42948 FAST TRACKBRIEF FEBRUARY 26, 2008 Based on the IEG report Evaluation of Bank Support for Public Sector Reform, To: Robert B. Zolellick which will be presented to CODE on From: Vinod Thomas, DGE March 26, 2008. cc: MDs, VPs, EDs Evaluation of World Bank Support for Public Sector Reform Theeffectivenessandefficiencyofa country'spublicsectorisvitaltothesuccess ofdevelopmentactivities, including those the World Bank supports. Sound financial management, an efficient civil service and administrative policy, efficient and fair collection of taxes, and transparent operations that are relatively free of corruption all contribute to good delivery of public services. TheBankhas devotedanincreasingshare--nowabout one-fifth--of itslending andadvisorysupportto the reform of central governments, so it is important to understand what is working, what needs improvement, and what is missing. To address these questions, IEG has examined lending and other kinds of Bank support in 1999-2006 for public sector reform in four areas--public financial management, administrative and civil service, revenue administration, and anticorruption and transparency. Althougha majorityof countries thatborrowedtosupportpublicsectorreformexperiencedimproved performance in some dimensions, there were shortcomings in important areas and in overall coordination. The frequency of improvement was higher among IBRD borrowers than among IDA borrowers. Performance usually improved for public financial management, tax administration, and transparency, but performance did not usually improve with respect to civil service. Direct measures to reduce corruption-- such as anticorruption laws and commissions--rarely succeeded. Recommendations to the Bank focus on improving guidelines for civil service and anticorruption reforms and on setting realistic objectives and sequencing for reforms. The public sector is the largest spender and employer in government counterparts is essential for the effectiveness virtually every World Bank client country and it sets the of the Bank's support to development. policy environment for the rest of the economy. About one-sixth of World Bank projects in recent years have Two themes of this evaluation correspond to the primary supported public sector reform (PSR, see figure) because dimensions of the public sector: how it manages finances the quality of the public sector--accountability, over the budget cycle and how it organizes and manages its effectiveness and efficiency in service delivery, employees--their recruitment, pay, and promotions. A third transparency, etc.--is thought by many to contribute to theme--tax administration--is a part of the public sector long-term growth and poverty reduction. The trend also that the Bank has often supported with special projects or reflects recognition that improving the efficiency of components. The fourth theme of the evaluation-- Task Manager: Steven Benjamin Webb (202) 473-8680 Manager, IEGCR: Ali M. Khadr (202) 458-7860 · Director IEGWB: Vinod Thomas (202) 473-6300 anticorruption and transparency--has cross-cutting issues most IBRD countries, the Bank stayed engaged, even with that appear in the other thematic areas and also in special problem-governance states. It did so with AAA or with components of some PSR projects. (Anticorruption lending if the countries wanted it; and the lending was components of sectoral projects are outside the scope of this usually associated with considerable improvement in the evaluation, as are decentralization, legal and judicial reforms.) public sector performance. Forty-seven percent of IBRD borrowers and 74 percent of IDA borrowers in 1999-2006 had one or more projects with The higher frequency of PSR lending to IDA countries components in at least one of these four areas. reflects both a greater need in these countries for PSR and stronger pressure from the Bank and other donors The evaluation team assembled and analyzed a database to do PSR. that combined information on all borrower countries and on the more than 460 projects that since 1990 have focused Among countries getting PSR lending, over 80 percent of on PSR in one or more of the four thematic areas. The IBRD borrowers showed improved performance, and 69 team also did in-depth studies of 19 countries, including percent of IDA borrowers. The country cases identify three field visits to 6, and supplemented this with information factors contributing to success in the different areas: from IEG's recent country evaluations. · Being realistic about what is politically and institutionally feasible, as well as being opportunistic in preparing The knowledge of outcomes is imperfect, due to technical foundations for what might become feasible measurement problems and the long lag between the start in the future. In Bangladesh the Bank supported of reforms and their full effects. Nonetheless, public sector preparatory work on difficult areas of civil service and performance on some key dimensions seems to have anticorruption when substantive reform was not on improved in a majority of cases where there have been the table, but later these proved useful when a reform- Bank lending and analytical and advisory activities. But minded government came to power. outcomes vary substantially across country types and thematic areas. Success or failure of PSR in any country is · Recognizing that enhancing technology was not enough by itself, determined mainly by government actions, but Bank that the most crucial and difficult part was changing behavior actions have also contributed. and organizational culture. In Ghana, implementation of the integrated financial management system stalled Lending Projects with Significant PSR Components until attention turned to changing the behavioral 1990-2006 patterns and incentives. 70 25 · Dealing with the basics first, such as ensuring that taxpayers 60 s 20 s have unique identification numbers before installing a ectjorPfo 50 complex collection system or ensuring that the 40 15 ectjorP B government is executing a one-year budget reasonably erb 30 10 muN Wfot well before launching a sophisticated multiyear 20 5 budgeting. Some projects in Bulgaria, Cambodia, 10 encreP Guatemala, Russia, and Sierra Leone did this relatively 0 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 well. In many countries, however, the policy-based Fiscal Year lending conditions were across-the-board and exceeded Investment Lending Development Policy Lending Total, as percent of World bank projects the government's technical or political implementation capacity. Projects in Ghana, Guatemala, Guyana, Patterns of Bank Support for PSR Honduras, and Indonesia had difficulty because they went straight to sophisticated measures, such as Almost all countries received some analytical and installing accrual accounting, when the personnel advisory assistance (AAA) on public sector issues over capacity was missing and the government was not 1999-2006, but coverage varied by theme. Most IDA successfully administering cash accounting. and blend countries had extensive AAA and three-fourths had PSR lending, including policy-based projects. For Variation across Themes instance, Burkina Faso had nine PSR loans, including eight development policy credits, with major components in all Public expenditure and financial management was four thematic areas, plus six AAA products. almost always a component in public sector reform loans. Public financial management--managing the money About half of IBRD countries had no PSR lending in from budget planning, to procurement, treasury functions, 1999-2006, and about a quarter had two or more loans. In and monitoring--has often been the leading edge of public Task Manager: Steven Benjamin Webb (202) 473-8680 Manager, IEGCR: Ali M. Khadr (202) 458-7860 · Director IEGWB: Vinod Thomas (202) 473-6300 sector reform, in both the diagnostic and lending phases of to be one reason why reform projects in this area have less Bank support. In this area (and in tax administration) the success than financial management reforms. AAA on civil ministry of finance has usually given strong support, and the service is less than one-fourth as common as for financial Bank's analytic tools have become the most systematic and management, and it did not precede lending in most case widely accepted. study countries. About two-thirds of all countries that borrowed for Bank projects for tax administration have generally financial management showed improvement in this succeeded and benefited from strong ownership by the area on a Bank-wide dataset (CPIA), and it was the most government, particularly the ministry of finance, and from consistent area of improvement in the case studies. Budget good diagnosis and strategy (often led by the IMF). Over formulation and reporting usually received more attention three-fourths of countries with investment projects for tax and had more success than the downstream phases of the administration improved their performance. In the areas of spending cycle, like procurement and auditing. tax administration, the IDA countries with investment projects had higher rates of improvement than IBRD Fiscal crises often initially motivated governments to get countries. For countries with a fiscal crisis, tax the Bank's help in financial management, and the projects administration reform was an attractive entry point, examined usually succeeded in resolving the fiscal crises particularly in the former Eastern Bloc countries. and making recurrence less likely. To improve the effectiveness of spending, however, the criteria and loan Attention to anticorruption and transparency in conditions have been harder to specify. country strategies and lending programs has grown since the late 1990s. A majority of the borrowers for The Bank's diagnostic work on financial management has PSR have increased transparency but not reduced contributed to the effectiveness of lending in this area. perceptions of corruption. Even after 1997, when direct Public Expenditure Reviews are now more frequently approaches were no longer taboo for the Bank, lending participatory or government-led, and give more attention to usually supported indirect measures against bureaucratic institutions and the implementation of the budget. The corruption--reducing opportunities for corruption by Public Expenditure and Financial Accountability (PEFA) simplifying procedures and regulations, moving to e- indicators have made an important advance by laying out a government in various areas, and rationalizing personnel framework for all aspects of public budgeting and financial management--which have had some success. Direct management, a framework agreed to by donor and borrower measures to reduce corruption--such as anticorruption countries. They are monitorable and actionable--the laws and commissions--rarely succeeded, as they often government can observe and affect them directly with its lacked the necessary support from political elites and the actions. judicial system. Civil service and administration reform (CSA) has been The Bank has helped develop tools to improve the second most common area of PSR lending. transparency and reduce bureaucratic corruption, such as Although CSA performance has improved in fewer than the Public Expenditure Tracking Survey (PETS), half the borrowing countries, improving CSA has been quantitative service delivery surveys, and the Business essential for sustaining PSR in other areas. The urgent Environment and Enterprise Performance Survey issue of affordability of the wage bill often led to emphasis (BEEPS). In Bulgaria and the Indian state of Orissa, direct on retrenchment and salary adjustments that were politically anticorruption measures helped make public service unrealistic. This approach typically failed to improve public delivery more efficient and accessible to citizens while administration, as noted in a 1999 IEG evaluation. Since staying within the bounds of political feasibility. Some then the Bank has advocated the same approach with similar government-wide transparency efforts, like access to lack of success in some countries, like Cambodia, Honduras, information laws and implementing agencies and the and Yemen, but elsewhere it has had some successes by Extractive Industries Transparency Initiative (EITI), also focusing more on personnel management reforms, such as show promise as tools against state capture, but it is too merit-based recruitment and promotion, in order to improve soon to see results in actually reducing corruption. performance and counter patronage-based systems. The Bank's diagnostic work on corruption and transparency The frequent failures of civil service and administrative generally follows a separate track from other public sector reform, despite continued acknowledgement of its areas, focusing on global perceptions or the experience of importance, seem to reflect the lack of a coherent strategy the private business sector, and giving less attention to the (with isolated exceptions) and of clear diagnostic tools to extent of corruption in the core public sector, like address CSA issues. Along with the inherent political procurement, personnel management, and tax difficulty, the weak diagnostic work on civil service seems Task Manager: Steven Benjamin Webb (202) 473-8680 Manager, IEGCR: Ali M. Khadr (202) 458-7860 · Director IEGWB: Vinod Thomas (202) 473-6300 administration. Most Country Financial Accountability Recommendations (elaborated in Chapter 6) Assessments and Country Procurement Assessment Reports have not dealt adequately with risks of corruption in those Design PSR projects and allocate Bank resources to systems. Institutional and Governance Reviews rarely them with recognition that PSR has especially analyzed the political factors contributing to corruption, complex political and sequencing issues. Be realistic although their saliency is widely acknowledged. about the time it takes to get significant results, understand the political context, identify prerequisites to achieve the Despite its mantra of "no one size fits all," the Bank has objectives, and focus first on the basic reforms that a not developed a framework that adequately recognizes the country needs in its initial situation. Reconsider the long duration of the process to reduce corruption and the balance between development-policy and investment differences in where countries start. As steps in the process, lending, because institutional change usually needs the experiences in Nigeria and Cambodia suggest that reducing sustained support of investment projects, although the development cost of corruption (including eliminating development policy lending can help secure the enabling it in Bank-supported investment projects) is politically policy changes. feasible and valuable for development. Still the Bank's stance against corruption needs operational clarification in Within country PSR strategies, set priorities for country contexts--for instance, how should the extent of anticorruption efforts based on assessments of which corruption affect the balance between investment and types of corruption are most harmful to poverty budget-support operations. reduction and growth. Only when the country has both strong political will and an adequate judiciary system should Sequencing and Coordination across Themes the Bank put primary emphasis on support for anticorruption laws and commissions. Given that reducing The evidence does not support either of two positions corruption will be a long-term effort, the Bank should taken by some observers--that PSR is too difficult to be emphasize (i) building country systems that reduce the worth trying or that public sector issues are so interlinked opportunities for corruption that is most costly to that only comprehensive solutions will work. Many PSR development and (ii) making information public in ways projects have succeeded, although usually not immediately. that stimulate popular demand for more efficient and less To realize the full benefits for improving public service corrupt service delivery. Provide operational clarification to delivery and accountability, PSR must eventually lead to the country team about how the Bank's anticorruption substantial improvement across the board, including the efforts fit within the overall country strategy. civil service, but modest and selected entry points can have partial success and lay the basis for later progress. Strengthen the civil service and administrative components of PSR, providing them with a better Starting with AAA has been a successful way for the Bank framework and indicator set, and give more attention to develop a trusting relationship with the government in to the budget execution phases of financial order to work on sensitive areas of PSR. In Egypt a management. This will require PEFA-like actionable reformist government requested Bank support for indicators for civil service and administrative performance anticorruption after an Investment Climate Assessment in and more linkage between the implementation of reforms 2006 identified corruption as a major barrier for business. for civil service and for financial management. Often a PER with financial management emphasis was a good starting place, as in Bangladesh, Ethiopia, Tanzania, Uganda, and several Indian states. The Bank has improved the integration of AAA and lending on the various aspects of public financial management, but not across the full range of PSR themes. Results are better where arrangements are institutionalized to coordinate staff in diverse sectors within the country program (as in the Latin America and Caribbean region, with the sector leaders in close proximity to country directors). Otherwise, coordination occurs less regularly, when there happens to be alignment of the personalities, skills, and schedules of the persons involved. Task Manager: Steven Benjamin Webb (202) 473-8680 Manager, IEGCR: Ali M. Khadr (202) 458-7860 · Director IEGWB: Vinod Thomas (202) 473-6300