the

1 Drawn from Plummer, Janelle, and Piers Cross. 2007. Tackling Corruption in the Water and Sanitation Sector in

Africa. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

2 United Nations. 2006. Water: A Shared Responsibility. World Development Report. Available: www.unesco.org/water/wwap


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incentive and patronage system. Figure 1 illustrates corrupt public-to-public interactions at various stages of the value chain. 5. Public-to-Private Interactions. Procurement calls for interaction between the public and private sectors and is the most publicized form of corruption. The set of private actors might include suppliers, contractors, utility operators, and consultants. The design, tendering, and negotiation phases in the procurement of water infrastructure and facilities offer substantial opportunities for corrupt action. During tendering, for example, corrupt practices can either restrict or influence the flow of information to favored and less favored competitors, create excuses for sole sourcing or uncompetitive selection, breach confidentiality or disqualify suppliers, and accept or solicit bribes to influence tender lists or selection procedures. Private contractors, consultants, and suppliers of pipes, chemicals, and other inputs may collude in taking turns in bid winning or mark up pricing. Contractors may also falsify records to make bids look competitive. Other corrupt practices in public-to-private interactions are shown in Figure 2. 6. Public-to-Consumer Interactions. Corrupt interactions between consumers and public officials, mostly in the form of bribery, are typically petty, frequent, and systemic. For the consumer who pays the bribe, water supply is the desired outcome, and the incentive is to obtain a much-needed basic service. Common corrupt practices at the point of service delivery include providing illegal connections, reselling utility water and utilizing utility vehicles, and giving preferential treatment for repairs or new services in exchange for “speed money.” Other interactions concern administrative corruption in payment systems, irregular billing, falsification of meter readings, and overcharging that can be avoided by paying bribes, often resulting in commercial leakage. Figure 3 illustrates additional examples of public-to-consumer interactions. 7. As a diagnostic method, the value chain involves three fundamental steps: (i) identify vulnerable points along the value chain; (ii) diagnose the situation and probe into the underlying causes; and (iii) design and implement anticorruption options. 8. Step 1: Identify vulnerable points along the value chain. Some examples of decision points that are susceptible to corruption include (i) policy capture and distortions in prioritizing policies, (ii) biases in regulation and licensing, (iii) kickbacks to ensure fund transfers, (iv) collusion/fraud in progress and quality of infrastructure works, (v) fraud in invoicing and pricing, (vi) theft of materials by village leaders and fraudulent reporting, (vii) bribes for access to water and preferential treatment, and (viii) fraudulent meter reading. 9. Step 2: Diagnose the situation and probe into the underlying causes. A comprehensive approach to sector diagnosis recognizes that water service delivery is heterogeneous at the sector, city or district, and household levels, and involves formal and informal stakeholders from the public and private sectors and civil society. The early warning indicators cited in Figures 1 to 3 (e.g.,, resistance to competition, no link between planning and budgeting, discretionary decision making, etc.) must be probed further. Corruption varies between agencies, within countries, and between countries. Understanding the incidence and intensity of corruption as well as the institutional context is fundamental in focusing on major points of leakage. A sound diagnosis facilitates the design and implementation of measures to mitigate corruption risks.


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Policy Making and Regulation

Vulnerable Decision Points

Figure 1: Public-to-Public Interactions

• No link between planning and budgeting

• Unclear rationale for spending on capital-intensive and large projects

• Discretionary decision making by finance and planning officers

• Policy and tariff improvements

• Separation of regulator and provider roles

• Development and publication of minimum standards

• Public complaints system

• Resistance to competition • No division of regulator and provider roles

Donor Financing

Fiscal Transfers

Examples of EarlyWarning Indicators

PotentialResponses/Risk

Mitigation Measures

• Policy capture/ distortions in prioritizing policies

• Biases in regulations • Biases in licensing and

standards

Stages

• High number of unqualified senior staff

• Poorly paid staff with significant extras, living beyond means

• Prevalence of unplanned transfers

• Conflict of interest on management board

Planning and Budgeting

• Long processing time for fund transfers

• Unexpected release of funds

• Transparency in negotiations, budgets, and plans

Source of basic information: Plummer, Janelle, and Piers Cross. 2007. Tackling Corruption in the Water and Sanitation Sector in Africa. In The Many Faces of Corruption, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

• Distortions in decision making by officials/ politicians

• Distortions in national and sector planning and budget management • Fraud, falsification of accounts, and collusion in budget management

• Bribery and kickbacks to ensure fund transfers

• Discretionary personnel recruitment and deployment

• Collusion in program design

Management and Program Design

• Donor-government collusion in negotiations to meet funding targets

• Organizational and procedural change in budgeting and finance functions

• Citizen involvement/ demand for accountability

• Media involvement • Independent audits

• Unexpected change in donor support

• Performance standards • Auditing

• Merit-based career structures

• Transparent appointment of qualified administrative leaders

• Declaration system for conflict of interest


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Tendering and Procure-ment


Figure 2: Public-to-Private Interactions

• Transparency in public-private interactions

• Independent tender evaluation

• Integrity pacts and sanctions

• Simplification of tender documentation

• Review of the role of middlemen and local consultancy commissions

• Audits and reporting • Third party oversight • Enforcement of codes of

conduct and business integrity

• Hotlines for complaints

• Same tenderers are shortlisted, selected (possible cartels)

• Dropping out of bidders • Share of sole-source suppliers • Lowest tender repeatedly not selected

Construct-ion

Operations and Maintenance


Potential Responses/Risk

Mitigation Measures

• Bribery to influence contract/bid organization • Inflated estimates of capital works, supply of

chemicals, vehicles, and equipment • Falsification of documentation

Stages

• Share of sole-source supply • Increase in informal price of water

• Technical audits • Performance-based management contracts

• Third party oversight • Hotlines for complaints

• Overbilling by suppliers • Diversion of inputs (chemicals)

• Avoiding compliance with regulations, specifications, health and safety rules • Falsification of accounts

• Inconsistent, irregular billing • Bribes to obtain permits and licenses

• Not building to specification;

concealing substandard work and materials • Failure to complete works • Underpayment of workers • Fraud and bribery in invoicing and pricing

• Resistance to meeting standard specifications

• Number of changes in specification

• Number of variation orders in site works

• Integrity pacts (in countries with capacity to sanction)

• Financial and technical audits and reporting

• Performance-based contracts

• Transparency in operations

• Citizen role in oversight • Benchmarking utility performance

• Formal bulk supply and pricing



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Construction


Figure 3: Public-to-Consumer/Civil Society Interactions

• Third party role in oversight and monitoring

• Spot checks of infrastructure constructed

• Performance-based contracts

• Hotlines for complaints

• Loss of materials • Resistance to meeting standard specifications

Operations & Maintenance

Payment Systems


PotentialResponses/Risk

Mitigation Measures

• Theft of materials by village leaders

• Fraudulent documentation, accounting, and reporting

Stages

• Unexplained variations in payment

• Complaints from consumers • Complaints from small-scale providers

• Legitimization of illegal connections

• Review of connection costs

• Performance contracts for speed of repairs

• Transparency and reporting of performance requirements

• Report cards and other feedback mechanisms

• Public complaints system

• Fraudulent meter reading, avoidance of payment, and overcharging

• Bribes for access to water: installing or concealing illegal connections, avoiding disconnection, non- network (tankers) illicit supply using public assets • Preferential treatment for new connections and repairs

• Changes in unaccounted-for water

• Unofficial use of tankers • Lack of fresh interest in connection campaigns

• Number of connections versus increase in water consumed

• Unexplained zonal variations

• Information and awareness campaigns

• Citizen participation in monitoring and oversight

• Participatory corruption assessments

• Commercialization • Customer interface improvement: metering, billing, and collection

• Performance contracts • Public complaints system



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10. Step 3: Design and implement anticorruption options. Understanding incentives is a key starting point for reducing the risk of corruption. To change behavior of officials, the expected gains must be lowered and the expected penalties increased. The incidence of corrupt transactions can be lowered through policies and organizational changes that reduce discretion, monopolies, and bureaucratic procedures and that clarify functional responsibilities for regulation, policy making, and service delivery. Increasing service standards can also help lower the incidence of corruption. The probability of detection or penalty can be enhanced by clarifying procedures and streamlining operational roles, increasing transparency through citizen or consumer participation and monitoring of water services, specifying standards, ensuring media independence, establishing hotlines for complaints, and providing support for whistle-blowers. The magnitude of the penalties for corrupt actions should also be increased. The development of accountability is central to tackling corruption, and should address both supply and demand sides. These include institutionalizing user surveys and report cards and providing mechanisms for civil society’s role in monitoring, complemented by policy and institutional improvements. Promoting integrity and ethical behavior in the sector is important. Relevant mechanisms include codes of conduct, education on ethics and anticorruption, and laws/rules on conflict of interest. To be effective, transparency and accountability frameworks must be in place, together with a capacity to sanction. Sanctions-based approaches that are not accompanied by effective enforcement are less likely to work. In general, an approach involving prevention, detection, and enforcement is important in tackling corruption. Figures 1 to 3 present examples of potential responses to corrupt interactions in the sector. 11. Several issues should be kept in mind in carrying out anticorruption efforts in the water supply and sanitation sector: (i) there is a lack of information on the scope, nature, impact, and costs of corruption in the sector; (ii) corruption in the water sector is linked with overall and sector governance; (iii) decentralization has created a new set of risks and opportunities, and more effort is called for to develop accountability at the outset; (iv) it takes two or more to bribe; (v) the political realities of fighting corruption in the water sector are sobering, and many constraints and opposing stakeholders block the way forward; (vi) the net effects of corruption and anticorruption activity in the sector for the poor are not really known; and (vii) developing pro-poor anticorruption activity within the water supply and sanitation sector should be informed by more widespread and detailed demand-side assessment. Prescriptive anticorruption efforts must be re-examined carefully in countries where the rule of law is weak, the state has little legitimacy, service delivery institutions are not accountable, and the commitment of leaders is doubtful. While it is possible to learn from other countries, specific risk mitigation measures will have to be tailored to specific country, sector, and local contexts. C. Remarks on the Value Chain Methodology 12. The value chain methodology offers several advantages: (i) it is results-oriented; (ii) it highlights key vulnerabilities along the chain as well as measures for reducing corruption risks; and (iii) it offers a convenient way of developing warning signals for tracking corruption. This line of inquiry is adaptable to differing country situations. The menu of anticorruption options, however, should be used with caution. In the water supply and sanitation sector, it is not yet known conclusively what works in which situations, what combinations of interventions are needed, and what sequencing of reforms will optimize anticorruption efforts. The users of this methodology could combine tools to assess corruption risks. A close interaction with various participants in the sector is valuable in carrying out diagnostics. Over time, the value chain analysis needs to be reviewed, with due regard for changing conditions.3

3 Kenny, Charles. 2007. Infrastructure Governance and Corruption: Where Next? Policy Research Working Paper

4331. Washington, DC: The World Bank. Available: http://go.worldbank.org/9P794X9DD0


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ASSESSING AND TRACKING CORRUPTION VULNERABILITIES IN THE ELECTRICITY SECTOR

A. Background 1. This summary presents a methodology for assessing and tracking areas that are susceptible to corruption in the electricity sector and offers potential measures for mitigating corruption risks. The electricity sector tends to be vulnerable to corrupt practices due to a number of factors: (i) the sheer magnitude of the expenditures, (ii) the existence of regulatory capture, (iii) the possibility of collusion among contractors, and (iv) opportunities for discretionary decisions and rent taking by public and private officials. Corruption in the electricity sector takes many forms. It ranges from grand larceny by political executives, who award concessions or require state-owned utilities to enter into unfavorable power purchase agreements or manipulate policies to suit favored parties, to petty corruption by meter readers and linemen. Utility managers/staff members are in the middle, obtaining their share from contractors and suppliers. Understanding how corruption manifests itself in the electricity sector can make a valuable contribution to the design of risk mitigation plans. Where the management controls, accountability of the utility managers, and the transparency of operations are compromised, poor service delivery, corruption, weak financial performance, and fiscal burden can occur. B. Scope and Methodology 2. The value chain methodology is a means of assessing and tracking corruption vulnerabilities at various stages along the process of translating inputs to outputs. The delivery of electricity generally involves a chain of three stages: (i) generation, (ii) transmission, and (iii) distribution. Electricity is produced at the generating plant and then delivered to the high-voltage transmission network at the grid substation. The power is stepped down at distribution substations, released into distribution feeders, and eventually sold to retail consumers. The relative risks and magnitudes of corruption along each link in the chain are likely to vary, implying that strategies will differ depending on the relative weights of the decision points along links of the chain. The subsequent Figure presents a generic framework that illustrates the decision points along the chain that are vulnerable to corruption, the red flags (warning signals), and practical risk mitigation measures. The examples in the Figure are not exhaustive. They are essentially meant to provide a springboard for tailoring the assessment of corruption vulnerabilities to country-specific situations. 3. The value chain methodology features three fundamental steps: (i) identify key areas of vulnerability; (ii) diagnose the situation and probe into the underlying causes; and (iii) design and implement anticorruption options.1

1 Adapted from Gulati, Mohinder, and M.Y. Rao. 2007. Corruption in the Electricity Sector: A Pervasive Scourge. In

The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

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For discuss purpose only

Generation

A Framework for Assessing and Tracking Corruption Vulnerabilities in the Electricity Sector

Examples of Decision Points Vulnerable to Corruption

Subsector/ Value Chain

Policy

Distribution

• Lack of an accurate forecast of demand

• Nontransparent selection process

• Ad hoc licensing revisions or exceptions

• Unclear procedures • Unmetered supply to

consumers • Political interference

Electricity Misuse

• Undue connection delays • Tampered-with meters • Wide consumption

variations by similarly placed consumers

• Frequent burning of transformers/meters

• Billing disputes

Transmission

Adapted from Gulati, Mohinder, and M.V. Rao. 2007. Corruption in the Electricity Sector: A Pervasive Scourge. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

Project Development (cuts across subsectors)

• Manipulation by planning agencies of additional capacity estimates to meet demand • Alteration by the regulator of the licensing criteria to favor particular entities • Repetitive procedures for statutory clearances with no time limit for the final decision

Customer and Effective People Interface

• Perfunctory or no study • Vague and nontransparent

procedures • Lack of contract specificity • Cost escalation claims/

disputes • Multiple certifications before

payments can be made

• Absence of internal controls (including geographic management information system and updated management information system)

• Non-adherence to commercial operations and procedures

• Political connections/interference

• Ad hoc licensing criteria alteration by the regulator • Restrictions on who may buy the energy • Subsidy administration

Red Flags/ Indicators

• Alteration by the regulator of the licensing criteria to favor certain entities • Repetitive procedures for clearances with no time limit for the final decision

Formulation • Technoeconomic studies • Surveys/site investigations • Estimation of costs and implementation schedules • Land acquisition for the utility • Plans for compensating persons affected by the project Implementation • Contractor selection • Type of contract and contract documents • Purchase and supply of plant, machinery, and materials • Payments to contractors Plant Operation • Performance of plant and machinery • Execution of operations and maintenance • Emergency repairs/purchases • Payments • Fuel supply measurements • Human resource management

• Unclear procedures on new connections • Poor meter quality • Irregular meter reading • Billing based on factors other than actual use • Collusion between utility staff and consumer on billing

• Unauthorized use of electricity in the homes of generation plant staff • Unreasonable auxiliary consumption of fuel in the thermal generation plant

• Tapping of overhead transmission lines by large consumers • Erratic and unreliable meters at the substations • Deliberate delay in replacing defective meters

• Tapping of distribution lines • Unauthorized electricity supply • Nonbilling and underbilling of electricity • Tampering with or bypassing meters • Billing the consumer at a lower rate • Organized resistance to paying for electricity

Potential Responses

Diagnostic work Energy master plan Consultations Procedure simplification Independent regulator

Analytical studies Procedure codification and transparent procurement

Third party oversight

Business process improvements Customer support centers User surveys Financial/technical audits

Watchdogs/penalties for offenders Insulated electricity lines Electricity audits Reporting system Computerized billing

• Compensation of persons affected by the project • Right of way implementation for transmission lines

• Compensation of persons affected by the project


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4. Step 1: Identify key areas of vulnerability. Areas that are generally prone to corruption are (i) policies, (ii) project development, (iii) customer and effective people interface, and (iv) misuse of electricity. Government policies, for example, involve the expansion of power generation capacity, norms for licensing, statutory and administrative clearances, land acquisition, compensation and resettlement of people affected by electricity projects, subsidy administration, and selection of regulator. Policy formulation without an in-depth study of the demand forecast and with little or no stakeholder consultation at all is likely to be unsound. When planners deliberately underestimate the demand, an opportunity for future shortages is created that may justify emergency arrangements to purchase electricity from expensive sources. An overstated demand, on the other hand, may justify the setting up of a favored new independent power producer. Other red flags/warning signals may be seen in ad hoc revisions or exceptions to licensing criteria; noncompetitive and nontransparent selection of entities for electricity generation, transmission, and distribution; vague procedures for obtaining clearances; unmetered supply to consumers; and political interference to favor certain interests. These signals, however, must be interpreted carefully because they may be associated with other reasons, rather than corruption (see para 8 below). 5. Once an investment proposal meets government policy requirements, the stage is set for activities pertaining to project formulation, implementation, and plant operation. Perfunctory studies, opaque procedures, lack of contract specificity, cost escalation claims/disputes, and multiple certifications before payments can be made are some red flags that could be probed further to indicate corrupt practices. Even personnel-related decisions such as appointments to the utility boards or senior management, staff recruitment, transfer, promotion, and disciplinary action can be a source of corruption. Politicians may reward their supporters or cronies by using their influence to award rent-collecting jobs in public enterprises. In procurement, the technical specifications and the bidding documents may be deliberately kept ambiguous, and nontransparent criteria may be used for participating bidders. Even where competitive bidding processes are used, bidders may make side payments to ensure favorable terms/conditions and bid evaluations. Side payments may also facilitate the issuance of work orders, the opening of letters of credit, and various stages of project implementation carried out by contractors and consultants, such as processing payments and obtaining permits. Contracts in an environment of weak watchdog institutions offer opportunities for making illegal gains. 6. At customer and effective people interface, decision points that are prone to corruption during the generation and transmission stages include compensation of persons affected by the project and right of way implementation. Inappropriate handling and insufficient resource allocation may lead to disputes and cost escalation claims that may provide opportunities for corruption. At the distribution stage, utility staff members exercise discretion in various activities such as new connections; meter installation, reading, and replacement; consumer billing; repair service; and disconnection and reconnection. Red flags may be seen in undue connection delays, tampered-with meters, wide consumption variations by similarly placed consumers, frequent burning of transformers and meters, and billing disputes. In general, corruption tends to be widespread at customer interface. 7. Another vulnerable point is misuse of electricity, which may occur in all of the three links in the value chain. The beneficiaries of corruption along the chain include staff of the generation plant, large consumers, politicians, bureaucrats, utility managers, transmission line staff and distribution utility staff, and small consumers. In electricity generation, for instance, corrupt practices may occur with unauthorized use of electricity in the homes of the staff of the generation plant and unreasonable auxiliary consumption of fuel in the thermal generation plant. In electricity transmission and distribution, tapping of lines, erratic and unreliable meters, and


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deliberate delay in replacing defective meters are common vulnerable points. The absence of internal controls (including geographic management information system and management information system), noncompliance with sound commercial operations and procedures, and political interference may at times be conducive for corrupt practices. 8. Step 2: Diagnose the situation and probe into the underlying causes. Caution must be exercised in interpreting the vulnerable points and red flags/indicators. A more rigorous analysis of the situation is necessary before establishing corruption as the underlying cause of the symptom, which may indicate inefficiency, inadequate analysis, faulty organizational structure, inefficient business processes, poor judgment and decisions by policy makers, or expediency-driven choices in public policies rather than outright corruption. Poor planning or poor implementation resulting in delays in project completion, cost escalation, and claims from contractors could occur simply because trained personnel were not available to the utility or the government. Before deciding whether or not corruption has played any role, the circumstances of each case must be carefully examined. Further analysis of the decision making process, case analysis, a review of related studies, triangulation, user surveys, and other diagnostic tools are necessary before concluding that the indicator reflects corruption. 9. The formulation C (corruption) = M (monopoly) + D (discretion) − A (accountability) − T (transparency) is useful for diagnosing corruption. The extent of corruption is often linked to the existence of state monopolies, the discretion held by decision makers, the absence of clear and enforceable accountability, and the lack of transparency in the decision making process. Agreements executed by governments or government-controlled units to purchase power from producers selected other than through transparent competitive bidding provide a fertile ground for corruption. Even tax holidays, subsidies, and other types of concessions given to independent power producers as part of the policy to encourage investment in the sector easily lend themselves to misuse and corruption unless they are administered openly and transparently. The lack of effective mechanisms for monitoring outcomes of government action shields corruption from public scrutiny. 10. Step 3: Design and implement anticorruption options. To make a positive impact in the short and medium term, it is more useful to focus on those vulnerable points that, if addressed, can have a relatively large effect. The starting point could range from making the procurement process transparent, to seeking expert consultation in electricity investment decisions and enforcing accountability of public officials and utility managers, to fighting petty corruption to build public support. A possible solution to petty corruption in bill collection, for example, is to sign a management contract with a private agency for meter reading and computerized billing, or to privatize electricity distribution (with due regard for the political economy context). Business process improvements, customer support centers, and financial/technical audits may also be considered, along with mobilizing the mass media, consumer groups, and civil society watchdogs to articulate key concerns. 11. In countries where corruption in procurement and contracting is pronounced, the strategy should focus on transparency and competition in procurement and contracting, and increasing accountability of public officials through independent regulatory institutions and stakeholder assertion of their right to information. Publication of all contract-related information on the website will help provide a safeguard against changing the rules of the game after the process has started. In certain countries, the continued presence and importance of state-owned operations in the sector suggests a renewed search for options, which may include third party monitoring and user surveys. Clear criteria and procedures, vigilance units, regular review of the works, and timely payments to contractors are a few other complementary measures.


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Separation of regulatory and commercial functions and ensuring independence of the regulatory institutions are also vital. 12. If corruption is pervasive, combating corruption requires mutually reinforcing improvements in public governance. It is a long-term process calling for sustained political commitment, changes in the incentives of stakeholders, and new standards of transparency and accountability. Presented below are some key elements of an anticorruption strategy for the electricity sector.

Key Elements of an Anticorruption Strategy for the Electricity Sector 1. Move from denial to acceptance of the problem and build a broad agreement among policy makers and

key stakeholders. • Undertake analytical and diagnostic work to identify the causes of the problem, its severity and effects, and

the political cost of maintaining the status quo. • Consult stakeholders on the diagnosis to create an environment for implementing the strategy. • Disseminate diagnostic information without blaming the actors. • Launch a communication campaign with strong and visible involvement of senior politicians.

2. Build a coalition. • Ensure buy-in by utility management and employees by addressing employee issues. • Secure employee commitment to reforms. • Improve customer service by establishing effective customer support centers. • Reduce the political cost of reform through better-targeted, transparent, judicious, and equitable

enforcement. • Ensure that service improvements precede tariff adjustments. • Engage in meaningful consultation with and participation of civil society.

3. Improve utility business processes. • Simplify and codify procedures. • Introduce modern technology in selected areas. • Foster efficiency and effectiveness of customer service and compliance with service standards. • Make procurement transparent.

4. Strengthen institutional mechanisms for accountability. • Separate commercial from regulatory functions. • Strengthen audit and internal vigilance units. • Prosecute offenders in courts and confiscate their illegal gains.

5. Encourage public participation. • Sponsor open discussions on all important matters. • Institutionalize user surveys. • Put in place a mechanism to redress public grievances. • Implement an effective right to information program. • Persuade client governments to adopt reforms suited to their countries.

Source: Gulati, Mohinder, and M.Y. Rao. Corruption in the Electricity Sector: A Pervasive Scourge. 2007. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

13. Prior to launching an anticorruption strategy for the sector, it is desirable to have committed leadership at the top that will serve as a champion for change, and a core team backed by resources to build and sustain support for anticorruption. Internally driven change is fundamental because a government that lacks commitment can neutralize laws and institutions that are perceived as potential threats to political control. Some of the tactics used are non-dissemination of information to the public, nonestablishment of implementing rules and procedures to render the laws inoperative, and depriving the institutions of budget, funds, and staff. The political leadership must be prepared to (i) provide an appropriate legal and regulatory framework to carry the reform forward, (ii) appoint persons of proven integrity and ability to key


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positions, (iii) provide adequate funds to support the reform process, (iv) establish regular monitoring and reporting, (v) support the institutions set up to further reforms, such as independent regulators, and (vi) enforce the law even when the offenders are influential. New utility managers may have to be brought in to initiate the reforms and discourage any infraction. Pressure from civil society and the international donor community can nudge utilities to reform. Apart from an enabling legal and regulatory framework, inculcating a new culture among the politicians, employees, the consumers, and the general public is a vital part of establishing good governance. 14. The initiation of reform is heavily dependent on timing. Governments can be persuaded to introduce reforms during the early part of their rule, but not later when reforms will be a political gamble. Political economy issues should be factored in. There is a need to reduce the political cost of reform through innovation and a phased approach to change; empowerment of consumers and civil society by providing them the opportunity to participate in policy formulation and decision making and access to information; and financing of pertinent costs. Consumers and civil society organizations acting in tandem with select members of the utility staff can form a powerful coalition against corruption. A well informed public armed with the right to critically examine the operations and decisions of a utility can serve as a safeguard against corruption. 15. Irrespective of the issues of ownership or corporate structure of electric utilities, the donor community has a role in reducing corruption by persuading client countries to enact laws, establish institutions, and adopt procedures that improve governance. Devising strategies specific to the particular place and time and analyzing stakeholder interests are crucial. Governments and donors have fiduciary obligations to ensure that their funds are used effectively for the intended purposes. C. Remarks on the Value Chain Methodology 16. The value chain methodology offers several advantages: (i) it focuses on results that a sector or core process seeks to achieve; (ii) it provides a structured and detailed picture of decision points along the chain of electricity generation, transmission, and distribution that are susceptible to corruption; (iii) it highlights key vulnerabilities and remedial measures that could impact on fighting corruption in a given problem area; and (iv) it offers a convenient vehicle for developing indicators for tracking the incidence of corruption. This line of inquiry lends itself to adaptation to different country settings. It also opens the door to linking operational concerns with theoretical and empirical work on corruption and, in the process, to developing more refined indicators. Users may use various data collection techniques and multiple diagnostic tools to diagnose corruption risks. Corruption often goes with capacity limitations, limited knowledge, and capture by special interests. There is a role for increased awareness of the corruption issue, including the development of generic lists of red flags. Large, complex, one-of-a-kind components where there are few potential bidders and where change orders are likely will be considerably more vulnerable to corruption than simple procurements based on standard products. This suggests the potential for developing a risk-based menu of anticorruption options. Where components are large and complex, for example, third party monitoring, independent physical and financial audit, integrity pacts, and/or increased procurement transparency are likely to help improve outcomes.3

3 Kenny, Charles. 2007. Infrastructure Governance and Corruption: Where Next? Policy Research Working Paper

4331. Washington, DC: The World Bank. Available: http://go.worldbank.org/9P794X9DD0


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FRAMEWORK FOR ASSESSING CORRUPTION RISKS IN THE HYDROPOWER PROJECT CYCLE

A. Background 1. This summary illustrates potential corruption risks and risk mitigation measures in the context of a hydropower project cycle.1 Hydropower provides about 17% of global electricity generation. It is generally high-risk, given the amount of global investment it attracts and the associated opportunities for bribery, fraud, and other forms of corrupt behavior.2 The complexity of hydropower projects, combined with a lack of transparency, provides a fertile ground for corruption. Complexity is mirrored in the structures for project implementation and operation (differing contracts for supply, construction, and consultancy, often with joint ventures, and frequently a mix of foreign-based and local firms). Where independent power producers are encouraged, the absence of transparency in power purchase agreements is a common concern. In developing countries where public systems in the water and power sectors are in transition, the debate on financing hydropower development feeds into ongoing debates about public sector governance, public procurement, and the influence of multinational companies. B. Corruption Risks at Various Stages of the Hydropower Project Cycle 2. The hydropower project cycle basically covers five stages: (i) options selection, (ii) project planning, (iii) contracting/bid and evaluation, (iv) construction and implementation, and (v) operation, maintenance, and rehabilitation. In particular, this cycle applies to the construction and management of a hydropower project rather than to its service provision aspects. Corruption risks can be mapped using a value chain method that analyzes vulnerable points along various stages of the project cycle (see subsequent figure). 3. During the options selection stage, authorities may be persuaded by project developers, politicians, and other officials to select unnecessary projects or accept project proposals, without subjecting them to a rigorous review. At the planning stage, potential corruption risks can occur from undue influence by vested interests over site identification/selection, biased specifications towards a particular technology, and over- and under-design of the project. The issuance of environmental clearances could also be marked by corruption, particularly when the criteria are unclear and the procedures non-transparent. During the contracting phase, grand corruption can occur in the form of bid rigging and kickbacks in the procurement process, often channeled through agents or subcontractors to disguise the practice. Non-objective and non-transparent contractor selection procedures, non-justifiable contract awards, and lack of disclosure of procurement decisions could add to corruption risks. During project implementation, concealing substandard work, agreeing to unwarranted contract variations, creating artificial claims, and poor project oversight can provide opportunities for corruption. Similar risks can continue during the award and execution of maintenance and rehabilitation contracts.

1 For further details, please refer to the following: (i) U4 Anti-Corruption Resource Center. 2007. Corruption in the Hydropower Sector. U4 Expert Answer. Bergen.

Available: www.U4.no/helpdesk/helpdesk/queries/query140.pdf (ii) O’ Leary, Donal. 2006. The Role of Transparency International in Fighting Corruption. A paper prepared for the

Annual Bank Conference on Development Economics: Rethinking Infrastructure for Development, Tokyo, 29−30 May 2006. Available: http://siteresources.worldbank.org/INTDECABCTOK2006/Resources/OLeary.pdf

2 Corruption, for purposes of this paper, refers to the abuse of public or private office for personal gain. ADB.1998. Anticorruption Policy. Manila. Available: www.adb.org/Documents/Policies/Anticorruption/anticorruption.pdf


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Options selection

Potential Corruption Risks and Mitigation Measures: Hydropower Project Cycle

• Perfunctory studies • Technical specifications

unduly favor a particular technology

• Over- or under-design • Poor environmental

impact assessment (EIA) • Nontransparent EIA

clearance

• Clear and transparent criteria for project selection • Strict implementation of an anticorruption policy

• Biased/predetermined options

• Nontransparent choices • Undue influence by

proponents and officials over potential project investments

• Selection of unnecessary projects

Contracting/

Bid and evaluation

Construction/ Implementa-

tion

Potential Responses/Risk Mitigation Measures

Stages

Project

planning

• Concealing substandard work

• Unwarranted contract variations

• Artificial claims • Weak project oversight • Blind eye to contract

violations

• Quality checks and close project supervision • Objective and clear guidelines for contract variations • Public access to information • Toll-free hotlines and grievance mechanisms • Participation of civil society/media in monitoring • Protection of whistle-blowers • Strengthening of audit and integrity units • Enforcement of international Conventions

Source of basic information: U4 Anti-Corruption Resource Center. 2007. Corruption in the Hydropower Sector. U4 Expert Answer. Bergen. Available: www.U4.no/helpdesk/helpdesk/queries/query140.pdf

Operation,

maintenance, and

rehabilitation

• Rigorous project studies: technical, economic, social, and environmental assessments

• Clear criteria for issuance of EIA clearances and verification of compliance with requirements

• Nontransparent prequalification criteria

• Opaque bid evaluation procedures

• Bid clarifications not shared with other bidders

• Award decisions not justified/not made public

• Collusion

• Transparent bidding and evaluation processes • Integrity pacts • Blacklisting of corrupt companies • Criminalization of corruption in compliance with the

United Nations Convention against Corruption • Participation of civil society/media in monitoring • Whistle-blower protection

• External influence over contract awards

• Under funding of social/ environment mitigation obligations

• Insurance fraud on equipment and performance guarantees

• Public access to information • Enforcement of plans for social and environmental

safeguards • Quality checks and close project supervision • Access to grievance mechanisms • Participation of civil society/media in monitoring • Strengthening of audit and integrity units • Whistle-blower protection

Examples of Potential Risks


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C. Potential Corruption Risk Mitigation Measures 4. The preceding Figure identifies a range of potential corruption risk mitigation measures at each stage of the project cycle, which should be further examined and adapted to local circumstances. For example, during the project planning stage, corruption risks could be mitigated by conducting rigorous project studies (technical, economic, social, and environmental) and enforcing compliance with requirements for obtaining clearances. These will provide a sound basis for project design and reduce arbitrary and discretionary decision making arising from undue influence by proponents, politicians, and other vested interest groups. 5. Moreover, the contracting process can be made unbiased through (i) transparent bidding and evaluation processes, and (ii) enforcement of integrity pacts that commit all parties to refrain from offering, demanding, or accepting bribes or from colluding with others to obtain or execute the contract. These options, however, call for actual capacity to impose penalties in case of infractions in order to be effective. Whistle-blower protection, criminalization of corruption (in line with the United Nations Convention against Corruption), and blacklisting/debarment of corrupt firms are other potential risk mitigation measures. 6. During construction and project implementation, quality checks, close project supervision, public access to information, access to grievance/complaints mechanisms, and strengthening of audit and integrity units can help mitigate corruption risks arising from concealing substandard work, unwarranted contract variations, and artificial claims. Finally, during project maintenance and rehabilitation, similar measures may be adopted in addition to enforcement of plans for social and environmental safeguards to reduce risks from fraud and under funding of social and environment mitigation obligations under the project. 7. In general, checks and balances, transparency of decision making, access to information, and putting in place accountability and oversight systems are vital. Corruption risks tend to be high in the face of wide discretion, little accountability, and prevalence of patron-client linkages that subvert adherence to rules and regulations. C. Remarks on Mapping Corruption Risks 8. A similar risk mapping exercise can be done for other types of projects. A clear grasp of the local context, the political economy, and incentives/disincentives for corruption is fundamental in assessing corruption risks and in crafting risk mitigation measures. There is no single blueprint, given variations in social, political, and economic settings under which projects operate. Obtaining and assessing information on corruption risks from multiple sources3 is essential.

3 These include available corruption reports, key informants from the government and private sectors, development

partners, and other stakeholders.


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FRAMEWORK FOR ASSESSING CORRUPTION RISKS IN THE EDUCATION SECTOR A. Background 1. This summary identifies corruption-prone areas in the education sector and presents potential measures for mitigating corruption risks.1 Education is a vital condition for achieving the Millennium Development Goals, promoting social and economic development, and reducing intergenerational transmission of poverty. Education stakeholders argue that the goals for education may not be achieved without strengthening and building the instruments needed to control corruption.2 Considering that the education sector can account for 20%−30% of the public budget, even low levels of corruption can result in a significant loss of public resources. Education investments are less effective when public spending in education is misallocated and when decisions are not based on tools and mechanisms that improve outcomes. Good governance is crucial in this context. It must ensure that the human right to education is enforced. B. Types of Corruption in the Education Sector and Their Consequences 2. Corruption can occur at any stage and among any group of actors: from policy makers at the ministerial level, to providers at the school level such as teachers and contractors, and to beneficiaries of education such as students and parents. Along this chain are opportunities for leakages and corrupt behavior (see subsequent Figure). Warning signals include biases in regulations toward narrow interests; unusual budgetary transfers, illegal fees for admission and examination; academic fraud; withholding teacher salaries; and preferential placement and promotion. They also include charging students for “tutoring” sessions to cover the curriculum needed to pass mandatory examinations and that could have been taught in the classroom; teacher absenteeism; and illegal practices in textbook procurement, meal provision, and infrastructure contracting. 3. Often, the underlying causes are linked to weaknesses of the education sector such as weak legislation and guidelines or the failure to enforce such legislation and guidelines; opaque and complex decision making structures and procedures at various levels; inadequate or delayed salaries that often compel teachers to seek supplementary income; donor funds that education bureaucracies cannot absorb responsibly; inadequate organizational structures and control systems; inadequate requirements to disclose information to citizens; and lack of community involvement in planning and monitoring.

1 The insights were synthesized mainly from: (i) Hallak, Jacques and Muriel Poisson. 2007. Corrupt Schools, Corrupt Universities: What Can Be Done? Paris:

International Instritute for Educational Planning. Available: www.unesco.org/iiep

(ii) Ochse, Katharina. 2004. Preventing Corruption in the Education System: A Practical Guide. Eschborn: GTZ. Available: www2.gtz.de/dokumente/bib/05-0676.pdf

(iii) Patrinos, Harry Anthony and Ruth Kagia. 2007. Maximizing the Performance of Education Systems. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level. Washington, DC: The World Bank.

(iv) U4 Anti-Corruption Resource Center. 2006. Corruption in the Education Sector. Bergen. Available: www.U4.no/themes/education

2 Corruption is defined as the abuse of public or private office for personal gain. ADB. 1998. Anticorruption Policy. Manila. Available: www.adb.org/Documents/Policies/Anticorruption/anticorruption.pdf


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• Policy making and regulation

Value ChainUpstream

Corruption Risks in the Education Sector and Illustrative Risk Mitigation Measures

• Teacher absenteeism/ unjustified absence • Extravagant lifestyle • Opaque private tutoring • Opaque admission and selection processes

• Unofficial fees • Rampant cheating • No mechanism for contesting decisions

• Unclear selection criteria • Non-transparent distribution pattern

• Improvement in the regulatory framework

• Independent accreditation bodies

• Publication of budgets,

program plans, and expenditures

• Conflict of interest rules • Transparent criteria • Effective civil service

reform • Performance-based

incentive systems • Strengthening control

systems • Independent audits • Whistle-blower

protection • Penalties for corrupt

practices

• Bias in laws and regulations toward narrow vested interests

• Unclear accreditation of educational institutions

• Unusual budgetary transfers • Unclear procedures • Weak internal/external control • Favoritism, nepotism, and selling of posts (misalignment between job requirements and actual skills)

• High incidence of noncompetitive bidding, collusion, bid rigging, poor construction, frequent delayed payments, and leakage of funds

• Supply of inferior materials • No monitoring of textbook distribution

• Human resources management

• Budget implementation

Value Chain downstream

Examples of Warning Signals

Potential Risk Mitigation Measures Policy-

makers (ministerial,

central)

• Budget allocation/finance

• Reduction of unexcused absences

• Systematic monitoring • Code of conduct • Working condition improvements

• Whistle-blower protection

• Transparent criteria/procedures

• Computerized examination system

• Coded certificates • Information disclosure • Financial management improvement

• Civil society participation in planning/monitoring

• Complaint mechanisms • Penalties for corrupt

• Teacher behavior

• Student admission • Exams, certificates, and diplomas

• School finance, allowances (fellowships, subsidies)

Providers (schools, teachers,

contractors

Beneficia-ries

(students, parents,

communi-ties)

Adapted and distilled from: (i) Ochse, Katharina. 2004. Preventing Corruption in the Education System: A Practical Guide. Eschborn: GTZ.

Available: www2.gtz.de/dokumente/bib/05-0676.pdf (ii) Patrinos, Harry Anthony and Ruth Kagia. 2007. Maximizing the Performance of Education Systems. In The Many

Faces of Corruption: Tracking Vulnerabilities at the Sector Level. Washington, DC: The World Bank. (iii) U4 Anti-Corruption Resource Center. 2006. Corruption in the Education Sector. Bergen.

Available: www.U4.no/themes/education


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4. Corruption affects education in several ways: (i) it causes prices to rise and service delivery to fall; (ii) students may not learn the skills needed to take advantage of available opportunities and contribute to social and economic development/low quality teaching; and (iii) corruption may undermine an entire generation’s core values regarding accountability, personal responsibility, and integrity. Corruption threatens equal access, quantity, and quality of education. C. Potential Corruption Risk Mitigation Measures in the Education Sector 5. Country dynamics and sector context must be kept in mind when formulating measures to mitigate corruption risks. Overall, clear, objective, and transparent criteria and regulations are needed for various tasks, such as accreditation of educational institutions; budget allocation and disbursement; merit-based teacher recruitment and promotion; procurement of educational materials, school supplies and equipment, meals, and construction of educational facilities; student admissions and examinations; and allocation of fellowships, among others. In procurement, for example, there might be a need to make procedural guidelines consistent with international standards to ensure fairness and efficiency; improve disclosure of information; strengthen the legal basis for civil society involvement in monitoring; and protect whistle-blowers. In personnel recruitment and promotion, well-defined criteria and guidelines, public advertisement of vacancies, and complaint mechanisms are important. 6. Moreover, adequate control mechanisms must be set in place, regular inspections and audits performed and appropriate action taken against perpetrators of corruption. The lack of law enforcement is often the biggest obstacle to curbing corruption. The public and the media should have access to information (e.g., fund transfers, purchase of books, school meals, allocation of teacher positions, etc.). An informed citizenry that is aware of its rights and entitlements and expects education to be delivered responsibly and equitably is a powerful tool in preventing abuse. Transparency allows an informed citizenry to have input in the budget process and to monitor whether policies and political commitments have indeed been implemented. Measures to promote budget transparency include publishing budgets and expenditures, building budget literacy, and improving financial management systems. 7. Civil society participation in planning and monitoring as well as access to complaint mechanisms can help strengthen accountability in the sector. Such participation may take the form of (i) school boards (comprising parents and community members) being involved in the review and approval of key decisions, including the allocation of fund transfers and contributions from the community; (ii) parent-teacher associations being responsible for managing the school meals; and (iii) nongovernmental organizations commenting on budget proposals and monitoring expenditures. Public hearings and citizen report cards may be used to generate public awareness of available goods and services and to obtain feedback on service delivery. Other measures to improve accountability include enforcing rules on conflict of interest, implementing a code of conduct, and providing for independent accreditation boards and autonomous examination agencies. Public demand for quality education, together with incentives for teachers and effective control and sanction mechanisms, are fundamental to reducing corruption risks in the sector. D. Ways of Assessing Corruption in the Education Sector 8. The extent and manifestations of corruption vary country to country. Sometimes, the border between incompetence and corruption is difficult to define. Country-specific investigations are a must. The diagnosis should lead to decisions to correct distorted practices


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and should integrate key concerns such as transparency, accountability, and participation. Specific ways of diagnosing corruption in the education sector include participatory assessment, including report card surveys; audits; public expenditure tracking surveys (PETS); and quantitative service delivery surveys (QSDS).3 Also useful is the value chain methodology of the World Bank that maps corruption vulnerabilities at various stages.4 9. At the national level, risk analysis and audits of accounts or of framework procedures can be conducted. Areas for investigation may include selection of projects for personal interests rather than national interest; an implementation process favoring particular suppliers or payoffs; contracting through irregular processes to corrupt firms and suppliers; and follow-up of contracts (weak delivery, quality and cost control). At the school level, perception surveys, report cards, and audits of school accounts are useful. Issues for investigation may include use of tuition fees; additional payments for textbooks and materials; teaching hours paid and actually delivered; school maintenance cost and quality control; and the annual purchase of materials and equipment. The analysis of resource flows (either financial, human, or material) from the central to the school levels can be done by using the PETS. The focus could include non-wage expenditure, teacher salaries, or textbook production and distribution. 10. Participatory Diagnosis, Report Card Surveys, and Social Audits. Participatory assessments seek to collect information on the perception of corruption. These are based on cross-interviews of various focus groups and build basic social consensus among stakeholders on the scope, magnitude, and cause of corrupt practices; generate anticorruption recommendations; and influence implementation of recommendations. Public feedback is powerful in situations where the government operates as a monopoly service provider and leaves the user of the services with no real exit options. The report card can be used to stimulate collective action by citizens and to provide organizational leaders an opportunity to design changes and bring in strategic reorientation. The growing use of report card surveys can be explained by their usefulness in building transparency and accountability.5 11. An audit is an expert, purposeful, and organized activity, which identifies the difference between the desired and actual state. External audits can provide objective information concerning particular entities to state bodies and the public at large. They are used not only to detect corrupt practices but also to identify weaknesses in the education sector's operation and management at different levels. Social audits evaluate how public resources are used to achieve social objectives, focus on the value for money of public services, and help locate system leakages. The Community Information, Empowerment, and Transparency social audits, for example, combine quantitative data and qualitative evidence, and attempt to generate accountability by systematically building the voice of the community into the process.6 Its phases consist of (i) design and data collection, (ii) evidence-based dialogue and analysis, and (iii) socialization of evidence for public accountability through workshops, training of planners and service providers, and partnerships with civil society. 12. PETS and QSDS. The main purpose of tracking expenditures is to check if there is leakage of funds, estimate the amount of funds not reaching schools, and detect the origin and

3 Ochse, Katharina. 2004. Preventing Corruption in the Education System: A Practical Guide. Eschborn: GTZ.

Available: www2.gtz.de/dokumente/bib/05-0676.pdf 4 Campos, J. Edgardo and Sanjay Pradhan (eds). 2007. The Many Faces of Corruption: Tracking Vulnerabilities at

the Sector Level. Washington, DC: The World Bank. 5 See http://transparency.org/tools/e_toolkit/corruption_fighters_tool_kit_2001 and www.adb.org/Projects/e-

toolkit/products.asp for examples of the use of report cards. 6 For details on social audits, please see www.ciet.org/en/documents/methods_docs/200794114231.pdf.


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causes of leakage. Leakage is not equivalent to corruption, but can be an indicator of corruption.7 During the preparatory phase of the PETS, it is necessary to (i) describe precisely the organizational and administrative structure of the education system; (ii) analyze the various steps involved in financing education from different sources at different administrative levels; (iii) review rules for allocations of funds; and (iv) draw flows of funds from the ministry down to the schools. Attempts at conducting the PETS may be hampered by unreliable and inconsistent budgets and/or little systematic information on financial flows at the educational facility level. While the PETS cannot provide exact estimates of corruption, it can be valuable in identifying potential corruption zones and informing the public on their entitlements. The QSDS, on the other hand, focuses on the service facility and factors affecting quality of service.8 Thus, it considers leakage of service as opposed to leakage of funds. When used in conjunction with the PETS, it documents the characteristics of service providers and identifies problems along the chain of budgetary transfers and service delivery points (inputs, outputs, and quality). It can also help assess the rates of teacher absenteeism and of ghost teachers. The QSDS has been conducted in the education and health sectors, but can also be applied to other providers of public services. 13. The usefulness of diagnostic surveys is conditioned by the availability of their findings to the public. If audit reports remain confidential, little action can occur to mitigate the problem. Participatory diagnosis implies shared consensus on perceptions of corruption, but sufficient pressure must drive a commitment to change. Finally, if the leakage of funds revealed by diagnostic surveys is not widely disseminated, complaints are unlikely to be voiced and appropriate measures may not be carried out to address the situation.

7 For details on the PETS, please refer to www.u4.no/themes/pets/main.cfm. 8 For details on the QSDS, please see http://go.worldbank.org/S3WPM3W9J0.


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FRAMEWORK FOR ASSESSING AND TRACKING CORRUPTION VULNERABILITIES IN PHARMACEUTICALS: A HEALTH SUBSECTOR

A. Background 1. Despite the importance of pharmaceuticals to health systems, poor drug access continues to be one of the main global health problems. This is because of poverty, high drug prices, poor health infrastructure, and corruption. This summary provides an understanding of multiple decision points in the pharmaceutical subsector that may be susceptible to corruption and offers potential corruption mitigation measures. The pharmaceutical subsector is susceptible to corruption due to a number of reasons: (i) the sale of pharmaceutical products is lucrative and the final customers are vulnerable to opportunism due to asymmetric information; (ii) the subsector is subject to a significant degree of government regulation; (iii) the supply chain is complex, involving different parties before the product reaches the end user; and (iv) the difficulty of distinguishing authentic pharmaceutical products from counterfeit or substandard ones creates opportunities for introducing fake and low-quality drugs. 2. Good governance is a sine qua non for ensuring access of the population to essential medicines. Governments are responsible for creating sound institutional structures, processes, and policies that promote public welfare. In the pharmaceutical subsector, they have two core responsibilities: (i) regulate the manufacture, distribution, sale, and use of pharmaceutical products; and (ii) select, purchase, and manage drugs for use through the public health care system, in cases where the government itself provides drug coverage. In the absence of robust institutional checks and oversight mechanisms, government regulators could make discretionary decisions and breed opportunities for unethical and corrupt behavior. Thus, government commitment to mitigating corruption is vital. B. Scope and Methodology 3. The value chain methodology is a means of assessing and tracking corruption vulnerabilities at various stages along the process of translating inputs to outputs. In the pharmaceutical subsector, the six core stages are (i) manufacturing, (ii) registration, (iii) selection, (iv) procurement, (v) distribution, and (vi) prescription and dispensing.1 The subsequent Figure illustrates various decision points along the value chain, along with potential corruption risk mitigation measures. 4. Manufacturing of pharmaceutical products calls for adherence to standards of good manufacturing practice to ensure that products are consistently produced and controlled to the quality standards appropriate to their intended use and as required by the marketing authorization. Where such standards are not clearly defined or poorly enforced, there is a risk that counterfeit or substandard drugs may be in circulation. In turn, these can lead to poor health outcomes and in the worst case scenario, death.

1 Details were drawn from Cohen, Jillian Clare, Monique Mrazek, and Loraine Hawkins. 2007. Corruption and

Pharmaceuticals: Strengthening Good Governance to Improve Access. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.


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Manufacturing

• Lengthy procedures with a weak legal framework • Bribery to facilitate drug registration without the requisite information

• Legal basis for good manufacturing practice requirements and fines for noncompliance

• Random inspections • Use of product identifiers (bar codes, electronic

product codes, etc.) • Public posting of a list of compliant manufacturers

• Production of substandard and counterfeit drugs

Selection

Procurement

Potential Options/Corruption Risk Mitigation Measures

Stages

• Biased prescriptions • Prescription fraud in medical claims

Registration

• Tailor-fit specifications • Discretion in selecting suppliers

• Competitive and transparent procurement • Monitoring of supplier selection • Strict adherence to announced closing dates • Maintenance of written records of all bids received • Public access to adjudication results • Regular reporting on key procurement performance indicators

Adapted from Cohen, Jillian Clare, Monique Mrazek, and Loraine Hawkins. 2007. Corruption and Pharmaceuticals: Strengthening Good Governance to Improve Access. In The Many Faces of Corruption, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.

Distribution

Prescription

and Dispensing

• Transparent and uniform laws and standards • Adequate drug quality control capacity • Education of public and professionals to identify

unregistered drugs • Drug registration dissemination • Toll-free hotlines to report complaints • Market surveillance and random batch testing

• Non-explicit selection criteria • Non-transparent drug selection meetings

• Well-defined criteria for selection and pricing • Use of the World Health Organization’s essential

drug list and drug selection criteria • Public posting of drug selection committee

membership • Media coverage of drug selection committee

meetings • Public posting of results and decisions

• Warehouse theft • Diversion of drugs to patronage networks

• Public expenditure tracking and information system • Quality standards for storage facilities • Control of inventory movements and deliveries

• Engagement of professional associations to improve adherence to codes of conduct • Information systems to monitor physician prescription patterns • Imposition of penalties for breaches of legal and ethical standards • Regulation of industry interaction with prescribers through explicit criteria that limit industry gifts • Licensing and inspection of pharmacies

Examples of Decision Points Vulnerable to

Corruption

A Framework for Assessing and Tracking Corruption Vulnerabilities in the Pharmaceutical Subsector


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5. The value chain analysis includes three basic steps: (i) identify vulnerable points at various stages; (ii) diagnose the situation and probe into the underlying causes; and (iii) design and implement anticorruption options. The details are given below.2 6. Step 1: Identify vulnerable points along the value chain. By understanding the multiple decision points along the pharmaceutical value chain, decision makers can determine where and how corruption can occur. During the registration stage, for example, potential vulnerabilities include (i) weak or flawed law defining registration; (ii) payment to government officials by suppliers to register their drugs without the requisite information; (iii) delay by government officials in registering a pharmaceutical product to favor market conditions for another supplier; and (iv) deliberate slowing down of the registration process to solicit payment from a supplier. During prescription, points that are susceptible to corruption may include biased medical prescriptions and fraud in medical claims. Other examples are shown in the preceding Figure. 7. Step 2: Diagnose the situation and probe into the underlying causes. In using the value chain methodology, the reasons underlying the decisions need to be probed further. While the nuts and bolts of a pharmaceutical system are similar from country to country, the vulnerable decision points may differ and may even vary within different levels within the same country. If only one decision point is vulnerable to corruption, the integrity of the entire supply chain is at risk because the population’s access to essential medicines could be compromised. If a particular decision point is corrupted, health outcomes may vary, depending on the institutional organization of the system and the depth of corruption. There are clear limitations in differentiating between corruption, incompetence, and inefficiency mainly because such distinctions could be complex. There is a need to ascertain through case-by-case examples if a given incident is likely to involve corruption or not. Corruption implies the intent to do wrong, while incompetence and inefficiency do not necessarily entail deliberate wrongdoing. 8. Step 3: Design and implement anticorruption options. The basic elements of an anticorruption strategy will depend on the country’s size, the resources available, the structure of the health system, and the importance of the local pharmaceutical industry to the balance of trade and employment. The preceding Figure offers potential corruption risk mitigation measures at various points in the pharmaceutical value chain. For example, during drug registration, options may include the development of transparent, effective, and uniform laws and standards; the education of public and professionals to identify unregistered drugs; and market surveillance and random batch testing, among others. During drug distribution, information systems could be developed to ensure that drugs are allocated, transported, and stored appropriately, and regular communication established between every level of the system to control inventory movements and deliveries. A well-managed distribution and storage system helps (i) maintain a constant supply of drugs, (ii) keep them in good condition throughout the distribution process, (iii) minimize drug losses due to spoilage and expiry, rationalize drug storage points, and (iv) use available transportation resources as efficiently as possible. During the prescription and dispensing stage, professional associations could be engaged to improve adherence to professional codes of conduct, and penalties imposed for breaches of legal and ethical standards. The main concern with drug prescription and dispensing is that the patient may not always receive the most appropriate drug for a given condition because the prescription decision can be driven by drug promotion and influence of drug companies over the physicians’

2 Drawn from Cohen, Jillian Clare, Monique Mrazek, and Loraine Hawkins. 2007. Corruption and Pharmaceuticals:

Strengthening Good Governance to Improve Access. In The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.


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drug prescription practices. The pharmaceutical industry’s provision of incentives to physicians for prescribing particular products may border on corruption, warranting self-regulatory guidelines to control industry marketing practices and adherence to clinical practice guidelines. C. Remarks on the Value Chain Methodology 9. The value chain methodology is results-oriented. It also draws attention to key vulnerabilities along the value chain that can provide a basis for formulating anticorruption strategies. This line of inquiry is adaptable to differing country situations. The users of this methodology could combine tools to assess corruption risks. A close interaction with various participants in the subsector is helpful in carrying out diagnostics. Over time, the value chain analysis needs to be reviewed and updated, given evolving opportunities for corruption. Measures to mitigate corruption measures can be monitored and evaluated against baseline data to see if the appropriate change is taking place and, if not, to determine why and to modify the approach as necessary. Corruption risks can be reduced if institutions are transparent, public scrutiny is high, and the law and administrative processes demand accountability. 10. Given the global nature of the pharmaceutical subsector, tackling corruption goes beyond any single government. The greater challenge for policy makers may be managing the global pharmaceutical industry, where raw material can be produced in one country, exported to another for manufacture into products that, in turn, are exported to other countries. Alliances should be formed to ensure that the pharmaceutical system is not easily susceptible to corruption. The Declaration of Rome, adopted in February 2006, is a public expression of the deep concern about counterfeit medicines by the international community and the international pharmaceutical industry. Increasingly, international institutions are taking action to tackle corruption. A body of literature to diagnose or tackle pharmaceutical corruption is also growing, which can inspire thinking on the topic.


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OTHER CORRUPTION RISKS FRAMEWORKS

• Corruption Risks in the Health Sector

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• Framework for Assessing and Tracking Corruption Vulnerabilities in Customs Administration

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FRAMEWORK FOR ASSESSING CORRUPTION RISKS IN THE HEALTH SECTOR A. Background 1. This summary looks into corruption risks in the health sector and offers potential measures for reducing these risks.1 The importance of health for economic growth and poverty reduction is reflected in the Millennium Development Goals. Three of the eight goals relate directly to health.2 The health sector is prone to corruption due to (i) an information imbalance in health systems, where health professionals have more information about illness than patients, and pharmaceutical and medical device companies know more about their products than public officials entrusted with spending decisions; (ii) the uncertainty in health markets, or not knowing when illness will occur, who will fall ill, and how effective treatments are; (iii) the complexity of health systems, particularly the number of dispersed parties involved,3 which worsens the difficulties of generating and analyzing information, promoting transparency, and detecting corruption; (iv) the volume of public funds involved; (v) the susceptibility of health systems with direct public provision, particularly when insulated from competition or external accountability; and (vi) the limited regulatory capacity in many developing countries. These features create opportunities for corrupt behavior. 2. In the health sector, the government has a key role in promoting equitable access to services, assuring sustainable financing for health objectives, and preventing the spread of disease. When the government fails, the consequences are low quality and ineffective health care services as well as increased cost of services. Often, government failure is linked to corruption, which reflects problems of governance and public accountability. Reducing corruption risks is important to increase resources available for health, pursue more efficient use of existing resources, and, ultimately, improve the population’s general health status. Health is a global human right, and good governance is vital in effective health care delivery.4 B. Types of Corruption in the Health Sector and Their Consequences 3. Corruption affects health policy and spending priorities. For example, investments in expensive buildings, facilities, and technologies may be favored over primary health care due to opportunities to extract larger bribes from procurement contracts. Collusion among bidders generally results in higher contract prices while kickbacks from suppliers and contractors reduce competition and influence the selection process. These practices lead to cost overruns, inferior public infrastructure, and less funds for the provision of health services. Bribes are used to avoid

1 The insights were synthesized mainly from:

(i) Transparency International. 2006. Global Corruption Report. Berlin. Available: www.transparency.org/publications/gcr

(ii) U4 Anti-Corruption Resource Center. 2006. Corruption in the Health Sector. Bergen. Available: www.U4.no/themes/health/corruptioninhealth.pdf

(iii) Vian, Taryn. 2002. Corruption and the Health Sector. United States Agency for International Development and Management Systems International.

Available: www.usaid.gov/our_work/democracy_and_governance/publications/ac/sector/health.doc 2 These include reducing child mortality, improving maternal health, and combating HIV/AIDS, malaria, and other

diseases. 3 These parties can be classified into five main categories: (i) government regulators (health ministries, parliaments,

specialized commissions); (ii) payers (social security institutions, government office, private insurers); (iii) providers (hospitals, doctors, pharmacists); (iv) consumers (patients); and (v) suppliers (medical equipment and pharmaceutical companies).

4 Lewis, Maureen. 2006. Governance and Corruption in Public Health Care Systems. Available: www.u4.no/themes/health.


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government regulation of medicines of sub-therapeutic value, which can subsequently lead to the development of drug-resistant organisms and increase the spread of disease. 4. Unethical drug promotion and physician conflict of interest may exist in the health sector, leading to nonrational prescriptions and increased cost with little or no additional health benefit to the patients. Common practices by pharmaceutical companies to provide incentives to use their products include gifts, training courses, or sponsored trips. Although it is sometimes difficult to draw the line between marketing and corruption, such practices could generate decisions that are not in the patient’s best interest. The health of patients, moreover, can be endangered as some doctors enroll unqualified patients in medical trials or prescribe unnecessary treatments. Theft and diversion of drugs in government facilities to private pharmacies may also occur, contributing to underutilization of public facilities and drug shortages in these facilities. 5. The table below summarizes the types of corruption and results associated with specific areas/processes in the health sector. These areas cover (i) construction and rehabilitation of health facilities; (ii) purchase of equipment and supplies; (iii) distribution and use of drugs and supplies in service delivery; (iv) regulation and quality of products, services, facilities, and professionals; (v) medical research; (vi) provision of services by frontline health workers; and (vii) payment systems. C. Potential Corruption Risk Mitigation Measures in the Health Sector 6. Managing corruption risks in the health sector is a complex challenge. Understanding how a country’s health system functions, reviewing the underlying incentives for provision of care, and analyzing its particular vulnerabilities are key to designing strategies from a systemic perspective. Corruption risk mitigation measures must be tailored to fit the particular context of a country’s health system. Corruption is less likely to flourish where (i) broad adherence to the rule of law, transparency and trust prevails; (ii) effective service codes and strong accountability mechanisms govern the public sector; and (iii) an independent media and strong civil society exist. Examples of potential risk mitigation measures in the health sector are given in the Table below.

Types of Corruption and Potential Risk Mitigation Measures in the Health Sector

Area or Process

Types of Corruption Results/Consequences Potential Corruption Risk Mitigation Measures

Construction and rehabilitation of health facilities

• Bribes, kickbacks, and political influence over the contracting process

• Contractors fail to perform and are not held accountable

• High cost, low quality facilities and construction work

• Facilities do not correspond to actual need

• Biased distribution of infrastructure

Budget transparency Third party oversight Quality inspections Hotlines for reporting

complaints Independent audits

Purchase of equipment and supplies

• Bribes, kickbacks, and political influence over specifications and winners of bids

• Collusion or bid rigging during

• High cost, inappropriate or duplicative drugs and equipment

• Inappropriate equipment located

Technical assistance to help develop government capacity to manage competitive procurements

Clear procurement and contracting rules


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Area or Process


procurement • Lack of incentives to

choose lower cost and high quality suppliers

• Unethical drug promotion

• Suppliers fail to deliver and are not held accountable

without consideration of actual need

• Substandard equipment and drugs

• Inequities due to inadequate funds left to provide for health needs

Public access to bidding results

Improvements in resource control systems based on transparency, timeliness, and comprehensiveness

Public database on reliable and well-performing suppliers

Monitoring of supplier selection and price information

Integrity pacts and debarment Compliance with the World

Health Organization’s medical guidelines on medicine promotion

Third party oversight Independent audits Whistle-blower protection

Distribution and use of drugs and supplies in service delivery

• Theft (for personal use) or diversion(for private sector resale) of drugs/supplies at storage and distribution points

• Sale of medical supplies that should be free of charge

• Low utilization • Patients do not get

proper treatment • Patients must make

informal payments to obtain drugs

Improvements in drug management logistics systems

Local health boards oversight Tracking of resource

flows/public spending Information on the benefits,

risks, and cost effectiveness of specific drugs

Regulation of quality of products, services, facilities, and professionals

• Bribes to facilitate process or gain approval for drug registration, drug quality inspection, or certification of good manufacturing practices

• Bribes or political influence over results of inspections or suppression of findings

• Biased application of sanitary regulations for restaurants, food production, and cosmetics

Biased application of accreditation, certification, or licensing procedures and standards

• Sub-therapeutic or fake drugs allowed on market

• Marginal suppliers are allowed to continue participating in bids

• Increased incidence of food poisoning

• Spread of infectious and communicable diseases

• Poor quality of facilities • Incompetent

professionals continue to practice

Transparent processes Prosecution of producers of

counterfeit drugs Equipping anticorruption

agencies with expertise, resources, and independence and backing them with functioning independent courts

Performance-based management systems

Increased role of community committees

Service delivery assessments


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Area or Process


Medical research (Note: may be an issue of ethics as well)

• Pseudo-trials funded by drug companies that are really for marketing

• Misunderstanding of informed consent and other issues of adequate standards in developing countries

• Violation of individual rights

• Biases and inequities in research

Adoption of rules on conflict of interest

Public database on protocols and results of clinical drug trials

Disclosure of financial contributions made to medical research units

Enforcement of codes of conduct

Provision of services by frontline health workers

• Use of public facilities and equipment for private use

• Unnecessary referrals to private practice or privately owned ancillary services

• Absenteeism • Soliciting informal

payments from patients for services

• Theft of user fee revenue and other diversion of budget allocations

• Government loses value of investments without adequate compensation

• Employees are not available to serve patients

• Reduced utilization of services by patients who cannot pay

• Impoverishment as citizens use income and sell assets to pay for health care

• Loss of faith in government by citizens

Improvements in management and accountability

Unannounced visits to health facilities

Monitoring of payment mechanisms

Service delivery assessments/citizen report cards

Independent audits

Payment systems

• Insurance fraud and unauthorized patient billing

• Unnecessary medical procedures

• Falsified records • Ghost patients • Non-rational medical

interventions to maximize fees

Improvements in financial management systems

Enforcement of codes of conduct

Sources: (i) Transparency International. 2006. Global Corruption Report. Berlin. Available: www.transparency.org/publications/gcr (ii) U4 Anti-Corruption Resource Center. 2006. Corruption in the Health Sector. Bergen. Available: www.U4.no/themes/health/corruptioninhealth.pdf (iii) Vian, Taryn. 2002. Corruption and the Health Sector. United States Agency for International Development and

Management Systems International. Available: www.usaid.gov/our_work/democracy_and_governance/publications/ac/sector/health.doc D. Ways of Assessing Corruption in the Health Sector 7. Several methods have been developed to measure leakages and efficacy of public spending. These include (i) public expenditure tracking survey (PETS), (ii) quantitative service delivery survey (QSDS), (iii) national health accounts (NHA), (iv) report cards, and (v) national integrity system surveys.5 Also useful are the value chain methodology of the World Bank,6 price information comparisons, and firm level surveys. 5 U4 Anti-Corruption Resource Center. 2006. Corruption in the Health Sector. Bergen. Available: www.U4.no/themes/health/corruptioninhealth.pdf 6 Campos, J. Edgardo and Sanjay Pradhan (eds). 2007. The Many Faces of Corruption: Tracking Vulnerabilities at

the Sector Level. Washington, DC: The World Bank.


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8. PETS. Improving public services is partly a problem of measuring the transfer of funds and the efficacy of spending. Using a sample survey, the PETS traces the flow of public resources through various layers of the administrative hierarchy to the targeted beneficiary, and develops estimates of fiscal leakage—the failure of resources to reach their intended destination. Leakage is not equivalent to corruption, but can be an indicator of corruption. For details, refer to www.u4.no/themes/pets/main.cfm and http://go.worldbank.org/5LTO2UXA50. Most tracking surveys have been implemented in integrated health systems, where public resources are channeled to public providers, and have proven effective in situations with identifiable providers and explicit resource allocation rules. Attempts at conducting PETS in the health sector may be hampered by unreliable and inconsistent budgets and/or little systematic information on financial flows at the health facility level. While PETS cannot provide exact estimates of corruption, it can be useful in identifying potential corruption zones and informing the public on their entitlements in a program or sector. 9. QSDS. The QSDS focuses on the service facility and factors affecting quality of service. It documents the characteristics of service providers and identifies problems along the chain of budgetary transfers and service delivery points (inputs, outputs, and quality). When deployed carefully, it is useful for analyzing the determinants of success and failure at the frontline. For details, see http://go.worldbank.org/S3WPM3W9J0. Necessary data to conduct a full QSDS may not be available at the facility level. Thus, a preliminary assessment of data availability is needed to determine feasibility of a QSDS. 10. NHA. The NHA is an internationally accepted method for summarizing, describing, and analyzing the financing of national health systems. It captures the full range of information in resource flows and reflects the main functions of health care financing: resource mobilization and allocation, pooling and insurance, purchase of care, and the distribution of benefits. Within a health system, it identifies four principal health care entities: (i) financing sources, (ii) financing agents, (iii) providers, and (iv) functions/services. The NHA-generated information on health financing is valuable in improving health system performance. For details, see www.who.int/nha/en. 11. Report Cards. Report cards provide an instrument for civil society to assess and highlight dimensions of public service delivery, including corruption, in a community. Examples of the use of report cards may be downloaded from certain websites such as http://transparency.org/tools/e_toolkit/corruption_fighters_tool_kit_2001 and www.adb.org/Projects/e-toolkit/products.asp. 12. National Integrity System Surveys of Transparency International. This tool assesses the sum total of the laws, institutions, and practices in a country that maintain accountability and integrity of public, private, and civil society organizations. For details, see http://transparency.org/policy_and_research/nis/regional.


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FRAMEWORK FOR ASSESSING AND TRACKING CORRUPTION VULNERABILITIES IN CUSTOMS ADMINISTRATION

A. Background 1. In many countries, the business community frequently perceives customs as one of the most serious constraints to business investment and cites it among the most corrupt government agencies. Corruption in customs administration is often fostered by administrative monopoly combined with broad discretionary power, particularly in a working environment where risk-based systems of control and accountability are absent or easily breached. Because of its monopoly over the flow of goods, a customs agency can easily interfere with a firm’s ability to do business. As a border protection agency that must prevent the importation of illegal goods, customs finds itself in the vortex of smuggling, with some entities using any means to promote their illegal transactions. Given the high financial stakes, rent-seeking opportunities tend to abound. 2. Corrupt practices often compromise revenue system operations, trade facilitation, and internal security requirements. Hot spots in revenue operations include the collection of import duties such as customs duties, excises, and value added tax (VAT), as well as the operation of the domestic tax system. Domestic VAT systems are most often breached by fraudulent VAT refund claims and improper initial valuation. In trade facilitation, corruption reduces the predictability of customs operations, raises the cost of cross-border trade, and places the overall competitiveness of the country at risk. Pervasive corruption in a customs agency can lead to a lower ranking in global investment climate surveys. In terms of security, collusion of organized crime with corrupt customs officials poses a major risk and can easily neutralize sophisticated security systems. B. Scope and Methodology 3. The value chain methodology is a means of assessing and tracking corruption vulnerabilities at various stages along the process of translating inputs to outputs. Essentially, it has three basic steps: (i) identify vulnerable points along the process flow; (ii) diagnose the situation and probe into the underlying causes; and (iii) design and implement anticorruption options. The Figure below maps risks for selected customs functions that are vulnerable to integrity violations. 4. Along various customs functions, integrity violations could occur in terms of soliciting or accepting payment to (i) accelerate the processing of documents, (ii) allow under invoicing of goods, (iii) skip the inspection, (iv) obtain import licenses and certificates without proper justification, and (v) obtain preferential treatment or speedy clearance. Other examples of integrity violations are shown in the Figure below.


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Processing of import, export, and transit declarations

Corruption Vulnerabilities and Risk Mitigation Measures: Customs Administration

Soliciting or accepting payment to • permit under invoicing of goods • not challenge the declaration of goods under a different harmonized classification system that attracts a lower tariff rate

• accept a false country-of-origin declaration, thus permitting the importer to benefit from a preferential tariff

Addressing motives• Esprit de corps and elite

ethos • Positive career

development • Competitive base pay • Performance-based

incentives • Sanctions for corrupt

behavior • Stakeholder surveys

Soliciting or accepting payment to • accelerate the processing of documents • ignore nondeclaration of some cargo • certify the exportation of fictitious exports or provide for a wrong harmonized system classification

Physical inspection, examination, and release of cargo

Post clearance audits

Examples of Integrity Violations

Potential Responses/Risk Mitigation Measures

Selected Customs

Functions

Assessment of origin, value, and classification of goods

Soliciting or accepting staff who would • ensure that an inspecting officer is chosen who will take an accommodating approach to the inspection

• skip the inspection • influence the findings of the inspection • simply speed up the inspection

Addressing opportunities• Clear legal framework reducing discretion

• Clear valuation procedures

• Computerization • Inspections based on risk analysis

• Stronger supervision and controls

• Arm’s length transactions and reduction in discretionary powers

• Transparent clearance requirements

• Rotation of officers • Internal audit unit • Dispute resolution mechanisms

• Stakeholder surveys

Administration of concessions, suspense and exemption schemes, and drawback schemes

Soliciting or accepting payment to • permit traders to release, for domestic consumption and without paying the required import duties, goods that entered under suspense regimes or goods with inputs that entered under such regimes

• obtain a release of the bond that is to protect customs revenues in case of temporary admission of imports without adequate documentation

• permit traders to claim drawbacks for fictitious exports

Soliciting or accepting payment to influence the outcome of audit findings

Issuance of licenses, warehouse approvals, and authorized trader status approvals

Soliciting or accepting payment to obtain licenses and certificates without proper justification

Processing of urgent consignments

Soliciting or accepting payment to obtain preferential treatment or speedy clearance

Adapted from Ferreira, Carlos, Michael Engelschalk, and William Mayville. 2007. The Challenge of Combating Corruption in Customs Administration . In The Many Faces of Corruption, edited by J. Edgardo Campos and Sanjay Pradhan. Washington, DC: The World Bank.


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5. Customs is exposed to corruption in many ways. In extreme cases, an entire customs administration can be politically captured, with customs becoming an instrument to generate revenues for the political elite. Moreover, corruption risks may be generated or increased by the external framework in which the customs agency operates or by weaknesses inherent in its internal organization and procedures. Complex and restrictive tax and foreign systems that lead to rent-seeking as well as high tax and tariff rates create incentives to engage in corrupt practices to reduce the tax burden. Exemptions in discretionary exemptions create opportunities for negotiation. Ambiguities in the customs and tax laws, especially in the classification of goods, often lead to discretionary behavior. Whether the civil service and the judicial systems permit a quick and appropriate action against identified incidence of corruption is another constraint on maintaining customs integrity. The difference between a customs salary and the potential income from corruption tends to be substantial, making it difficult to resist soliciting or accepting bribes. The lack of an external accountability system reinforces corruption risks in customs administration. 6. Customs agencies, therefore, need to identify the potential vulnerabilities of its processes. Crucial to this exercise is a diagnosis of the forces underlying corruption, along with the implementation of practical plans to reduce corruption risks. C. Mitigating Corruption Risks in Customs Administration 7. The World Customs Organization’s Revised Arusha Declaration on Integrity in Customs recommends 10 specific areas that must be tackled in customs operations: (i) leadership and commitment, (ii) regulatory framework, (iii) transparency, (iv) automation, (v) reform and modernization, (vi) audit and investigation, (vii) code of conduct, (viii) human resource management, (ix) morale and organizational culture, and (x) relationship with the private sector (www.wcoomd.org). 8. An anticorruption strategy for customs needs to mesh elements addressing opportunities for corruption with those intended to reduce the motive for corrupt practices (see the preceding Figure for illustrative measures). The development of an elite ethos and esprit de corps requires familiarizing staff with the importance of customs administration, communicating a vision and mission statement of the organization, and designing team-building strategies and related programs. Developing an elite ethos in customs can be supported by a code of ethics and conduct. The special integrity challenges in customs are better addressed by a specific code of ethics and conduct that delineates the high moral and behavioral standards to which all customs officials are expected to adhere to in their work environment. Management should take concrete action when staff members deviate from the principles of the code; otherwise, the code of conduct quickly loses relevance. A major challenge in implementing an anticorruption strategy is designing a human resources policy that reduces incentives for corruption and creates the necessary conditions for customs staff to refuse to engage in corrupt practices. This goes beyond providing adequate salaries to complementary reforms in staff recruitment, selection, career development, and promotion. 9. Limiting rent-seeking opportunities requires a mix of coordinated organizational and legal measures, ranging from simplifying and streamlining the overall legal operational framework for customs to streamlining and computerizing specific business processes. For example, lowering and harmonizing tariff rates, eliminating special exemptions, providing clear rules for classifying goods, and reducing the number and type of supporting documents for customs clearance clarifies and brings transparency to the obligations of importers and reduces their compliance costs. Availability of up-to-date and easily accessible information on customs laws and


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procedures is also valuable. Technical assistance for improved valuation work could be more productive if it helps develop valuation databases, risk management systems, and post-release review and audit. In addition, a clear and efficient administrative and judicial dispute resolution mechanism provides a tool for correct application of the legal framework. 10. Computerization of streamlined processes reduces the need for direct contact between customs officials and importers or their agents. It also improves the conditions for enforcing the use of uniform business practices by customs offices, reduces discretion, and provides trails of the clearance process. 11. The introduction of a risk-based selection system for physical inspection allows most imports to be cleared without inspection. The increasing complexity, speed, and volume of international trade have led to the adoption of a more disciplined approach to managing risk. This risk-based approach to compliance management enables customs officials to select cases for physical inspection based on an analysis of high risk areas, in contrast to a regime of 100% checks associated with gatekeeper management.1 It underscores pre-arrival import clearance and information management, and aims to achieve a balance between facilitation and control. 12. Moreover, an internal audit unit is necessary to impose adequate controls to ensure compliance with rules and regulations. Enhancing the detection of corruption as well as strengthening the capacity to investigate and prosecute will help promote integrity in customs. In addition, an open, transparent, and trusting relationship with the private sector (e.g., business associations and associations of customs brokers) is crucial for any integrity program. Feedback from the private sector through perception surveys and routine consultations can support the efficacy of anticorruption measures. 13. The robustness of business processes and systems is key to reducing corruption risks and must accompany efforts to address motive. The opportunity and motive for corruption, nevertheless, will vary with country circumstances. Anticorruption efforts in customs administration takes many forms and must be monitored constantly. D. Remarks on the Value Chain Methodology 14. The value chain methodology offers several advantages: (i) it is results-oriented; (ii) it highlights key vulnerabilities along the process flow as well as measures for mitigating corruption risks; and (iii) it offers a convenient method for developing warning signals for tracking corruption. This line of inquiry is adaptable to differing country situations. 15. The users of this methodology could combine methods to assess corruption risks.2 Each customs administration will need to tailor its anticorruption efforts to national objectives, implementation capacities, and resource availability. Over time, the value chain analysis must be reviewed, with due regard for changing conditions that could trigger new opportunities for corruption.

1 Widdowson, David. 2005. Managing Risk in the Customs Context. In Customs Modernization Handbook, edited by

Luc de Wulf and Jose Sokol. Washington, DC: The World Bank. 2 Information may be collected through interviews with officials and other groups, focus group discussions, surveys,

and triangulated diagnostics.