Corruption – the development impediment in

Bosnia and Herzegovina

Boris Divjak, Chair of BoardTransparency International BiH

Sarajevo28 October 2005

Analysing the causes and effects

the existing situationin Bosnia and Herzegovina

Problems in BiH 1

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

Problems in BiH 2

Division according to professional status

Source: TI BiH, 2002

16.7 2.6 20.8 8.7 12.5 22.8 1.90.60.3 12.8 0.3

14.8 5.2 20 6.7 13.8 20.5 11.91.9 14.3

15.4 3.8 25 15.4 9.6 21.2 1.9 7.7

13.1 3 14.3 8.3 11.9 21.4 4.8 4.81.2 15.5 0.61.2

10.8 3.2 22.9 6 8.8 34.1 2.40.80.8 10

12.7 2 16.7 4.9 8.8 30.4 3.92.92 12.7 21

14.8 3.7 22.2 3.7 6.2 32.1 1.21.22.5 12.3

0 10 20 30 40 50 60 70 80 90 100

Public company employee

Private firm employee

Firm owner/self-employed

Pensioner

Unemployed

Housewife

Student

Political instability Bad interpersonal relations Corruption

Economic transition Crime Unemployment

Return of refugees Poor social system War criminals

Poverty Other Refuses

State capture

How many officials are involved in corrupt practice?Source: TI BiH, 2004

Municipal authorities

Entity governments

Cantonal governments

BiH State institutions

% 2002 2004 2002 2004 2002 2004 2002 2004

Almost all 25.2 23.1 19.0 23.9 19.6 21.8 20.8 21.2

Majority 46.1 47.6 51.9 50.3 48.3 50.2 49.5 51.9

Some 22.5 24.5 20.8 22.1 19.8 22.3 15.2 22.0

Almost none 1.1 1.7 0.5 0.4 0.6 0.6 0.0 0.0

No corruption 0.3 0.1 0.3 0.0 0.2 0.0 0.0 0.0

D/K, refuse 4.9 2.9 7.5 3.3 11.5 5.1 13.4 4.9

Corrupt institutions

Source: TI BiH, 2004.

Experience with corruption

0% 50% 100%

0-149 KM

150-249

250-499

500-699

700-1000

1000-2000

2000+

directexperience

talks to friendsand relatives

mediainformation

seeing new richamong publ.officialsother

D/ K

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

Privatisation is unsuccessful

How do you view SoE privatisation process so far? BiH-wide responses from 2002 and 2004

Very poor marks given to the process – over ¾ think it unsuccessful

Source: TI BiH Corruption Perception Studies 2002 and 2004, sample as indicated

Privatisation is corrupt Privatisation-related

corruption on the rise

Over 80% of respondents dissatisfied; think it highly corrupt and do not see benefits

Source: TI BiH Corruption Perception Studies 2002 and 2004, sample as indicated

Privatisation proceeds misused

31.2

26.7

20.9

7.2 5.2

0.7

8.1

0

5

10

15

20

25

30

35

SoE directors

Privatisation Agencies' staff

Entity Government staff

Council of Ministers staff

others

refuse

don't know

Who benefited privatisation most? (Source: TI BiH, 2002)

• Illegal proceeds mostly feeding SoE directors• Party-triangle: SoEs-privatisation agencies-relevant ministries• Covering up corruption by closing the triangle

Politicians gain… Appointing party members to leading posts in SoEs Money laundering: depleting the assets and

increasing liabilities, i.e. loss-making: management wins

Salaries of politicians: managers and government appointees in executive and supervisory boards

(Public) procurement, purchases etc. conducted by SoEs among the party-related individuals and firms

Subsidies for debt (negative SoE balance) – mismanagement and limitless irresponsible expenditures of SoEs

‘Rackets’ or ‘voluntary contributions’ to politicians and ruling parties

Tax evasions on all illegal transfers

Citizens lose… Taxes to cover irrational expenditures of SoE

management or failure to be profit-making Taxes to cover subsidies for loss-making Taxes to cover salaries of the public enterprise

staff salaries Public funds (taxes) used for inefficient

procurement No revenues from privatisation, i.e. sale of state-

owned capital No fresh capital penetrating the market – no new

employment generation Private sector fails to grow – lack of foreign

investment and no entrepreneurship growth

Other damages – institutional and structural

Administrative barriers – doing business even more complex (do not apply to SoEs)

Poor image of the country abroad and capital shifts to more successful transition economies

More corruption + ever greater centralisation of powers in the hands of a few

Quasi-social policies for external use, covering up state-owned capital theft

Macroeconomic stagnation, widespread poverty, lower living standards

Increasing external debt, unsustainable fiscal policy through enormous public spending

Weak and impotent private sector, which moves to tax evasions as the means of maintaining some market presence in competition with the state-owned sector

What is the CPI 2005? Measures the degree to

which corruption is perceived to exist among public officials and politicians.

Composite index, drawing on 16 different polls and surveys from 10 independent institutions carried out among business people and country analysts, including local experts.

CPI Objectives

To measure perceptions of public sector corruption among experienced observers (business people, academics and risks analysts).

To enhance comparative understanding of levels of corruption.

To offer a snapshot of the views of decision-makers who influence trade and investment.

To stimulate scientific research and complementary diagnostic analysis on causes and consequences of corruption, both at international and national level.

To create public awareness of corruption – and create a climate for change.

CPI Methodology CPI is a rolling survey of surveys

Minimum of 3 surveys per country Surveys cover 3 previous years

Country scores on a scale from 10 (very clean) to 0 (very corrupt) CPI approach is that of a composite perception index combining

inter alia: Center for International Earth Science Information Network (CIESIN) na

Univerzitetu Columbia

Economist Intelligence Unit

Freedom House

Institute for Management Development, Lausanne

Merchant International Group

The World Markets Research Centre

World Economic Forum, Global Competitiveness Report ...

Countries perceived as being least corrupt

Rank Country Score Surveys used

1 Iceland 9.7 8

2 Finland 9.6 9

New Zealand 9.6 9

3 Denmark 9.5 10

Countries perceived as being most corrupt

Rank Country Score Surveys used

157 Haiti 1.8 4

Myanmar 1.8 4

Turkmenistan

1.8 4

158 Bangladesh 1.7 7

Chad 1.7 6

CPI 2005 – Global ranks

Rank CountryScore (1-

10)Score 2004 Rank 2004 Surveys

31 Slovenia 6,1 (6,0) (31-33) 1170-76 Croatia 3,4 (3,5) (67-70) 788-96 BiH 2.9 (3,1) (82-84) 6

97-102Serbia & MN

2,8 (2,7) (97-101) 7

103-106

Macedonia 2,7 = (2,7) (97-101) 7

ArmeniaBeninBosnia and HerzegovinaGabonIndia

IranMaliMoldovaTanzania

88-96 position:

CPI 2005 – Ranking the region

Source: TI’s 2005 CPI

Proposing solutions

Next steps in Bosnia and Herzegovina

Strengthening institutional framework

Centralising sale of state-owned capital in FBiH (single Agency)

Sale of remaining state-owned capital through stock market and/or transparent tenders for a limited number of SoEs

Prevention of conflict of interest in the interim period and removal from public office or SoE position all those with incompatible functions

Corporate governance – strengthening legal and institutional framework

Strengthening rule of law(Preventions and sanctions mechanisms)

Sanctioning individuals who have sold state-owned capital illegally (and not the new owners, unless they have committed a criminal act)

Full processing of the auditors’ reports and sanctions regarding illegitimate depletion of funds as well as loss of profit/revenue

Stock exchange sale as the most transparent prevention of crime in privatisation, incl. introduction of stock market standards that disable mismanagement, misuse of privileged information, position etc.

Education and ethics Secondary education favouring free market

principles and understanding of its mechanisms

Corporate governance courses for all stakeholders

Understanding of supreme audit and their reports by the executive and legislative, as well as some media

Broad awareness campaign on the changing structure of capital: strengths and weaknesses and relevant reforms

Economic policy and legal framework

Privatisation must be accompanies by a simplified administrative framework for market entry, operations and exit, i.e. investment climate

Introducing flat tax as the only means of combating tax evasions, broadening the basis and creating conditions for lowering the rate in the future incl. regional competitive edge

Control mechanisms which are not repressive, but service-oriented, according to the European standards

National Integrity System 1

System which resolves conflict of interest, delegating powers, limits occurrences of personal interest topping public ones

Includes: responsibility, transparency, prevention & sanctions, incl. reform of system and not individual responsibilities

Goal: corruption = high-risk and low-benefit undertaking (prevention above sanctions)

Promotion of public awareness and social values

National Integrity System 2

Leading anti-corruption Which institution should lead the anti-corruption efforts?

Source: TI BiH, 2004

Process so far… Lists of legal requirements and no institutional

responsibilities: deadlines, monitoring, financing? Subsidiarity principle – the level that is most

practical and most efficient operates and not the ‘politically correct’ one

Exit strategy of the international community with a greater ‘ownership’ and takeover of responsibilities

Systemic instead of ad hoc solutions – policies cannot be tailored to individual bad experiences

Interdependence of ‘pillars of integrity’ and strengthening the system simultaneously

Thank you!We welcome your questions

Transparency International BiH

www.ti-bih.org