Governance from words to deeds

Governance from words to deeds Learning Lunch with Miguel Schloss 1818 Society Water Group, May 13, 2011

Agenda There is no such thing as a free lunch Milton Freedman Governance: why and what for The approach: how to go about it Efforts to-date: from diagnosis to action Implications and lessons for the future 2

BRIBERY HIGH Controlling Bribery and Civil Liberties D Bribery (GCS97+) LOW BRIBERY VNM CHN r=0.67 AGO KEN CMR IDN NGA MOZ EGY TZA UGA UKR CIV JOR ETH MEX TUR BRA ZWE BFA MWI GHA MYS MAR ZMB SVK PER TWN SWZ THA NIC GTM PHL RUS COL IND TUN SGP LSO ZAF HND VEN GRC ARG KOR NAM MUS ISR POL HUN CZE FRA ITA CHL JPN DEU CRI ESP USA GBR DNK PRT BEL NLD NZL IRL SWE ISL CHE AUT AUS CAN LUX FIN NOR LOW Civil Liberties (Freedom House) HIGH Source: Kaufmann and Sachs 3

4 Bribery vs. Civil Service Professionalism BGR CZE SVK KAZ BRA CAN CHE CHL CHN COL CRI CZE DEU DNK ESP FIN FRA GBR GRC GTM HKG HND HUN IDN IND IRL ISL ISR ITA JOR JPN KOR LUX MEX MYS NIC NLD NOR NZL PER PHL POL PRT RUS SGP SLV SVK SWE THA TUR TWN UKR USA VEN VNM ZAF ZWE r=0.86 Civil Service Professionalism Bribery HIGH LOW LOW HIGH D

5 Corruption and Regulatory Discretion ARG AUS AUT BEL BRA CAN CHE CHL CHN COL CRI CZE DEU DNK ESP FIN FRA GBR GRC HKG HUN IDN IND IRL ISR ITA JPN KOR LUX MEX MYS NGA NLD NOR NZL PHL POL PRT RUS SGP SWE THA TUR TWN USA VEN VNM ZAF r=0.76 Regulatory discretion (GCS) Corruption High corruption Low corruption Low High D

6 Corruption and Rule of Law ZWE ZMB ZAR ZAF VNM VEN USA URY UGA TZA TWN TUR TUN THA SYR SWE SVK SGP SAU RUS ROM QAT PRT POL PHL PER PAN PAK OMN NZL NOR NLD NGA MYS MMR MEX MAR LKA LBY KWT KOR KEN JPN JOR ITA ISR IRQ IRN IRL IND IDN HUN HKG GRC GHA GBR FRA FIN ESP EGY ECU DZA DNK DEU CZE CRI COL CMR CIV CHN CHL CHE CAN BWA BRA BOL BHR BGR BGD BEL AUT AUS ARG ARE AGO r=0.82 Rule of Law (ICRG) S&P-DRI Corruption Index LOW HIGH LOW HIGH D

Unofficial Economy and Corruption Index Unofficial economy as percent of GDP D BOL 60% PER PAN GTM UKR HND 40% LVA HUN GRC BGR URY BRA ECU RUS COL VEN MEX 20% SWE NLD CAN DNK GBR NOR DEU IRL CHE USA AUT CRI CHL PRT ESP FRA EST JPN ITA BEL POL CZE SVK ROM ARG BLR r = 0.79 0% Low corruption Corruption High corruption 7

Time Management Spent with Bureaucrats and Frequency of Bribery % Management Time with bureaucrats D 30% TZA UZB 20% 10% CHE IRL GBR HKG DEU SGP CAN ZAF AUT ESP EST MEX FJI JOR JAM COL ZMB HUN MWI CRI ZWE MUS USA PRT FRA CZE ITA MYS KOR GNB NGA MKD TUR LTU POL TCD BOL BLR GIN MLI GEOKAZ ARM BEN COG KEN CIVMDA KGZ MDG THA RUS SEN MOZ UGA UKR GHA TGO VEN MAR SVK IND LVA ECU CMR AZE BGR R =.77 0 Low Frequency of bribery (WDR) High 8 11 Source: Kaufmann and Wei (1998) Data analysis based on survey conducted under the World Bank s World Development

D Corruption Perception By Regions OECD East Asia Middle East and North Africa South Asia Latin America and Caribbean Former Soviet Union Sub-Saharan Africa 0 10 20 30 40 50 60 70 80 90 100 % 9

Multipronged Strategy for D Combating Corruption Civil Service: Pay Meritocracy Economic Policy: Deregulation Tax Simplification Corruption Financial Controls: Audit Procurement Legal-Judicial: Independence Judicial Strengthening ADR Mechanisms Public Oversight: Parliamentary Oversight Civil society and media Power of data /Surveys Independent agency/ngo 10

D The Response Corruption Public Oversight and Civil Society: Ombudsman in Albania and Bolivia Private Sector Coalition in Bolivia Diagnostic Surveys and NGO monitoring in Ecuador and others 11

S Bribers Payers Index YEAR 1 1 YEAR 2 YEARYY Y 12

S Bribery in Business Sectors Agriculture Light manufacturing Fishery IT Forestry Civilian aerospace Banking and finance Heavy manufacturing Pharmaceuticals/medical care Transportation/storage Mining Power generation/transmission Telecoms Real estate/property Oil and gas Arms and defense Public works/construction 0 10 20 30 40 50 60 70 80 90 100 13

Role of governance weak governance contributes to a number of policy distortions, resulting in poor economic performance S Weak governance normally associated with: More costly public investments Lower government revenues Lower operations & maintenance expenditures Lower resource surpluses Policy distortions normally involve: Foreign exchange overvaluation Loss of competitiveness of nonextractive sectors Please effect incremental recurrent expenditures Diminishing human capital formation Poor economic performance 14

Agenda You cannot fish with a tennis racket Fernando Eyzaguirre Governance: why and what for The approach: how to go about it Efforts to-date: from diagnosis to action Implications and lessons for the future 15

Phases and objectives the current effort involved developing a systematic framework & conducting two pilot projects, in Ghana and Mali BNPP Grant Development objectives: (i) Develop and test Governance Framework for Extractive Industries; (ii) Provide governments with practical, operational measures to support sustainable mineral resource development; (iii)develop, mainstream actions for transparency, accountability, information-sharing & scrutiny mechanisms. Key expected outputs/ results: Taxonomy of countries and types of governance issues; How well issues can be addressed with instruments & tools; Types of implementation issues to address for success; and, Capacity building to support application of framework by governments in countries. 1 Phase 1: Framework Development Development systematic approach to governance assessment, remediation, and evaluation in extractive industries, including: Demand as well as supply; A systemic view, rather than purely sectoral; An emphasis on fact-finding; and, A customized approach. 2 Phase 2: Pilot Phase In-depth diagnosis of governance vulnerabilities; mapping institutional vulnerabilities: Ghana Mali PNG Designing action plan and implementation implications 16

Framework and guidance the approach entails a high-level analysis, detailed country diagnostics, and designs for action plans Stage of Bank involvement Objective Relevant fact base Tools provided First Cut Analysis Compare countries and chart progress against peers Segment countries according to stage of governance, and type of vulnerability. This enables the development of segment-oriented product portfolios Provide task teams initial guidelines to diagnose, analyze and develop strategies to address areas vulnerable to corruption Outline a detailed work plan to carry out the full initiative In-house expertise WBI Statistical database Governance Typology Prioritization matrix Institutional forces framework Detailed Diagnostic Provide the necessary information about a corrupt system to prioritize and plan interventions at the outset of a Bank program in a specific country and in the context of a specific investment First hand meetings with institution staff Field visits 14 Diagnostic Guides Action Plan Create a customized approach to meet governance goals Full description of governance vulnerabilities and dynamics among institutions, and key participants Strategic approach 17

Agenda Sunlight is the best disinfectant U.S. Supreme Court Justice Louis Brandeis Governance: why and what for The approach: how to go about it Efforts to-date: from diagnosis to action Implications and lessons for the future 18

IRAQ CHAD ANGOLA CONGO SIERRA LEONE CAMEROON PAPUA NEW GUINEA AZERBAIJAN KAZAKHSTAN MOZAMBIQUE Normalized Rule of Law Index Congo, Dem. Rep. GUINEA VENEZUELA NIGERIA TAJIKISTAN TOGO BOLIVIA NIGER SOUTH AFRICA ECUADOR INDONESIA IRAN ZAMBIA GABON BOTSWANA NORWAY CHILE Role of governance countries with significant extractive industries tend to have low rankings in governance indicators 3 Rule of Law - 2006 (Chosen comparator also shown for selected countries) 2 HIGH 1 0-1 -2 LOW 211 Countries Note: Blue dots represent estimates for the 2006 governance indicators. The thin vertical lines represent standard errors around these estimates for each country in worldwide sample. Black dot represents the chosen year comparator (if any). To add or delete countries from the chart, click on the "Country Selection" tab below. -3 Source: "Governance Matters VI: Governance Indicators for 1996-2006 " by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi. Disclaimer: The governance indicators presented here reflect the statistical compilation of responses on the quality of governance given by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries, as reported by a number of survey institutes, think tanks, non-governmental organizations, and international organizations. The aggregate indicators in no way reflect the official position of the World Bank, its Executive Directors, or the countries they represent. As discussed in detail in the accompanying papers, countries' relative positions on these indicators are subject to margins of error that are clearly indicated. Consequently, precise country rankings should not be inferred from this 90th 100th percentile 75th 90th percentile 50th 75th percentile 25th -50th percentile 10th 25th percentile 0th 10th percentile 19

High-level analysis countries analyzed in terms of current and potential impact of improvements to mining sector governance Primary focus Highest number of exploration contracts Level of impact [Desirability] 30% Moderate number of contracts No or low number of contracts % of GDP from ore/ metals exports 25% Difficult to engage Mauritania Fewer challenges Countries selection: Potential impact 20% Ability to absorb assistance 15% Guinea Zambia Country willingness to engage 10% 5% Congo- DRC Angola Ethiopia Niger Togo Tanzania Cameroon Mozambique Ghana Mali Namibia Madagascar South Africa Botswana 0% 0 10 20 30 40 50 60 70 80 Integration with strategic objectives teams willingness to engage Country ability to absorb assistance [Feasibility] Government effectiveness Rule of law Regulatory quality Control of corruption Voice and accountability Political stability / no violence 20

Country-level analysis pilots considered key perspectives of mining sector, demand-side, supply-side, & revenue flows Demand side Supply side Revenue Flows Key objectives: Highlight mechanisms for accountability and demand for good governance Concentrate on the most vulnerable institutions in terms of capacity Emphasize collection & redistribution of mining sector revenues & royalties E.g., civil society, small scale miners, media, local populations E.g., Ministries of Mines, etc. E.g., Ministries of Finance, etc. Value added by effort: Largely missing in existing efforts Vital to long term development objectives & sustainability Strategic prioritization of capacity & institutional issues beyond financial corruption Build on specific findings of previous efforts (e.g. EITI, etc.) 21

Sector-level analysis key demand- and supply-side mining sector stakeholders evaluated across project cycle to rank issues Project Phases Institution Preparation Investment Operations Closure Department of Mines (Licensing Agency) X X X Environmental Authority X X X Social Services (Education and Health) Taxation Authorities X X Central Bank / Investment Board Agency Ministry of Finance Local Business Partner (State or private) Regional / Local Authorities and Stakeholders X X X X X X X X X Customs X X Inspection Agencies (Mines, Health and Safety) Infrastructure Providers (State or Private) Trusts Oversight Institution (Supreme Audit Authority) Budget Finance and Surplus Management Political Authorities (President, Cabinet, etc ) X X X X X X X X X X X X X Where are the most critical governance vulnerabilities? Where are governance interventions most likely to foster improvements? Which institutions should be prioritized? How can the demand side best be addressed, in conjunction with supply side institutional issues? Institutions with a focus broader than mining 22

Institutional-level analysis for selected institutions, the approach looked at six key areas of potential governance vulnerabilities 1 Resources & capacity Does the organization have sufficient resources? Can it maintain adequate capacity? 2 Leadership & authority To what degree is management committed to strong internal control? Is authority properly delegated & limited? 5 Organizational structure Is authority properly delegated and limited? Are appropriate reporting relationships in place among the organizational units? 4 6 Transparency Are policies and procedures clear to employees? Can outside stakeholders view and react to internal processes? Culture and incentives To what degree are staff of the organization sufficiently compensated to ensure competence and integrity? 3 Policies and processes Are financial and management controls well established & safeguarded? Are budgeting and reporting procedures well specified & effectively implemented? 23

Agenda Everything is in the execution Napoleon Bonaparte Governance: why and what for The approach: how to go about it Efforts to-date: from diagnosis to action Implications and lessons for the future 24

This approach differs in key ways from others, by providing comprehensive & customized methodology Focus on demand as well as supply not just government effectiveness in the areas of laws, policies and institutional development, but also indigenous civil society and private sector Not limited to the sector inclusive of institutions and parties peripherally involved in extractive industries activities who play critical and often leading roles in permitting corruption in the sector Emphasis on fact finding and not symptoms focus on groundlevel, inside-out analysis to diagnose problems and develop solutions A customized and adaptable approach fit and adapt to unique corruption challenges in country, and able to evolve as conditions change 25

Constraints the approach requires continuous iterations to arrive at good fit recommendations This is work in progress the best approach will be adaptive and iterative, with continued improvements This would require a shift of emphasis from replicating good practices towards designing good fits These are guidelines not questionnaires the emphasis is on probing, figuring out how specific institutions work, identifying critical vulnerabilities, and crafting a strategy from the ground-up This demands interactive approach to address problems corruption, governance, etc. is unwieldy, often times pervasive, and dynamic involves continuing adaptive approaches, emphasis on systemic issues and cross-sector teams, new skills/competencies. 26

Implications integrating this approach may enhance sustainability and impact to foster mining-sector led development EITI discloses and tracks royalties, taxes and associated payments of extractives BUT, does not address the development impact of the resources Some institutions rightly focus on the latter BUT, caution is needed in extending tracking locally, due to intensive information- and institutional- needs, & potential entitlements culture Efforts needed to build vehicles of transparency, feedback, contestation, checks and balances, that provide incentives for locally-driven accountability Demand side improvements effectively complement institution-building efforts The approach systematically analyzed issues around leadership & authority, policies & processes, culture & incentives, organizational structure and transparency The effectiveness of this approach may be enhanced if: Mainstreamed" into normal policy, sector and project work Properly integrated governance dimensions into operational work The result could help reduce claims on scarce government capabilities and time by approaching institutional issues with a common framework 27