Improving Governance and Combating Corruption in the Transport Sector William D.O. Paterson Pinki...

Improving Governance and Improving Governance and Combating Corruption in the Combating Corruption in the

Transport SectorTransport Sector

William D.O. PatersonWilliam D.O. PatersonPinki ChaudhuriPinki Chaudhuri

May 30, 2006May 30, 2006

AC Transport chapter - zero draftAC Transport chapter - zero draft 22

Rationale for Review of Corruption in Rationale for Review of Corruption in the Transport Sectorthe Transport Sector

The Economic RationaleThe Economic Rationale– Substantial size of infrastructure budgetsSubstantial size of infrastructure budgets– Large and numerous contracts in the transport sector – easy Large and numerous contracts in the transport sector – easy

target for corrupt capturetarget for corrupt capture– Resulting in unjustifiable losses of public funds through Resulting in unjustifiable losses of public funds through

leakage – approximately 5-40% of transport allocations are lost leakage – approximately 5-40% of transport allocations are lost due to corruptiondue to corruption

The Integrity RationaleThe Integrity Rationale– Inter-sectoral, pervasive nature of corruption: need for macro-Inter-sectoral, pervasive nature of corruption: need for macro-

institutional integrityinstitutional integrity– Vulnerability of the transport sector due to higher incidence of Vulnerability of the transport sector due to higher incidence of

tangible state goods such as permits, licenses, and contracts tangible state goods such as permits, licenses, and contracts that are targets for corrupt capturethat are targets for corrupt capture

– Need for a practice and knowledge base to combat corruption Need for a practice and knowledge base to combat corruption to facilitate work ofto facilitate work of operational teamsoperational teams


Defining CorruptionDefining Corruption CorruptionCorruption

– (1) The misuse of public funds for private gain(1) The misuse of public funds for private gain

– (2) The misuse of public funds, goods, or office for (2) The misuse of public funds, goods, or office for private or political gainprivate or political gain

State CaptureState Capture: Use of public office, entities, : Use of public office, entities, rules, laws, policies other than for their rules, laws, policies other than for their intended purpose/s.intended purpose/s.

BOTH CORRUPTION AND STATE CAPTURE BOTH CORRUPTION AND STATE CAPTURE MUST EVIDENCE INTENT AND ACTION OTHER MUST EVIDENCE INTENT AND ACTION OTHER

THAN FOR INTENDED PURPOSETHAN FOR INTENDED PURPOSE


Distinguishing Corruption and Distinguishing Corruption and Governance FailureGovernance Failure

Governance failure vs. CorruptionGovernance failure vs. Corruption: : Inefficiency vs. intent and action to divert state Inefficiency vs. intent and action to divert state goods for illicit private gaingoods for illicit private gain

Governance Failure vs. State CaptureGovernance Failure vs. State Capture: : Inefficiency vs. use of public office, entities, laws, Inefficiency vs. use of public office, entities, laws, rules other than for intended purpose/srules other than for intended purpose/s

ALL CORRUPTION AND STATE CAPTURE ALL CORRUPTION AND STATE CAPTURE IS GOVERNANCE FAILURE, BUT NOT IS GOVERNANCE FAILURE, BUT NOT

ALL GOVERNANCE FAILURE IS ALL GOVERNANCE FAILURE IS CORRUPTION.CORRUPTION.


Types of corrupt Behavior Most Types of corrupt Behavior Most Prevalent in the Transport SectorPrevalent in the Transport Sector

BribesBribes KickbacksKickbacks CollusionCollusion Bid riggingBid rigging FraudFraud

– Misrepresentation of legal status or Misrepresentation of legal status or qualificationsqualifications

– Front companies, etc.Front companies, etc.



National Level

•Election rigging•“Buying” of candidates by engg. Firms•Large pockets of discretionary funding•Large scale political capture of agency leadership•Manipulation of the judicial process

Sector Level

•Sector budgetary allocation rules subverted for political purposes •Road Fund revenues not earmarked•Road Fund revenues used for political purposes

State Capture at National and Sector Levels


Governance Failure at the Agency Level

Unclear budgetary allocation rules within the sector Unclear budgetary allocation rules within the sector Outdated planning methods and mechanisms, undue Outdated planning methods and mechanisms, undue

political influence in the selection and prioritization of political influence in the selection and prioritization of projects projects

Weak procurement mechanisms with ample scope for Weak procurement mechanisms with ample scope for leakageleakage

Weak financial and project monitoring systems and Weak financial and project monitoring systems and protocols allowing scope for manipulationprotocols allowing scope for manipulation

Absence and/or scarcity of information technology, Absence and/or scarcity of information technology, communication systems and networks, causing uneven communication systems and networks, causing uneven work and monitoring qualitywork and monitoring quality

Absence of rigorous recruitment and human resource Absence of rigorous recruitment and human resource development procedures, with scope for subversion of development procedures, with scope for subversion of established rules and technical requirementsestablished rules and technical requirements

Inadequate audit procedures and systemsInadequate audit procedures and systems Lack of explicit anti-corruption plans and awarenessLack of explicit anti-corruption plans and awareness


Administrative Corruption at the Project Level

Manipulation of design and cost estimationManipulation of design and cost estimation Deceptive, uncompetitive bid Deceptive, uncompetitive bid

specificationsspecifications Collusions and kickbacksCollusions and kickbacks Firm collusionFirm collusion Change ordersChange orders False certificationFalse certification Bribes for processing payments to Bribes for processing payments to

contractorscontractors


Corruption Risk Mapping: What It Corruption Risk Mapping: What It Looks Like and the Forms it takesLooks Like and the Forms it takes

Political Economy Context: the broadest enabling Political Economy Context: the broadest enabling environmentenvironment

Failure of Sector GovernanceFailure of Sector Governance– Discretionary allocation of capital expendituresDiscretionary allocation of capital expenditures– Political influence over recurrent expendituresPolitical influence over recurrent expenditures– Manipulating budgetary entitlement criteriaManipulating budgetary entitlement criteria– Capture of State entitiesCapture of State entities

Governance failure: concentration and bundling of Governance failure: concentration and bundling of power and functionspower and functions

Macroeconomic justification for “legitimate” Macroeconomic justification for “legitimate” diversion of user charge revenues to subsidize other diversion of user charge revenues to subsidize other sectorssectors

Appropriation of funds for projects/programs with Appropriation of funds for projects/programs with political kickbacks or purposepolitical kickbacks or purpose

Outright corruption: looting of Road FundsOutright corruption: looting of Road Funds


Transport Corruption Transport Corruption at the Project Levelat the Project Level

Arbitrary Appointments Arbitrary Appointments – reward for favors, channel for corrupt actions reward for favors, channel for corrupt actions – lack in skill, capacity or qualificationslack in skill, capacity or qualifications

Procurement Value Chain - VulnerabilitiesProcurement Value Chain - Vulnerabilities– Design Specifications: tailoring to favor contractor/sDesign Specifications: tailoring to favor contractor/s– Bid specifications: information asymmetryBid specifications: information asymmetry– Kickbacks: corrupt quid pro quoKickbacks: corrupt quid pro quo– Contractor Collusion, cartel activityContractor Collusion, cartel activity– Circumventing fairness rulesCircumventing fairness rules– Ex post change ordersEx post change orders

Certification of WorksCertification of Works Payments to ContractorsPayments to Contractors


What Can Task teams and What Can Task teams and Governments, Donors Do About ItGovernments, Donors Do About It

Optimal approach:Optimal approach: PreventionPrevention DetectionDetection DeterrenceDeterrence Reform of Sector, Entities, and Reform of Sector, Entities, and

IncentivesIncentives


The Operational Role of WB The Operational Role of WB ProjectsProjects


PreventionPrevention Measures to make it difficult to perform corrupt Measures to make it difficult to perform corrupt

acts, e.g.acts, e.g. Procurement –Procurement –

– Computerized prequalificationComputerized prequalification– Standardized bid & evaluation docsStandardized bid & evaluation docs– Web announcements of bids, awardsWeb announcements of bids, awards– Open access to ads, bid docsOpen access to ads, bid docs– Citizen participation in bid openingCitizen participation in bid opening

Financial management –Financial management –– Accounting systemsAccounting systems– Transaction trackingTransaction tracking– Trial balance and other internal controlsTrial balance and other internal controls


DetectionDetection Red Flags: Indicators of SuspicionRed Flags: Indicators of Suspicion

– Local agents with unclear rolesLocal agents with unclear roles– Bidding irregularities in favor of a few Bidding irregularities in favor of a few

contractorscontractors– Unexplained delaysUnexplained delays– Unreasonable pre-qualification requirementsUnreasonable pre-qualification requirements– Selection of unqualified contractors / prolonged Selection of unqualified contractors / prolonged

prequalification periodprequalification period– High bid prices, few bidders, same biddersHigh bid prices, few bidders, same bidders– Apparent affiliations among bidders’ affiliated Apparent affiliations among bidders’ affiliated

companiescompanies– Bid securities issued by same bank, serial Bid securities issued by same bank, serial

numbersnumbers


Detection – Pattern of Bid RiggingDetection – Pattern of Bid RiggingDPWH Foreign Assisted Projects (2001-2004)

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Approved Budge Ceiling (ABC) in Million Pesos

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Red Flags vs. Actionable Evidence: Red Flags vs. Actionable Evidence: Where is the Proof? Where is the Proof?

Real task of detection is in conducting Real task of detection is in conducting investigations to gather evidenceinvestigations to gather evidence– Receipts, forged docs, bid analysis, technical audits Receipts, forged docs, bid analysis, technical audits

Techniques combine legal, forensic, and Techniques combine legal, forensic, and accounting expertiseaccounting expertise

Some recent tools and techniquesSome recent tools and techniques– Maintenance of databases containing bid information Maintenance of databases containing bid information

that can be checked or searched based on queries that that can be checked or searched based on queries that “trigger” incriminating information“trigger” incriminating information

– Maintaining reporting hotlines to accept tips, Maintaining reporting hotlines to accept tips, information, complaintsinformation, complaints

– Range of new financial investigative software Range of new financial investigative software applications applications


Operational Issues for Task TeamsOperational Issues for Task Teams

Training in detection skills Training in detection skills INT type activity has a cost, not all complaints INT type activity has a cost, not all complaints

can be handled by expert investigationscan be handled by expert investigations When should task teams call in the experts, when When should task teams call in the experts, when

to handle in house?to handle in house? How to mainstream some of the investigative How to mainstream some of the investigative

techniques to assess in house?techniques to assess in house? Implications: resources, learning curve, training, Implications: resources, learning curve, training,

commitmentcommitment


Controls and MonitoringControls and Monitoring Accounting, AuditingAccounting, Auditing

– Internal controls & auditInternal controls & audit– Financial mgt systems – tracking systemsFinancial mgt systems – tracking systems– Audit access clauses in contractsAudit access clauses in contracts– Technical auditsTechnical audits

MonitoringMonitoring– In-house monitors (can be captured)In-house monitors (can be captured)– Independent monitors at arms length more Independent monitors at arms length more

effectiveeffective– Third party monitoring – an evolving conceptThird party monitoring – an evolving concept– Third party monitoring consortium completes Third party monitoring consortium completes

the enforcement task spectrumthe enforcement task spectrum


DeterrenceDeterrence SanctionsSanctions

– Scope - Agency-wide, donor-specific, or Scope - Agency-wide, donor-specific, or internationalinternational

– Important to establish strict sanctions, Important to establish strict sanctions, including debarmentincluding debarment

– More important to More important to enforceenforce Legal and Judicial IntegrityLegal and Judicial Integrity

– Finally, legal and judicial environment must Finally, legal and judicial environment must promote a culture of compliancepromote a culture of compliance

– Transport teams can play a role in contributing Transport teams can play a role in contributing to procurement laws and reforms by identifying to procurement laws and reforms by identifying sector specific issues, loop holes, remediessector specific issues, loop holes, remedies


A-C Plan Design OptionsA-C Plan Design Options

Improving Accountability and TransparencyImproving Accountability and Transparency– External Monitoring - formalExternal Monitoring - formal– Internal agency controlsInternal agency controls– External Monitoring – civil society External Monitoring – civil society

(e.g., Agency report cards)(e.g., Agency report cards)– Industry integrity actionsIndustry integrity actions

Business Process Improvements Business Process Improvements – E-governmentE-government– Applications to improve efficiency, monitoring, Applications to improve efficiency, monitoring,

transparency and reduce human influencetransparency and reduce human influence– Empowering human resources to manage organizational Empowering human resources to manage organizational

changechange Restructuring of sector entities for improved Restructuring of sector entities for improved

efficiencyefficiency


Key New Areas of Work NeededKey New Areas of Work Needed

Measuring Integrity: Measuring Integrity: – Indicators and Baseline Data to measure progressIndicators and Baseline Data to measure progress

Anti-corruption Frameworks and PlansAnti-corruption Frameworks and Plans– Teams will need to identify appropriate approach for Teams will need to identify appropriate approach for

country conditions:country conditions: a strict enforcement approach; or a strict enforcement approach; or integrated enforcement and sector reform approachintegrated enforcement and sector reform approach

– More analytical and operational expertise is needed to More analytical and operational expertise is needed to test approaches, build communities of practice in this test approaches, build communities of practice in this area and share knowledgearea and share knowledge

– Important for governments and donors to fund this Important for governments and donors to fund this mandate adequately at country and project levels in mandate adequately at country and project levels in order to mainstream into core development practiceorder to mainstream into core development practice


This is a work in progress – your This is a work in progress – your comments and suggestions will comments and suggestions will be very welcome to make this be very welcome to make this chapter operationally usefulchapter operationally useful

Thank youThank you

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