WATER P-NOTES ISSUE 27 JANUARY 2009 47315 Deterring Corruption and Improving Governance in the Urban Water & Sanitation Sector G overnments typically provide the water and sani- To be effective, government may mandate a specific tation sector with substantial amounts of public official body--such as a water department or a money. Monopoly power, public funds, and regulator--to monitor the provider. 3 In addition, discretionary decisions, coupled with poor account- good governance usually requires a provider with ability, breed corruption. The best hope for reducing strong incentives and a high degree of autonomy, corruption in the water and sanitation sector is to 4 good financial management and business pro- incentivize water sector officials and managers to be cesses, 5 and sound arrangements for planning, responsive to citizens' demands. procuring, and supervising capital works. 6 Im- Accountability in the water and sanitation sec- proving governance to reduce corruption therefore tor is complicated, as Figure 1 illustrates. Effective may require action to strengthen weak points in the sector governance requires an effective "long route governance system illustrated in Figure 1. of accountability". Through the `long route', citizens hold government accountable for water sector per- Accountability to citizens formance. 1 The government's objective is to en- 1 sure good service at reasonable tariffs. 2 It may do Citizens can only hold government and providers this by owning the provider, regulating it, or both. accountable if they have good information on ac- Figure 1. Governance in the Water and Sanitation Sector Long route of accountability 3 Government 1 2 Accountability to citizens Officials, e.g. Service and tariff specifications Department Regulator Monitoring Units Public/Consumers Providers 4 Autonomy Short route of accountability 5 Processes 6 Project This note reports key messages and findings from "Deterring Corruption and Improving Governance in the Water Supply & Sanitation Sector: A Sourcebook," by Jonathan Halpern, Charles Kenny, Eric Dickson, David Erhardt and Chloe Oliver, published by the World Bank in September 2008 (Water Supply and Sanitation Working Note 18). Readers may download the complete paper from www.worldbank.org/water. WATER P-NOTES tual performance, and on what performance they sanitation providers are micro-managed by their should reasonably expect. Report cards, bench- monitoring bodies, be these regulators, mayors or marking, and reporting performance against agreed ministers. While perhaps an understandable re- targets, can inform citizens on reasonable and ac- sponse to sluggish management at the utility level, tual performance. Public participation could be in- micro-management can in some cases allow pow- troduced in planning and regulatory hearings, and erful decision-makers to benefit from the corruption through community supervision of capital works. and patronage opportunities that a utility offers. Furthermore, a micro-managed provider cannot be held accountable for failure. Finally, if the monitor- Service and tariff specifications 2 ing unit is managing service provision, the monitor- For government and citizens to hold the water and ing role is by default left vacant. Ways to strengthen sanitation provider accountable, there needs to be provider autonomy and incentives may include a clear and public agreement on the service levels corporatization, cooperative ownership of utilities or, to be provided. This agreement should generally where feasible, private participation. specify targets for coverage, hours, pressure and water quality, and effluent treatment standards. To be realistic and coherent, the agreement also needs Provider processes and systems 5 to provide adequate resources--from a mix of tariffs In many public water and sanitation providers, and subsidies--to cover the cost of meeting those waste and corruption flourish in "hot-spots" such as targets. The service and tariff specifications can commercial systems (connections, billing, and col- be complete and legally binding contracts. Other lection), human resources (where ghost workers col- performance agreements can be useful and made lect pay-checks, and positions are bought and sold), public without being legally binding--for example and procurement of supplies and capital works. municipal development plans that set out service In contrast, well run providers have good financial targets and resource requirements. What may mat- management systems and business processes that ter most is that the performance agreement is real- prevent misuse of company funds and property. The istic and clear, and that the government checks and spine of these systems is an accrual accounting and publishes progress against the agreement. auditing process. A utility's accounting system keeps track of the utility's income, expenditure, and as- sets. This system should be linked to various aspects Monitoring unit 3 of the utility's operation, including revenue and Governments should establish a unit to monitor the receivables, inventories, payroll, and capital proj- provider's performance and to apply penalties and ects. Accounting systems should be complemented sanctions. The monitoring unit may be a water de- by clear delegations of authority to incur costs and partment monitoring a government-owned provider approve payments, as well as processes governing (or managing a contract with a private firm), or it human resources, procurement, and the like. may be an autonomous regulator. Such a monitor- ing unit needs adequate skills, resources, and focus. Ways to make the monitoring unit more accountable Project planning, procurement, and might include: giving citizens more information and supervision 6 opportunities to participate in sector decisions, us- Finally, at the project level, bribes and kickbacks to ing democratic selection processes for the members influence contract specifications, award, and supervi- of the monitoring unit (or those who appoint them), sion, can result in projects that are low quality, high- and moving the monitoring unit closer to the people cost, and of dubious sustainability. Bribe-seeking it serves, for example through decentralization. officials may bias project choice toward excessively costly or technically complex projects. Well designed Provider incentives and autonomy fiduciary safeguards can reduce these risks in Bank 4 projects. Sound governance arrangements, coupled To deliver the required services within the agreed with good procurement and supervision processes, resources, managers need the freedom to manage, can achieve the more important job of reducing cor- and incentives to manage well. Yet many water and ruption in capital works across the sector as a whole. 2 ISSUE 27 · JANUARY 2009 World Bank Engagement in the sure improvements and establish a baseline and a Water and Sanitation Sector monitoring framework. Water and sanitation sector governance is complex, and strengthening governance even more so. To be Investment loans effective, the Bank increasingly uses a comprehen- The Bank's major engagement with its clients will sive, multi-year partnership approach with clients. continue to be financing physical infrastructure. To Such partnerships will typically start with analytic ensure that this money is well spent, and supports and advisory work that contributes to the Country development, lending operations should: Assistance Strategy (CAS). Country teams help cli- · Include well thought-out and context-specific ents develop and implement sector strategies with a fiduciary safeguards to reduce the risk that loan good governance focus. Governance and corrup- proceeds will be misused. tion monitoring and evaluation should be designed into the Bank's engagements early on, and the les- · Ensure that the physical works financed are sons learned applied as the engagement continues. least cost. Master-planning and economic Simplistic solutions to detect and deter corruption at analysis of projects should be used as a key de- particular points bolted onto single investment loans cision tool. This may require the dedication of will not, by themselves, be sufficient to improve more specialized resources. sectoral outcomes. The following sections discuss · Include capacity building measures intended promising approaches to addressing governance is- to promote probity in the water and sanitation sues at distinct phases of the Bank's engagement. providers and their financiers. Country Assistance Strategy · Clearly identify the goals for improvements in governance and reductions in corruption in- Where the Bank foresees significant engagement cluding indicators and monitoring mechanisms. in the water and sanitation sector, the CAS should include: · Address governance weaknesses identified in he sector strategy, by supporting information provi- · A high level mapping of corruption risks in wa- sion, public participation, specification of service ter and sanitation sector. standards and tariff, creating effective and ac- · Diagnosis of strengths and weaknesses in sector countable monitoring bodies, and giving utility governance, against the framework described in managers autonomy and incentives to perform. Section 2 of this Note. Loans to support physical investment could · Guiding principles and instruments for improv- be conditioned on implementation of governance ing governance in the sector. strengthening measures. Sector-wide approaches agreed with other donors or development policy lending can help to move towards an integrated Water and sanitation sector strategy governance approach. It is useful for the Bank and a client government to agree on a multi-year sector assistance program Engagements already underway that includes approaches to strengthening sector governance. Preparation of the sector strategy will Bank staff may find themselves managing engage- generally require analytical work to evaluate corrup- ments in environments of weak governance begun tion risks and governance weaknesses and develop without the benefit of fully developed governance specific actions. This includes understanding the po- and anti-corruption strategies. The incremental bud- litical economy of corruption and poor governance get set aside for the governance and anti-corruption in the sector by mapping winners and losers, identi- agenda can help task managers in these circum- fying individual and institutional "good governance stances. Task managers may find it beneficial to: champions", and defining actions to build political · Develop high-level scans of corruption risks and and popular support. Depending on the strategy's governance weaknesses in the parts of the sec- level of detail, it should include indicators to mea- tor in which the Bank is engaged. 3 WATER P-NOTES · Determine which incremental steps may be in- would champion change. Working with cham- corporated into the existing engagement. While pions can give immediate results, while setting major changes may not be possible, initiatives an example of what is possible. worth considering may include: · The Bank may engage in the sector through increasing clarity on the results expected of technical assistance to set the groundwork for the provider, through better specification of improved governance while reserving major expected service standards and clearer defi- capital investments for other sectors that are nition of the resources required to achieve more ready to embrace the good governance those standards. necessary to ensure that loan proceeds benefit the citizens of the country. providing the fiscal authorities and public with more timely, relevant, and accurate in- In addition, in these circumstances the Bank formation on sector performance. should strengthen fiduciary oversight of projects, but an approach based solely on "ring-fencing" Bank increasing public disclosure of information on capital works, and involving the com- financed investments will have limited development munity or knowledgeable third parties in impact. project supervision. · Assess fiduciary risk to the project, and, in the Conclusion event of red-flags, increase the level of Bank supervision of the project. Improving governance in the water and sanita- tion sector is a complex task, with no single right Where Government is not yet answer. Our knowledge in this area is not yet well developed. Approaches that work in one place fail committed elsewhere, for reasons that we are not yet sure of. Powerful forces are often arrayed against efforts to If even measuring corruption is fraught with difficul- strengthen governance. While lip service may be ties, how much harder must it be to convincingly paid, real commitment can be lacking. In some reduce corruption and improve governance? The cases, commitments made by reformers will be un- intention of the "Deterring Corruption and Improv- dermined by those who benefit from the status quo. ing Governance in the Water Supply & Sanitation Sector: A Sourcebook," is to assist World Bank staff This creates a dilemma for the Bank. Engage- to provide a set of practical suggestions. The Sour- ment that does not seriously attempt to strengthen cebook is a starting point, not an end point, for the governance would be contrary to the Bank's development of good practice in strengthening gov- commitment to improving governance. Yet trying ernance through Bank operations in the water and to strengthen governance in the face of tacit op- sanitation sector. position from those with power over the sector will generally fail. The overall principle of the Bank's What can be said definitively, however, is Governance and Anticorruption Strategy is "don't that promoting good governance is not primarily make the poor pay twice"--once in terms of suf- about safeguarding Bank-derived funds, ring- fering under weak governance and again through fencing Bank-supported projects, or detecting the withdrawal of donor support. In this situation, a and punishing corruption. Rather, the governance number of approaches may be appropriate: agenda is a continuation of the Bank's efforts over decades to help its member countries find · In a decentralized sector, some providers may ways of effectively delivering water and sanitation be vested in the existing system, while others services. The Water Sector Board Practitioner Notes (P-Notes) series is published by the Water Sector Board of the Sustainable Development Network of the World Bank Group. P-Notes are available online at www.worldbank.org/water. P-Notes are a synopsis of larger World Bank documents in the water sector. 4 THE WORLD BANK | 1818 H Street, NW | Washington, DC 20433 www.worldbank.org/water | whelpdesk@worldbank.org