THE WORLD BANK 44818 Public Sector Reform: What Works and Why? An IEG Evaluation of World Bank Support THE WORLD BANK GROUP WORKING FOR A WORLD FREE OF POVERTY The World Bank Group consists of five institutions--the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment Disputes (ICSID). Its mission is to fight poverty for lasting results and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors. THE INDEPENDENT EVALUATION GROUP ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION The Independent Evaluation Group (IEG) is an independent, three-part unit within the World Bank Group. IEG-World Bank is charged with evaluating the activities of the IBRD (the World Bank) and IDA, IEG-IFC focuses on assessment of IFC's work toward private sector development, and IEG-MIGA evaluates the contributions of MIGA guarantee projects and services. IEG reports directly to the Bank's Board of Directors through the Director-General, Evaluation. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank Group's work, and to provide accountability in the achievement of its objectives. It also improves Bank Group work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. W O R L D B A N K I N D E P E N D E N T E V A L U A T I O N G R O U P Public Sector Reform: What Works and Why? An IEG Evaluation of World Bank Support 2008 The World Bank http://www.worldbank.org/ieg Washington, D.C. ©2008 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 10 09 08 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Di- rectors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomina- tions, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Courtesy of Universidad Autónoma de Chapingo, where this mural appears in the Administration Building. ISBN-13: 978-0-8213-7589-1 e-ISBN-13: 978-0-8213-7590-7 DOI: 10.1596/978-0-8213-7589-1 Library of Congress Cataloging-in-Publication Data have been applied for. World Bank InfoShop Independent Evaluation Group E-mail: pic@worldbank.org Knowledge Programs and Evaluation Capacity Telephone: 202-458-5454 Development (IEGKE) Facsimile: 202-522-1500 E-mail: eline@worldbank.org Telephone: 202-458-4497 Facsimile: 202-522-3125 Printed on Recycled Paper Contents vii Abbreviations ix Acknowledgments xi Foreword xiii Executive Summary xix Management Response xxiii Chairperson's Summary: Committee on Development Effectiveness (CODE) 1 1 Objective, Scope, and Method of Evaluation 3 Objectives and Framework 4 Scope 5 Criteria for Evaluation 7 Methods 9 2 Historical Overview of Public Sector Reform at the World Bank 11 1946 to 1982: PSR at the Margins 12 1983 to 1989: Focus on Quality of Government 14 1990 to 1996: Increasing Awareness of Governance Agenda 15 1997 to 2007: PSR Efforts Become Central, Include Anticorruption 19 3 World Bank Support for Public Sector Reform 21 Lending Projects for Public Sector Reform 24 AAA Tasks for Public Sector Reform 25 Institutional Development Grants 25 Country Portfolios of PSR Activities 28 Thematic Distribution of PSR Projects 30 Staffing for PSR 33 4 How Public Sector Reform Outcomes Differ by Country Groups 35 Measurement, Attribution, and the Role of Governments, the Bank, and Donors 37 Summary Results 38 IEG Project Ratings 40 Reasons for Country Differences iii PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? 43 5 Public Sector Reform Outcomes and Performance by Thematic Area 45 Overview of Thematic Differences 64 Summary Lessons from Thematic Comparisons 67 6 Strategic Summary, Ratings, and Recommendations 69 Reform Motivations, Expectations, and Success Factors 71 Country PSR Strategy Entry Points 72 Summary Evaluation Ratings 73 Recommendations 77 Appendixes 79 A: Data Set Description: Public Sector Reform Lending, AAA, and Institutional Development Funds 81 B: Statement by the External Advisory Panel These appendixes are available online at http://www.worldbank.org/ieg/psr/appendix.html. C: Public Sector Reform Project List, Fiscal 1990­2006 D: Public Sector Reform--Advisory and Analytical Activities, Fiscal 1999­2006 E: Public Sector Reform--Institutional Development Funds, Fiscal 1992­2006 F: Clients and Other External Stakeholders Interviewed 83 Endnotes 87 Bibliography Boxes 5 1.1 Scope of Review of the Bank's Anticorruption Activity 36 4.1 Pros and Cons of CPIA as a Governance Measure 50 5.1 Too Much Attention to the Technical Aspects--Not Enough to the Human Element in Ghana 62 5.2 Extractive Industries Transparency Initiative­Multi-Donor Trust Fund Figures xiv ES.1. Lending Projects with Significant PSR Components, 1990­2006 22 3.1 Lending Projects with Significant PSR Components, 1990­2006 23 3.2 Lending Value in Projects with a Significant PSR Component 23 3.3 Regional Distribution of Public Sector Reform Projects 28 3.4 Themes Included in Projects with Significant PSR Funding 29 3.5 Public Sector Reform Conditions 54 5.1 Number of CSA Projects with Various Subcategories of Conditions Tables 6 1.1 Results Framework for Public Sector Reform 7 1.2 Case Study Countries 24 3.1 Public Sector Reform AAA Products iv CONTENTS 26 3.2 IDF Grants on Public Sector Reform Themes 26 3.3 Public Sector Reform Lending and AAA Activities in Relation to Public Sector Governance 31 3.4 Public Sector Staffing and Specialties by Region 38 4.1 Percent of Countries with Improved CPIA Governance Scores by PSR Theme and IDA/IBRD Classification 39 4.2 Percent of Countries with Improved Governance CPIA Scores by Region, 1999­2006 39 4.3 Summary of IEG Project Ratings for Closed PSR Projects, 1999­2006 46 5.1 Changes in Selected CPIA Scores by PSR Theme, Initial Governance Score, and IDA/IBRD Classification 49 5.2 Improvement Rates in Public Financial Management (CPIA 13) by IDA/IBRD Classification 53 5.3 Civil Service and Administrative Reform: Types and Challenges 59 5.4 State Capture and Bureaucratic Corruption, and Indirect Ways to Combat Them 72 6.1 Overall Bank Performance Ratings, 1999­2006 v Central post office in Morrocco. Photo by Julio Etchart, courtesy of the World Bank Photo Library. Abbreviations AAA Analytical and advisory activities ACT Anticorruption and governance (transparency) BEEPS Business Environment and Enterprise Performance Survey CAS Country Assistance Strategy CEM Country Economic Memorandum CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPIA Country Policy and Institutional Assessment CSA Civil service and administrative (reform) DPL Development Policy Loan DFID Department for International Development (United Kingdom) DPR Development Policy Review EITI Extractive Industries Transparency Initiative ESW Economic and sector work GAC Governance and anticorruption (strategy) HIPC Heavily indebted poor countries IBRD International Bank for Reconstruction and Development ICRG International Country Risk Guide IDA International Development Association IDF Institutional development funds IEG Independent Evaluation Group IGR Institutional and Governance Review IMF International Monetary Fund MTEF Medium-term expenditure framework NGO Nongovernmental organization OECD Organisation for Economic Co-operation and Development OPCS Operations Policy and Country Services PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PETS Public expenditure tracking surveys PFM Public financial management PIU Project implementation unit PPAR Project Performance Audit Report PREM Poverty Reduction and Economic Management Network PRSC Poverty Reduction Support Credit PSG Public sector governance PSM Public sector management PSR Public sector reform SAL Structural Adjustment Loan TAX Tax administration (reform) WBI World Bank Institute WDR World Development Report vii Government building in Hanoi, Vietnam. Photo © Galen Frysinger. Acknowledgments This evaluation of the World Bank's support for during the final phases of preparing the evalua- public sector reform was prepared by the Coun- tion, recused herself from management oversight try Evaluation and Regional Relations division in because of her earlier key role in the public sec- the Independent Evaluation Group (IEG). tor reform agenda. The team was led by Steven Webb and comprised Colum Garrity, Gregory Kisunko, and others on Milka Casanegra (tax administration), Corky de the Public Sector and Governance Sector Board Asis, Tim De Vaan, Anne Evans (civil service and were generous in helping gather information. administrative reform), Odd-Helge Fjeldstad (an- ticorruption), Ilka Funke (assistant team leader), The peer reviewers--Catherine Gwin, Roumeen Gita Gopal, Ina Hoxha, Keith Kranker (database Islam, and Marcelo Selowsky--gave useful sug- and statistical analysis), Evelina Mengova (data- gestions at several stages of the process, as did sev- base), Victor Orozco (database and statistical eral other colleagues in IEG. analysis), Vikki Taaka (logistics and document handling), Rajiv Joseph Tharian, Gemi Thomas, A panel of external advisors--Professor Shankar Sofia Valencia, Richard Webb (history), and Clay Acharya (Indian Council for Research on Inter- Wescott (public financial management). The coun- national Economic Relations), Professor Francis try case studies were prepared by de Vaan, Funke, Fukuyama (School for Advanced International Hoxha, Orozco, Tharian, Webb, and Wescott. Studies, Johns Hopkins University), and Dr. Ngozi Helen Chin, Heather Dittbrenner, and William Okonjo-Iweala (until November 30, 2007, of Hurlbut assisted with editing. Brookings Institution)--gave useful inputs at sev- eral stages of the evaluation. Professors Acharya The team received guidance and support from the and Fukuyama provided a joint comment on the IEG management team--Shahrokh Fardoust, Ali report going to the Committee on Developmen- Khadr, and Vinod Thomas--and in the initial tal Effectiveness. The generous financial support stages work from Ajay Chhibber, Lily Chu, and Kyle of the Norwegian Agency for Development Co- Peters. Cheryl Gray, Director of IEG World Bank operation (Norad) is gratefully acknowledged. Director-General, Evaluation: Vinod Thomas Senior Manager, IEGCR: Ali M. Khadr Task Manager, IEGCR: Steven B. Webb ix Government building in Yaroslavl, Russia. Photo © Linda Garrison/cruises.about.com. Foreword World Bank support for public sector reform has The Governance and Anticorruption Strategy ap- grown notably in recent years. To address the proved by the Board in 2007 and being imple- questions of what is working and why in this area, mented now proposed actions that could address the Independent Evaluation Group has examined concerns raised in this evaluation. The recom- Bank lending and other support for public sector mendations of this evaluation highlight direc- reform in four areas: public financial management, tions that deserve priority. administrative and civil service, revenue adminis- tration, and anticorruption and transparency. First, it pays to recognize the especially complex political and sequencing issues in public sector re- A majority of countries that borrowed to support form projects. That in turn puts a premium on un- public sector reform improved their perform- derstanding the political context, identifying the ance in some dimensions, but there were short- prerequisites to achieve the objectives, focusing comings in important aspects. Middle-income on the basic reforms initially, and being realistic borrowers saw improvements in their public sec- about the time it takes to get significant results. tor quality more frequently than low-income bor- rowers, even though the low-income group Second, the priorities for anticorruption efforts usually had greater needs for public sector need to be based on an assessment in each coun- improvement. try of the types of corruption most harmful to de- velopment. Sustaining efforts to reduce corruption Performance usually improved for public financial have better prospects when they emphasize mak- management, tax administration, and trans- ing information public and building country sys- parency, but not for civil service. Direct meas- tems to reduce the opportunities for corruption. ures to reduce corruption--such as anticorruption laws and commissions--rarely succeeded, as they Third, it is important to strengthen the civil ser- often lacked the necessary support from political vice and administrative components of public sec- elites and the judicial system. tor reform. This effort includes providing a better framework and indicator sets for quality of civil ser- Analytic work, including the development of vice. Although the difficulties of civil service reform monitorable indicators, was especially useful in have led to some calls for abandoning this area, the financial management, but such analysis was evidence indicates that improved civil service is es- usually absent in the civil service and adminis- sential for major improvements in other areas. trative area, which contributed to the differences Successes with some aspects of civil service have in outcomes. shown what is possible. Vinod Thomas Director-General, Evaluation xi Segment of mural El Buen Gobierno by Diego Rivera (1924). Courtesy of Universidad Autónoma de Chapingo, where this mural appears in the Administration Building. Executive Summary T he effectiveness and efficiency of a country's public sector is vital to the success of development activities, including those the World Bank supports. Sound financial management, an efficient civil service and administrative policy, efficient and fair collection of taxes, and transparent op- erations that are relatively free of corruption all contribute to good delivery of public services. The Bank has devoted an increasing share--now The public sector is the largest spender and em- about one-sixth--of its lending and advisory sup- ployer in virtually every developing country, and port to the reform of central governments, so it it sets the policy environment for the rest of the is important to understand what is working, what economy. About one-sixth of World Bank projects needs improvement, and what is missing. To ad- in recent years have supported PSR (see figure dress these questions, the Independent Evalua- ES.1) because the quality of the public sector-- tion Group (IEG) has examined lending and other accountability, effectiveness, and efficiency in ser- kinds of Bank support for public sector reform vice delivery, transparency, and so forth--is (PSR) between 1999 and 2006 in four areas: pub- thought by many to contribute to development. lic financial management, administrative and civil Improving the efficiency of government coun- service, revenue administration, and anticorrup- terparts is also essential for the effectiveness of the tion and transparency. Bank's support for development. Although a majority of countries that borrowed Two themes of this evaluation correspond to the to support PSR experienced improved perform- primary dimensions of the public sector: how it ance in some dimensions, there were short- manages finances over the budget cycle and how comings in important areas and in overall coor- it organizes and manages its employees--their re- dination. The frequency of improvement was cruitment, pay, and promotions. A third theme-- higher among International Bank for Recon- tax administration--is a part of the public sector struction and Development (IBRD) borrowers that the Bank has often supported with special proj- than among International Development Asso- ects or components. The fourth theme of the eval- ciation (IDA) borrowers. Performance usually im- uation--anticorruption and transparency--has proved for public financial management, tax cross-cutting issues that appear in the other the- administration, and transparency, but not usually matic areas and also in special components of for civil service. Direct measures to reduce cor- some PSR projects. (Anticorruption components ruption--such as anticorruption laws and com- of sectoral projects are outside the scope of this missions--rarely succeeded. Recommendations evaluation, as are decentralization and legal and ju- of this evaluation focus on improving guidelines dicial reforms.) Forty-seven percent of IBRD bor- for civil service and anticorruption reforms and rowers and 74 percent of IDA borrowers in the on setting realistic objectives and sequencing of period 1999­2006 had one or more projects with reforms. components in at least one of these four areas. xiii PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? The evaluation team assembled and analyzed a varied by theme. Most IDA and blend coun- database that combined information on all bor- tries had extensive AAA, and three-fourths had rower countries and on the more than 460 proj- PSR lending, including policy-based projects. For ects that since 1990 have focused on PSR in one instance, Burkina Faso had nine PSR loans, in- or more of the four thematic areas. The team also cluding eight development policy credits, with did in-depth studies of 19 countries, including major components in all four thematic areas, plus field visits to 6, and supplemented this with in- six AAA products. formation from IEG's recent country evaluations. About half of IBRD countries had no PSR The knowledge of outcomes is imperfect, because lending in the period 1999­2006, and about of measurement problems and the long lag be- a quarter had two or more loans. In most IBRD tween the start of reforms and seeing their full ef- countries, the Bank stayed engaged, even with fects. Nonetheless, public sector performance on problem governance states. It did so through AAA some key dimensions seems to have improved in or lending if the countries wanted it; the lending a majority of cases where there have been Bank was usually associated with considerable im- lending and analytical and advisory activities. But provement in the public sector performance. outcomes vary substantially across country types and thematic areas. Success or failure of PSR in any The higher frequency of PSR lending to IDA country is determined mainly by government ac- countries reflects both a greater need in tions, but Bank actions have also contributed. these countries for PSR and stronger pres- sure from the Bank and other donors to Patterns of Bank Support for PSR conduct PSR. Almost all countries received some analyti- cal and advisory assistance (AAA) on public Among countries getting PSR lending, more than sector issues over 1999­2006, but coverage 80 percent of IBRD borrowers and 69 percent of Figure ES.1: Lending Projects with Significant PSR Components, 1990­2006 70 25 60 20 50 15 40 projects projects of 30 Bank 10 of Number 20 Percent 5 10 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fiscal year Investment lending Development policy lending Total, as percent of World Bank projects Source: World Bank database and IEG staff calculations. xiv EXECUTIVE SUMMARY IDA borrowers showed improved performance. ministry of finance has usually been given strong Country cases identify three factors contributing support, and the Bank's analytic tools have be- to success in the different areas: come the most systematic and widely accepted. · Being realistic about what is politically and About two-thirds of all countries that bor- institutionally feasible, as well as being op- rowed for financial management showed portunistic in preparing technical foundations improvement in this area in a Bank-wide data for what might become feasible in the future. set (the Country Policy and Institutional Assess- In Bangladesh, the Bank supported preparatory ment), and it was the most consistent area of im- work on difficult areas of civil service and an- provement in the case studies. Budget formulation ticorruption when substantive reform was not and reporting usually received more attention on the table. These later proved useful when and had more success than the downstream a reform-minded government came to power. phases of the spending cycle, such as procurement · Recognizing that enhancing technology is not and auditing. enough by itself, that the most crucial and dif- ficult part is changing behavior and organi- Fiscal crises often initially motivated governments zational culture. In Ghana, for instance, to seek financial management help from the Bank, implementation of the integrated financial man- and the projects examined usually succeeded in agement system stalled until attention turned resolving the fiscal crises and making recurrence to changing behavioral patterns and incentives. less likely. To improve the effectiveness of spend- · Dealing with the basics first, such as ensuring ing, however, the criteria and loan conditions that taxpayers have unique identification num- have been harder to specify. bers before installing a complex collection sys- tem or ensuring that the government is The Bank's diagnostic work on financial man- executing a one-year budget reasonably well be- agement has contributed to the effectiveness of fore launching sophisticated multiyear budg- lending in this area. Public Expenditure Reviews eting. Some projects in Bulgaria, Cambodia, are now more frequently participatory or are gov- Guatemala, the Russian Federation, and Sierra ernment led and give more attention to institu- Leone did this relatively well. In many countries, tions and the implementation of the budget. The however, the policy-based lending conditions Public Expenditure and Financial Accountability were across the board and exceeded the gov- (PEFA) indicators have made an important ad- ernment's technical or political implementation vance by laying out a framework for all aspects of capacity. Projects in Ghana, Guatemala, Guyana, public budgeting and financial management, a Honduras, and Indonesia had difficulty be- framework agreed to by donor and borrower cause they went straight to sophisticated meas- countries. They are monitorable and actionable-- ures, such as installing accrual accounting, the government can observe and affect them when the personnel capacity was not ready directly. and the government was not successfully ad- ministering cash accounting. Civil service and administrative (CSA) re- form has been the second most common Variation across Themes area of PSR lending. Although CSA per- Public expenditure and financial manage- formance has improved in fewer than half of ment was almost always a component in the borrowing countries, improving CSA has PSR loans. Public financial management--man- been essential for sustaining PSR in other aging the money from budget planning, to pro- areas. The urgent issue of affordability of a wage curement, treasury functions, and monitoring-- bill often led to emphasis on retrenchment and has often been the leading edge of PSR, in both salary adjustments that were politically unrealistic. the diagnostic and lending phases of Bank sup- This approach typically failed to improve public ad- port. In this area (and in tax administration), the ministration, as noted in a 1999 IEG evaluation xv PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? (IEG 1999). Since then, the Bank has advocated ures to reduce corruption--such as anticorrup- the same approach, with similar lack of success in tion laws and commissions--rarely succeeded, some countries, such as Cambodia, Honduras, as they often lacked the necessary support from and the Republic of Yemen; elsewhere, however, political elites and the judicial system. it has had some success by focusing more on per- sonnel management reforms, such as merit-based The Bank has helped develop tools to improve recruitment and promotion, to improve per- transparency and reduce bureaucratic corrup- formance and counter patronage-based systems. tion, such as the Public Expenditure Tracking Sur- vey, quantitative service delivery surveys, and the The frequent failures of CSA reform, despite con- Business Environment and Enterprise Perform- tinued acknowledgment of its importance, seem ance Survey. In Bulgaria and the Indian state of to reflect the lack of a coherent strategy (with iso- Orissa, direct anticorruption measures helped lated exceptions) and of clear diagnostic tools to make public service delivery more efficient and address CSA issues. Along with the inherent po- accessible to citizens while staying within the litical difficulty, the weak diagnostic work on civil bounds of political feasibility. Some government- service seems to be one reason reform projects wide transparency efforts, such as access to in- in this area have less success than financial man- formation laws and implementing agencies and agement reforms. AAA on civil service is less than the Extractive Industries Transparency Initiative, one-fourth as common as for financial manage- also show promise as tools against state capture, ment, and it did not precede lending in most but it is too soon to see results. case study countries. The Bank's diagnostic work on corruption and Bank projects for tax administration have transparency generally follows a separate track generally succeeded and benefited from strong from other public sector areas, focusing on global government ownership, particularly by ministries perceptions or the experience of the private busi- of finance, and from good diagnosis and strategy ness sector and giving less attention to the extent (often led by the International Monetary Fund). of corruption in the core public sector. Most More than three-fourths of countries with invest- Country Financial Accountability Assessments and ment projects for tax administration improved Country Procurement Assessment Reports have their performance. In the areas of tax administra- not dealt adequately with risks of corruption in tion, IDA countries with investment projects had those systems. Institutional and governance re- higher rates of improvement than IBRD coun- views rarely analyzed the political factors con- tries. For countries with a fiscal crisis, tax admin- tributing to corruption, although their saliency is istration reform was an attractive entry point, widely acknowledged. particularly in former Eastern Bloc countries. Despite its mantra of "no one size fits all," the Attention to anticorruption and trans- Bank has not developed a framework that ade- parency in country strategies and lending quately recognizes the long duration of the process programs has grown since the late 1990s. A to reduce corruption and the differences in where majority of the borrowers for PSR have in- countries need to start. As steps in the process, ex- creased transparency but not reduced per- periences in Nigeria and Cambodia suggest that re- ceptions of corruption. Even after 1997, when ducing the development cost of corruption direct approaches were no longer taboo for the (including eliminating it in Bank-supported in- Bank, lending usually supported indirect measures vestment projects) is politically feasible and valu- against bureaucratic corruption--reducing op- able for development. Still, the Bank's stance portunities for corruption by simplifying proce- against corruption needs operational clarification dures and regulations, moving to e-government in country contexts--for instance, how the ex- in various areas, and rationalizing personnel man- tent of corruption should affect the balance be- agement. These had some success. Direct meas- tween investment and budget-support operations. xvi EXECUTIVE SUMMARY Sequencing and Coordination has especially complex political and se- across Themes quencing issues. Be realistic about the time it The evidence does not support either of two po- takes to get significant results, understand the sitions taken by some observers--that PSR is too political context, identify prerequisites to achieve difficult to be worth trying or that public sector the objectives, and focus first on the basic re- issues are so interlinked that only comprehensive forms that a country needs in its initial situation. solutions will work. Many PSR projects have suc- Reconsider the balance between development ceeded, although usually not immediately. To re- policy and investment lending; institutional alize the full benefits of improving public service change usually needs the sustained support of in- delivery and accountability, PSR must eventually vestment projects, although development policy lead to substantial improvement across the board, lending can help secure the enabling policy including the civil service; modest and selected changes. entry points can have partial success and can lay the basis for later progress. In country PSR strategies, set priorities for anticorruption efforts based on assessments Starting with AAA has been a successful way for the of which types of corruption are most harm- Bank to develop a trusting relationship with gov- ful to poverty reduction and growth. Only ernments to work on sensitive areas of PSR. In when the country has both strong political will Egypt, a reformist government requested Bank sup- and an adequate judiciary system should primary port for anticorruption after an Investment Climate emphasis be on support for anticorruption laws Assessment in 2006 identified corruption as a major and commissions. Given that reducing corrup- barrier for business. Often a Public Expenditure Re- tion will be a long-term effort, the Bank should view with financial management emphasis was a emphasize two things: building country sys- good starting place, as in Bangladesh, Ethiopia, Tan- tems that reduce the opportunities for corruption zania, Uganda, and several Indian states. that are most costly to development and making information public in ways that stimulate popu- The Bank has improved the integration of AAA and lar demand for more efficient and less corrupt lending in the various aspects of public financial service delivery. The country team needs opera- management, but not across the full range of PSR tional clarification about how the Bank's anti- themes. Results are better where arrangements are corruption efforts fit within the overall country institutionalized to coordinate staff in diverse sec- strategy. tors within the country program (as in the Latin America and Caribbean Region, with the sector Strengthen the CSA components of PSR, leaders in close proximity to country directors). giving them a better framework and in- Otherwise, coordination occurs less regularly, dicator set, and give more attention to when there happens to be alignment of person- the budget-execution phases of financial alities, skills, and schedules. management. This will require PEFA-like actionable indicators for CSA performance and Recommendations more linkage between the implementation Design PSR projects and allocate Bank re- of reforms for civil service and for financial sources to them with recognition that PSR management. xvii Government building in Nairobi. Photo from picasaweb.google.com. Management Response M anagement welcomes this Independent Evaluation Group (IEG) evaluation of World Bank support for public sector reform (PSR), cov- ering the period from 1999 through 2006. Management sees much on which it can build from the review's findings. However, it would like to make a few observations on the review, relative to recent strategy and policy changes. Last, management broadly concurs with the recommendations, with some nu- ances and clarifications. Concurrence with the Broad Thrust of the tial success and can lay the basis for later progress, Analysis and Recommendations including in difficult areas such as civil service reform. That fits with management's view that The evaluation contains a number of important PSR needs strong country ownership and that conclusions that management welcomes in the the Bank needs to tailor its assistance to the coun- context of its overall assistance to countries in PSR. try's pace of reform. It also reinforces the point Specifically, management appreciates the find- above with regard to lending instruments. ings on the long-term nature of PSR, the conclu- sion that an incremental approach can produce results, and the usefulness of economic and sec- Usefulness of ESW tor work (ESW) up front. It will build on these in The IEG review notes the benefit of up-front ESW. work going forward. It credits good diagnostic work in public financial management (PFM) as having contributed to suc- PSR requires time cessful outcomes of Bank support. In particular, Management notes IEG's finding that many PSR it cites Public Expenditure Reviews and the Pub- projects have succeeded, although often not im- lic Expenditure and Financial Accountability mediately. The key lesson is to be realistic as to (PEFA) indicators as useful in this regard. Man- timing. That fact has implications regarding the agement notes the potential value of prior ESW lending products that best support PSR. In many with regard to support for countries that want to cases, a programmatic approach using a series of undertake civil service reform. loans, notably Development Policy Loans (DPLs), linkedtoagovernment'smedium-termprogramhas Management Observations proven successful (see, for example, World Bank Management has just a few issues that it would like 2007a). As noted in the review, specific investment to raise with regard to the analysis in the review. operations, either in parallel with DPLs or self- These issues are related to governance and anti- standing, can provide a longer time frame of sup- corruption, to analytic and advisory activities (AAA) port. Country context will determine the exact mix. work on PFM, and to the evolution of Bank sup- port over time, learning the lessons of experience. Incremental approach Management also acknowledges that greater The IEG review concludes that support through progress needs to be made on civil service and ad- modest and selected entry points can have par- ministrative reform but notes that the outcomes xix PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? are weaker in poor governance environments and countability Assessments (CFAAs) and Country stronger in better governance environments, as Procurement Assessment Reviews (CPARs) should measured by the Country Policy and Institutional incorporate more diagnosis of corruption issues. Assessment. CFAAs and CPARs typically identify aspects of country PFM systems that might facilitate cor- ruption (such as off-budget accounts, inadequate Governance and anticorruption financial management and procurement infor- The Bank does thematically classify a portion of its mation systems, weak regulatory environments, in- support as "other accountability/anticorruption." adequate systems of internal control and internal However, as emphasized in its new Governance audit, poor capacity of implementing agency staff, and Anticorruption (GAC) strategy, management excessively complex financial administration rules sees corruption as an outcome of poor gover- leading to poor enforcement, and "cash ra- nance (World Bank 2007c). Support for better tioning"). Management considers this coverage of governance--and so for reduced corruption--is corruption issues appropriate. Given the com- being mainstreamed across the Bank's entire port- plexity and multifaceted dimensions of the cor- folio, including in traditional investment opera- ruption issue, neither detailed corruption tions. Though this is recognized in the IEG review, diagnostics nor the development of anticorruption from some of the discussion, a perception might strategies can be undertaken as part of the CFAA be that the review is of the Bank's anticorruption or CPAR per se. That said, as part of its overall work agenda rather than that subset of the agenda that on implementing the new strategy, management can usefully be addressed through PSR. For in- is developing stronger linkages with corruption is- stance, the IEG review does not evaluate treatment sues in the Bank's PFM work, recognizing that of GAC in country assistance strategies, GAC in sec- PFM systems are an important instrument in a tors, or GAC in projects or global partnerships on country's anticorruption agenda and also that GAC. The World Bank Group's overall approach PFM performance is affected by the overall cor- to anticorruption is best discussed in the context ruption environment. of the strategy cited above. Management has com- mitted to report to the Board in 2008 on progress Learning the lessons of experience in implementation of this strategy. Management notes that the review covers seven years. During that period, many of the lessons Demand side of support for good governance cited in the IEG review have been taken into ac- and anticorruption count in Bank work, notably regarding develop- The report points to possible missed opportuni- ment policy operations (DPOs). The Bank ties for supporting the demand side of good GAC. extensively reviewed its experience with adjust- Management would point out that in many cases, ment lending, held wide consultations, and countries have incorporated innovative measures moved in 2004 from adjustment to DPOs (World into sector projects supported by Bank lending Bank 2004b). That change was more than just in that helped develop the demand for good gov- name and incorporates many of the suggestions ernance--for example, expenditure tracking sur- that the IEG review highlights--including the veys, beneficiary surveys, and citizen scorecards. importance of strong country ownership, a long- Understandably, the purely sectoral operations term approach to policy reform taken in realis- with these components were beyond the scope tic incremental steps, customization, and a sharp of the IEG review. reduction in the number of conditions to just those critical for the success of the reform (nor- Scope of public financial management AAA mally taken in advance of Board approval of the Management would like to reiterate its different operation--one indicator of ownership). One of view on one point--whether Country Financial Ac- the reasons for these changes was to better po- xx MANAGEMENT RESPONSE sition the Bank to help countries strengthen pub- Conclusion lic sector institutions. Under DPOs, the type of Overall, management warmly welcomes this eval- conditions has changed, notably toward measures uation from IEG. Management generally accepts to strengthen public sector management, and IEG's recommendations. Detailed responses to the number has fallen significantly (World Bank the recommendations are outlined in the Man- 2007a). agement Action Record. xxi PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Management Action Record Recommendation Management response Design PSR projects and allocate Bank re- Ongoing/Agreed. Bank management agrees in principle with this recommendation, sources to them with recognition that PSR has noting that it points to the importance of intensifying AAA upstream of PSR operations-- especially complex political and sequencing which can have significant budget implications. How the recommendation can best be issues. Be realistic about the time it takes to get sig- implemented will require learning by doing and will depend on country context. To im- nificant results, understand the political context, iden- plement the GAC strategy, the Bank's regional Vice Presidential units have identified tify prerequisites to achieve the objectives, and focus 26 countries that currently are initiating country-specific country GAC strategy first on the basic reforms that a country needs in its processes--including, in some of these countries, intensified governance assess- initial situation. Reconsider the balance between ments that aim to, among others, identify political obstacles to reform and feasible development policy and investment lending, because approaches to sequencing. At the conclusion of this learning process, Bank manage- institutional change usually needs the sustained sup- ment is committed to reporting to the Board whether and how it intends to system- port of investment projects, although development atize and scale up its GAC work, including AAA. Reporting on the agreed actions will policy lending can help secure the enabling policy be done in the context of overall GAC reporting. changes. Within country PSR strategies, set priorities for Mostly agreed. Management agrees with the recommendation that the most effec- anticorruption efforts based on assessments of tive way in which PSR can support anticorruption efforts is by giving priority to work which types of corruption are most harmful to on country systems and on information flows to the public. As the recommendation sug- poverty reduction and growth. Only when the gests, the more complex challenge (which goes beyond the scope of PSR operational country has both strong political will and an ade- work) has to do with the relationship between country strategies and operations more quate judiciary system should the Bank put primary broadly and anticorruption efforts. Management's response to this broader challenge emphasis on support for anticorruption laws and com- has been laid out in the strategy, "Strengthening World Bank Group Engagement on Gov- missions. Given that reducing corruption will be a ernance and Anticorruption" (World Bank 2007c). Three ways in which GAC strategy long-term effort, the Bank should emphasize (i) build- implementation addresses this broader challenge are (i) by signaling that GAC is not ing country systems that reduce the opportunities for only a PSR concern but "is everybody's business"; (ii) by intensifying efforts to manage corruption that is most costly to development and (ii) fiduciary and other GAC risks in Bank operations; and (iii) by underscoring that approaches making information public in ways that stimulate pop- to addressing GAC are country specific and should be derived from poverty-reduction ular demand for more efficient and less corrupt ser- priorities. With regard to IEG's request for operational clarification, this last point im- vice delivery. Provide operational clarification to the plies that attention to GAC issues generally will be most intensive in those sectors that country team about how the Bank's anticorruption ef- are given priority for poverty reduction in country strategies. The GAC implementation forts fit within the overall country strategy. progress report to the Board, to be presented in 2008, will report on experience. Strengthen the CSA components of PSR, pro- Ongoing/Agreed. Bank management agrees with the recommendation that a better viding them with a better framework and indi- framework is needed for the civil service and administrative components of PSR work. cator set, and give more attention to the budget A strategic staffing exercise, being undertaken as part of GAC strategy implementa- execution phases of financial management. This tion, will help implement this recommendation. The Poverty Reduction and Economic will require PEFA-like actionable indicators for civil ser- Management anchor already has begun recruiting to strengthen its staffing on civil ser- vice and administrative performance and more link- vice and administrative reform. Under the GAC strategy and implementation plan, in- age between the implementation of reforms for civil tensified work is under way within that anchor to develop a new generation of service and for financial management. "actionable indicators," with indicators for civil service and administrative a top pri- ority. However, as is evident from the seven-year experience of developing the PEFA indicators--cited as a success in the IEG evaluation--the development of new and better indicators is a challenging task that will take time. For the budget execution phases of financial management, Bank management notes that both the PEFA indicators and the CFAAs give them strong attention. An earlier, narrower focus on budget formula- tion has already has been incorporated in the Bank's operational work. Management will monitor and report on progress on these actions in reports to Executive Directors on the implementation of the GAC initiative. xxii Chairperson's Summary: Committee on Development Effectiveness O n March 26, 2008, the Committee on Development Effectiveness (CODE) discussed the evaluation of World Bank support for public sector reform and the draft management response. Background cross-cutting anticorruption and transparency Key strategy documents include "Strengthening initiatives. One of the key findings was that per- World Bank Group Engagement on Governance formance in at least one dimension of PSR im- and Anticorruption" (World Bank 2007c) and Re- proved in a majority of countries that borrowed forming Public Institutions and Strengthening for core public sector activities. IEG also noted Governance: A World Bank Strategy (World Bank that outcomes of PSR lending were better in PFM 2000). The update on implementation of the 2000 and revenue administration, but less successful Bank strategy was prepared in April 2002, and it in CSA. It found that direct measures to reduce was also reviewed in 2005 as part of the Sector corruption rarely succeeded, and it was more Strategy Implementation Update, which was dis- effective to strengthen systems and increase cussed by CODE. The Independent Evaluation transparency. IEG identified three factors con- Group (IEG) evaluations related to public sector tributing to better performance: realism about reform (PSR) include "Country Financial Ac- what is feasible; attention to behavior and orga- countability Assessments and Country Procure- nizational culture as well as incentives that are un- ment Assessments Reports: How Effective are derlying drivers of reform; and focusing on the World Bank Fiduciary Diagnostics?" (IEG 2007), basic issues first. The need for a Bank frame- considered by the CODE Informal Subcommittee work that recognizes the long-term process re- in 2007; and "The Impact of Public Expenditure quired to reduce corruption and the different Reviews: An Evaluation" (IEG 1998) and "Civil starting points of countries was noted. IEG's Service Reform: A Review of World Bank Assis- main recommendations were as follows: (i) rec- tance" (IEG 1999), which were considered by ognize the complex political and sequencing CODE in 1999. issues in the design of PSR projects and alloca- tion of resources; (ii) set priorities for anticor- Main Findings and Recommendations ruption efforts within country PSR strategies IEG reviewed the Bank support for PSR between based on an assessment of which types of cor- 1999 and 2006 across four themes--public fi- ruption are most harmful to poverty reduction nancial management (PFM), civil service and ad- and growth; and (iii) strengthen the CSA com- ministration (CSA), revenue administration, and ponents of PSR. xxiii PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Draft management response holistic approach to address the broader and Management found that the report offered rich more fundamental issue of government effec- insights. It appreciated the manner in which the tiveness--including of CSA and the delivery sys- evaluation was undertaken and the dialogue with tems for various public services/functions--was IEG on different aspects of PSR. Management was emphasized. Some members emphasized the encouraged by the improved performance in a ma- need for selection criteria based on the Bank's jority of countries that borrowed for PSR, al- comparative advantage vis-ŕ-vis other actors. though it also recognized that there was no room There were several comments about support for for complacency. Although broadly agreeing with CSA and anticorruption and the advisability of a the thrust of the analysis and recommendations, more nuanced approach than a simplistic direct management commented on the treatment of effort. Other interventions related to the need to the anticorruption agenda, support to the de- consider the sustainability of PSR improvements; mand side of governance and anticorruption, and the progress in the Bank's knowledge of PSR scope of the analytic and advisory activities related support since the World Development Report to PFM. It cautioned that the IEG evaluation may (WDR) of 1997, whose findings are echoed in be perceived as a review of the Bank's anticor- the report; the link between PSR and poverty re- ruption agenda rather than of PSR that contributes duction; and internal institutional issues, in- to reducing corruption. Regarding more diagno- cluding incentives and instruments to better sis of corruption issues through the Country Fi- support PSR. Better understanding of PSR issues nancial Accountability Assessments (CFAAs) and based on comprehensive international experi- Country Procurement Assessment Reports ence, and the need for candor in evaluation and (CPARs), management considered that there is ad- learning from failures, were recommended. equate coverage in these diagnostic assessments, which typically identify aspects that might facili- The following main issues were raised during the tate corruption. It remarked that work was on- meeting. going to develop stronger links with corruption issues in the Bank's PFM work. Management Challenges of PSR noted that many lessons emerging from this eval- Given the central importance of PSR to the Bank's uation report have been taken into account in the work and the complexity of PSR, speakers were Bank's PSR work. encouraged by the Bank's performance in this area. Members generally concurred with IEG's Overall Conclusions and Next Steps findings and emphasized the need for a country- The Committee welcomed the clear and well- specific approach; government ownership and written evaluation and the positive response from political will; time and patience for organizational management. Noting the central importance of culture and behavioral changes; coordination PSR to the Bank's work, members were gratified with other donors; and an opportunistic and re- by the improvements in performance in countries alistic approach and appropriate sequencing for receiving International Bank for Reconstruction PSR. A member remarked on the paradox of PSR and Development or International Development support, which can build capabilities but may not Association resources for PSR. There was broad lead to an increase in government effectiveness; agreement with the main findings and recom- it was suggested that IEG could further explore mendations, and members agreed on the im- this dichotomy in future evaluations. Manage- portance of political commitment, complexity of ment commented that the Bank was attempting sequencing, and the need to sustain efforts over to increase government responsiveness and the long term, especially to change organiza- effectiveness in public service delivery by en- tional culture and behavior in support of PSR. Al- couraging beneficiary participation in imple- though the Bank has demonstrated comparative menting, monitoring, and providing feedback. advantage in PFM, a member cautioned against Another member highlighted that PSR outcomes excessive focus in this area. The importance of a depend on both the Bank's and the government's xxiv CHAIRPERSON'S SUMMARY: COMMITTEE ON DEVELOPMENT EFFECTIVENESS efforts and emphasized that IEG needs to be clear and of the 1999 IEG evaluation on civil service re- that it is evaluating the Bank's and not the gov- form and wondered what the real progress in ernment's performance. IEG clarified that the the Bank's PSR work has been. Management ex- evaluation's primary focus is the effectiveness of plained how key findings from the 1997 WDR are the Bank's programs, but there is a strong coun- being integrated into its work, such as focusing try context that needs to be considered. The issue on the basics and being more realistic in PFM. of how the Bank may bring about government As for the overall lower performance for CSA, commitment, political will, and behavior changes management clarified that outcomes were poor was raised. A member suggested that the Bank can in weaker governance environments but much only increase capacity and knowledge, which can stronger in those countries with a higher gover- lead to change. Questions were also raised on how nance environment, as measured by the Coun- to ensure sustainability of efforts and what the link try Policy and Institutional Assessment. Hence, between PSR and poverty reduction is. Manage- the key challenge is CSA reform in weaker gov- ment sought to ensure sustainability by estab- ernance environments. IEG indicated that al- lishing models of success that would increase though the Bank is moving in the right direction interest and political commitment for further re- in implementing the 1997 WDR recommenda- forms. Based on limited data, IEG found that sus- tions, the report also highlights the need for con- tainability had been more likely in PFM and tinued efforts to strengthen support for PSR for tax administration than in CSA and cross-cutting which there is no single solution. anticorruption initiatives. Management and IEG commented on the links between PSR and Focus of Bank support for PSR poverty reduction, which is the final outcome (for While noting the Bank's demonstrated compara- example, greater budget transparency leading tive advantage in PFM, many speakers remarked to predictable flow of resources for service de- on the need for a broader, comprehensive ap- livery, and better targeting of social spending). proach to PSR. A few of them cautioned about put- ting too much emphasis on PFM, which may The challenges of addressing CSA, which must be detract from broader PSR efforts in other parts of done country by country, go beyond the intro- the government, including service delivery (for ex- duction of merit-based systems and could bene- ample, health, environment, transport). Several fit from a long-term "in-service" approach. A others noted that PFM and CSA are interrelated member sought clarifications about IEG's refer- and stressed the importance of continued support ence to the "ingrained patronage systems" and for CSA, which contributes to good governance. whether this is applicable to all countries. IEG clar- A few members supported a more nuanced ap- ified that CSA initiatives often did not succeed be- proach in which the Bank should focus on areas cause of difficulties in removing resistance to of comparative advantage vis ŕ vis other donors. reforms and indicated that it would take a care- They added that the Bank could still provide sup- ful look at the language in the final report. It was port for CSA, but this should depend on the coun- expected that country teams would have a better try's request and readiness to address this area. understanding of the context in which PSR sup- IEG noted that the report underscores the im- port, including for CSA, would be implemented. portance of the interlinkages between the dif- In view of the complexity of PSR, a few members ferent areas of PSR but also brings out the merits stressed the importance of sharing experiences of more specific and opportunistic interventions and lessons learned. Some speakers were inter- where there is country ownership. Management ested in learning not only from successful expe- agreed that PSR is broader than PFM and com- riences but also from failures and from countries mented on Bank support to improve public ser- that have made progress in PSR but that did not vice delivery. It also noted that the Bank's ability borrow from the Bank for this purpose. A mem- to support comprehensive reforms depends on ber found that the findings of this IEG evaluation country ownership and political commitment, are similar to the main messages of the 1997 WDR and there is a need to be opportunistic and xxv PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? incremental in its intervention. Responding to a ruption risk through systematic corruption risk question raised about the development of a new mapping in procurement systems. financial instrument to enable long-term support for PSR, management said the appropriateness Staff skill mix and budget resources of existing instruments is being reviewed in the A few speakers sought information on availability context of the president's six strategic themes. of resources within the overall budget frame- work, appropriate staff skill to work on PSR, par- Governance and anticorruption (GAC) ticularly CSA, and balance of staff between Several speakers considered indirect approaches headquarters and country offices and between the to be more effective in addressing GAC issues in Poverty Reduction and Economic Management PSR, such as simplifying processes and enhancing Network and the Regions. Management said a the robustness of systems, which would reduce strategic staffing exercise is ongoing in the con- opportunities for corruption. A member urged a text of the GAC strategy, including for CSA. clear articulation of the GAC agenda in PSR and noted the need for adequate diagnostic tools for Other comments GAC, as well as for assessing the fiduciary risks in A member asked how IEG ensures the inde- the use of country systems for procurement, and pendence of its evaluation, given the staff mobil- social and environmental safeguards. He sug- ity between IEG and the Bank. IEG explained gested that the CFAAs and CPARs should be ad- that staff who have directly worked on the topic justed to better track progress in GAC. A speaker being evaluated do not take part in the evalua- reiterated the Development Committee's request tion. There was a request for IEG to do an eval- for actionable governance indicators. Manage- uation on Bank support for privatization of public ment clarified that the CFAAs, the CPARs, the Pub- firms. IEG indicated it would consider future lic Expenditure and Financial Accountability work on this, but cautioned that its work pro- and the Public Expenditure Review already as- gram in the near term was already very full. sess the system's vulnerabilities, which could pro- vide opportunities for corruption. It added that efforts are under way to identify and address cor- Jiayi Zou, Chairperson xxvi Chapter 1 Evaluation Essentials · The objective of this evaluation is to inform decision making about the selection of public sector reform pro- grams based on what is likely to work. · The scope of the evaluation is Bank support between fiscal 1999 and 2006 for country programs to enhance the rule-based operation of governments. · The evaluation focuses primarily on the effectiveness of country programs. City government building in Guayaquil, Ecuador. Photo © Damon P. Coppola. Objective, Scope, and Method of Evaluation T he main objective of this Independent Evaluation Group (IEG) evaluation is to help the World Bank learn how to contribute more effectively to public sector reform (PSR) in its member countries. Objectives and Framework The attention to PSR has emerged from two con- The intended audience also includes government siderations. First, the quality of the public sector-- officials and other stakeholders that want to see accountability, efficiency in service delivery, what lessons are available for improving project transparency, and so forth--correlates strongly and program design and for better using the with--and is thought by many to contribute to-- Bank's support for PSR. long-term growth and poverty reduction, although causality probably runs both ways (Bates 2001; In other words, the evaluation seeks to provide Kaufmann, Kraay, and Mastruzzi 2005; Przeworski country directors or finance ministers with knowl- and colleagues 2000; van de Walle 2001). edge of what sort of PSR program is likely to work in their country, based on what has been learned Second, the World Bank works prima- The quality of the public from the 1999­2006 experiences. rily with government counterparts and sector has a strong intermediaries. Improving the effi- relationship with growth Foremost, this evaluation considers the design of ciency of and public support for their and poverty reduction. country programs for PSR--not only the con- work contributes to the effectiveness tent and sequence of reforms within the key the- of the Bank's support to development, because matic areas, but also the coordination and 38 percent of total Bank lending during 1999­ sequence of the overall program. Based on in- 2006--amounting to $62 billion--went directly to terviews with Bank managers and the experi- budgets without project earmarks (policy reform ences in a sample of countries, the evaluation also lending, budget support, and so forth), and the considers how the Bank organizes its PSR work majority of investment lending is executed by and resources. core government agencies. Support for improving the operation of the gov- In 2000 the Bank produced and discussed with its ernment has long been part of the Bank's work Executive Board a strategy document--Reform- with countries. The rationale for this work has ing Public Institutions and Strengthening Gov- evolved and its centrality has grown. Since the late ernance: A World Bank Strategy.1 The strategy 1980s, it has become one of the most prominent aimed to help build efficient and accountable items on the reform agenda, as will be detailed in public sector institutions in addition to providing chapters 2 and 3. discrete policy advice. The strategy noted that a 3 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? main lesson from experiences in the 1990s was the long term of countries' PSR programs. The that "neither good policies nor good investments evaluation focuses on the four areas outlined in are likely to emerge and be sustainable in an en- the Bank's 2000 public sector strategy that pertain vironment with dysfunctional institutions and to the way the core government organizes itself: poor governance" (World Bank 2000, p. vii). · Public financial management (PFM) con- The PSR strategy "focuses primarily on core pub- cerns the management of money through the lic sector institutions and their interface with sec- entire budget cycle. This includes budget plan- toral institutions. It touches only lightly on ning and execution, in particular, financial institutional concerns within specific sectors... and management information systems and medium- it does so primarily to point out generic issues that term expenditure frameworks (MTEFs), pro- concern many sectors" (World Bank 2000, p. 12). curement, auditing, and monitoring and The strategy identified eight areas of evaluation. It also includes the implementa- A Bank-wide strategy for public sector reform in which Bank ac- tion of reforms arising from country financial PSR was published in 2000. tivities could contribute: accountability assessments (CFAAs) and coun- try procurement assessment reviews (CPARs) · Public expenditure analysis and management and the strengthening of key budgetary ac- · Administrative and civil service reform countability institutions, such as public ac- · Revenue policy and administration counts committees of the legislature and · Anticorruption supreme audit institutions. · Decentralization · Civil service and administrative (CSA) re- · Legal and judicial reform form involves all aspects of the management · Sectoral institution building and organization of personnel. It includes pro- · Public enterprise reform. grams to downsize the civil service and re- forms to the personnel information system Concerning tactics to work in these areas, the (including civil service censuses), career paths, strategy also said that PSR support should avoid pay grades (decompression), other aspects of trying to make "one size fit all" and should aim to the incentive system, and the organization of ensure that basic reforms were done first, before ministries. attempting more sophisticated ones. · Tax administration reform includes the key aspects of revenue administration, partic- Scope ularly the institutional setting and develop- PSR is part of the agenda for improving gover- ment of operational processes, including nance, which includes three broad areas: rule- automation and interaction with taxpayers (ac- based operation of the government itself to tual and potential).3 improve the supply of public goods, voice and ac- · Anticorruption and transparency (ACT) countability for citizens to demand better public reforms are involved in the first three areas; services, and more efficient and effective regula- going further, many recent operations support tion of the private sector to improve its compet- specific activities to combat corruption and itiveness.2 PSR in this document refers mainly to improve transparency across the public sec- the first area and to the aspects of the second that tor.4 Box 1.1 explains how the Bank support deal with transparency and access to informa- evaluated here relates to the full spectrum of tion. It does not deal with regulation of the pri- work on anticorruption. vate sector. The evaluation recognizes the interdependence To assess the relevance and effectiveness of the of these components of PSR and recognizes that PSR strategy, the evaluation focuses on projects the Bank's PSR programs have sometimes worked in the period between fiscal 1999 and 2006, and across these dimensions. This evaluation does it also looks back to the previous decade to see not delve into sector-specific issues or the reform 4 OBJECTIVE, SCOPE, AND METHOD OF EVALUATION Box 1.1: Scope of Review on the Bank's Anticorruption Activity This IEG evaluation reviews only part of the World Bank's work on tance Committee of the Organisation for Economic Co- anticorruption, dealing with cross-cutting systems (IEG evaluated operation and Development (OECD), and support for regional the full range of the Bank's anticorruption work in 2004; IEG 2004b). and global conventions such as the OECD Convention against The Bank's Anticorruption Strategy, endorsed by the Board in 1997, Bribery of Foreign Officials. contained four principal pillars: This review primarily covers anticorruption aspects in the sec- · Mainstreaming anticorruption in country analysis, country ond pillar, focusing on cross-cutting public management systems strategy, and lending decisions. This includes the CPIA for the but not on anticorruption reforms in individual sectors. International Development Association resource allocation The 2007 Governance and Anticorruption Strategy (GAC) con- and anticorruption in country assistance strategies (for ex- sists of three broad levels: ample, Indonesia, Bangladesh, and Albania). · Helping countries that request assistance in curbing cor- (i) Country level: Helping countries build more capable and ac- ruption. This includes support for cross-cutting public man- countable systems (including core public management sys- agement systems and transparency reforms, as well as tems, demand-side institutions, and sectoral institutions) anticorruption in key sectors, such as extractive industries, (ii) Project level: Combating corruption in Bank operations health, education, and transport. (iii) Global level: Global partnerships and collective action. · Preventing fraud and corruption in Bank projects and pro- grams. This includes fiduciary controls (financial management, This IEG evaluation primarily focuses on the country level of the procurement, risk mapping, and mitigation) and investiga- GAC strategy dealing with strengthening core public management tion of fraud and corruption by the Bank's Department of In- systems, but covering projects and activities undertaken before the stitutional Integrity. launch of the 2007 strategy. The GAC strategy has just commenced · Contributing to international efforts to fight corruption. This implementation, and an IEG evaluation on the GAC is planned in due includes collaboration with donors, the Development Assis- course. of state-owned enterprises, which are important raised in this evaluation; whether that strategy but deserve separate treatment. does so will depend on the implementation. The Board approved the strategy in April 2007 and the The present evaluation considers all types of Bank implementation plan in October 2007. activities to support PSR in countries, including development policy and investment/technical as- Criteria for Evaluation sistance loans, institutional development fund In terms of IEG's three standard evaluation con- (IDF) and other grants, and the major institu- cerns--relevance, efficacy, and efficiency--this tional pieces in all types of analytical and advisory evaluation is mainly about efficacy, that is, see- activities (AAA), such as Public Expenditure Re- ing what the Bank-supported programs have views (PERs), Institutional and Governance Re- done and figuring out what was effective and views (IGRs), and others. Consideration of AAA has why. been coordinated with IEG's ongoing evaluation of economic and sector work (ESW). The evaluation concurs with the public sector strategy: in essentially all the borrowing coun- The evaluation covers the period mainly from fis- tries, the objective of PSR is relevant, generally cal 1999 through 2006. Thus, it does not evaluate and in the four areas of evaluation focus. The the 2007 Governance and Anticorruption (GAC) proper management of those resources must be strategy, which could address some of the issues a key determinant of development because core 5 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Table 1.1: Results Framework for Public Sector Reform Inputs from the Ultimate Bank's country desired impacts PSR areas and outcomes Outputs in the countries programs Public expenditure and Comprehensive budget; transparent financial management budget planning, approval, and exe- Fiscal discipline, allocation of re- cution; robust and timely account- sources consistent with policy ing and audit; cost-effective and priorities, and good operational transparent procurement (CPIA 13) management Economic growth Civil service and Development administrative reform policy lending Reduced poverty High-performing public service Adequate personnel information that attracts, retains, and motivates system; reduced salary compres- Technical Security of life and competent staff; transparent, sion and turnover; adequate train- assistance/ property nondiscretionary pay regime appro- ing; effective business processes investment lending priate to local labor market; wage and interministerial coordination Participation and bill within budget constraint (CPIA 15) IDF and other empowerment of grants people Tax administration Improved revenue performance; Improved information system; well- AAA (PERs, PRSPS, Improved quality of more equitable and efficient tax paid staff; reduced arrears; reduced IGRs, other) and access to public system, reduced tax evasion; more cost of taxpayer compliance; re- services (water, open to citizen feedback duced collection cost (CPIA 14b) health, and so forth) Anticorruption and transparency Executive branch and personnel are In addition to anticorruption meas- held accountable for use of funds ures in the three areas above, clear and other actions; accountability rules about conflict of interest; enhanced by audit institutions and sanctions enforced through effec- public access to information; ac- tive laws, audits, prosecution, and countability and transparency help judiciary; public has access to infor- discourage use of public office for mation and protection for whistle- private gain blowers (CPIA 16) Note: AAA = analytical and advisory activities; CPIA = Country Policy and Institutional Assessment; IDF = institutional development fund; IGR = Institutional and Governance Review; PER = Public Expenditure Review; PRSP = Poverty Reduction Strategy Paper. public sector spending accounts for 15 percent to overall effectiveness of the Bank's support to 30 percent of gross domestic product in the development. Bank's borrowing countries. In another view, 38 percent of total Bank financing during 1999­2006 The World Bank's results framework for PSR in went directly to budgets without project ear- table 1.15 shows how PSR can contribute to the marks (development policy lending, budget sup- goals of poverty reduction and growth, as well as port, debt relief, and so forth), and the great accountability of government to citizens. This majority of investment lending is executed by evaluation takes the potential connection as a core government agencies. Therefore, improv- given and examines the extent to which programs ing the core public sector is essential for the achieved the objectives of PSR. 6 OBJECTIVE, SCOPE, AND METHOD OF EVALUATION Obviously, programs are efficient only if they two parts regarding to what extent the Bank con- are effective. Coordination of Bank staff and donor tributed to PSR in client countries: support, or its lack, would qualify as an efficiency issue. To what extent were staff skills, internal or- · To what extent did PSR succeed in countries ganization, incentives, and relations with external where the Bank was providing support? partners aligned for effective support to the coun- · What aspect of the Bank support, if any, con- try? By and large, however, the Bank and others tributed to the success? are still trying to figure out what works; fine tun- ing for efficiency can come afterward. Attributing PSR results to Bank sup- The attribution of PSR port poses a challenge. The evidence results to Bank support is The question of how effectively the Bank's strat- for definitive successes generally difficult. egy was implemented at the country level im- emerges in the longer term, for which plies several more specific questions: there are only preliminary conclusions. In addi- tion to the World Bank program influences, the · Was Bank support at the country level based on review considers the impact of conditions in the sound analysis and adequate knowledge of in- country and the programs of other actors, such stitutional and political realities? as international finance institutions (the Interna- · To what extent was the Bank-supported pro- tional Monetary Fund [IMF] and regional devel- gram tailored to fit the needs of the country and opment banks) and bilateral donors. Important to take account of institutional and political country conditions include (i) macroeconomic realities? To what extent did the Bank use a pri- conditions, which are linked (causation is in both oritized and phased approach? Did the program directions) to the fiscal situation of the govern- address basics first? ment and therefore its ability to address long- · Which entry points for the PSR agenda worked term priorities; (ii) labor market conditions, which best? affect the challenges for personnel reforms in · To what extent did the Bank use lending and the public sector; and (iii) political conditions AAA instruments appropriate for country and events, because most authors on the subject conditions, including the degree of reform identify political support as essential for success commitment? in PSR. In assessing results, the evaluation draws lessons Methods on whether the Bank has achieved better results The evaluation employs three main ways to an- in some areas of PSR than in others or whether swer questions: country case analyses, thematic it has generated better results in some types of analyses of the four selected thematic dimen- country situations than in others. The question has sions, and statistical analysis of the pattern of Table 1.2: Case Study Countries Region IDA IBRD Sub-Saharan Africa Burkina Faso,a Ethiopia, Ghana, Sierra Leone, Tanzania,a Uganda East Asia and Pacific Cambodiaa Indonesia (blend) Europe and Central Asia Albania Bulgaria,a Russian Fed. Latin America and the Caribbean Bolivia, Guyana, Honduras, Argentina, Guatemala Middle East and North Africa Yemen, Rep. of South Asia Bangladesh India (blend)a a. Countries where the team made field visits. 7 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? PSR interventions and outcomes in the full set of tribution. Chapter 5 examines the evidence on ef- countries for which data are available. The eval- fectiveness according to theme. uation also draws on the previous IEG evaluations of public expenditure reviews (IEG 1998), civil ser- Country analysis vice reform (IEG 1999), anticorruption activities With a topic as nuanced and country specific as PSR, (IEG 2004b), capacity building in Africa (IEG country cases are an important complement to 2005), support to low-income countries under statistical analysis. The country reviews contributed stress (IEG 2006b), and fiduciary instruments-- to an understanding of how different combina- CFAAs and CPARs (IEG 2007)--plus relevant tions of interventions work in various country set- Country Assistance Evaluations and Project Per- tings. The evaluation team did desk reviews of the formance Audit Reports (PPARs). All aspects of the Bank-supported programs for PSR in 19 countries, evaluation were informed by interviews with task drawing on country assistance evaluation findings managers and other relevant staff, field visits, and PPARs, where available; for six of the analyses and exchange with IEG teams doing country as- the team also made field visits (table 1.2). sistance evaluations and relevant PPARs. Countries represented different Regions, subre- The main unit of analysis is the country program, gions, and income groups, and all the countries as it is generally recognized that success in PSR had substantial Bank support in PSR. The selection depends on a combination of support instru- of countries was also coordinated with the de- ments, which cannot therefore be well appreci- centralization and legal/judicial evaluations to re- ated in isolation. duce the burden of the evaluations on client and Bank staff time. Statistical analysis For the full set of Bank borrower countries, there Each country-level review examined the role of PSR are three types of analysis of the pattern of pub- within the country assistance strategy (CAS). Each lic sector issues, interventions, and outcomes. also explored how the strategy was implemented First, chapter 3 examines the pattern of choices and what contribution Bank support made to for PSR intervention, particularly how they relate achieving the PSR objectives. The evolving eco- to a country's International Bank for Recon- nomic, political, and institutional capacity condi- struction and Development (IBRD) or tions in each country affected the outcomes, and The main unit of analysis International Development Associa- the evaluation considers whether the Bank took for the evaluation is the tion (IDA) status and to the initial qual- appropriate account of these conditions in the country program. ity of the public sector in the country. design and implementation phases of its support. Second, the chapter looks at the medium-term change in public sector quality in- Thematic analyses dicators in the countries where the Bank has These compare the evolution of Bank practice worked on PSR. Third, it examines the data to see with the state of the art in the four thematic areas. what factors correlate with project success, as They begin with a review of the literature on in- measured in IEG reviews of Implementation Com- ternational experience and then pose questions pletion Reports. to be covered in the country studies. Then, draw- ing on the results of the statistical analysis and Chapter 4 looks at the evidence on these two country studies, they describe the patterns of questions, organized by country groups. It also dis- success and failure of the most common ap- cusses the quality of data and the questions of at- proaches in each thematic area. 8 Chapter 2 Evaluation Essentials · The Bank's engagement with PSR has gone through four phases. · PSR was initially neglected, except in building institutions to carry out public investment projects that the Bank was financing. · In the 1980s, institutional develop- ment gained recognition as a key component for carrying out policy reforms supported by development policy lending. · In the 1990s, many became con- vinced that institutional development needed to be central in most CASs. · Since 1997, the public sector and governance agenda has been for- malized, and anticorruption has been added explicitly. The north block of the Secretariat building in Delhi, India, is the administrative heart of the government. Photo © Patrick Horton/Lonely Planet Images. Historical Overview of Public Sector Reform at the World Bank T he current prominence of public sector governance in the World Bank is a relatively recent feature of its agenda. Issues related to public sec- tor capability have been present in Bank operations from its earliest days, above all when it came to evaluating creditworthiness and making de- cisions to lend and when ad hoc institutions were designed to ensure the suc- cess of specific projects. Only recently, however, has the Bank identified programs, and persistence of project loan fail- governmental capability as a central obstacle to ures in Africa convinced many people that insti- successful development and allocated an impor- tutional development needed to be central in tant share of its funding operations and analyti- most CASs. cal work to improving the institutional capability of borrowers, not only in the specific projects or 1997­2007--The public sector and governance sectors financed by the Bank, but in the overall agenda was formalized, and anticorruption was conduct of government functions. added explicitly to the agenda. The Bank's engagement with PSR has gone through 1946 to 1982: PSR at the Margins four main phases. The discussion of them is based During the Bank's first 36 years of operation, on interviews with more than 45 current and for- public sector management (PSM) capacity was mer Bank staff and on review of more than 75 doc- almost entirely absent in Bank statements, as a uments and publications (see Bibliography and major determinant either of the success of Bank appendix E [see http://www.worldbank.org/ieg/ projects or of overall economic development in psr/appendix.html for appendix E]). borrower countries. Only a small num- ber of loans and technical assistance The Bank initially 1946­82--PSR was neglected except in the build- projects concerned themselves with neglected PSR except to ing of institutions to carry out public investment broad institutional development in build up institutions to projects that the Bank was financing. member countries, beyond the design carry out investment of specific project implementation projects that the Bank 1983­89--Institutional development gained units. was financing. recognition as a key component for carrying out policy reforms supported by adjustment lending. The vigorous institutional development and PSM effort by other donors suggests that the 36-year- 1990­96--The collapse of communist states, long, almost complete absence of that work in the frequent failures of macroeconomic adjustment Bank's agenda had more to do with particular 11 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? features of the institution than with predominant in India, power in Mexico and Colombia, and development thinking. The most evident dis- ports in other countries. tinctive feature separating the Bank from other donors during the first two to three decades of its Another encounter with public administration existence was its dependency on market financ- took the form of a growing volume of training and ing. To raise funds in the market, the Bank culti- advisory work, including technical assistance mis- vated a lending culture that stressed visibly and sions and the creation of the Economic Devel- measurably productive loans, stressed the en- opment Institute in 1956--an implicit recognition ergy and transport infrastructure sectors, and of deficiencies in government capacity. By the downplayed social and institutional objectives. early 1950s, there was a "growing belief at the Bank The creation of IDA in 1960 introduced a quasi- that the relatively low level of economic man- grant element into Bank lending, but Bank lend- agement in the countries which it dealt with con- ing strategy remained constrained by the primacy stituted a major impediment to development" of market funding well into the 1970s. (Mason and Asher 1973, p. 324), and in 1952, the Board approved the exploration of a training ini- Among the earliest sources of contact with pub- tiative. Nonetheless, government managerial ca- lic administration issues were country surveys pacity was not a significant feature in the Bank's prepared by Bank missions between 1950 and strategy in these years. 1966. In all, 25 surveys were carried out--the first in Colombia and the last in Morocco. Many An exception to the prevailing neglect of gov- touched on basic issues of administrative capa- ernment capacity during these years was a study bilities and political economy. Some of the re- on rural development in Africa (Lele 1975). The ports, such as the one on Colombia, resulted in study contains a rich discussion of cultural factors the creation of new national bodies for pro- affecting rural development and of the need "to gramming and planning or in strengthening ma- build human and institutional development ca- chinery already in existence. pacities." The subsequent increase in concern for good government, in both analysis and oper- The Bank's initial involvement with PSM took the ations, came to be closely associated with the form of an insistence on national planning mech- Sub-Saharan Africa Region, where extreme gov- anisms in borrower countries (Mason and Asher ernmental deficiencies became the seeds for a 1973). The second area of institutional develop- strategic reappraisal. A subsequent study rein- ment in which the Bank was operationally in- forced the call for attention to government ca- volved was the creation of development finance pacity (World Bank 1981). institutions. Between 1950 and 1971, the Bank helped design and fund 39 such operations, 1983 to 1989: Focus on Quality of mostly during the 1960s. Government Quality of government first appeared as a central More broadly, the Bank was drawn increasingly developmental issue for the Bank in the 1983 into the creation, support, and guidance of proj- World Development Report (World Bank 1983). ect implementation units (PIUs) and sector in- The principal section in the report, "Management stitutions as instruments to ensure in Development," discussed the appropriate size, In the 1980s, institutional efficient management and coordina- role, and managerial efficiency of the state: development gained tion of energy, transport, and agricul- recognition as a key tural investments. The development Policy and institutional reform are com- component for carrying of sector lending in particular enabled plementary. Policies are relevant only if out policy reforms the Bank to contribute to the strength- there is the institutional capacity to carry supported by adjustment ening of government in specific areas, them out, while strong institutions are in- lending. such as railways and communications effective--even counterproductive--if the 12 HISTORICAL OVERVIEW OF PUBLIC SECTOR REFORM AT THE WORLD BANK policy framework discourages efficiency Bank managers were not convinced of the worth (World Bank 1983). of institutional development work and that the Bank lacked intellectual and conceptual leadership One precipitating factor for this conceptual "bend in the institutional development field. in the road" was the strong evidence that gov- ernment weakness and corruption was key to ex- The growth of structural adjustment and sector plaining the project failures and disappointing adjustment lending throughout this period be- development record of the 1970s, especially in came a vehicle for an expansion and broadening Africa. In both rich and poor countries, the pre- of the scope of institutional development opera- vious development model had placed a great deal tions. Adjustment lending could accommodate a of faith in government, but financial crisis and variety of concerns and targets, creating space economic failure naturally led to a reappraisal of for reform in core administration, especially in civil government's role and capabilities. service and financial management, and for across- the-board reform in the management of state- A new consensus developed in favor of smaller and owned enterprises. better government. In response to the Legal Department's objections against any political in- A review of institutional development work car- tervention by the Bank, the concern for govern- ried out through sector adjustment loans be- mental quality was cast in the politically neutral tween 1983 and 1987 found that 55 of 65 sector terms of managerial capacities. adjustment loans approved by the Bank included institutional development components The changing composition of Bank operations also and that results were mixed, with good The growth of contributed to the rethinking of government. implementation of simpler reforms but adjustment lending in During the 1970s the Bank expanded its work poor results with more complex and the 1980s became a related to basic needs policies and its lending for politically sensitive reforms (Paul 1990). vehicle for expanding education, health, and urban social infrastruc- Though much institutional develop- and broadening the ture--sectors that demanded more of the general ment work was packaged in adjust- scope of the Bank's administrative capacities of governments than in- ment loans, the principal instrument institutional frastructure lending. Furthermore, the rise in ad- for achieving institutional development development justment lending drew the attention of the Bank was project-related and freestanding operations. and policy makers to the institutional constraints technical assistance, which accounted on successful adjustment; policy reforms needed for 95 percent of total Bank technical assistance institutions that could implement them. resources during the 1980s. In 1983, the Bank created its first organizational A more complete study of PSM operations during unit dedicated to research and operational sup- the 1980s mirrored previous conclusions; the port related to administrative efficiency in gov- record was mixed. PSM successes had been lim- ernment, the Public Sector Management Unit. ited, and roughly half the PSM effort had gone into During the 1980s, the unit devoted much of its Africa, where dramatic breakthroughs were lack- time to the restructuring of public enterprises. An- ing. The key problems were the political costs of other line of PSM work was civil service reform, bureaucratic reform and the long maturation pe- focusing especially on downsizing. riods required for PSM success. The relatively un- satisfactory record of institutional development By 1986, in addition to the central PSM unit, spe- efforts during these years was confirmed by a cialized PSM units had been created in three 1988 IEG review of performance evaluation, which Regional departments and in the Industrial Re- noted that in a large number of operations the structuring Division. A 1986 internal review of in- principal determinants of underperformance were stitutional development lending found that most institutional. A special report on Africa concluded, 13 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? "The root cause of weak performance has been report called "the political economy of reform." In the failure of public institutions" (World Bank the pursuit of growth, conditionality had thus 1989). evolved to include administrative reforms as well as macroeconomic measures. Although it stated 1990 to 1996: Increasing Awareness of that the Bank must avoid interfering in politics, the Governance Agenda report considered that "the cost of failure was too Between 1990 and 1996, four factors increased the great for the borrowing countries and the Bank to Bank's awareness of the governance agenda and ignore the potential contribution of a better un- induced a more active response: (i) the collapse derstanding of the reality of the political econ- of communism, which created an unprecedented omy of adjustment." need for reconstructing the public sector; (ii) recognition of the need for "second-generation" A task force report titled Governance and De- reforms of the institutions; (iii) donors' increas- velopment (World Bank 1992a) spelled out a jus- ing demands and expectations for IDA as condi- tification for Bank involvement in matters of tions for the replenishment of IDA funding; and governance, particularly in its more sensitive, po- (iv) the unacceptable failure rate of in- litical aspects such as the rule of law, transparency, In the 1990s, many vestment lending, especially in Africa. corruption, and military expenditures. It said lit- became convinced Intellectual currents also came to bear, tle about the traditional "technocratic" aspects that institutional as institutional economics helped to of public sector financial and human resource development needed to legitimize the governance-related con- management; these already had a long record in be central in most CASs. cerns voiced by noneconomists. the Bank's agenda, and the issues had more to do with efficacy than legal and political propriety. The operational response toward the former communist states transitioning to democracy and The heart of the report was an elucidation of the a market economy went through a learning relationship between economic growth and gov- process, moving from privatization and social ernance. The report ended by sanctioning par- safety support to a growing recognition of the ticular governance considerations that had need for core institutional and public adminis- previously been excluded. tration development: In October 1996, World Bank President James At the beginning of the transition, the Bank Wolfensohn set new precedents by speaking out understood the need to reorient and against "the cancer of corruption" at that year's strengthen public sector institutions, but it Annual Meeting (Wolfensohn 1996). This speech greatly underestimated the consequences of opened the way to a more explicit discussion of still-weak core institutions and public ad- the subject within the Bank. This was made ac- ministrationsmanagingthetransitionprocess ceptable under the Bank's bylaws by redefining . . . . PSM reform has often been approached "the `C' word not as a political issue but as some- in an ad hoc manner, without a compre- thing social and economic" (Mallaby 2004, p. 176). hensive long-term institutional development and reform strategy (IEG 2004a, p. viii). There was a cost to this tactic in that the Bank would engage on the corruption issue while still, The Bank's report on adjustment lending (World in practice, adhering to a prohibition against look- Bank 1990) recognized that early ing seriously at the political system, which is often A 1992 task force justified adjustment loans were often too opti- the root cause of corruption (Thomas 2007, Bank involvement in mistic about governments' implemen- p. 742). Perhaps the biggest boost to the growing governance, particularly tation capacity and reform commitment. anticorruption movement came about because of in political aspects that This directed attention both to meas- the East Asian crisis of 1997­98, in which public had previously been ures that enhance government imple- opinion identified market failures with corruption, proscribed. mentation capabilities and to what the most notoriously in Indonesia. 14 HISTORICAL OVERVIEW OF PUBLIC SECTOR REFORM AT THE WORLD BANK 1997 to 2007: PSR Efforts Become Central, opment partners of governments in social and en- Include Anticorruption vironmental work and also as watchdogs of gov- The Bank's work on broad institutional develop- ernments. In both roles, stronger civil society ment and governance increased substantially be- was itself a major form of institutional growth tween 1997 and 2000. This work moved to the and acted as advance troops for the direction in center of CASs, as will be elaborated in the next which the Bank was going. chapter. Non-Bank donors were moving in the same di- The 1997 World Development Report, The State rection, placing greater priority on governance and in a Changing World (World Bank 1997b), laid out civil society in their aid programs. They not only the rationale and created an official commitment set an example and created expertise but also in- for that enhanced role. In the same year, the Bank fluenced the Bank from within, through financial issued a report titled Helping Countries Combat leverage of the substantial donor trust funds man- Corruption: The Role of the World Bank (World aged by the Bank. Bank 1997a). This report stated the developmental and legal rationale for including anticorruption Rising concerns with corruption con- Prominence of the in the Bank's agenda; admitted that "the Bank tributed to the strategic reformulation governance theme after has some catching up to do," including with its in- during this period. One cause was the 1997 was more of a ternal controls; and laid out a comprehensive op- publication of comparative measure- tipping point than a erational proposal that placed anticorruption ments of governance, including cor- major change in the efforts within the Bank's framework for improv- ruption, by several sources, including underlying forces. ing PSM and governance. It also highlighted co- Transparency International. The mes- operation with civil society and other donors. sage of these ratings was reinforced by emerging revelations of large-scale corruption in several The greater prominence of the governance theme borrower countries. The argument that corrup- after 1997 was more of a tipping point than a tion was only part of a larger problem changed major change in the underlying forces. For a from a reason for inaction on corruption into a rea- decade or more, the most powerful factor driving son for action across the whole governance front. governance was the rising tide of democracy. This factor was most dramatic in the transition coun- Following the publication of the 1997 World De- tries, but also in Latin America and, more spottily, velopment Report, other circumstances came even in some African and Middle Eastern coun- into play to reinforce a governance agenda. One tries. Democracy brought the rhetoric of ac- was a new strategic proposal, the Comprehensive countability, decentralization, transparency, and Development Framework. This framework gained rule of law, all of which relaxed the inhibitions that important momentum in 1999 when the G-7 had previously prevented the Bank from includ- agreed to support an enhanced Heavily Indebted ing such topics in country dialogues with a large Poor Countries (HIPC) Initiative. The new initia- number of borrowers--much less incorporating tive was tightly monitored to ensure that debt re- them as loan conditions. A related factor was the lief funds would be spent honestly and applied end of the Cold War, which relaxed the pressure toward poverty reduction. The Comprehensive to support authoritarian and corrupt govern- Development Framework was aptly suited for the ments for political reasons. The Bank now had a across-the-board surveillance and control of gov- freer hand to engage governments on gover- ernance implied by the enhanced initiative. nance issues. The step from soft IDA credits to open HIPC This trend was closely related to the vigorous debt-forgiveness grants also brought into the growth of civil society organizations and the open the issue of the fungibility of the money the Bank's relations with them. Nongovernmental Bank loaned. The rationale for financial transfers organizations (NGOs) emerged as active devel- continued to be growth and poverty reduction, 15 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? When the fungibility of but, if funds were fungible, the loans plexities and longer time requirements of insti- money lent by the Bank could no longer be justified solely in tutional change, would be developed. emerged as an issue, terms of the cost benefit of specific in- pressure increased to vestments or of promised policy The fungibility problem was acknowledged and ensure that recipient changes. became an argument for heightened fiduciary governments were safeguards.2 Analytic work would be increased efficiently using their To justify continued support, it would and moved upstream and would be more partic- entire budgets. be necessary to assure taxpayers in ipatory to enhance local ownership and align with donor countries that recipient gov- the cultural and historical specificity of institutional ernments were making honest and efficient use reform paths and political economy. not only of the support received but of their en- tire budgets. The governance agenda, especially In 1998, the Bank increased the detail and im- accountability and transparency, became both a portance of the governance part of the Country way to improve development performance and a Performance and Institutional Assessment (CPIA). necessary condition for the continuation of IDA For allocations of IDA funding, the revised CPIA replenishments and of aid in general. placed heavier weight on the quality of govern- ment management, including transparency and A 1997 reorganization of the Bank had a substan- corruption, as well as the technical aspects of tial effect on the Bank's capacity to expand PSR op- civil service and financial management, which erations. One new thematic area, poverty reduction had been in the CPIA before. This increased the and economic management (PREM), was to carry leverage for the governance agenda. forward the PSR agenda. Previously, PSM had been the responsibility of a small, specialized unit; after The need for fiduciary control was more directly 1997 the field gained prominence and resources addressed in 2004 by a multiagency partnership-- that allowed it to manage specialized PSM projects including the Bank, the IMF, and several bilater- and influence a variety of operations in all regions. als, with a secretariat housed in the Bank--that A coordinating mechanism was created around the developed a performance measurement frame- same time--the Public Sector Board.1 PREM work for Public Expenditure and Financial Ac- quickly expanded its capacity for PSM, growing countability (PEFA). It focused mainly on financial from about two dozen specialists in 1997 to around management, with increased weight given to 200 by 2000, mostly in Regional units. transparency and accountability and the down- stream phases of the budget cycle. It also con- A strategy paper, Reforming Public Institutions sidered at the margin some aspects of civil service and Strengthening Governance: A World Bank and tax administration. Strategy (World Bank 2000) set out the operational agenda for this new effort. It provided a road Again in 1998, another opportunity for donor co- map for implementing an agenda of PSR for "core ordination arose, in this case between the World public institutions." These included the civil ser- Bank and the European Bank for Reconstruction vice as a whole, public financial management, and Development. This coordination led to the legal and judicial reform, regulation of the private creation of the Business Environment and En- sector, and decentralization. This expanded cov- terprise Performance Survey (BEEPS), which erage highlighted the shift from past operations, measures aspects of the business environment in which had focused on the institutional 22 transition countries. Other new diagnostic in- The 2000 strategy set capacity for specific projects. Corrup- struments--the IGR, the Public Expenditure Track- out for the first time tion was to be "explicitly taken into ac- ing Survey (PETS), and the Quantitative Service the Bank-wide count," and new, programmatic lending Delivery Survey--evolved at the Bank in the late agenda for PSR. instruments, better suited to the com- 1990s to complement the PER. 16 HISTORICAL OVERVIEW OF PUBLIC SECTOR REFORM AT THE WORLD BANK The governance agenda designed between 1997 · Strategy requires the Bank to remain engaged and 2000 has mostly remained in place, with two even in countries with weak governance, so the additions. The first addition was upgrading the im- poor do not "pay twice." portance of "the demand side," meaning citizen · The Bank will work with many stakeholders. participation, voice, and effective power in the · The Bank will not act in isolation, but with conduct of government (see World Bank 2004b). partners. Second, in 2006, the Bank prepared a reinforced · The Bank will work to strengthen, not bypass, governance and anticorruption strategy, "Strength- country systems through stronger institutions. ening World Bank Group Engagement on Gov- ernance and Anticorruption" (World Bank 2007c), The staff, Board, and governments Since 2000 the importance which the Board approved in 2007. The strategy recognized that the effect of this strat- of citizen participation laid out seven principles: egy would depend less on the broad has been recognized and principals than on the specifics of anticorruption has · The Bank's work on GAC is part of the mandate implementation, with emphasis on become a central concern to address poverty reduction, not an end in learning by doing. The Board ap- for the Bank. itself. proved a GAC implementation plan · Strategy must be country driven. in October 2007 with the understanding that it · Strategy must be adapted to country circum- would be a living document, evolving to reflect the stances, not "one size fits all." lessons of experience. 17 Chapter 3 Evaluation Essentials · Almost all countries get some AAA for PSR. · A large majority of IDA countries get lending for PSR, both investment lending and development policy lending. · The IBRD countries are much more selective in taking PSR lending; some take investment lending and others take development policy lending. · The Bank has put more staffing and resources for analytic work into PFM than into the areas of political economy and civil service (public administration). Tanzanian Parliment Building, Dodoma, Tanzania. Photo © Shawn McCullars. World Bank Support for Public Sector Reform T his chapter examines the patterns of the Bank's lending and non- - lending support for PSR--over time, by Region, and by type of borrower-- and the public sector outcomes asso- than three-fourths of investment loans with sig- ciated with that support. nificant PSG components have been categorized under PSG since the mid-1990s. First, the overall package is considered, and then different types of ESW, lending, and other non- Total funding to these 467 projects represents lending support are examined in more detail. Each about $47 billion in commitments, or about 13 per- country situation--and the Bank's response to it-- cent of Bank project lending over the period. is unique, yet there are some trends and patterns. Many of these projects contain a variety of non- PSR-related components; only 14 percent funded Lending Projects for Public Sector PSR activities exclusively.4 Reform Considering only the fraction of each project (43 Aggregate trends percent, on average) associated with PSR (see The Bank approved 467 lending projects from appendix A), these 467 projects represent about 1990 to 2006 with significant PSR components in $20 billion (about 5.4 percent of Bank lending) in the areas evaluated in this report (see figure 3.1).1 commitments designated specifically for PSR5 These projects represent 11 percent of all World (figure 3.2). About 83 percent of this funding was Bank (IBRD and IDA) loans approved over the pe- from DPLs. The number of DPLs (289) repre- riod. Of the projects, 62 percent were development sented 62 percent of the 467 projects. policy loans (DPLs) or credits, and the rest were Whereas the majority of these PSR The 467 projects investment loans. IDA financed 305 of the projects projects were IDA agreements, more represent about $20 fully and 12 in part (blend financing). About two- than half of the commitment amounts billion in commitments thirds of these loans (304) have been made since had IBRD funding. designated for PSR. 1999, and the analysis concentrates on those. Both the number and funding of PSR-related proj- The majority of the 467 PSR projects were not cat- ects have risen over the last two decades. In par- egorized under ("pathed to") public sector gov- ticular, there have been significantly higher levels ernance (PSG), which reflects the prevalence of of PSR lending since about fiscal 2000. There was DPLs with PSR components that are managed by an average of 19 PSR programs per year from other sectors, especially economic policy. The2 1990 to 1999, but this number more than doubled public governance sector managed about a third3 to 40 programs per year from 2000 to 2006. Proj- of development policy projects with significant PSR ects with a significant PSR component almost components from 1998 to 2006. In contrast, more doubled, from 7.6 percent of Bank projects to 14.5 21 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Figure 3.1: Lending Projects with Significant PSR Components, 1990­2006 70 25 60 20 50 15 40 projects projects of 30 Bank 10 of Number 20 Percent 5 10 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fiscal year Investment lending Development policy lending Total, as percent of World Bank projects Source: World Bank database and IEG staff calculations. percent,6 which reflects trends in Bank thinking.7 general budget support would provide adequate The value of PSR lending, measured as a per- incentives and resources for institutional devel- centage of total Bank lending, increased sharply opment. At least in the cases investigated in detail, around 2000, from 2.6 percent of Bank loans in such as Honduras, Tanzania, and Uganda, this did 1990­99 to 10.2 percent of lending in 2000­06. not happen reliably. The budget-support projects gave incentives to put resources toward big-budget, Although development policy lending for PSR has front-line, poverty-reduction sectors such as ed- grown steeply since 2001, the number of invest- ucation and health but not to the smaller, back- ment loans with significant PSR components office, institutional development for PSR. So in- peaked in 1993­95 (at 12­14 projects per year) and vestment PSR projects had value added in getting has been at or below that rate since. In other attention and resources to the institutional re- words, this mechanism for sustaining forms, according to Bank and government sources. The number and funding medium-term support for institutional of PSR-related projects development has not grown apace with Regional distribution have been rising, much of the other means for PSR support. PSR projects were geographically concentrated in the recent increase Sub-Saharan Africa (173), Latin America and the coming from policy The number of DPLs with significant Caribbean (103), and Europe and Central Asia (90). lending related to PSR. PSR components did not grow rapidly The number of projects increased in all Regions until about fiscal 2001. Since then, they throughout the last 20 years, although the pace of have predominated, partly because of the expan- growth varied (figure 3.3). Africa has the highest sion of Poverty-Reduction Support Credits (PRSCs). share of PSR projects throughout the period (about Sometimes, and for some parts of PSR, technical 15 percent of projects in the Region had significant assistance loans accompany the PRSCs, but in PSR components), followed by Latin America and other cases the country strategy anticipated that the Caribbean and Europe and Central Asia. South 22 WORLD BANK SUPPORT FOR PUBLIC SECTOR REFORM Figure 3.2: Lending Value in Projects with a Significant PSR Component 4,000 IBRD and IDA loans and grants 20 a 3,000 15 millions) lending dollars, 2,000 10 Bank of (current Percent 1,000 5 lending PSR 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fiscal year of approval IBRD commitments IDA commitments Grants (negligible) Total, as percent of World Bank lending Source: World Bank data and IEG staff calculations. a. The graph represents the sum of loans and grants for all projects multiplied by the share that each project allocated to a PSR theme. Figure 3.3: Regional Distribution of Public Sector Reform Projects 25 20 a percentage region 15 as in projects 10 projects of all of 5 Number 0 Sub-Saharan East Asia Europe and Latin America Middle East and South Asia Africa and Pacific Central Asia and the North Africa Caribbean 1992­94 1995­97 1998­2000 2001­03 2004­06 Source: World Bank data and IEG staff calculations. a. The graph represents numbers of projects with significant PSR components, as a percentage of all projects in the Region. 23 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Asia had relatively few PSR projects in the 1990s; As a result of the Bank's changing policy, as well it has had 33 PSR projects since 2000, making it the as the increased coverage, the number of CFAAs, second most active Region recently. CPARs, and PERs peaked between 2002 and 2004 (see table 3.1). After a sharp decline in the num- AAA Tasks for Public Sector Reform8 ber of CEMs in 2001, the number increased again In 1999, the Bank committed to deliver for every in 2003 and has remained stable since. The num- active borrower a set of five core di- ber of IGRs has steadily increased in the past four Coverage of PSR-related agnostics: a poverty assessment, a years (appendix C [http://www.worldbank.org/ieg/ AAA has increased for Country Economic Memorandum psr.appendix.html] has a list of AAA on PSR). IDA countries. (CEM)/Development Policy Review, a PER, a CPAR, and a CFAA.9 The pace accelerated Coverage of AAA for IDA countries has increased. in 2001 when the Bank sought to have an up-to- At the end of fiscal 2006, 54 percent of active IDA- date core diagnostic (less than five years old) for eligible countries were covered with up-to-date all active countries. The requirement was re- (five years or less) core diagnostic products, com- moved in 2004 because it became obvious that pared with only 13 percent at the end of fiscal core diagnostic requirements were driven by 2003. About 85 percent of these had an up-to-date Bank-specified timetables and not by the bor- fiduciary study at the end of fiscal 2006, com- rowers' needs. pared with only 46 percent three years earlier. An- alytical work in fragile states has significantly Table 3.1: Public Sector Reform AAA Products (number of products) Fiscal Fiscal Fiscal Fiscal 1999­2000 2001­02 2003­04 2005­06 Total Core ESW 41 111 198 124 474 Fiduciary studiesa 14 66 104 44 228 PSR CEM/Development Policy Reviewb 12 14 46 40 112 PSR Public Expenditure Reviewb 15 31 48 40 134 Noncore products ESW 42 46 43 67 198 Public financial management 13 18 16 39 86 Tax administration 1 0 0 1 2 Civil service and administration 8 9 8 6 31 Anticorruption and transparency 20 19 19 21 79 of which: IGRs 0 3 5 10 18 Nonlending technical assistance 15 25 41 50 131 Public financial management 4 10 18 34 66 Tax administration 0 2 2 1 5 Civil service and administration 1 2 9 10 22 Anticorruption and transparency 10 11 12 5 38 Total, core and noncore 98 182 282 241 803 Source: World Bank data and IEG staff calculations. Note: AAA = analytical and advisory activities; CEM = Country Economic Memorandum; ESW = economic and sector work; IGRs = Institutional Governance Reviews; PSR = public sector reform. a. Country Financial Accountability Assessment, Country Procurement Assessment, and Integrative Fiduciary Assessment. b. Reports that had as main two sectors the following sectors: general public administration, central government administration, PSM, PFM, civil service reform, other PSR, institutional development, and subnational government. 24 WORLD BANK SUPPORT FOR PUBLIC SECTOR REFORM increased since 2001: More than 85 percent have factory; this increased to 84 percent Fiduciary studies have up-to-date PERs and CFAAs; roughly 80 percent satisfactory between fiscal 2003 and been done in 79 percent of have CPARs; more than half have a recent poverty 2005. countries, but even with assessment, and more than one-third have a improving quality, many CEM/Development Policy Review. The Bank also Nonetheless, action plans often lack still result in fragmented nearly doubled the budget for AAA in low- an appropriately phased approach. action plans. income countries under stress during fiscal Client consultation in the preparation 2003­05 compared with fiscal 2000­02. of CFAAs and CPARs has increased, but the three Bank units dealing with PFM have often not co- PERs have the longest history of AAA in address- ordinated adequately, resulting in fragmented ac- ing PSR issues, along with macrofiscal and sectoral tion plans for clients. concerns. Since 1999 there have been 161 PERs, with at least one in 72 percent of borrower coun- Although core diagnostics added coherence to tries. More than three-fourths of PERs since the overall country AAA, in small countries they some- late 1990s have given substantial attention to PSR, times crowded out other AAA for PSR that might typically with chapters on the process of formu- have had better value. lating and (more recently) executing the budget. Institutional Development Grants A forthcoming IEG review of AAA finds that PERs IDF grants concentrate on PSR. The IDFs, estab- have substantial positive effect, especially pro- lished in fiscal 1993, support capacity building grammatic ones that are becoming more com- and are part of nonlending technical assistance. mon. In some cases, PERs have become part of IDF grants are relatively small and last no more the regular budget cycle and thus contribute to than three years.10 A 2001 review recommended the PFM capacity building, even if there is not an that the IDF "focus its grants more sharply, par- explicit section on institutions. ticularly on governance," and identified two focus areas: financial accountability (financial manage- For instance, in Tanzania, a good PER with sub- ment and procurement) and legal and judicial stantive institutional analysis led the government systems (World Bank 2001). to decide to do a PER every year and to have a pub- lic conference on the report every year to launch Most IDF grants are concentrated in the area of its budget discussions. The PERs discuss how PSG (table 3.2): in public expenditure and finan- well the execution of the budget matched what cial accountability (44 percent in fiscal 2004, 34 was approved by parliament the year before and percent in fiscal 2005), in monitoring and evalu- lay out options for the future composition ation (16 percent in fiscal 2004 and 22 percent in of spending. Donors participate in this conference, fiscal 2005), and in procurement (10 percent in and it has become a focal point for their decisions fiscal 2004, 18 percent in fiscal 2005). Civil service, about what aid to pledge in support of the budget. on the other hand, has a low and static number of IDFs. Fiduciary studies, CFAAs, and CPARs are now the most widespread form of AAA--79 percent of Country Portfolios of PSR Activities countries have at least one--and are often done Overall improvement to PSM requires achieve- in conjunction with PERs. IEG's evaluation of the ments in all thematic areas, which the Bank can instrument (IEG 2007) found that CFAAs have and often does support in multiple ways. The shown steady improvement in quality since guide- success of PSR in a country therefore depends on lines were issued in 2003, increasing from 27 the package of activities that the Bank and other percent satisfactory (including moderately satis- multilateral and bilateral organizations support. factory) in fiscal 2001 to 97 percent in fiscal 2004 In the country case studies (further discussed in and 2005. For CPARs, the average quality of reports chapters 4 and 5), the evaluation considers the before the 2002 guidelines was 49 percent satis- overall donor package. This chapter considers 25 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Table 3.2: IDF Grants on Public Sector Reform Themes (numbers of grants) PSR theme Fiscal 1995­98 Fiscal 1999­2002 Fiscal 2003­06 Total Public financial management 38 37 110 185 Tax administration 3 2 1 6 Civil service and administration 21 8 12 41 Anticorruption and governance 4 14 6 24 Total 66 61 129 256 Source: World Bank data and IEG calculations. Note: IDF = institutional development funds; PSR = public sector reform. how the package of Bank support for PSR--lend- panied by any significant PSR lending. From fis- ing and AAA--varies across countries and in dif- cal 1999 through 2006, 45 countries received ferent situations. PSR-related AAA without any PSR lending, but only one country received PSR lending with- Table 3.3 shows how the pattern of Bank activi- out any PSR advisory services. For the coun- ties--PSR investment and DPLs/credits and AAA-- tries that had both, AAA tasks were more fre- varies according to the borrowing window (IBRD, quent; only three countries had more loans than blend, IDA) and to the initial (1999) CPIA (13­16) AAA. governance rating as well as the change in the rat- ing until 2006. IDFs are mostly for PSR but are less common than PFR lending in support. Of counties with PSR PSR lending has nearly always been accompa- lending support, 43 had no IDFs for PSR, and only nied by PSR advisory work in recent years. a few had more IDFs than loans for PSR. Fourteen In contrast, that AAA was frequently unaccom- countries had an IDF without any lending. Unlike Table 3.3: Public Sector Reform Lending and AAA Activities in Relation to Public Sector Governance Percent Percent with any Percent with PSR Percent Number of Lending category PSR with PSR development with Percent countries and governance lending investment policy PSR with in row CPIA score in 1999 project project project AAA task PSR IDF (of table) IBRD--all 47 32 40 82 49 54 4 + 27 20 13 73 47 11 3­3.9 57 32 57 86 57 28 < 3 50 43 36 86 36 15 IDA and blend--all 74 54 65 94 64 80 4 + 50 0 50 100 50 2 3­3.9 79 55 71 95 69 42 < 3 69 56 58 92 58 36 Source: World Bank data and IEG staff calculations. Note: CPIA governance score is the average of CPIA 13­16. Countries are separated by their classification in 1999 as an IBRD, IDA, or blend country. Develop- ment policy and investment loans include those with the approval date in fiscal 1999­2006. If there is no 1999 CPIA score, the score from 2000 or 2001 is used. AAA = analytical and advisory activities; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IDF = institutional development funds; PSR = public sector reform. 26 WORLD BANK SUPPORT FOR PUBLIC SECTOR REFORM with AAA, there is no reason IDFs should accom- IDA financing IBRD borrowers that most pany lending, as they are intended only for agen- Of countries with access to IDA or blend needed lending for PSR-- cies that are not getting support from lending resources,12 three-fourths took PSR those with low CPIA operations. Interviews in case study countries in- lending (credits) and almost all had governance ratings-- dicated that country commitment tended to be AAA activities, usually numerous. Forty- often did borrow, and the stronger with a loan than with an IDF grant. eight of the countries had two or more engagement usually PSR loans. These countries usually took brought improvement in IBRD lending both policy-based and investment lend- public sector dimensions Among IBRD borrowers, governments have wide ing, including technical assistance. IDA measured by the CPIA. scope for selecting areas for which to borrow or countries are, therefore, more likely to have AAA. The pattern of Bank involvement dif- than mid-range IBRD countries to take PSR lend- fers according to each country's initial gover- ing. This could reflect both a greater need in nance situation. these countries for PSR and stronger pressure from the Bank and other donors to make re- Countries with initial governance CPIA ratings of forms.13 4.0 or above (11 countries) had no or, at most, one project (3 cases) in the PSR area. All but one had For the 39 IDA-blend countries with initial gov- at least one and usually several AAA activities ernance CPIAs below 3.0, a larger share of cases (ESW or nonlending technical assistance). This in- (28) had PSR lending, and all but four had some dicates that they no longer perceive much need PSR AAA. In almost all the cases with lending, the for Bank PSR lending, but the governments still governance CPIA improved (to above 3.0 about put at least some value in the Bank's advice on PSR half the time).14 Even IDA states with relatively via AAA.11 Case studies verified this. good initial governance (CPIA scores above 3.5) received PSR lending in five of seven cases, often Almost all countries with an initial governance multiple loans. CPIA score between 3.0 and 3.9 had AAA in the PSR areas, but the lending activity varied widely: Of the six IDA-blend countries with Standard & one-third had none, and almost half had two or Poor's credit scores in 1999 (which presumably more loans. It appears, therefore, that the PSR ad- indicated at least some credit access via the pri- vice has some value for all countries, but the gov- vate sector), all received PSR subsequent loans; ernments have divergent views about the all but one received at least one DPL for PSR , and usefulness of Bank lending for PSR. (Presumably two (Pakistan and India) borrowed heavily for it was available to virtually all of them if they PSR. All six experienced improvements in their wanted it. Some received support from other CPIA governance score from 1999 to 2006, show- agencies as well or instead.) ing the benefits of undertaking PSR reforms when the country is not desperate for funds. Half of IBRD countries with poor initial gover- Most of the countries that nance--with scores below 3.0--asked for and re- If having poor public sector institutions did borrow for PSR ceived PSR lending, usually two or more loans, and is one of the main reasons that coun- improved their CPIA all but one of the borrowers improved their gov- tries have income low enough to qual- governance ratings. ernance CPIA at least 0.5 points. Therefore, it ap- ify for IDA (as many now believe), then pears that (i) the Bank often did stay engaged with it is appropriate and relevant that the Bank had these problem governance states, (ii) it often did PSR activities in virtually all these countries.15 so with lending (if countries wanted it), and (iii) Global governance performance and indicators the engagement was usually associated with im- usually take longer to improve, but on the provement in the public sector dimensions meas- narrower measures of most CPIA governance di- ured by the CPIA. mensions, there was at least some improvement in the majority of cases. 27 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Recovering postconflict states typically got sub- theme of the project.16 Although PFM investment stantial amounts of PSR lending and AAA. The lending has increased somewhat, DPLs with PFM typically strong improvement in CPIA ratings components have risen the fastest since 2000. for these countries presumably reflects a combi- nation of benefits from Bank (and other donor) If one multiplies the commitment amount of each support and spontaneous rebounding when a loan by the share designated as a PFM theme, the development-oriented government takes over. amount we can attribute to PFM lending in the 467 Some very small states, mostly islands in the projects with significant PSR components in- Pacific and eastern Caribbean, got little or no creased from an average of $126.9 million in lending or AAA in the PSR area. But countries 1990­99 to $912.0 million per year in 2000­06. that demonstrated clear disregard for good gov- This represented an increase from 0.6 percent to ernance usually still had some AAA for PSR, al- 4.7 percent of total Bank lending. Institutional though they received little or no lending. development grants for PFM also increased strongly, from 15 in 1992­99 to 90 in 2000­06, ris- Thematic Distribution of PSR Projects ing from 3 percent to 18 percent of the total num- For each PSR project, it is possible to identify ber of IDF grants. whether it has components related to the four themes of PSR: PFM, CSA, tax administration Since 1990, there has been an increase in total (TAX), and ACT (see appendix A). Bank support to PFM (including procurement); within this, there has been an increase in program Public financial management reform lending. The number of projects with PFM com- PFM was by far the most common theme: it was ponents of 25 percent or greater increased from a major component of 81 percent (379) of the PSR 59 over the period 1990­99 to 157 over the pe- projects in the data set. Although 13­14 projects riod 2000­06. About 31 percent of these PFM per year contained PFM components in the late loans were DPLs in 1990­99, and this increased 1980s and 1990s, this figure has risen to more than to about 67 percent during the years 2000­06.17 30 projects per year since 2000 (see figure 3.4). The increased lending was supported by IDF Many of these projects contained PFM as a primary grants for PFM, which increased from 15 in 1992­99 to 90 in 2000­06, and from 3 percent to 18 percent of the total number of IDF grants. Figure 3.4: Themes Included in Projects with Significant PSR Funding Loan commitments on projects with PFM com- ponents of 25 percent or greater increased from 35 $2,179 million over the period 1990­99 to $14,946 PFM million over the period 2000­06. 30 with 25 The number of PFM-focused projects (at least 25 CSA percent of the projects) rose in all Regions from projects year) 20 1990­99 to 2000­06, including an increase from of (per 15 ACT PFM 22 to 64 projects in Africa, from 5 to 18 projects DPL CSA in East Asia and the Pacific, and from 11 to 22 proj- number theme DPL 10 DPL TAX DPL ects in Europe and Central Asia. Total commit- DPL TAX ments on projects with PFM components over 25 verageA 5 DPL DPL IL IL IL IL ACT IL percent rose in all Regions, most notably in Africa, IL IL 0 Europe and Central Asia, and Latin America and 1990­98 1999­2006 the Caribbean. A World Bank review (2006g) Source: World Bank database and IEG staff calculations. found that 32 of 34 recent development policy Note: ACT = anticorruption and governance (transparency); CSA = civil service and administrative; DPL = development policy loan; IL = investment loan; PFM = public financial management; TAX = tax administration. operations had conditions, triggers; milestones linked to PFM-related analytic work and in most 28 WORLD BANK SUPPORT FOR PUBLIC SECTOR REFORM cases were appropriately sequenced, took into ac- from about 10 projects per year with Public financial count parallel actions, supported the evaluation CSA components to about 20 projects management was the most of results, and avoided addressing too many issues. per year. common theme in PSR projects and has increased The World Bank Institute (WBI) and the Financial The number of projects with CSA com- sharply since the 1990s. Management network (under Operations Policy ponents declined in Africa (where they and Country Services[OPCS]) have provided con- had been very common) and, on average, rose in siderable nonlending technical assistance to pub- all the other Regions. Like PFM, the majority of the lic accounts committees and supreme audit CSA projects were DPLs.19 The number of CSA in- institutions, which typically report to legislatures. vestment loans overall trended downward This part of the budget cycle rarely gets attention throughout the 1990s and early in this decade. in the lending process, because lending usually goes to the executive branch, so the nonlending In 2002, however, there was a sudden route has been important. The WBI, for instance, and large increase in CSA lending, More than half of projects has had multiyear programs in the Dominican mostly with DPLs. If the commitment with PSR components Republic, Ghana, Guatemala, Indonesia, Nigeria, amount of each loan is multiplied by the addressed CSA reform, Pakistan, Senegal, Sri Lanka, Thailand, and Viet- share designated as a CSA theme, the mostly through nam. Other donors, such as the United Nations amount that can be attributed to CSA development policy lending. Development Programme and the Canadian In- lending rose from $126 million per year ternational Development Agency, have also been in 1990­99 to $422 million per year in 2000­06. active in these areas and often look to the Bank This represents an increase from 0.54 percent to for leadership. 2.17 percent of total Bank lending. Institutional development grants for CSA increased from 17 per The Bank has, of course, used conditionality ex- year in 1992­99 to 34 in 2000­06. This represents tensively with DPLs to encourage PSR. As shown in figure 3.5, there was a recent rapid expansion in the number of legally binding conditions related to PSR.18 This occurred even as the total number Figure 3.5: Public Sector Reform Conditions of conditions per loan declined (World Bank 2007a). This meant that the share of PSR in con- 150 By year of project approval and theme ditionality increased even more sharply. The boom in PFM conditionality in 2001 reflects the growth of PRSCs and other budget-support lend- 100 ing, in which the expected positive effect on poverty depends on improving the country's institutions conditions of to manage the budget funds. The efficacy of this strategy to reduce poverty is being evaluated, but 50 Number evidence (see chapter 5) indicates some success in the intermediate step of improving PFM. Civil service and administration reform 0 CSA reform was the second most prevalent theme 1990 1995 2000 2005 Fiscal year in PSR lending: more than half (261) of the proj- PFM reform CSA reform ects with significant PSR components included a ACT reform Tax administration reform CSA theme, a measure that remained roughly Source: Adjustment Lending Conditionality and Implementation Database and IEG staff calculations. constant (unlike other themes). Consistent with Note: ACT = anticorruption and governance (trqansparency); CSA = civil service and administrative; PFM = the overall rise in the number of projects with sig- public financial management. nificant PSR components, there was an increase 29 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? about 35 percent of IDF grants over the entire pe- account for this. In investment projects, TAX was riod. often the sole focus (10 percent of the investment loans with significant PSR components). Looking at other measures of the Bank's activity in CSA generally, the number of projects with sig- Anticorruption and transparency reform nificant PSR components has grown over time, Project components explicitly identified as ACT re- particularly since 2000. This trend reflects an in- form became much more prevalent starting creasing number of PSR projects overall, rather around fiscal 1999. Anticorruption and gover- than a greater share of projects with a CSA com- nance components typically supported anticor- ponent, which has stayed roughly constant. This ruption commissions or laws. trend contrasts with both the ACT and PFM themes, where the share of projects with these The term "governance" has many meanings-- components has gone up significantly over the including legal and regulatory reform, public en- same period (see figure 3.5). terprises, public financial management, civil ser- vice, and administration of sector programs--but The mix of lending instruments between invest- in the context of classifying project components, ment loans (or credits) and DPLs has fluctuated the term has usually meant transparency measures since 1990. The number of investment loans with that would help reduce corruption and promote CSA content declined gradually through most of better accountability. This includes freedom of the 1990s but has risen since 2001. The number information laws and agencies. So in this evalua- of DPLs with CSA conditions increased substan- tion, the category is called anticorruption and tially since 2004 (figure 3.5).20 transparency.21 The case studies show that technical assistance ACT components appeared in only nine percent funded with investment loans has been a partic- of the PSR projects during the years 1990­99. ularly important tool for encouraging reform in From 2000 to 2006, however, 38 percent of PSR the area of civil service reform, especially in poorer projects contained identifiable ACT components countries where capacity levels are usually very (an increase from 1.7 to 15.1 projects per year be- low. In some cases, the lack of supporting tech- tween these respective periods), mainly due to the nical assistance was cited as a hindrance to presence of ACT conditions in policy reform proj- progress where only DPLs supported CSA re- ects. Increases in this indicator occurred in all form. Learning from such experiences, especially Regions. in PRSC countries, led in some cases (for exam- ple, Tanzania) to the revival of investment lend- The number of projects with ACT components ing to support civil service reforms. remains lower than the number of projects with CSA and PFM components. The number is, how- Tax administration reform ever, much higher than in the 1980s and 1990s, TAX reform was included in 24 per- when almost no projects had ACT components. In 1999, the prevalence of cent of the projects with significant ACT does not appear to be crowding out other anticorruption and PSR components. It was included in al- PSR themes. Rather, it appears that the other governance reform most six projects per year from 1990 three themes are included in about the same components increased to 1999 and in seven to eight projects fraction of PSR projects as earlier, and ACT should sharply. per year from 2000 to 2006. Two-thirds be understood as an addition to the typical of these projects were DPLs. Tax ad- package.22 ministration conditions were relatively less com- mon overall, with only 192 legally binding Staffing for PSR conditions, roughly 27 per year from 2000 to Staffing is another indicator of Bank inputs, for not 2006. The strong role of the IMF on tax issues may all work shows up as coded activity with clear at- 30 WORLD BANK SUPPORT FOR PUBLIC SECTOR REFORM Table 3.4: Public Sector Staffing and Specialties by Region Europe Latin Middle Sub- East and America East and Saharan Asia and Central and the North South Total Africa Pacific Asia Caribbean Africa Asia PREM 99 24 12 18 16 13 16 Public expenditure/ 60 11 7 7 12 7 16 financial management Civil service 28 9 2 6 2 3 6 Tax administration 5 0 0 4 1 0 0 Anticorruption 13 2 0 3 1 2 5 Political analysis 15 2 4 1 1 1 6 Level E/F 24 6 3 4 7 3 1 Level G 60 16 7 11 7 8 11 Level H 15 2 2 3 2 2 4 OPCS Financial management 33 6 5 6 5 2 9 Procurement 78 16 17 14 7 9 15 Source: IEG survey and calculations. Note: Some people work on more than one theme, so the total of people by themes exceeds the total number of people at various personnel grade levels. The procurement figures are all the G and H level; for staff at these levels, work on the country systems is a more substantial part of their activity (rather than just procurement for Bank financed projects). PREM = Poverty Reduction and Economic Management Network; OPCS = Operations and Policy Country Services. tributes. Based on a survey of Regional public PFM specialists account for more than Although anticorruption sector managers, table 3.4 shows the allocation of half of PREM staff, and there is an even components have grown staffing across the Regions and thematic areas. larger contingent within OPCS (not since the 1980s, this does counting those who mainly do finan- not appear to be Within in the public sector part of PREM there are cial management and procurement for crowding out other almost 100 staff and regular consultants working Bank projects). About one-fourth of themes. on country support in the four areas of this eval- PREM public sector staff specialize in uation's focus (not counting legal and judicial, de- civil service. The rest specialize in tax adminis- centralization, and so forth), plus the OPCS staff tration or anticorruption and political analysis, working on country systems for financial man- plus some in decentralization and legal/judicial; agement and procurement and the PREM Eco- those themes, however, are not the focus here. nomic Policy staff working on public expenditure. The civil service contingent is almost as large as The Regional distribution is roughly in proportion the PFM part of PREM in Sub-Saharan Africa and with the distribution of projects, with the largest Europe and Central Asia, but is much smaller in number in Africa, followed by Europe and Central the other Regions. Tax administration specialists Asia, Latin America and the Caribbean, and South are all in Europe and Central Asia or Latin Amer- Asia. ica and the Caribbean, with none in other Re- 31 Chapter 4 Evaluation Essentials · The majority of countries that bor- rowed to support reform of the core public sector had improved perfor- mance in at least some dimensions, with outliers in every category. · IBRD countries improved more often than IDA countries, but the differ- ences with nonborrowers were similar. · IDA countries that had more PSR loans did better--about as well as the IBRD borrowers (one-timers)-- whereas IBRD repeat borrowers did not do better. · IEG ratings of outcome and Bank performance were also better for IBRD countries. · Greater selectivity by countries in taking PSR loans could explain some of the difference, but IBRD would probably have better outcomes even without the selectivity effect. Government building in Sofia, Bulgaria. Photo © J. Kaman/Travel-Images.com. How Public Sector Reform Outcomes Differ by Country Groups W hen governance changes in a country, it is never possible to say pre- cisely who is responsible--who should take credit for improvement or blame for deterioration. Of course the country itself, especially the government, has the most control and responsibility, but the degree of that control varies, as does the degree of coherence within the public sector. There is never success in PSR without favorable government involvement. Measurement, Attribution, and the Role sider midcourse corrections if the evidence seems of Governments, the Bank, and Donors strong enough to suggest them. External actors come into play, including the World Bank along with other international insti- Coordination with other donors in PSR support tutions (IMF, the European Union, the United has gotten increasingly sophisticated and gener- Nations Development Programme, regional de- ally well adapted to the country situation. For velopment banks) and bilateral agencies. Several instance, in Guyana the Inter-American Devel- of them are usually involved, in close collabora- opment Bank is able to do policy-based lending tion with the government when there is success, to complement the technical assistance work of but even excellent external support alone is in- the Bank; in Bangladesh and Indian states, the sufficient to guarantee success. World Bank's policy-based lending complements the technical assistance grants of the United King- Measurement and timing further compound at- dom's Department for International Develop- tribution. Measurements of the initial governance ment (DFID) programs. With Indian states, the situation and the subsequent changes are far from Asian Development Bank and World Bank have a perfect, even with the many improvements over geographic division of labor. In Tanzania, there is the last decade. And when there is some reform now basket funding for several dimensions of effort, the effects become evident only with a lag, PSR, to which the Bank contributes but which and an even longer lag is required to know if the does not always take the lead role. The govern- effect is sustained. ment has taken the lead, rightly insisting on bet- ter coordination. Deputy Minister Lyimo, the Although the evidence has weaknesses, and al- Bank's lead counterpart and recipient of the 2006 though attribution will always be a problem, it is Gill Award, demanded of all the donors, "One important to examine available evidence to con- process--one assessment." 35 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Both the need for strong government participa- Governance measures tion and ownership in successful PSR and the The CPIA is the main governance indicator con- typical participation of many donors make it dif- sidered here, though it has pros and cons (box ficult to have any clear attribution of results to the 4.1). Indeed, one may consider the relevant CPIA Bank's intervention. This is unavoidable and ap- indicators as the specific objectives of core PSR.1 propriate. What the Bank can ask for is that the To measure changes in PSG, the analysis below process in a country to which it contributes has uses the change of the average of CPIA indicators an impact that improves the public sector's ac- 13­16 (the governance CPIA) between 1999 and countability and efficiency in furthering growth 2006.2 and poverty reduction. The outcomes of PSR are inherently difficult to Two available measures Two kinds of outcome measures are measure. The discussion that follows provides in- of outcome are changes available for essentially all the coun- dicative information at best. The results here indi- in CPIA governance tries receiving the Bank's lending proj- cate correlation, not causation, for several reasons: indicators and IEG ects for PSR: the changes in governance project ratings. indicators and IEG project ratings. · Imperfect measures of governance quality and There is also less systematic but deeper the absence of these measures across wide information for a few counties in the ranges of countries and for a long enough time case studies. frame to see the effects of PSR Box 4.1: Pros and Cons of CPIA as a Governance Measure For this evaluation, two major advantages of the CPIA are that it itively but not perfectly correlated with CPIA ratings. We ran a re- covers essentially all borrower countries and that it rates per- gression to see if a variable for past Bank lending explained the di- formance categories that correspond closely to the thematic areas vergence between the two ratings. Although the coefficient on of the evaluation. lending was statistically significant, it was very small--having an- Bank staff make the CPIA ratings, so one must ask if this biases other loan of any type increased the total CPIA by less than 0.02, the ratings so as to invalidate them as a measure for this evalua- on a scale of 1­6, compared with what the ICRG would predict. So tion. Bank management uses the CPIA ratings to allocate budget for comparing groups of countries, the conclusion was that the CPIA and lending resources, especially for IDA countries, and wants them was useable as a measure of initial conditions, and the change could to be unbiased. An extensive benchmarking and vetting process measure the progress in PSR. is used to avoid bias and to counterbalance the natural tendency To interpret the results with the CPIA, one must bear in mind that of country teams to make their countries look better. An external the nature of progress measured by the CPIA (at least for the pub- review of the CPIA in 2004 concluded that there was no serious bias lic sector items) evolves as one moves up the scale. The low rat- (World Bank 2004a). Collier (2007) also uses the CPIA to define his ings mostly refer to basic processes in areas of concern--such as category of failing states. having a publicly approved budget, having rules for hiring person- The team for this evaluation also tested whether more lending nel and against accepting bribes, and having nominal rules for for a country biased its CPIA rating upward. (If there were such a checks on executive authority. These are necessary steps to im- bias, it would undermine the CPIA as an indicator of progress for proving the public sector, but effective implementation and en- countries that received lending for PSR.) For this test, we used the forcement of rules to assure results only comes at the higher ratings. International Country Risk Guide (ICRG), one of the major external So a 3 is better than a 1 or 2, but a citizen may not perceive any rating projects, with coverage similar to CPIA; its ratings are pos- better services and accountability until the rating gets to 4 or 5. 36 HOW PUBLIC SECTOR REFORM OUTCOMES DIFFER BY COUNTRY GROUPS · The coarseness of most governance measures, sistance from other external sources, Three-quarters of in addition to uncertainty and imprecision even when the Bank was not involved. countries that received · Difficulty in capturing the timing of the im- And some just did it on their own.3 PSR lending over pacts of the programs The Bank's support for PSR is not in- 1999­2006 saw an · Nonrandom selection of countries for having dispensable, even though it usually improvement in their PFM lending programs and governance ratings does seem to be helpful. Table 4.1 in- governance CPIA · Omitted variable biases and the lack of infor- dicates that when there was not lend- measure. mation about PFM reforms with non-Bank ing, IDFs and AAA from the Bank were sources of support. not consistently correlated with improved public sector performance. Summary Results Three-quarters of countries getting Bank PSR IBRD countries with PSR projects improved more lending in the period 1999­2006 experienced at frequently than IDA countries, especially for those least some improvement in the governance CPIA with mid-range initial governance ratings. In some measure. In a quarter of the cases, the improve- cases, such as Cambodia and Honduras civil ser- ment averaged at least one notch (0.5) across all vice, this was because project design was less four categories, which is substantial for the rela- well adapted to country circumstance tively short period covered. Countries with PSR for the IDA borrower. A higher degree Countries with lower lending improved 0.3 points on average in the of self-selection by IBRD borrowers initial ratings were more CPIA from 1999 to 2006; countries without PSR that had PSR lending programs proba- likely to improve than lending did not on average show a major change. bly also contributed to the difference. those with higher ratings. Among countries with initially low gov- This correlation indicates a combination of two ernance (CPIA lower than 3.0), however, for rea- phenomena: (i) Bank support helps improve pub- sons that are not clear, the rate of improvement lic sector performance and (ii) a selection process for borrowers was higher for the IDA countries exists whereby countries that are more enthusi- than the IBRD countries. astic about PSR (and would improve somewhat anyway) are more likely to get Bank support. The Bank--with a variety of tools, international Both phenomena are desirable. The statistical knowledge, and analytic capacity--has a com- analysis cannot tell which phenomenon pre- parative advantage for diagnosis in the technical dominates, and both were present in the case aspects of the four PSR themes. Discussions with study countries with successful programs. the government counterparts and other donors in the countries visited confirm this perception but Whether countries have improved their gover- also indicate that the extent to which this advan- nance also depends on income level and where tage is used varies across themes and across coun- they start. Countries in all categories of initial try types. governance and IBRD/IDA were more likely to im- prove governance if they had a PSR project. Coun- In some countries (typically IBRD countries), the ties with lower initial ratings, say below 3.0, were government has the financial freedom and in- more likely to improve than those with higher rat- house technical capacity to decide whether, when, ings. This is probably because movement in the and for what it will borrow for a PSR project. higher ratings requires more serious changes to Then the strategy tends to be custom made the way of doing business, as noted in box 4.1. ("selective") to the country circum- stances. But in countries getting major IBRD countries improved A number of countries improved even without budget support (typically IDA/PRSC), more frequently than IDA Bank lending for PSR, especially those that started the Bank and donors more often insist countries when they had at low governance levels. Many countries had as- on a full array of public sector reforms, PSR loans. 37 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Table 4.1: Percent of Countries with Improved CPIA Governance Scores by PSR Theme and IDA/IBRD Classification Major IBRD IDA or blend Total improvement Percent Number Percent Number Percent Number (>0.5) (%) Any PSR lending 81 31 69 62 73 93 24 With >=2 PSR IL 64 11 73 30 71 41 22 With >=4 PSR AL 25 4 83 12 69 16 6 With IDF(s) 84 19 67 45 72 64 25 Without IDF 75 12 76 17 76 29 21 No PSR lending 54 26 38 16 48 42 5 With IDF(s) 44 9 50 6 47 15 7 With AAA (only) 56 16 31 13 45 29 7 Source: WB CPIA scores and IEG staff calculations. Note: Entries show the percent and number of countries that show an improvement in the average of CPIA 13­16 between the years 1999 and 2006 (or closest year available). Columns classify countries by their 1999 IBRD/IDA classification. Rows provide this figure for subsets of countries based on the number and type of in- vestment loans (IL) approved or active fiscal 1999­2006 and DPLs (AL) approved in fiscal 1999­2006. AAA = analytical and advisory activities; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IDF = institutional development funds; PSR = public sector reform. and staff often lack the time and resources to de- Almost all the countries in Europe and Central Asia sign a fully tailored product. So the result is likely not borrowing for PSR in 1999­2006 were among to be one size fits all, off the shelf. the first from the East to join the European Union and had done a lot of reforms with Bank support The relatively favorable experience with PSR in before 1999. the IBRD (middle-income) countries, where the leverage of lending rarely motivates reform, shows Latin America and the Caribbean had the second that the Bank can motivate reforms on the basis highest rate of improvement for PSR borrowers of its high-quality expertise and advice. (See also and a high differential with nonborrowers. In this the discussion on project ratings.) Especially in an Region, the improvement rate for IDA was above area such as PSR, where long-term commitment IBRD (both categories having significant num- is essential--one-off decisions and turnkey oper- bers of countries). Africa and East Asia both had ations will never suffice--success has come if and 70 percent improvement rates for borrowers, only when the experts work over time with gov- with Africa having the larger differential from the ernment counterparts to design and implement nonborrowers. The Middle East and North Africa a project that fits local circumstances. and South Asia have the lowest percentages of im- provement in governance CPIA scores for PSR Regional differences in results borrowers. Just as the incidence of lending varied across Re- gions, so did the correlation of PSR lending with changes governance scores (see table 4.2). Europe IEG Project Ratings and Central Asia has the highest rate of im- Another source of evidence on these projects is provement for countries getting PSR lending-- the ratings provided by IEG. Of the 238 PSR proj- 90 percent--but the rate of improvement for ects that closed during calendar years 1999 through nonborrowers is almost as high. Clearly something 2006, three-quarters of PSR projects with IEG rat- else is going on: European Union accession. ings received an overall outcome rating of at least 38 HOW PUBLIC SECTOR REFORM OUTCOMES DIFFER BY COUNTRY GROUPS Table 4.2: Percent of Countries with Improved Governance CPIA Scores by Region, 1999­2006 With Bank PSR lending Without Bank PSR lending Region Percent Number Percent Number Sub-Saharan Africa 70 30 47 15 East Asia and Pacific 70 10 56 9 Europe and Central Asia 90 20 86 7 Latin America and the Caribbean 75 20 25 8 Middle East and North Africa 57 7 0 2 South Asia 50 6 0 1 Total 73 93 48 42 Source: World Bank CPIA scores and IEG staff calculations. Note: Entries show the percent and number of countries with an improvement in the average of CPIA 13­16 between 1999 and 2006 (or closest year available). Columns classify countries by their 1999 IBRD/IDA classification. Rows provide this figure for subsets of countries based on the number and type of investment loans approved or active fiscal 1999­2006 and development policy loans approved in fiscal 1999­2006. "moderately satisfactory" and almost half received objectives with the same substantive projects a rating of "satisfactory" or "highly satisfactory" would have led to higher ratings. (table 4.3).4 Project design (quality-at-entry) and supervision received usually received more fa- PSR projects to IBRD countries received a larger vorable ratings on overall outcome, which suggests share of "satisfactory" outcome ratings ("moder- that the main source of difficulty is with the coun- ately satisfactory," "satisfactory," and "highly satis- tries' performance. Another factor, however, is factory") than IDA and blend countries. Differences that project objectives (against which outcomes are between development policy and investment lend- judged) are sometimes overly ambitious, which ing projects were mixed but were generally small. pulls down the outcome ratings. More modest Projects in the Europe and Central Asia Region Table 4.3: Summary of IEG Project Ratings for Closed PSR Projects, 1999­2006 Lending Lending instrument classification Region East Europe Latin Middle Sub- Asia and America East and All PSR Invest- Adjust- Saharan and Central and the North South projects ment ment IBRD Blend IDA Africa Pacific Asia Caribbean Africa Asia Overall outcome rating Percent S or HS 43 37 45 55 43 35 37 22 67 41 20 41 Percent MS, S, or HS 74 67 78 81 75 69 68 61 92 70 60 86 Overall Bank performance rating Percent S or HS 79 66 85 89 78 73 68 78 92 84 70 86 Percent MS, S, or HS 80 67 86 91 78 74 69 78 92 88 70 86 Source: IEG Project ratings database and IEG staff calculations. Note: Table includes projects with significant PSR components that closed between January 1, 1999, and December 31, 2006, and have received IEG project ratings (238 projects). Rows indicate when cells provide the percent of projects with marginally satisfactory (MS), satisfactory (S), or highly satisfactory (HS) ratings. 39 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? performed the best on average, with South Asia and things that need fixing rather than the govern- Latin America and the Caribbean Region also doing ment's list of things it is ready to do. So the rea- better than the others. son for the lower success rate in IDA countries may have been that IBRD borrowers had a Projects implemented in countries with higher stronger say in selecting project components, in- CPIA governance scores5 received higher proj- cluding conditions. ect ratings. For example, 67 percent of countries with a 1999 CPIA score above 4.0 received at least Ratings of IDF grants, most of them for PFM, have a "satisfactory" IEG outcome rating, whereas only improved overall (IEG 2007). For grants approved 54 percent of projects implemented in countries between fiscal 2002 and 2005, relevance was rated with a 1999 CPIA score of 2.0­2.5 received this rat- satisfactory in 99 percent, outcome in 79 per- ing in the same period. In particular, projects in cent, sustainability in 72 percent, Bank perform- countries with high governance scores scored ance in 90 percent, and client performance in 77 exceptionally high in the borrower preparation, percent. Relevance, sustainability, and Bank per- implementation, and compliance ratings. formance showed the greatest improvement since 2001. Procurement grants had the lowest per- In a sense, this result is not surprising, but it raises formance, with less than 70 percent of the grants the question of why PSR projects are not better de- rated as satisfactory. Financial management grants signed and implemented in the countries that (including auditing) performed at levels similar to need reform most urgently--according to the the whole group; however, differences across Re- Bank's own ratings. From the case study evidence, gions were substantial. Financial management it seems that expectations are often unrealistic grants included several best-practice cases, as in and the projects sometimes fail to take care of basic Thailand and Turkey. matters first, especially in countries where the ba- sics are most often missing. It is also possible that Interviews in some country visits indicated that the government commitment is less the government counterparts do not take IDFs as predictable in the countries with weak seriously as loans. Quality of supervision also re- Projects implemented in governance, making it more likely that mains a problem in IDF implementation. Super- countries with higher outcomes would fall below the satis- vision quality has depended on the availability of CPIA governance scores factory range even if the expected the task team leader and was usually better with generally received higher outcomes (ex ante objectives) were a team leader based in the field. Continuity is project ratings. unbiased on average. also important: the few grants for which team leaders were changed more than once had lower The success rates for PSR projects--measured ratings for quality of supervision (IEG 2007). by IEG ratings--was higher for IBRD loans than for IDA credits. The reasons for this are not evi- Reasons for Country Differences dent in the statistics, but the country cases sug- Some of the outcome differentials result from the- gest two possible explanations. First, the design matic factors discussed in the next chapter, but oth- of reforms is sometimes based on models for de- ers are more cross cutting. In all four thematic veloped countries, which are too complex for areas of PSR, the Bank concentrates on the formal still-developing countries. And the gap is greater rules and regulations, and where divergence from for the IDA countries, which tend to have insti- actual practices is recognized, the most common tutions that are further from those of developed strategy is to fix the formal rules in ways that en- countries for which the models are developed. courage greater compliance and/or reduce op- portunities for corruption. Such a tactic makes Second, the expectations and objectives in heavy sense for an institution like the Bank, which works budget-support projects tend to be more ambi- mainly with the executive branch of government. tious and global, reflecting the donors' list of However, it is often done without much knowledge 40 HOW PUBLIC SECTOR REFORM OUTCOMES DIFFER BY COUNTRY GROUPS of what created the problem in the first place and without connection to details of the The Bank has improved without a clear understanding of the informal PSR agenda. Increasingly, there is agree- its responsiveness to processes that typically determine the outcomes. ment that a governance assessment is borrowers, the Bank's needed before a country proceeds to matrix management has Some country cases show that the Bank's un- specific public sector reforms. Ad- caused some problems. derstanding has improved regarding the difference dressing corruption, for instance, re- between formal managerial processes and the quires understanding the nature of governance in practices that actually take place, driven by political the particular country. For this, the Bank has done economy factors. Guatemala, Bolivia, Honduras, much less. Through fiscal 2006 there were more and India are examples of relatively good practice. than 20 IGRs, on a variety of topics, but only 5 of The Bank has to some extent taken the differences them gave serious attention to the political econ- between formal process rules and administrative omy of the public sector as a whole. It is this sec- practices into account in designing and carrying tor that drives corruption and other aspects of the out its support for PFM and taxes. Civil service and PSR agenda being evaluated here. corruption have proven more difficult and less successful. Only in a few cases (for example, Bangladesh, Bolivia, and Peru) have such analyses fed into World Bank guidelines (World Bank 2001) rec- the PSR pillar of a CAS. Some argue that this is not ommended substantial participation by clients in the comparative advantage of the Bank, given its PFM data gathering and analysis to facilitate own- constitutional requirement to stay out of internal ership by clients of the results of the analysis. Since politics and its dependence on the permission of 2001, the country cases have shown a mixed record governments to do its work. But the official po- of the Bank's PERs and other PFM AAA being more sition of the World Bank Group, reflected in pres- responsive to demand from borrower countries, idential statements and backed by much evidence, including the private sector and civil society as is that fundamental improvements in PSM re- well as government. Bank assistance has also been quire political commitment and are important more active in helping to shape the demand. Good for growth and poverty reduction. examples were noted in Bangladesh, Tanzania, Uganda, and Vietnam. In some places, such as The Bank has done some work and could do Bulgaria, the Russian Federation, and Ghana (until more to understand the political foundations of recently), the Bank had a productive interaction governance in its partner countries. Collaborative with the government but not with civil society. work, especially involving local researchers, is useful in this area, and the Bank could and oc- Reasons for shortcomings include lack of incen- casionally does take the lead in sponsoring such tives for Bank staff to disseminate AAA findings, research. Some of this was done informally (India, Bank focus on supply-side rather than demand-side Mexico, and Tanzania), but usually it is done with- interventions, and concern among Bank staff that out as much attention as to items in the regular civil society awareness raising constitutes political work program.6 Internal budget constraints have lobbying, which is forbidden by the Bank's char- hindered such work in many smaller ter. This is part of a broader issue: under matrix countries, where PREM staff do not The Bank has been management--according to interviews with staff-- have much time or money left after improving its the Bank has gotten better at building cutting-edge doing the standard macroeconomic understanding of skills, but not at integrating knowledge in support work. As the IMF already covers that political economy in its of operations at the country level. base, the Bank might consider a pub- partner countries but lic sector/political economist, rather needs to do more, The Bank's understanding of political economy is than a macroeconomist, as the core particularly engaging improving, but much of it is still at a general level, of its team in some countries. local research. 41 Chapter 5 Evaluation Essentials · Performance measures usually im- proved for financial management and tax administration, where Bank lending supported such reforms. · Measures for CSA systems-- essential for sustaining other reform areas--did not improve on average. So improving the strategic frame- work and indicators needs high priority. · Bank-supported programs for core PSR have rarely succeeded in re- ducing overall corruption, but have had some success in improving transparency. · The thematic differences in out- comes result in part from financial management and tax administration being less politically and culturally sensitive than issues surrounding public employment and corruption. · Bank practices also seem to have contributed to the differences in outcome. Government building in Putrajaya, Malaysia. Photo © gferro.com. Public Sector Reform Outcomes and Performance by Thematic Area I n addition to the differences in success across country groups, there are also important differences across thematic areas of PSR. This chapter lays out those differences and looks at country experiences for explanations. Overview of Thematic Differences Outcomes for IDA and IBRD countries were sim- The statistical evidence follows from the same ilar for PFM and civil service. For tax administra- methods as in chapter 4--looking at the per- tion reform, the IDA countries did a little better centage of countries in which the CPIA improved. than IBRD countries. This shows the importance The difference is that in this chapter the ratings for of attention to tax collection even in places where the individual thematic areas are used. Table 5.1 the tax bases look meager. For transparency and shows that for all countries (with CPIA informa- anticorruption, however, the success rate for IBRD tion), improvement was most likely--60­70 per- was considerably higher (almost equal to that with cent likely--in PFM (CPIA 13) and revenue PFM), and the success rate was much lower for ACT administration (CPIA 14)1 for countries getting among IDA borrowers. The question for the rest projects in those areas. Quality of public admin- of this chapter is why we see these patterns. istration (CPIA 15), which we take as civil service reform, had the lowest success rate, with fewer Public financial management than 45 percent of borrowers in this area showing What was the support for PFM trying to achieve? improvement. The framework for analyzing and improving PFM came mostly from upper-income countries. For transparency and anticorruption, the success Among the PFM reforms pursued by Organisation rate was just over half for countries that had PSR for Economic Co-operation and Development lending in any of the thematic areas. Similar re- (OECD) countries over the past 25 years, eight sults obtain when considering only projects with broad components are noteworthy explicit (direct) transparency and anticorruption (OECD 1995; Brumby 1999; Pollitt and Eight components of components. It seemed more appropriate to con- Bouchaert 2004; Rubin and Kelly 2005): financial management sider PSR lending in any theme, because all themes are notable in the reforms aim to improve transparency and reduce cor- · Achieving budget savings through pursued by OECD ruption as at least collateral objectives. more robust central controls or by countries. 45 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Table 5.1: Changes in Selected CPIA Scores by PSR Theme, Initial Governance Score, and IDA/IBRD Classification Major improvement IBRD IDA or blend Total (>0.5) Number Number Number Number of of of of Percent countries Percent countries Percent countries Percent countries CPIA (13)--Quality of budget and financial management Any PSR PFM lending 64 28 61 59 62 87 28 87 No PSR PFM lending 21 29 32 19 25 48 10 48 CPIA (15)--Quality of public administration Any PSR CSA lending 44 18 42 53 42 71 10 71 No PSR CSA lending 41 39 20 25 33 64 16 64 CPIA (14) --Efficiency of revenue mobilization Any PSR TAX lending 67 18 73 26 70 44 32 44 No PSR TAX lending 46 39 56 52 52 91 21 91 CPIA (16) --Corruption, transparency and accountability Any PSR lending 61 31 48 62 53 93 26 93 No PSR lending 38 26 44 16 40 42 7 42 Source: World Bank CPIA scores and IEG staff calculations. Note: Entries show the percent and number of countries that show an improvement in the respective CPIA score between the years 1999 and 2006 (or closest year available). Columns clas- sify countries by their 1999 IBRD/IDA classification. Rows provide this figure for subsets of countries based on the number and type of investment loans approved or active fiscal 1999­2006 and development policy loans approved fiscal 1999­2006. CPIA = Country Policy and Institutional Assessment; IBRD = International Bank for Reconstruction and Development; IDA = Inter- national Development Association; PFM = public finance management; PSR = public sector reform; TAX = tax administration. providing greater flexibility to managers and or- · Computerized information systems providing ganizations in reallocating funds within budget timely financial and related information to all line items to reflect changing conditions and parties in the budget process priorities · Greater use of devolved budget management · Restructuring budgets to include expenditures and market-based mechanisms, such as user for all government activities, global budgetary and capital charges, market testing, outsourc- ing, and performance agreements. targets, hard budget constraints, and program allocations to facilitate results monitoring and Most of the countries receiving PFM support are evaluation doing better in that area, as noted earlier, which · A multiyear budget linked to a realistic fiscal pol- is consistent with the more detailed results of icy and revenue estimates Levy and Kpundeh (2004) for a sample of African · Regular use of performance information in countries. In examining why this happened and monitoring against targets to facilitate ac- what the limits to success are, the following ques- countability and manage performance tions are relevant: · Shifting from cost accounting2 toward accrual accounting3 · Have PFM reforms first rolled out in devel- · Shifting from compliance auditing4 toward per- oped countries been transferred and adapted formance auditing5 appropriately to developing country settings? 46 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA · Did the Bank understand the differences be- transparency, procurement, accounta- The Bank's handbook tween formal, managerial processes and the bility in budget execution, and audits on public expenditure practices that actually take place, and did it (internal and external). management stresses the take the differences into account in designing importance of getting the and carrying out its support? In some other places, however, such as basics right first. · Has the bank stressed "getting the basics right" Ghana, Indonesia, and initially Hon- before supporting more complex financial man- duras, the Bank supported the installation of sys- agement reforms? tems that turned out to be overly complex. · Has PFM in sector ministries been a better Guyana's PFM program in the 1990s was also entry point than PFM in core ministries, or overly complex, leading to problems at various vice versa? Have PFM projects/components stages of procurement and implementation. When been usefully piloted in sector ministries before Bank support for PFM restarted there after 2000, wider rollouts have taken place? Has PFM in it concentrated more on the basics first. subnational jurisdictions been a useful entry point? Ambitious PFM reforms in the Republic of Yemen · Has the Bank's PFM approach resulted in im- could have used a more incremental approach, proved public sector performance? Were the starting with core treasury systems and a general benefits achieved greater than the costs in- ledger and then building broader capacity and curred? In what technical areas and country commitment for more extensive reforms. An ad- contexts has the Bank been effective/ineffective vanced financial management information sys- and why? tem supported by the Bank, although showing initial results, may be difficult to sustain in a low- The Bank's Public Expenditure Management capacity environment. Handbook (World Bank 1998b) stresses the im- portance of getting the basics right first: Control Similarly, financial management information tech- inputs before seeking to control outputs, account nology systems have been successfully adopted for cash before moving to accrual accounting, in some cases when there are sufficient commit- operate a reliable budget for inputs before mov- ment, capacity, and resources as part of a broad ing to budgeting for results, make a comprehen- and appropriately phased reform program, with sive budget and reliable accounting system before significant efficiency gains if conditions are right. trying an integrated financial management system, In places with weak capacity, however, such as are get a proper budgeting and accounting function found in many Bank borrowers, the principal before strengthening the auditing function, and benefit from information technology may be en- do reliable financial auditing before trying per- suring more systematic adherence to financial formance auditing (Schick 1998; Shand 2001). rules by manual systems, which finance staff may rely on more, as the older systems run in paral- Evidence from case studies shows favorable results lel to technology-based systems. where the Bank followed this advice. In coun- tries such as Bulgaria, which is working to meet The evidence is also mixed on the re- Case studies show the standards for admission to the European lated question of whether PFM reforms favorable results where Union, improving basic PFM has been an impor- first tried in developed countries have PFM reforms did address tant part of the agenda. In Guatemala, the Inte- been transferred with appropriate adap- the basics first. grated Financial Management System program tations to local conditions in developing supported basic public finance building blocks country settings. An early innovation was Bolivia's (improved budgeting, accounting, frameworks, 1990 Financial Management and Control Law, and cash management) and well-sequenced ca- which sought to increase the efficiency and effec- pacity building. Progress has taken place even in tiveness of the public sector by switching from a weak capacity countries just emerging from con- centralized rule-based system to a more modern, flict, such as Sierra Leone, which has improved decentralized, results-oriented system. Enacted 47 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Financial management because of strong pressure from the program budgeting and a firmer (compared with reforms first tried in Bank and other donors, it lacked suffi- previous years) ceiling for the current year and in- developed countries have cient incentives for public officials to dicative ceilings for the next two years. This frame- sometimes--but not enforce it. As a result, the required an- work had the benefit of discouraging the past always--had appropriate nual operating plans were formally un- practice of submitting budget requests that are out adaptations for dertaken as a ritual, but were ignored of line with available resources. Program budgeting application in developing when it came to agency programming is still considered separately from the real budget countries. and resource allocation (Dove 2002). preparation, however; there is little time devoted to substance; performance indicators focus on out- Another type of innovation introduced in devel- puts rather than outcomes; and program man- oped countries and now being promoted by the agers are not accountable for results. In addition, Bank among borrower countries is a multiyear per- budget execution does not take place on a pro- spective in fiscal planning, expenditure policy, grammatic basis, which reinforces the view that and budgeting. Despite concerns about achieving the program budget is not the real budget. Even transparency in multiyear budgeting and despite where MTEFs are proving useful, a less-detailed challenges evident in developed countries in mak- and more strategic planning exercise might serve ing effective use of this tool (Oxford Policy Man- the purpose better. agement 2000), MTEFs are central features of the Poverty Reduction Strategy Papers and PRSCs Entry points are important, as noted above; PFM prepared in recent years. Craig and Porter (2003) and tax administration are good thematic entry point out that aside from technical problems of points, and AAA is a good entry instrument-- using this tool effectively, its use for upward ac- such as PERs, CPARs, CFAAs, and PETS. Within the countability to central ministries and donors can limits of PFM project activities, the question of undermine local political legitimacy and ac- entry points also arises. Some countries found it countability, sideline the role of legislatures, and helpful to pilot nascent MTEFs and other reforms cut off important sources of local knowledge on in ministries or subnational governments with what works and what does not in poverty reduc- demonstrated PFM capacity, to draw lessons from tion. Many developing countries have followed the the pilot, and then to gradually scale up to other example of developed countries in adopting this ministries. reform to help achieve greater certainty on future funding from donors. Argentina, Cambodia, India (state level), Russia, and Tanzania were good examples. These initia- Although MTEFs have been challenging for many tives were most successful when core ministries-- developed countries, Albania, Burkina Faso, South finance and planning--provided the support and Africa, Tanzania, and Uganda have adopted well- space for the sectoral or subnational interven- functioning systems, with Bank support. Such an tions to succeed. Although entry points were innovation can be especially useful for a borrower mainly finance ministries or departments in min- in a context of high aid dependency, where the istries or subnational authorities, the Bank also big uncertainty on the revenue side is donor sup- supported legislative oversight and civil society ini- port. Tanzania's MTEF helps coordinate commit- tiatives in Ghana, for example. ment from the donors, which fund more than 40 percent of the budget, and thus helps get enough Regarding lending instruments, there has been a certainty on the revenue side to plan shift toward more flexible, long-term lending in- Some countries have the budget. Implementation and uti- struments since 2000. This includes a shift in PFM adopted well-functioning lization of the MTEF has been more support from investment to programmatic policy- MTEFs with Bank support, difficult in Mali and Ghana. based loans. The results of this shift are broadly although such favorable, with strong performance in Ghana, frameworks have been Slovakia has an MTEF, implemented Guatemala, and Tanzania, for example. PFM out- challenging for many. with Bank support, that also includes comes tied to HIPC accession and PRSCs proved 48 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA fruitful in Ghana, Honduras, Tanzania, and Uganda. perceptions of corruption make donors reluc- Yet the delayed treasury system in Indonesia and tant to channel resources through the regular the modest PFM improvements evident in Uganda civil service. Instead, a proliferation of PIUs has point to continuing challenges under the new led to expensive and fragmented procurement instruments. managed under a host of balkanized rules and reg- ulations. Procurement delays in Ghana, Guyana, In Mali, investment lending--rather than or in ad- and Indonesia, among other countries, have ham- dition to policy-based lending--might have pered PFM support, although this seems to be achieved better results. In Guyana, India, Russia, improving. The U.S. Millennium Challenge Cor- and Tanzania, the continuation of PSR investment poration recently agreed to use the new infor- lending, in parallel with Policy Reform Loans and mation management systems for the management often with longer-term instruments, was impor- of its program in Honduras. This is a notable tant to sustain support for reforms. achievement, given the strict requirements of the U.S. government. The Bank has been cautious in considering the use of procurement processes of governments or Investment projects for PFM and tax administra- other donors, usually preferring the processes tion typically put a strong emphasis on technol- in the PIUs it sponsors rather than using govern- ogy and sometimes carried the expectation that ment systems.6 This can slow down improve- it would be the main key to results, ments in government systems and exacerbate without adequately recognizing that The Bank has often used the delays in information technology projects, changes of incentives, behavior, and PIUs rather than and it still does not ensure that procurement will organizational cultures are more im- government procurement be corruption free (see table 5.2). portant and more challenging (see box systems, but this slows 5.1). Even when the people-manage- government improvements For example, decentralized procurement in Hon- ment aspects were recognized in the without ensuring duras within the ministries and agencies has lan- project design, if these more difficult as- corruption-free guished for lack of capacity and because pects of the projects hit snags, the tech- procurement. Table 5.2: Improvement Rates in Public Financial Management (CPIA 13) by IDA/IBRD Classification CPIA (13) quality of budget and financial management and PFM PSR lending, 1999­2006 Major IBRD IDA or blend Total improvement (>0.5) Percent Number Percent Number Percent Number Percent Number Any PSR PFM lending 64 28 61 59 62 87 28 87 With > = 2 PSR PFM IL 29 7 64 22 55 29 28 29 With > = 4 PSR PFM AL 67 3 82 11 79 14 21 14 With PFM IDF 79 14 68 37 71 51 31 51 Without PFM IDF 50 14 50 22 50 36 22 36 No PSR PFM lending 21 29 32 19 25 48 10 48 With PFM IDF 20 10 38 8 28 18 17 18 With any AAA 26 19 31 16 29 35 14 35 Source: World Bank CPIA scores and IEG staff calculations. Note: Entries show the percent and number of countries that show an improvement in the average of CPIA 13 between the years 1999 and 2006 (or closest year available). Columns classify countries by their 1999 IBRD/IDA classification. Rows provide this figure for subsets of countries based on the number and type of in- vestment loans (IL) approved or active fiscal 1999­2006 and development policy loans (AL) approved in fiscal 1999­2006. AAA = analytical and advisory activities; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IDF = institutional development funds; PFM = pub- lic financial management; PSR = public sector reform. 49 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? percent of CFAAs were of satisfactory quality, with Box 5.1: Too Much Attention to the Technical steady improvement in quality since the publica- Aspects--Not Enough to the Human Element in Ghana tion of the respective guidelines and with in- creased donor collaboration. They could have The Public Financial Management Technical Assistance Project in Ghana been more effective, however, with improved co- had an information management system component that was overly com- ordination among the units preparing them and plex, when simple spreadsheets could have done the job. It created "a other PFM reports; they could have avoided con- very big conceptual, technical, and managerial challenge" and left gaps fusing situations such as clients getting multiple in policies and outputs. It did not link "the poor performance with the man- PFM action plans. dates, role, organizational structures, overlapping responsibilities, outdates procedures and processes, and skill levels," nor did it flag the issue of avail- Despite these shortcomings, CFAAs and CPARs ability for training. There were too many components for the PIU and gov- contributed to a greater focus on PFM in subse- ernment to effectively coordinate, and the implementation schedule was overambitious. Functional units should have been given responsibility quent CASs and to increased PFM lending. CASs for implementing reforms rather than the PIU, which was recommended in 13 of the 22 countries studied proposed DPLs in the midterm review but which was not done. with PFM prior actions and conditions, and only 4 CASs proposed such lending prior to the com- Source: World Bank 2004d. pletion of the CFAAs/CPARs. Likewise, twice as many CASs since 2000 proposed PFM investment nology parts of the project often continued to dis- lending as was proposed in countries prior to burse despite the changed conditions that re- the completion of CFAAs/CPARs. These instru- duced their effectiveness. ments have only had a modest overall impact, however, on PFM and procurement arrangements In the area of PFM, the Bank's analytic work has and on the choice of instruments for Bank assis- progressed furthest. A review of 50 recent devel- tance (IEG 2007, pp. 37, 41­42). opment policy operations found that more than half were informed by at least three PFM studies Routine monitoring of public expenditure man- by the Bank and other development partners agement has improved greatly since the late 1990s, (Parison 2005). The number of PERs has increased first with the HIPC tracking process and more from 17 per year for 1999­2002 to more than 23 recently with the PEFA indicators. The interest in annually since then. ensuring good management of HPIC resources evolved into interest in ensuring that general Increased attention is now given to institutional budget support, with instruments such as PRSCs, aspects. Initially, the focus was almost exclusively went through efficient, transparent, and socially on budget formulation--setting aggregates and accountable processes. sectoral allocations--but since 2000 more atten- tion has gone to the execution phase of the budget This led the Bank, along with other partners and cycle. PERs are now routinely (although still not in consultation with many governments, to de- always) linked with CFAAs and CPARs, which now velop the PEFA indicators.8 These focus on the include governmentwide assessments and some- PFM process but also include a little on tax ad- times subnational governments.7 The PETS has ministration, civil service, corruption, and relia- proven to be a powerful addition to the Bank's bility of donor funding. There are 28 major toolkit for identifying problems with (and cor- indicators of country performance, most with ruption in) expenditure and financial manage- subindicators, plus three indicators of donor prac- ment, although the cost and time demands have tices, such as predictability of direct budget made PETS impractical for universal support. CFAAs and CPARs helped application. increase the focus on PFM Building on the three budgetary outcomes dis- issues in subsequent A recent IEG evaluation (IEG 2007) cussed above, the indicators measure six dimen- country strategies. found that 64 percent of CPARs and 71 sions: budget credibility, comprehensiveness and 50 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA transparency, alignment with policy, predictabil- and then again in 2003­04 and con- Routine monitoring of ity and control, accounting and reporting, and ex- sidering the benchmarks set for 15 PFM public expenditure ternal scrutiny and audit (see PEFA Secretariat elements, the number of countries management has 2005 for a complete listing). They indicate gra- meeting or exceeding the benchmarks improved with the use of dations of improvement in PSM, corresponding increased for 8 indicators, declined for PEFA indicators, which to a sequence, and provide a range of standards 6, and stayed the same for 1. Of the measure practice rather that includes OECD countries, some of which three main PFM areas (see appendix A), than perception or are also rated. PEFA is thus a model for what budget reporting improved the most, reputation. could be extended to or replicated in other PSR with 14 countries improving and 4 thematic areas.9 worsening. As of August 2007, 40 countries had completed Within this indicator group is, for example, the in- one or more PEFA assessments.10 PEFA and other dicator 13: "Regular fiscal reports track poverty re- related indicators are useful because they meas- ducing spending." Here the number of countries ure actual practice, rather than perception or rep- meeting the benchmark increased from three to utation, and they look at actions that would be the seven. Forty-two percent of benchmarks in the "re- immediate objectives of reform. porting" area were met in 2004, up from 33 per- cent in 2001. An analysis of 15 countries with both HIPC and PEFA ratings looked at 11 indicators where there In the other two PFM areas of "formulation" and is close correspondence between the two as- "execution," however, there were modest de- sessment methods. Over the period 2001­2006, clines between the two reporting periods in coun- five countries showed improvement in the num- tries meeting the benchmarks (World Bank and ber of HIPC benchmarks met (with Ghana im- IMF 2006).11 Traditionally, the Bank gave more proving by six benchmarks), six showed a decline, attention to budget formulation than to budget and four remained largely unchanged. Based on execution, and traditional financial management raw scores, eight countries improved, four de- looked mainly at Bank projects, not the whole clined, and three were unchanged. spending cycle. Somewhat more attention now goes to the downstream aspects, but more con- In terms of the different phases of the budget sistent effort is still needed in that direction. cycle, the greatest improvement was in budget re- porting, with less improvement in budget for- In summary, the Bank's increased PFM lending and mulation and some deterioration in budget analytical work can be linked with encouraging execution. At a more detailed level, more than 90 PFM improvements among borrowers, usefully percent of countries could limit the discrepancies adapting PFM tools from other jurisdictions, and between budget allocations and budget outturns carrying out effective monitoring with robust in 2006, compared with less than 50 percent in assessment tools accepted by major donors. 2004. Eighty percent of countries met the bench- However, progress is uneven, both across coun- mark on improvements in budget classification in tries and across different types of indicators. Bank 2006, the same as in 2004. However, there was a performance might have achieved greater suc- decline in the quality of medium-term projec- cess with deeper institutional and governance tions in budget processes and in ability to reflect analysis, greater attention to addressing basic donor funds in the budget (de Renzio and systems before moving to advanced Dorotinsky 2007). PFM tools, and more Bank support and The Bank's increased PFM flexibility in working to improve coun- lending and analytical Some HIPC countries, where the Bank's work on tries' own procurement systems. Con- work can be linked to PFM issues has been intense, have more detailed ditionality worked better when it encouraging PFM records of progress. Taking the 23 countries par- focused on PSR outcomes, leaving improvements among ticipating in HIPC that were monitored first in 2001 country governments to pick specific its borrowers. 51 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? measures and the Bank to give technical assistance cially in the 1980s and 1990s) retrenchment and on request. salary decompression (increases at the top). But this focus often overlooked indications that these CSA reform design actions were politically unrealistic and also as- What was the support for CSA reform trying to sumed without evidence that these changes would achieve? This thematic area of reform includes sev- bring about improved public administration. This eral components: approach usually failed, because the downsizing either did not take place or was reversed by re- · Measures to track the existing staff--for in- hiring, often of the same people. Since then, the stance, developing computerized payroll and Bank has continued to endorse the same formula human resources databases--are usually an with similar lack of success in 1999­2006, al- important early reform action without much though in fewer countries, such as Cambodia, controversy. Pay and employment data are Honduras, and the Republic of Yemen. often missing, and these data are essential to diagnosing civil service issues and designing In the past few years, the Bank has shifted its reforms. focus in many countries to human resource man- · Measures to contain and reduce the number agement reforms, such as merit-based recruit- of staff--via retrenchment and layoffs, early ment and promotion, both as a means to improve retirement, and hiring freezes--are usually the performance and as a counter to patronage-based most controversial components of CSA reform. systems. Drawing on project conditionality as a · Compensation reforms deal with pay struc- proxy for the Bank's activity in this area, the focus tures and pensions. on merit-based measures has grown significantly · Human resource management reforms deal in the past five years; downsizing is somewhat less with management of cadres generally and the prominent (see figure 5.1). senior civil service particularly. This includes merit-based recruitment, promotion and dis- In the 19 case studies, the reforms most fre- cipline, performance management, and ap- quently supported with Bank programs since praisal systems. 1999 include payroll and human resources data- · Organizational reforms deal with issues such bases, redeployment/layoff provisions, pay re- as contracting, creating delivery agencies, and forms, merit recruitment and promotion, and process engineering and organizational re- training/capacity-building programs. The Bank structuring. These issues are usually based on has continued to advocate downsizing and pay re- functional and program reviews and aim to forms, but merit-related reforms have risen in improve operational efficiency. importance since 2000 (see also Stevens and · Demand-side reforms focus on the users of ser- Teggemann 2004.) vices, through service standards, e-government, and so forth. Database reforms and training have also been · Training and capacity building. common elements of many reform packages, in part because of their less controversial nature as Table 5.3 compares the different CSA reform com- well as their direct linkage to other reform areas, ponents in terms of political risk, financial impli- particularly PFM. An important step in many coun- cations, and demands on capacity. tries has been to get the human resource database and the payroll (usually at the ministries of fi- The Bank used to The Bank's involvement in CSA re- nance) consistent with each other. emphasize retrenchment forms evolved out of the need to ad- and salary decompression dress the issue of an affordable wage For administrative reforms, the bulk of activity has among CSA reforms-- bill as a significant component of pub- centered on functional reviews, at times to support an approach that lic sector expenditures. As a result, downsizing efforts but also as a means to improve usually failed. CSA reforms often emphasized (espe- operational efficiencies. In Russia, some redun- 52 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA Table 5.3: Civil Service and Administrative Reform: Types and Challenges Successfully Little Demanding of implemented or no Component Political risk Financial cost capacity reforms progress Pay and employment Minimal Modest Yes--but Rep. of Yemen, Honduras, data capacity Guyana Uganda building is part of project Downsizing High Significant Yes, to do it Russia, Bulgaria, one-time costs right (targeted) Tanzania, India Guyana, for retrenchment Uganda, Ethiopia, Rep. of Yemen, Cambodia, Sri Lanka Compensation reforms Yes, in egalitarian Yes Yes Bulgaria, Albania Guyana, cultures, where lower Indonesia, ranks are politicized Rep. of Yemen or where unions Pakistan are strong Human resource Yes, especially in Moderate Yes Bulgaria, Bolivia Ghana management reforms patgronage-based (pilots), Albania systems Organizational reforms Moderate Modest Yes Russia, Ghana India, Tanzania Demand-side reforms Moderate Modest Yes Tanzania, Uganda, India Training No Modest No Ethiopia, Russia, Bolivia Rep. of Yemen Source: IEG country case studies. dant or duplicative functions were eliminated; in reform has been relatively unsuccess- In the past five years, Ghana, some minor process improvements have ful, as is apparent from table 5.3. A merit-based measures for been reported. However, in other case studies, similar table using a non-Bank indica- civil service reform have these reviews generally did not lead to real process tor (the public administration rating increased. changes. There has been some reform effort fo- of the ICRG) also gave an unsatisfactory cused on restructuring, including agency au- result. Also, countries getting more Bank loans tomation, such as in Tanzania. On demand-side (development policy or investment) for CSA re- reforms, citizen charters, standards of service, or form did not do better on average than those other mechanisms like client service units and getting only one. The question is, why? And why surveys have been introduced in some countries were there successes in some cases? (Ghana, India, Russia, Tanzania, and Uganda), with favorable results beginning to show in some places. The case studies show that reform in the area of CSA has been extremely challenging, even in a rel- Outcomes. Despite the continued efforts and atively supportive environment. The cases high- some modification of the approach, civil service lighted a number of country-specific reasons why 53 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Figure 5.1: Number of CSA Projects with Various ing. In addition, the strength of trade unions in the Subcategories of Conditions public sector can subvert downsizing, pay, and merit-based reforms in an otherwise supportive po- 30 litical regime. Concerted government effort partly overcame this in Burkina Faso and Guatemala, but not in Honduras. 20 Despite these political, cultural, and institutional challenges, the cases give some examples of suc- cessful CSA reforms. Six factors seem to have 10 contributed to these successes--and in their absence, likely contributed to reform failures: an- alytic diagnosis and advice, pragmatic oppor- 0 tunism in selecting reforms to support, realistic 1982­86 1987­91 1992­96 1997­01 2002­06 external expectations, appropriate packages of Downsizing Compensation HR/Merit Op. Eff./Policy reform lending instruments, tangible indicators of success, and effective donor coordination. Source: Adjustment Lending Conditionality and Implementation Database and IEG staff calculations. Note: CSA = civil service and administrative; HR = human resources. Strong and coherent technical and contextual analysis. For CSA issues, the Bank's analytical implementation of these reforms--particularly tools are relatively underdeveloped and under- downsizing, pay decompression, and merit-based used. There is no standard Bank diagnostic in- reforms--failed. strument or report for the analysis of the civil service. The absence of a standard analytical tool Civil service reforms, First and most common, there can be is partly a consequence of the lack of interna- despite modifications in a lack of political commitment to reform tional consensus around the "right" civil service approach, have remained or a discontinuity over the implemen- model for developing countries, or indeed for a relatively difficult and tation period. In some countries, the developed countries. Debate continues about the often unsuccessful area of government may adopt reform strate- objective of CSA reform--whether it is afford- the Bank's assistance. gies and even pass new legislation. But ability, performance, or accountability--and the se- then as implementation starts up, mo- quencing and fit with political realities. mentum slows, delays occur, and projects can completely stall, such as in Ghana, Argentina, and The Bank has rarely analyzed the political con- the Republic of Yemen. This issue of political com- siderations that make civil service reform so dif- mitment can affect even the most uncontroversial ficult; the IGRs in Bolivia and Bangladesh are measures, such as introduction of new data sys- notable exceptions. As a result, many of the case tems, by reallocating resources or simply delaying studies attribute part of the failure to make head- projects because of staff turnover. way in CSA to the narrow scope of the Bank's an- alytical work. Changes in political leadership can also result in decisions to terminate, reverse, or dilute more The diagnostic work done by the Bank on ad- controversial reforms such as downsizing. In a ministrative and civil service reform is typically rel- number of countries, such as Bangladesh, Ethiopia, egated to one chapter of a broader piece of and the Republic of Yemen, the persistance of pa- analysis, most often a financial report of some type. tronage systems and politicization of In reviewing the country studies, for example, of The Bank's analytical the bureaucracy undermined imple- 69 ESW reports that had some discussion of CSA, tools for analyzing CSA mentation in the review period, par- only 5 were freestanding analyses of civil service issues are underdeveloped ticularly those reforms that affect pay, issues; 39 were PERs or other financial reports; 6 and underused. recruitment, promotion, and downsiz- were CEMs; and 19 were parts of other broader 54 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA papers. Although the number has grown--25 re- other examples where contextual Analytics tend to focus ports during the 1990s, increasing to 44 in the past analysis was carried out to good ef- on civil service reform 7 years--the bias toward using financial report- fect. Understanding labor market con- affordability issues rather ing vehicles remains strong. As a consequence, the ditions has been an important part of than on performance. CSA analyses tend to focus on affordability issues successful contextual analyses. Unfor- rather than on performance or accountability.12 tunately, the more common experience has been This is not to deny the importance of affordabil- the opposite--the absence of good diagnosis ity, but rather to note that it has not usually proven and analysis can lead to inappropriate reforms or successful as an entry point for dialogue on civil failure to convince governments to take action. service reform. This issue was highlighted in a number of case study countries, including Ethiopia, Ghana, Effective analysis of CSA issues is made more dif- Guyana, and Indonesia. ficult by the scarcity of standardized data, such as numbers of staff by grade and occupation group, Taking a pragmatic and opportunistic approach as well as data on the wage bill. Nor do standard to CSA reforms where the institutional environ- measures of performance or indicators of reform ment is challenging. Ingrained systems of pa- implementation exist. tronage political appointments are often at the root of problems with the civil service, which Recently, however, there has been some process successful diagnosis has understood. But the in this area. For instance, the CPIA question on Bank's traditional tools, especially lending con- quality of public administration has four sub- ditions, are ill suited to addressing this funda- components: policy coordination and respon- mental challenge. siveness, service delivery and operational efficiency, merit and ethics, and pay adequacy and manage- Some positive results are being achieved where ment of the wage bill. WBI governance indicators the design of reform measures is more pragmatic; also measure bureaucracy quality. Although there the reforms try to shift existing practice rather than is no civil service equivalent to PEFA, there have advocate all-or-nothing change. Russia, for ex- been a few diagnostic pilots in the Europe and Cen- ample, has started to require that new hires meet tral Asia Region (Albania and the former Yugoslav certain minimum qualifications even if the final se- Republic of Macedonia, for instance) and in some lection is politicized, to keep track of absentees, Indian states--measuring rates of turnover, shares and to make it easier to fire them. In Cambodia, of personnel recruited through competitive exams, selective, enhanced pay schemes have been used; and so on--but these have not been widely ap- at first the Bank and IMF staff were unsupportive, plied in other countries. concerned that a two-tier salary system would cause friction. But ultimately it was recognized that Often even basic data are lacking, and initial re- an informal two-tier system was already in place forms may involve personnel inventory and in- because of ad hoc donor arrangements and that formation systems. This is sometimes a good this program would encourage consistency and opportunity for an entry point to the civil service a better targeting of resources. Implementation reform agenda. However, the Bank has not (with of reforms through pilots--as in Russia--when a other stakeholders) developed or promoted an ad- more comprehensive approach would likely fail equate framework and tools to incorporate CSA can also be more effective in riskier environments. issues into the standard diagnostics. Realistic expectations by the donor community. Russia is an example of a country for which the It is now well acknowledged that CSA reforms take Bank provided good quality analysis and advice time to implement and to show tangible results. on CSA reforms that was well received and val- Tanzania provides a good example of a reform ued by the client and that helped support the process where the Bank and other donors have client's reform agenda. Bolivia and Honduras are let the government take the lead in terms of pace 55 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? and direction and have shown patience for build- ducive to this effort is the development of pay- ing capacity. In this case, the Bank has used a roll and human resources databases, as well as longer-term and more flexible lending instrument training and capacity building in support of PFM. (such as an adaptable program loan) and has pooled funds with other donors to respond to this Another strategy is to develop measurable indi- reality. cators of results. The Albania case study shows some progress in this area, with the Bank sup- Other cases, however, show that Bank and other porting the development of a number of civil donors can have expectations that are too short service­related measures, such as the percentage term, which inevitably sets the reforms up for of recruitment done by merit, which the gov- failure. The Republic of Yemen offers an example ernment is now tracking on a regular basis. These of this. It is also true that unrealistic expectations are not final outcome measures, but they provide can be created by the political leadership within a more transparent method of demonstrating the country (such as Ghana), where broad and am- progress in implementation. bitious strategies are at times promoted and ap- proved, but implementation stalls as vested A few other countries are tracking similar meas- interests coalesce. ures, such as FYR Macedonia and some Indian states, but there is no standard set of indicators Appropriate package of lending in- or wide adoption that is similar to the PEFA indi- Case studies show that struments. The case studies show that cators. Further effort in this area is certainly worth technical assistance technical assistance funded with in- pursuing. funded with investment vestment loans has been a particularly loans has been important tool for encouraging civil The case study of Russia offers additional insights. particularly important service reform, especially in poorer Its reform agenda began with economic reforms in encouraging civil countries where capacity levels are and then moved to fiscal reforms. Russia has service reform. usually very low. In some of the cases, more recently reached the stage where poor ca- such as Cambodia, Honduras, and Tan- pacity is holding back other reforms, and with this zania, the combination of policy-based lending realization at the political level, there is now a supported by technical assistance was a positive growing acceptance of the need for civil service feature, particularly in countries with low capac- reform. Not only has this case shown the impor- ity for implementation. tance of building demand for CSA reform through identifying tangible benefits, but it also shows In other cases, where only development policy that it is possible to proceed with some elements lending supported civil service reform, the lack of of reform in the absence of or in advance of com- supporting technical assistance was a hindrance prehensive action. to progress. Learning from such experiences some- times led to the revival of investment lending to Effective donor coordination. In some countries, support civil service reforms. In Uganda, the gov- reform strategies have become joint efforts with ernment did not initially allocate enough budget the donor community, with positive effects. Tan- resources to the CSA reforms; now bilateral fund- zania, Bulgaria, and Guyana provide good exam- ing supports them. ples, as does Ghana with its joint CAS process. In some cases, the Bank has shown itself to be an ef- Tangible indicators of success. Unlike tax re- fective facilitator, and results have generally been form, where leaders see obvious ben- more positive than when it has tried to drive re- Linking CSA reforms to efits, the political leadership cannot forms (such as downsizing) in the absence of po- PFM reforms may help easily identify tangible benefits of CSA litical commitment. Interestingly, Tanzania's reform overcome the perceived reform. Linking CSA reforms to more agenda suffered in the early years because an un- lack of tangible benefit concrete PFM reforms where possible coordinated approach by donors resulted in con- to CSA reform. is one way to address this. Most con- flicting advice and multiple agendas. This situation 56 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA changed when the government successfully de- objectives include preparation for ac- There have been positive manded better coordination among donors. cession to the European Union (Bul- effects where tax reform garia), adapting tax administration to a strategies have become These various Bank strategies to support CSA re- free market economy (Russia and other joint efforts with the forms in the case study countries are consistent Eastern European countries), and in- donor community. with and reflect a number of the recommenda- creasing transparency and efficiency tions from the 1999 IEG evaluation. For instance, to improve the image of tax administration with that report emphasized the need to preface re- voters and the business sector. form design with institutional assessments of ad- ministrative systems and analyses of labor market Over the past decades there have been several trends in addition to budget scenarios. However, trends in tax administration reform: this type of analysis is still the exception rather than the norm. · Reorganization of tax departments along func- tional lines Another recommendation proposed that the Bank · Establishing a comprehensive system of tax- engage in a more participatory approach to reform payer identification numbers design and implementation. This is now hap- · Computerization pening, for example, in Tanzania. The Bank has · Granting autonomy to tax departments also made progress on the report's recommen- · Establishment of large taxpayer units. dation to coordinate better with other donors and focus its input where it has a comparative ad- All these measures helped improve the effec- vantage. In Bulgaria, for example, the Bank pro- tiveness of tax administration, but none was a vided a roadmap for reform, but other donors magic bullet. A judicious combination of these provided the technical assistance for specific re- measures with others, such as simplification of forms. The development of standardized per- procedures, appropriate collection systems, ef- formance measures, as is being tried in Albania, fective audit and appeal mechanisms, adequate was a recommendation from the 1999 report. human resource policies, and well-designed tax- payer information and service systems, are all Tax administration necessary to increase the effectiveness of tax ad- What was the support for tax administration try- ministration and reduce opportunities for cor- ing to achieve, and why did it usually succeed? Tax ruption. Although there is not a unique ideal administration reforms aim--or at least should administrative model that fits all revenue agencies, aim--primarily to increase voluntary compliance. there is a widely recognized set of administrative Other important objectives include raising more strategies that allows experts to usually agree on revenue, reducing evasion, and making the pat- the main set of reforms needed in a country. tern of tax collection and incentives correspond Some of these are captured in the PEFA indicators, to those intended in the legislation. This evalua- three of which deal with tax administration, each tion does not discuss tax policy (legislation), al- with three subdimensions. though tax administration is tax policy in the sense that what actually gets implemented is what To develop an appropriate reform strategy, suc- matters (Bird and Casanegra de Jantscher 1992). cess has depended on starting with a good diag- Legislated tax policy also matters for administra- nostic of the problems of the existing tax tion, of course, with clarity and the absence of ex- administration. With respect to both diagnosis emptions in the law facilitating collection, and strategy design, it is advisable to compliance, and enforcement. profit from work done previously by The Bank's entry point for other donors--for example, the IMF tax administration For tax administration reform, the typical entry in Albania, Bulgaria, and Tanzania-- reform has typically been point for the Bank's policy dialogue has been the and complement it with Bank work. A the need to increase government's need for additional revenue. Other pilot approach to tax administration revenues. 57 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? reform has proven successful in many cases. In More contribution from Bank staff has been some countries, implementation of the value- needed and is beneficial, according to the case added tax has been used as a pilot for introduc- studies, when there are tax administration proj- ing modern systems of taxpayer identification, ects, which the IMF does not have the instru- tax collection, and so on (for example, Albania). ments to design, finance, or supervise. Bank staff In other countries, the establishment of large tax- expertise is very thin in tax administration, as payer units has served the same purpose (for ex- noted in chapter 3, so care is needed to maintain ample, in Bulgaria and Russia). it and perhaps deepen it. Outcomes. Among the 27 countries with tax Anticorruption and transparency administration investment projects approved or What was the support for ACT trying to achieve? still active in 1999­2006, more than three-fourths The Bank's standard definition of corruption has showed improved CPIAs (1999­2006) for rev- been "the abuse of public office for private gain" enue mobilization; seven had major improve- (World Bank 1997a). Although this does not in- ments. In contrast, among countries with tax clude all kinds of corruption, it matches well the administration conditions in DPLs but no corruption concerns for reform of the core pub- investment/technical assistance loans, only a bare lic sector. majority showed improvement--not much bet- ter than in countries with no tax administration The attention to anticorruption and transparency lending. Doing a complete reform of tax admin- in CASs, AAA, and projects has grown strongly istration takes some time--most of the Bank's tax since the late 1990s, when the "C word" first gained administration investment projects lasted five to official usage. Initially, corruption only appeared seven years, and more than 80 percent had to be in the CASs of countries that were enthusiastic re- extended to achieve the desired results. Patience formers or that were heavily aid dependent. It has paid off. was prominent in the 1997 Indonesia CAS and in- cluded in the 1998 Honduras and Bolivia CASs. It Most of the Bank's Working with other donors has been has become standard in PRSCs, starting with the tax administration important in most of the cases studied. first in Uganda. investment projects have The IMF often helps with the diagno- been extended, but they sis and strategy; others, such as DFID As more countries have opened up on the topic, have usually paid off. and the European Union often help it has become a negative point of note if a coun- with cofinancing. Still, the role of Bank try does not say it is doing something about cor- expertise is important; even when the IMF is pro- ruption. Even the most ardent opponents of viding a lot of technical advice, having the Bank discussing the topic initially now have something help design and manage the actual project has on it in their CASs or Country Partnership Strat- been essential, according to interviews with coun- egy. Real action has come more slowly. The Bank try counterparts. And the IMF is not always avail- and others usually distinguish two broad types of able; in those cases, the in-house expertise and corruption--state capture (or grand) and bu- consultant roster of the Bank become even more reaucratic (or petty) corruption--and two ways important. of combating it--indirect and direct--as laid out in table 5.4, showing some examples in each of On diagnosis and general strategy for tax ad- the categories. ministration (and treasury), the IMF routinely takes the lead, as in Bulgaria, Guatemala, Russia, State capture gets the front-page headlines: "Hun- and Uganda. The Bank has a good manual on tax dreds of millions stolen and stashed overseas" administration (Gill 2000), but it has not been up- or "Public enterprises sold to insiders for 20 per- dated. Only a few regular Bank staff have the ap- cent of true value." It also includes more subtle propriate expertise, so consultants have often examples, where persons with political authority been used when IMF support was not available. make decisions, without explicit bribes, that ad- 58 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA Table 5.4: State Capture and Bureaucratic Corruption, and Indirect Ways to Combat Them Types of corruption State capture Bureaucratic Examples · Corrupt award of big contracts · Bribe taking or extraction · Embezzlement of public funds · Skimming paychecks · Kickbacks from big international corporations · Nepotism in appointments · Privatization to insiders at bargain prices · Selective enforcement of taxes · Absentee employees, teachers, doctors · Doctors using public facilities for private paying patients · Teachers tutoring for pay to prepare students for tests Ways to combat Indirect Transparency · Civil service pay reform · Publication of budgets and actual spending-- · Expenditure tracking surveys with comprehensible formats · Bank payment systems for taxes and public salaries · Access-to-information law · Public announcement of hiring opportunities · EITI · Removal of ambiguity from laws and regulations · Independent audits published · Procurement reform Publication of opportunities Competitive bidding E-procurement · Anticorruption commission with high power · Anticorruption commission with low-level mandate Direct · Public officials' disclosure of assets · Prosecution/fining/firing of bribe takers · Investigation and prosecution of officials' · Code of conduct for public officials unaccounted-for wealth · Public officials' disclosure of assets · Stolen asset recovery · Investigation and prosecution of officials' unaccounted-for wealth Source: IEG assessment. Note: EITI = Extractive Industries Transparency Initiative. vance the particular interests of their family and doses the stolen millions would buy, and these business associates. calculations assume that efficient noncorrupt in- stitutions use the funds--that is, without much bu- Bureaucratic corruption usually gets less media reaucratic corruption. Grand corruption is rightly attention but can have serious impacts on devel- condemned for setting a bad example at the top, opment: some teachers and doctors frequently fail but the "little guys" at the bottom would tolerate to come to work, without consequences. People it less if they were not also getting some morsels have to pay bribes to get birth certificates or ac- from petty corruption. cess other public services. In considering the outcomes for anticorruption The two phenomena have intrinsic links, how- and transparency efforts, one must keep in mind ever. Costs of grand corruption are described in that there are many aspects of the anticorruption terms of how many school books and medicine agenda that are not considered here--such as 59 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? legal and judicial systems, public utilities, and pri- CPIA 16, but not usually reduction in corruption vate corporations--and that CPIA 16 considers not per se. only the ultimate objective of lower corruption but also transparency and accountability. Both are As with civil service reform, reducing corruption process inputs for reducing corruption, as well as involves deeper and more politically challenging for other objectives. change than in PFM. Even today's relatively low corruption in upper-income countries did not As shown in table 5.1, only 53 percent of countries come about quickly, but often took generations. getting PSR lending showed improvement in CPIA Bank programs can have only marginal effects 16, but the difference between IDA and IBRD on whether and when the political will material- borrowers is the largest of any theme. The IDA izes to address corruption. The Bank's lending countries that borrowed for PSR did little better support for anticorruption efforts has mostly used than those that did not. IBRD countries, in con- indirect methods, which still predominate, often trast, had a 61 percent improvement rate, almost through reforms to PFM, civil service, and tax ad- as good as for PFM. Europe and Central Asia had ministration, as discussed above. the strongest performance, with 79 percent of bor- rowers improving, compared with none of the Reducing opportunities for corruption by sim- nonborrowers. In half of the Europe and Central plifying procedures and regulations and getting Asia countries that borrowed for PSR, CPIA 16 im- incentives right through, for instance, personnel proved by 1.0 or more during the period remuneration schemes, are systemic approaches 1999­2006. that have been incorporated in Bank support to PFM, tax administration, and civil service reform. Although many Other indicators round out this pic- The expressed objectives have been to make pub- countries now talk ture. With the Corruption Perception lic institutions more efficient, transparent, and about corruption, Index (from Transparency Interna- accountable--all goals valuable in their own right action has been slow. tional) and the Worldwide Governance that also contribute to reducing corruption. Some Indicator for Control of Corruption empirical evidence supports the latter connection, (from WBI), about half of the countries getting PSR although some of the better government effec- lending improved their corruption ranking from tiveness is explained by higher income, which 1999 to 2006, which is only 4 and 10 percentage also correlates with both variables (Kaufmann, points, respectively, better than the countries Kraay, and Mastruzzi 2005; Islam 2003). with no PSR lending.13 In a variety of places examined for this evalu- For IDA countries, the improvement is slightly ation--Bulgaria, Guatemala, Indian states such less, and there is no difference from countries as Andhra Pradesh, Indonesia, Russia, and Tan- without PSR lending. Because these results are zania--improvements to PFM (sometimes in- based on rankings, they change at least a little cluding implementation of PEFA) and tax even if nothing changes in the country's per- administration improved transparency and re- formance. The small or zero difference with non- duced bureaucratic corruption. State capture borrowers implies no significant improvement. has been more difficult to address, and the eval- With the ICRG rating on corruption, the percent uation did not find clear evidence of success in the of PSR borrowers that improve is much cases examined, at least not in the time observed. In some of the case lower--only 13 percent--and only 2 A sample of HIPC countries that have imple- study countries, percent of countries without PSR lend- mented PEFA showed a similar pattern; the CPIA reforms on other public ing show improvement. These results transparency and corruption indicator (16) has not sector themes improved from the non-CPIA indicators are con- improved for the majority of the countries (all re- transparency and sistent with results in most of the case ceived PSR lending), even though a majority of the reduced bureaucratic studies--there is improved trans- PEFA indicators showed improvement relative to corruption. parency, which explains the improved the previous (HIPC) assessment. 60 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA Why did the Bank-supported ACT programs agnostic also addresses the importance The development and use achieve as much as they have? Why has there not of providing information as a moni- of diagnostic tools has been more progress? Three groups of issues seem toring tool, as well as a tool for em- helped identify potential relevant: diagnosis and analysis (AAA), indirect ver- powering stakeholders. Monitoring problem areas. sus direct approaches to different levels of cor- and follow-up to the diagnostics have ruption (state capture or bureaucratic), and often not happened, with exceptions that in- supply-side versus demand-side approaches. clude Paraguay. AAA. Anticorruption and transparency diagno- Although there is no PEFA indicator for corrup- sis and monitoring has been a major growth in- tion, improvements in the 28 areas covered by dustry within and outside the Bank for the past PEFA can help reduce opportunities for corrup- decade (Levy 2007; World Bank 2006c). Some of tion. Most CPARs and CFAAs do not adequately ad- this work, like the World Governance Indicators dress the question of how well procurement and (from the WBI), tells about aggregate percep- financial management systems protect against or tions of the quality of governance in a country. reduce the risk of corruption. They do not discuss These indicators have served to alert authorities specific methods to identify corrupt practices that there is some problem; they can show and measures to deter them in procurement and medium-term results if things improve through financial management. They rarely look at the in- government efforts or other factors, but they do centives for corruption in these areas. A few have not connect to what the government controls di- done so, such as for Bolivia and Indonesia, and rectly. Thus, they are not actionable. Some indi- with broader application this could help countries cators, such as the Doing Business reports, tell reduce corruption (IEG 2007). about governance issues facing private investors. For instance, researchers in Italy have developed BEEPS gathers data about actual government a method to measure corruption by comparing practices toward the companies surveyed, and the growth of infrastructure stock with amounts these are, therefore, actionable indicators for con- of spending. In the context of Bank work this structing a business-friendly environment.14 BEEPS would also identify the project areas where cor- was conducted in 2000, 2004, and 2006, and the ruption is draining off the most public invest- changes over the period show a record of im- ment resources (Golden and Picci 2005). provement in PSR borrowers, similar to that from CPIA 16. BEEPS does not cover many aspects of The World Bank has been instrumental in devel- public sector corruption, because of its focus on oping new tools that help improve transparency business issues. That focus, however, is important and societal accountability, such as the PETS in for attracting foreign investment and therefore get- 13 countries and quantitative service delivery sur- ting the attention of political leaders. veys in FYR Macedonia and Papua New Guinea (DFID n.d.). Although some of the instruments In 19 countries, the WBI has done extensive gov- used by the Bank and bilateral donors to assess ernance diagnostic studies, with much attention fiduciary risk have been useful for identifying in- given to anticorruption and transparency.15 WBI stitutional weaknesses in the PFM systems of de- diagnostics in Ghana and Guatemala, among veloping countries, especially the PEFA framework, the case study countries, were central to devel- the absence of political and cultural factors in oping extensive anticorruption strategies. The these analyses reflects a general weakness in Bank diagnostic is a potentially important tool for and donor approaches to anticorruption. unbundling corruption, identifying weak/strong institutions, and assessing the costs of corrup- Indirect or direct approaches for different tion on different stakeholders. Moreover, it iden- levels of corruption. Many of the previously tifies key determinants of good governance in mentioned reforms to PFM, civil service (recruit- a number of countries. This WBI governance di- ment and pay reform), and tax administration are 61 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? Box 5.2: Extractive Industries Transparency process of information about mineral revenues Initiative­Multi-Donor Trust Fund stimulating domestic political demands for ac- countability and for more information. If a coun- Thus far, 22 developing countries have signed on to the Extractive Industries try already has the infrastructure of inquisitive Transparency Initiative (EITI)--14 in Africa, 3 in Europe and Central Asia, media, opposition parties, and democratic budg- 2 in East Asia, and 3 in Latin America and the Caribbean. eting, EITI could have good effects on trans- To help countries implement the principles, the Multi-Donor Trust parency and corruption in a few years. In most Fund for the EITI was established in 2004 through an agreement between of the EITI signatory countries where the Bank DFID and the World Bank. The governments of Germany, the Nether- has provided support, however, there are great lands, and Norway joined in 2005. The goal of the EITI­Multi-Donor Trust needs for institution building.16 Fund is to broaden support for the EITI principles and process by estab- lishing extractive industries transparency initiatives in countries. The Direct anticorruption efforts supported by the Multi-Donor Trust Fund is an arrangement whereby the Bank manages Bank have mostly targeted bureaucratic corrup- funds on behalf of multiple donors. tion, such as an anticorruption commission with The EITI­Multi-Donor Trust Fund currently funds activities in more than low-level mandate, prosecution and firing of those 12 countries, and the EITI has been endorsed in almost 10 more. Coun- who take bribes, establishing a code of conduct try-specific grant agreements are signed between the recipient country for public officials, requiring public officials to and the Bank to define and establish which activities are to be executed disclose their assets, and investigation and pros- by the recipient. ecution of officials' unaccounted wealth. In Gua- temala, however, the government showed only Source: EITI Web site (http://www.eitransparency.org). limited support for strengthening the anticor- ruption commission, even as it supported mea- important indirect ways to reduce bureaucratic sures--computerized systems for financial corruption by reducing opportunities and incen- management information and procurement-- tives for corrupt acts. Increasing transparency and that indirectly reduced corruption. access to information in all parts of the public sector also help reduce state capture by supply- Most of these direct anticorruption mechanisms ing information that the media, civil society, and also have potential against senior politicians and the broader political process can use to demand businessmen involved in state capture, but they accountability and uncorrupt behavior from po- are rarely invoked except to settle political scores. litical leaders. Support for these measures has In Indian states, the anticorruption commis- been the most important way to date that the sions--some of which are supported in Bank op- Bank has advanced the anticorruption effort. Ex- erations--usually can investigate officials above a amples include the civil service, procurement, certain level only with permission of the head of financial management, and tax administration the administration. The issue illustrates the diffi- measures in Albania, Bolivia, Guatemala, Russia, cult balance between protecting officials from and the Republic of Yemen. politically motivated prosecution and making sure that all are subject to anticorruption rules. Against state-capture corruption, the Extractive In Ghana, the Commission on Human Rights and Industries Transparency Initiative (EITI) has re- Administrative Justice has a small anticorruption ceived Bank support for the interna- unit cofunded by the government and donor; it Reforms to financial tional set-up and for implementation has reported that the government has restrained management, civil in at least 12 of the 22 developing its work and independence. service, and tax countries that have signed on (box administration are 5.2). EITI improves transparency on Tanzania had a good enquiry (United Republic of important indirect the revenue side, but its potential and Tanzania 1996) into forms, loci, causes, and reme- approaches to reducing hoped-for effects in reducing corrup- dies for corruption. Its main recommendation the potential for tion and increasing transparency in was to treat the problem of corruption by start- corruption. the use of funds depend mainly on a ing at the top, but the government has not im- 62 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA plemented the recommendations. The Good Gov- category, in that the reforms are sup- Direct anticorruption ernance Coordination Unit (donor funded but plied by the government (perhaps in re- efforts supported by the staffed with Tanzanian civil servants) and the Pre- sponse to domestic or international Bank have mostly vention and Combating of Corruption Bureau demands) and address corrupt prac- targeted bureaucratic have not done much yet. The national anticor- tices by the government (perhaps in corruption. ruption strategy and action plan theoretically em- response to bribes that accompany pri- powers private citizens to take up a corruption vate sector demands). In its transparency and an- issue, but none seems to have done this with any ticorruption efforts (like the rest of PRS), the effect. Although the plan seems an ambitious and Bank has focused mainly on the supply side, all-encompassing anticorruption approach, it lacks because it generally works with governments serious mechanisms to monitor compliance or to and needs those governments' approval for its hold implementing agencies accountable. Indirect activities. anticorruption efforts through financial manage- ment have been more effective through the Min- Nonetheless, there are more than a dozen proj- istry of Finance and the Public Procurement ects listed in the GAC (World Bank 2007c) with Regulatory Authority. Support to the National components aimed specifically at the demand Audit Office has also encouraged demand-side side for PSR in the areas of this evaluation. Most transparency. of them include measures to strengthen the over- sight capacity of legislatures and their audit com- The Bank's country strategy and major opera- mittees. Other support for the demand side tions have directly addressed state-capture cor- includes WBI courses and contact with civil soci- ruption only in rare cases, when deep political and ety, the media, and NGOs. Some programs, for economic crises exposed the corruption of old example, in Guatemala and Indonesia, include regimes and brought in new ones dedicated to a measures to strengthen grassroots monitoring fresh start, such as in Indonesia in the late 1990s of local infrastructure developments and assist the and Nigeria after 2003. Advocating wholesale media in enhancing transparency. Transparency transformation of neopatrimonial governments and accountability of the budget processes are also has been politically difficult for the Bank and is usu- reflected in some country portfolios, such as in ally avoided, even when formal or informal ana- Uganda. Generally, however, supply-side factors lytic work identifies the problem, as it did in are at the core of the Bank's support of anticor- Bangladesh, Bolivia, Peru, and the Philippines. ruption. In particular, this applies to support to improve PFM legislation, public procurement sys- Focusing reform efforts on combatting bureau- tems, capacity of the auditor general's office, and cratic corruption seems unfair if state-capture cor- CSA, especially payroll reforms. ruption is persisting, but it may serve to make public service delivery more efficient and helpful Increasing awareness of the potential role of civil to citizens while staying within the bounds of po- society in fighting corruption has only materialized litical feasibility. Reducing state capture (if possible) in a few of the Bank's anticorruption lending would make reduction of bureaucratic corruption programs. For example, reforms in Ghana to more effective and sustainable, and reducing bu- strengthen good governance and social account- reaucratic corruption seems to have some use ability have to an important extent been demand in itself and may help move the broader political driven from civil society; the Freedom of Infor- culture toward opposing grand corruption. In mation Act is expected to further strengthen the perception-based indicators of corruption, how- voice of civil society. In Indonesia, demand-side ef- ever, the persistence of state capture may obscure forts brought in civil society and local progress in fighting bureaucratic corruption. stakeholders to perform monitoring Country strategies and and evaluation functions, especially in Bank operations have Supply- and demand-side approaches. The decentralization projects, investment rarely addressed state measures discussed above are in the supply-side climate surveys, and PETS. capture directly. 63 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? In Ukraine, the Bank has supported a program pecially IDA countries. Most developing coun- called Voices of the People. This program's goal tries today (as with Western Europe and the is to improve municipal-level integrity by strength- United States 150 years ago) have political systems ening the voice of citizen groups as they demand that depend fundamentally on patronage. In these better services and governance. The Canadian places the recommendation to be opportunistic International Development Agency also supported in fighting all types of corruption often degener- this program. It started as a pilot in four cities, ates into a game, where prosecuting corruption monitoring local service delivery, promoting NGO when it becomes most obvious or politically capacity, and facilitating public involvement in vulnerable leads to it popping out elsewhere. An government decision making. Positive reaction to open dialogue about the realistic options is the first phase led to the addition of six more needed. cities for the second phase, starting in 2003. The typologies of corruption elaborated above still The persistence of state The cases and literature reviewed raise do not provide a way to assess the cost of differ- capture may obscure challenges to traditional supply-side ent corruption types to development, set the cor- progress in fighting approaches--leaving it to the govern- responding priorities, and choose remedies that bureaucratic corruption. ment and a country's legal institutions work for the relevant situations.17 The experi- to devise and enforce public account- ences in Indonesia, Nigeria, and Russia suggest ability. Conventional mechanisms, such as anti- that reducing the development cost of corruption corruption commissions and audit and legislative is a politically attainable goal, even where pa- reviews, may not be enough (Reinikka and Svens- tronage is ingrained in the political system. Even son 2006, p. 368). Collusion, organizational in patronage-based, corrupt governments, most deficiencies, abuse of power, and lack of respon- leaders want to have at least somewhat more and siveness to citizens have been hard to detect and better public services and infrastructure in re- rectify, even with the best of supervision. When turn for their patronage spending. Beyond keep- the institutions are weak, as is common in de- ing corruption out of the projects it finances veloping countries, the government's potential (which should be a high priority because the role as auditor and supervisor is even more projects are presumably of high value for devel- constrained. opment), the Bank has not developed a system- atic way to determine how it can and should work Evidence suggests that corruption can be sub- in such situations. stantially reduced only when the supply-side re- forms are complemented by systematic efforts to increase the citizens' capability to monitor and Summary Lessons from Thematic challenge abuses of the system and to inform the Comparisons citizens about their rights and entitlements. Break- ing the culture of secrecy that pervades the gov- Standards and measurements ernment functioning and empowering people to Actionable indicators exist for PFM and tax ad- demand public accountability are important com- ministration. Indicators exist for corruption per- ponents in such an effort. ception, but mostly they are not actionable. Indicators for transparency are being developed Tailoring an anticorruption strategy to coun- in some areas--such as the Open Budget Proj- try circumstances. The Bank dutifully repeats ect--and could be replicated in others. These in- the mantra of "no one size fits all," yet it has dicators have sometimes been used to define not developed guidance on what to do if the project objectives and baselines, but this could be Chilean or Nordic size--that is, the size that fits done more systematically. That would give more most countries where the Bank lends--does not objective indicators for judging project outcomes, come close to fitting in the country at hand, es- rather than relative to objectives defined in terms 64 PUBLIC SECTOR REFORM OUTCOMES AND PERFORMANCE BY THEMATIC AREA unique to each project, as is now the case with al- form, there is less clarity about what content most all projects. should be. Capacity building needs to include not only technical skills but also skills in manag- For civil service, a few indicators exist, such as ing and monitoring people. number of public employees, wage bills, disper- sion ratios for wage rates, and (occasionally) ab- Interdependence of the thematic areas senteeism. However, these are not widely or The analysis of PSR by themes should not leave systematically tracked. Also there is not a set of in- the impression that they can or should be dealt ternationally standardized indicators established with in isolation. There is a particular temptation within a coherent framework for analysis. to leave civil service out, as out of fashion or too difficult in practice, although it is sometimes also Core agenda to be adapted dismissed as "easy, if there is only the political will." Everyone agrees that one size does not fit all, but Nonetheless, CSA reform affects the incentives and it also seems important to start with a basic adapt- capacities of the people who have to implement able pattern and from that learn the best ways to reforms in all the other areas, so it cannot be adapt it. PFM, transparency of budget, and tax ad- ignored. ministration have such patterns, which the Bank, the IMF, OECD, and various other agencies and In the CPIA, the ratings for PFM are usually bet- bilaterals have helped develop. ter than for CSA, but never by more than one grade (except in one country that has 5.5 for PFM For civil service and administration, there is no and 4.0 for CSA). Improving PFM to the point such a pattern, although the beginnings for it have where it gets beyond just processes and has real been tried in isolated instances. Where manage- effects on public service performance and ac- ment of civil service and other personnel is countability has not happened without also im- weak, the Bank has had some successes in sup- proving the civil service. porting the gathering of reliable data on num- bers, total compensation, and attendance and The extent of coordination among Bank staff spe- the institutionalization of these processes. Im- cializing in the themes discussed here varies proving the links between personnel manage- within the operational Regions. Country cases ment and financial management information and other staff interviews revealed that in (large) systems has also been a useful way to get a tech- country offices, where the specialists sit in prox- nocratic start on problems that are often highly imity, and in Latin America and the Caribbean, with politicized. country management teams representing all the areas, there tends to be better coordination. In Motivation and competence of counterparts other contexts, the Bank has not developed ad- In PFM and tax administration, a lot of project, equate institutions to avoid having silos in the AAA, and IDF resources go to capacity building in Bank reflect and reinforce those that exist in the the counterpart agencies. In the areas of CSA re- client countries. 65 Chapter 6 Parliment building in Cape Town, South Africa. Photo by Trevor Samson, courtesy of World Bank Photo Library. Strategic Summary, Ratings, and Recommendations T he motivation of countries for PSR has varied widely and mostly has involved factors beyond the control of the World Bank Group. Aware- ness of the motives is important for the Bank to choose the appropriate instruments. Reform Motivations, Expectations, and government was eager to do as a remedy for fis- Success Factors cal crisis. Actual and potential taxpayers suffer in Popular pressure and the desire for faster eco- a fiscal crisis, so they are then more likely to sup- nomic growth and improved public services fre- port better revenue collection. South Korean quently motivate reform. In countries with businessmen were explicit about this in 1998, as well-established democratic processes and a free they increased voluntary tax compliance to help press, such as Mexico, Costa Rica, Chile, India, and the country during the financial crisis. The Min- the Czech Republic, the demand for PSR has been istry of Finance, the World Bank Group's typical substantial. counterpart, is motivated to see reforms in these areas and is the typical agent for accomplishing The Bank has sometimes played an encouraging them. role by fueling the demand with information, working with local think tanks and academic in- So the fiscal crisis motivation most often leads to stitutions, and supporting special institutions, tax administration and PFM as entry points (Rus- such as Mexico's Federal Institute for Access to In- sia, Tanzania, Colombia, Indian states, and Ar- formation. Participatory PERs in Tanzania, Uganda, gentina). In rare cases, the government has and Vietnam that the World Bank supports have successfully used civil service retrenchment as a increased the popular interest in public expen- fiscal development policy measure (Tanzania and diture and whetted the appetite for more infor- some Indian states), but more often this does mation, especially in local think tanks and NGOs. not go beyond temporary freezes on salaries and But these types of PERs are still not common. hiring. Fiscal crises are almost always temporary, so except as memories they do not sustain the mo- A fiscal crisis has frequently motivated coun- tivation that is needed for more complex reforms tries to seek support from the Bank and other that take longer to implement. donors for PSR, especially if financial assistance is expected. Among the four areas of PSR discussed European Union accession has also success- here, tax administration and basic financial man- fully motivated PSR, and the positive results are agement have been most frequently what the striking. Other factors may also have contributed 69 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? to these positive outcomes, such as completing · Second, the Bank is often the leader of a con- the dual transitions to democracy and from state- cert of donors, which adds to the financial planned to market economies. The governance leverage but also makes the demands more CPIA ratings for the 10 accession countries have diverse and less focused, as each donor has its almost all improved since 1999.1 own set of priorities. The Bank has helped co- ordinate these demands--sometimes at a gov- Although this specific model is not replicable in ernment's request--with varying degrees of most other parts of the world, three features of success. In Tanzania and Guyana, this went rel- the situation of the European Union accession atively well, but in other cases--Bangladesh countries have general lessons. First, the European and Honduras--multiple agendas led to overly Union's conditions for entry are comprehensive complex sets of conditions. and standardized, with the pre-announced re- · Third, the Bank may find itself under pressure wards (accession and major funding) dependent to lend for various reasons--international po- on the extent and pace with which the country litical strategy, defensive lending to avert default, meets the standards. Second, the promise of re- or the momentum of delivering budget support wards and enforcement of standards are both on a predictable annual cycle. It has some- highly credible and extend over a long period-- times done this despite PSR conditions that forever on the issue of admission. Third, the Eu- are vague or not well enforced, as a way to jus- ropean Union­accession scenario enhanced the tify the lending. This type of lending under- World Bank's effectiveness by emphasizing its mines the credibility the World Bank's seal of role as an advisor and facilitator, not an arm approval for PSR programs. twister, and its relatively small financing for PSR · Fourth, the Bank's tight schedules for com- had importance mainly through the earmark of mitment and disbursement of lending, espe- money for technical assistance and the supervi- cially for IDA, often conflict with the long period sion process. typically needed to implement PSR and the need to respect political cycles and build con- A fourth category of motivation, and one over sensus and capacity. Investment projects did which the Bank has considerable control, is better in this regard, especially if they were financial support, which includes general adaptable program loans, like the public service budget support through loans, credits (IDA loans), reform loan in Tanzania. These relatively small grants, debt relief (HIPC), and investment loans investment projects were useful as a financial for the costs of specific PSR activities. Budget incentive to the implementing agency, but not support often carries high hopes as a motivator, for political ownership by the government as but four realities have limited the effectiveness of a whole. Consequently, the most effective PSR financial support as motivation for reform: support from the Bank has often come in sit- uations where the country does not urgently · First, countries where the Bank has the most need lending. financial leverage have the furthest to go to im- prove institutions, but the weakest capacity to Expectations for the progress and effects of PSR implement change. Countries with strong in- are the foundations for motivating the govern- stitutional capacity to implement change, in ment to undertake them and the Bank and other contrast, are also likely to have good access to donors to finance them. Thus, the ideal balance is financial markets and are thus less motivated for expectations to be high enough to motivate but by the attractiveness of Bank financing. In- not so high that they misguide efforts or that fail- deed, some see the acceptance of Bank fi- ures to meet them erode credibility and commit- nancing as the price to pay for getting the ment. Expectations for PSR have often been expertise that comes with the money--a price unrealistic. Some of this is due to overstated goals these countries are still willing to pay. and the mismatch of objectives with disbursement 70 STRATEGIC SUMMARY, RATINGS, AND RECOMMENDATIONS timelines. The generic problem was recognized at typical: "The single most important point about least as early as the 1992 Wapenhans report (World institutional change, which must be grasped if Bank 1992a), and the programmatic development we are to begin to get a handle on the subject, is policy (now, development policy) loans and adapt- that institutional change is overwhelmingly in- able program loans were introduced as instru- cremental" (North 1990, p. 89). Although there ments to allow longer time horizons.2 would seem to be more evidence of success of in- cremental rather than strategy-driven reform, Nonetheless, the momentum of high budget- both types have worked at times, and both have support programs encouraged the search for suc- sometimes failed. cess stories that were sometimes overhyped and led to overstated objectives, at least in the period One pattern we do see is that rapid reform only under evaluation. Thus, compared to middle- succeeds when there is strong support at the be- income countries that pay essentially the full mar- ginning--European Union accession countries ket rate for loans, the pressure to exaggerate was are the best group of cases--whereas gradual re- greater for the IDA countries, which faced if any- forms have sometimes succeeded when public thing greater challenges to produce results in the support was initially weak (but did exist), be- short and medium term. cause early successes of reform pilots builds sup- port for more. Expectations about reforming civil service and reducing corruption have been especially difficult With either pattern of reforms, it has been use- to manage. Successful reforms in these areas have ful for the Bank to get a comprehensive and po- taken a long time in any country, with important litically savvy overview and strategy at the historical antecedents. Although the Bank dutifully beginning, which then gets modified as events un- repeats the mantra of "no one size fits all," it has fold. This need not be formal ESW, publicly dis- not developed guidance on what pace of progress seminated. Sometimes a background paper on to expect, given the initial conditions in a coun- sensitive political issues can be presented as re- try. Most developing countries today (such as search in an academic setting, with a government Western Europe and the United States 150 years representative as discussant; the Bank then need ago) have political systems that depend funda- not take an official position. The case studies mentally on patronage. Some countries have pro- show that with governments unsure about doing gressed more quickly in recent years, but an open PSR, focused and technocratic AAA (not neces- dialogue about the realistic expectations has been sarily formal ESW) has often opened the door missing. for wider dialogue and eventually for lending sup- port for PSR. Country PSR Strategy Entry Points In concluding, there are two cross-cutting ques- The Bank and its borrowing partners have tried tions: First, what should be the scope of reforms? a variety of combinations of investment lending Second, what is the best mix of policy-based and and development policy lending, including for investment lending? the support of PSR. Investment and technical as- sistance lending by itself can work well when the There are continuing debates over whether re- government has the appropriate policy and legal forms should be rapid and comprehensive in framework in place and the implementing agency scope, taking a "big bang" approach, or incre- has good motivation, institutional autonomy, and mental and opportunistic (Wescott 2006). Some clear access to the funds. This is more likely to pre- stress the need for a "top-down," politically driven, vail in middle-income countries and more mod- all-encompassing reform process to take advan- ern Indian states. Where the appropriate policy tage of narrow windows of opportunity. In con- framework and incentives are not in place, an in- trast, North views piecemeal reforms as more vestment loan will not generate them, even with 71 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? a willing implementing agency, as in Venezuela and as a way to focus the learning process. Nonethe- Argentina. less, the country outcomes carry over somewhat to the ratings of Bank performance, as it contrib- Where the country is getting substantial Provin- utes to outcomes. cial Reform Loan or PRSC funds, the Bank and other development partners often have assumed For every cell of the resulting 2 ? 5 matrix, shown that governments will give adequate resources and in table 6.1, there are examples of highly satisfac- attention to implementing institutional reforms, tory work. So the results reflect the median, based but this has not always happened, as seen in mainly on the tasks that were done but also con- Uganda and Bangladesh (see IDD & Associates sidering opportunities missed. Almost every bor- 2006). In such cases, the big but not always reli- rower country needed some support in every cell able inflows of budget support go to the large of the matrix. Sometimes other development part- high-priority areas, such as education and health; ners covered part of the program, so the Bank this is appropriate, but the details of implement- played a lesser role there and in some cases played ing new systems of financial management or per- none. In every case the Bank and country au- sonnel administration get bypassed. thorities (and often other development partners) share the credit or blame for the outcomes, with However, in other cases, channeling aid through the Bank having more control and therefore more country systems has strengthened budget pro- responsibility for the AAA and the countries hav- cesses, including comprehensiveness and trans- ing more control over the selection, design, and parency. In cases where there is a multiyear especially outcomes in the project areas. investment technical assistance loan, especially an adaptable program loan, then the agency man- The ratings here focus on Bank performance, aging the project gets funds as needed for im- particularly the more strategic aspects of setting plementation but also gets the long-term and agendas, fostering synergies within country port- focused attention of the supervision team, which folios, and allocating and organizing Bank re- may help to improve fiduciary systems. sources. Thus, the ratings here differ from those for individual PSR projects, which are usually Summary Evaluation Ratings rated satisfactory for Bank performance. To arrive at summary ratings, the evaluation builds up from ratings in each of the four themes and dif- In the PFM area, the diagnostics have developed ferentiates AAA and funding operations. Because strongly, especially since 2000, with PEFA and the borrower performance and outcome are so Public Expenditure and Institutional Reviews being heterogeneous and largely beyond the Bank's highly satisfactory examples. In most cases, the control, the ratings here are for Bank performance Bank offered well-structured packages of lending Table 6.1: Overall Bank Performance Ratings, 1999­2006 Reform area AAA Lending Public expenditure and financial management Highly satisfactory Moderately satisfactory Civil service and administration Unsatisfactory Moderately unsatisfactory Tax administration N.A. (IMF usually leads) Satisfactory Direct anticorruption and transparency Moderately unsatisfactory Moderately unsatisfactory Integration and consistency across themes Moderately unsatisfactory Moderately unsatisfactory Overall Moderately satisfactory Source: IEG assessment. Note: AAA = analytical and advisory activities; IMF = International Monetary Fund. 72 STRATEGIC SUMMARY, RATINGS, AND RECOMMENDATIONS support, although sometimes the packages were ruption in the core PSM areas that are the focus overly complex or gave too little attention to be- of this report. The CPAR and CFAA, for instance, havioral aspects of institutional change. Govern- have not usually given much attention to cor- ment ownership for PFM investment projects was ruption issues pertaining to procurement and fi- usually good, because the main counterparts--the nancial management. The requisite analysis of ministries of finance--have a clear interest in political factors in the specific country contexts was such projects. Implementation of the budget-- typically missing. procurement and financial management--still has received too little attention, especially in pol- Even more than in other areas, top-level govern- icy reform lending projects. The set-up of Bank ment ownership is essential for making progress projects with PIUs and ring fencing has some- against corruption, but the diagnostic work and times hindered improvement in financial man- program design rarely took this into account. agement of the rest of the country's resources. Furthermore, adequate guidelines for how to do this did not exist, even in the 2007 GAC strategy. For civil service, there has been some improve- (The learning process under way for its imple- ment in the decade since the previous IEG eval- mentation aims to address this, but it is beyond uation, but not enough. Although some projects the scope of this evaluation.) have followed and had success with incremental approaches that emphasize improving person- Because the main themes of PSR--PFM, civil ser- nel management, in other places the Bank (often vice, and anticorruption--look at different sides with the IMF) continued to support simplistic re- of essentially the same phenomenon, the whole trenchment programs of the same sort that failed portfolio of Bank support for PSR should be in the past. Too often CSA diagnostic AAA is sim- greater than the sum of the parts. But it is less. ply not done before projects tackle reform, as in Coordination and integration across the themes 8 of 18 case study countries. The absence of a good has often been inadequate or lacking, although analytic and diagnostic framework hinders both this improved in some country programs during AAA and projects for CSA reform. Promising pi- the evaluation period. The country GAC strate- lots in a few countries have not been replicated gies, now being developed as pilots, offer an op- widely or brought into a multiagency context to portunity to address this shortcoming more build international consensus for the equivalent systematically. of PEFA. Analysis and projects do not focus often enough on the features that would do the most The overall rating for Bank performance is mod- to improve the quality and efficiency of service de- erately satisfactory, although the picture is het- livery, although there has been some movement erogeneous. PFM has been the largest area of in that direction. Bank activity for PSR, and performance there has been moderately to highly satisfactory. This out- Tax administration, the smallest area of Bank ac- weighs the shortcomings in other areas. tivity in the PSR field, illustrates the potential for reform when there is a good diagnostic and reform Recommendations framework (typically led by the IMF) combined There are many favorable trends in PSR that the with typically enthusiastic government support Bank should continue to pursue and many areas and effective project management from the Bank. where improvements are needed. This chapter highlights three recommendations. Anticorruption and transparency is new as an area of its own. The Bank has done a lot of sur- Recognize the complexity and political nature vey work that contributes to anticorruption di- of PSR agnosis, especially to improve the environment for First, the design of PSR projects and resource al- business (as with BEEPS), but there has been less location to them needs to reflect the fact that diagnostic work at the country level about cor- they face more complex political and sequencing 73 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? issues than in most traditional areas of the Bank's would feed into the country GACs mandated by activity. This implies, therefore, the need to (i) set the 2007 GAC. Based on this, the country teams project objectives with realistic recognition of would clarify the sequencing and priorities with the time it takes to get significant results, (ii) un- which they would be addressing the long-term derstand the political context, identifying pre- agenda of reducing corruption and improving requisites to achieve the objectives, and (iii) focus other aspects of governance. first on the basic reforms that a country needs in its initial situation and that generate political sup- Enabling such diagnosis at the country level may port for the process. require a strategic framework from the center. The country team might meet as a group to compare The PEFA indicators provide a good basis for this and synthesize knowledge about areas where cor- in the PFM area, because they will track incre- ruption is a problem. Comparing cost of corrup- mental progress. As institutional change needs sus- tion across all sectors may not be possible in the tained support, that support usually needs to near term, but the country GACs could include include investment projects; although develop- AAA to assess the costs of corruption within spe- ment policy lending can help secure the enabling cific areas that previous information (Worldwide policy changes, it is not generally a substitute for Governance Indicators, CPIA, CPARs) identifies as investment loans. problematic--such as business licensing, pro- curement, and tax administration. The political complexity and typically longer du- ration of public sector reforms mean more ana- For instance, researchers in Italy have developed lytical and preparatory work, including on political a method to measure corruption by comparing the issues. They also mean that any one loan, espe- growth of infrastructure stock with amounts of cially fast disbursing, will promise more modest, spending, which in the context of Bank work incremental progress. For some countries, these would also identify the project areas where cor- changes may entail more loans per year. Invest- ruption is draining off the most public investment ment loans will often need to have longer dura- resources (Golden and Picci 2005). The Bank's di- tion. This does not mean to stop encouraging a agnostic work looks comparatively at corruption government to progress as fast as possible, but it costs to some extent already, as in Doing Business does recognize the value in setting more realis- and BEEPS. The recommendation is to do this tic targets that, when accomplished, will enhance more systematically, aiming at comparability. An al- the credibility of public sector reform in that ternative approach could look comprehensively at country and more generally. all areas (procurement, human resources man- agement, taxation, licensing and regulation, and These considerations are especially relevant for so forth) of one or more sectors identified as piv- countries starting with weaker-than-average ca- otal for that country--such as natural resource pacity, and the initial steps there may need to focus management, health, or agriculture. on capacity building and data collection. Coun- tries with severe governance problems, where the To complement estimates of the cost of corrup- "bottom billion" live, may need more AAA for tion, institutional and political analysis (perhaps PSR--nonlending technical assistance as well as for- in the Institutional Governance Review format) mal ESW--prior to policy reform lending. would need to consider the cost and feasibility of the measures that aim to reduce the most costly Prioritize PSR efforts types of corruption. Having zero tolerance for Second, devote more effort at both country and corruption in Bank-financed investment projects thematic levels to identify in each country where makes sense in light of their high value for de- PSR--including anticorruption efforts--will con- velopment (that is why the Bank finances them) tribute most to poverty reduction and growth. This and the strong institutional mechanisms that are 74 STRATEGIC SUMMARY, RATINGS, AND RECOMMENDATIONS available to fight corruption in these projects. with a better framework, and give more attention These justifications from the country point of to the budget-execution phases of PFM. Despite view are in addition to the rationale of protecting the difficulties of improving CSA reform, it is not the anticorruption reputation of the Bank. something that can be ignored. Improving PFM to the point where it gets beyond just processes To reduce the negative effect of corruption on and has real effects on public service performance growth and poverty reduction, Bank support for and accountability has not happened without PSR should emphasize (i) building systems (in also improving the civil service. areas such as PFM, procurement, tax administra- tion, and human resources management and in- A better framework for CSA reform will require formation systems, as well as in licensing and things such as elaboration and implementation of registration services, social services, and so on) that a PEFA-like set of actionable indicators for CSA per- reduce the opportunities for corruption that is formance, which is foreseen in the 2007 GAC strat- most costly to development (including any that egy. There may need to be variants corresponding might be in Bank-supported projects) and to different types of public administrations--such (ii) making better information public (as with as presidential, continental European, and White- PETS, EITI, publicly discussed PERs, citizen re- hall. These indicators would guide the analysis of port cards, and so forth) in ways that stimulate pub- CSA issues in CASs/Country Partnership Strate- lic demand for more efficient and less corrupt gies, as would AAA and lending. service delivery. As the framework for CSA diagnosis and reform Building the capacity of demand-side institutions, improves, the Bank's staffing for public manage- like the legislature and its audit office and the news ment, including the civil service area, may need media, is often needed to complement the meas- enhancement in line with its importance in the ures to improve access to information. Only when lending programs. Finding resources for this will the country has both strong political will and an face the usual budget constraints, and manage- adequate judiciary system should the Bank's sup- ment may consider shifting some resources out port for anticorruption put primary emphasis on of standard macroeconomic analysis, especially anticorruption laws and commissions. where the Bank's program is relatively small and the IMF already does a lot of analytic work. For in- Set a better framework for CSA stance, the Bank might consider having a politi- Third, keep CSA reforms (including human re- cal scientist or public management specialist with sources management systems) as a major com- some macroeconomics background as the core ponent of PSR, but design and implement them of its team for some small countries. 75 Segment of mural El Buen Gobierno by Diego Rivera (1924). Courtesy of Universidad Autónoma de Chapingo, where this mural appears in the Administration Building. Appendixes APPENDIX A: DATA SET DESCRIPTION: PUBLIC SECTOR REFORM LENDING, AAA, AND INSTITUTIONAL DEVELOPMENT FUNDS 1. Lending that project was added. Many of these projects The lending projects included in this public sec- were already included from the first process. tor reform (PSR) evaluation were selected through two processes, both looking at projects approved The intersection of these two processes com- during fiscal years 1990 through 2006. One process prised 467 projects--the main database for the (with multiple steps) started with a list of projects evaluation. A list of these projects has been in- from the World Bank project database that had at cluded as appendix B (http://www.worldbank.org/ least 25 percent of the project dedicated to PSR- ieg/psr/appendix.html). For each project, de- related themes or sectors. scriptive information was also collected from an internal database, including a short description, PSR-related themes in this selection process in- commitment amounts, important dates, sector cluded administrative and civil service reform; board, network, project status, lending instru- public expenditure, financial management and ment type, and other information. procurement; tax policy and administration; other accountability/anticorruption; and other public Within the data set, the projects were coded to in- sector governance. PSR-related sectors included dicate whether they had components in the fol- central government administration, subnational lowing four thematic categories: public finance government administration, and general public management (PFM), civil service and adminis- administration. trative (CSA) reform, tax administration (TAX), or anticorruption and governance (transparency). The team examined each project's appraisal doc- umentation and included only the projects that Many of the projects in the database included ac- had objectives and policy actions pertaining to tivities in more than one of these categories. The public budgeting and financial management (in- percentage allocations2 of all of the themes related cluding audit and procurement), civil service and to PSR were combined to estimate a combined administrative reform, tax administration, and share of the project allocated to PSR. This num- anticorruption and transparency. ber was multiplied by the loan commitment amount to obtain a rough indication of funding Some development policy lending included so (in dollars) allocated to PSR. many sectors and themes that PSR-related shares did not make the 25 percent cutoff, even though 2. Analytic and Advisory Activities there were important PSR conditions. So the team The analytic and advisory activities (AAA) list used did a second selection process, using the Ad- the following criteria: justment Lending Conditionality and Imple- mentation Database. If there were at least three (i) Only AAA that was delivered to the client be- conditions required for loan disbursement as ei- tween fiscal 1999 and 2006 is included. Inter- ther prior actions or legal tranche-release condi- nal databases do not allow retrieving a tions1 in the focus areas of the evaluation, then complete list of AAA prior to fiscal 1999. 79 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? (ii) All core reports (Country Economic Memo- cover several sectors not captured by the randum[CEMs]/Development Policy Reviews internal Bank database). The total number [DPRs], Public Expenditure Reviews, Country of AAA projects is 803. This list is in appen- Financial Accountability Assessment, Coun- dix C (http://www.worldbank.org/ieg/psr/ try Procurement Assessment Reports) were in- appendix.html). cluded if they had as their main sector any of the following eight categories: general public 3. Institutional Development Fund grants administration, central government adminis- The Institutional Development Fund (IDF) list tration, public sector management, public fi- was based on a complete list of active and closed nancial management, civil service reform, IDFs (which began in fiscal 1992). The team fol- other public sector reforms, institutional de- lowed a procedure similar to steps (iii) and (iv) velopment, and subnational government. for AAA. Team members carefully read the titles (iii) For the noncore AAA, the team carefully read of all IDFs that were either mapped under the sec- the titles of all AAA that were either mapped tor boards Public Sector Governance, Financial under four sector boards (Public Sector Gov- Management, Procurement, and Economic Policy, ernance, Financial Management, Procurement, or that had as their main sector one of the eight and Economic Policy) or had as their main sec- categories (general public administration, cen- tor one of the above eight categories. AAA tral government administration, public sector that had a heavy sectoral focus was excluded management, PFM, civil service reform, other from this list. public sector reforms, institutional development, (iv) For the AAA that did not fall under the above and subnational government). IDFs with a heavy four sector boards or eight sector categories, sectoral focus were dropped from this list. For the the team used word-search techniques and IDFs not under the above four sector boards or added those products relevant to our evalu- eight sector categories, the team used word- ation. Once the core and noncore lists were search techniques and added the ones relevant to complete, the team classified each AAA as the evaluation. Once the list was complete, the PFM, TAX, administrative and civil service, or team classified each IDF as PFM, TAX, CSA, or anticorruption and governance (CEM/DPRs transparency. The total number of IDFs is 279. Ap- and Public Expenditure Reviews were classi- pendix D (http://www.worldbank.org/ieg/psr/ fied as generic PSR, because these products appendix.html) lists them. 80 APPENDIX B: STATEMENT BY THE EXTERNAL ADVISORY PANEL The Panel believes that the report Public Sector Re- the CPIA yardstick may be familiar to people form: What Works and Why? by the Independent in the Bank, it is not well known outside the Evaluation Group (IEG) provides a very competent Bank (indeed, CPIA scores for middle-income and informative analysis of the Bank's efforts to pro- countries are not publicly available). This mote PSR from 1999 to 2006. The importance of means that they (unlike, for example, the World good governance to development has been well Bank Institute Worldwide Governance Indica- established in the academic literature at this point; tors) have not been carefully scrutinized ex- given the large and steadily increasing amount of ternally for possible biases, endogeneity, and PSR lending by the Bank, evaluation of the Bank's so forth. It may well be, as the report sug- efforts in this regard is critical. gests, that no better set of indicators exists, but it is worth explaining at greater length how the The history of the Bank's involvement with PSR CPIA scores are derived and their possible in the report is very useful, and the four main the- weaknesses. matic areas highlighted--public financial man- 2. As far as the Panel can tell, the statistical analy- agement, tax administration, CSA reform, and sis is not based on a full-blown multivariate sta- anticorruption and transparency--cover the most tistical analysis that seeks to isolate the degree important dimensions of PSR. The report appro- of variance in governance outcomes accounted priately recognizes the underlying complexity for by Bank PSR programs. It is therefore not and the challenges posed by PSR and is sensitive possible to know with any reasonable confi- to the multivariate and bidirectional nature of dence the extent to which improvements in causality in government performance. The Panel public sector performance result from Bank also commends the three-pronged approach of PSR operations versus other factors, such as the country case studies, thematic assessments, and intensity of PSR activities, complementary pro- statistical analysis as an appropriate methodology grams by other donors, or exogenous trends for an evaluation in this intrinsically difficult area. (such as European Union accession). The Panel The report underlines the importance of per- appreciates that it may not be possible to per- forming a broad political economy analysis before form this kind of analysis given the limitations proceeding with PSR and the need for the Bank of the data, but more explicit recognition of this to include more noneconomists on its country problem would have been appropriate. teams to help in this effort. We fully endorse this 3. The report makes some scattered allusions to recommendation. the importance of stimulating demand for good governance, an issue that has been under The Panel feels that the report's findings could be considerable discussion within the Bank in re- strengthened or extended in the following areas: cent years. However, the conclusions and rec- ommendations make no reference to a possible 1. The statistical analysis in chapters 4 and 5 re- role for the Bank on the demand side. lies very heavily on Country Policy and Insti- 4. What is most striking about the report is the tutional Assessments (CPIA) scores. Although finding that public financial management and 81 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? tax administration operations have been rea- the growing mobility of skilled labor and com- sonably effective in improving public sector petition from the private sector that have been performance in most Bank client countries, but brought about by economic development and that civil service reform and anticorruption globalization. Corruption is often driven by efforts have not had a significant impact on out- key political actors (who, on occasion, are comes. Accordingly, the Panel expected a rec- members of governments that are clients of the ommendation that the Bank should focus Bank and whose behavior may not be cor- much more heavily on the relatively technical rected by anything that the Bank or other areas of public financial management and tax donors can offer). The report suggests that administration that it knows best. There is no civil service reform and anticorruption and such recommendation. Somewhat inexplicably, transparency efforts take a long time to ger- the report recommends that the Bank con- minate; it may be, however, that external donor tinue with civil service reform and anticor- interventions are permanently hostage to local ruption and transparency efforts (albeit and global conditions over which the donors prioritized and based on better analysis), as op- have no control. posed to confronting more forthrightly the possibility that the Bank may have reached The IEG report provides an excellent analytical the limits of potential effectiveness in these basis for understanding both the importance and areas. functioning of PSR. Its evaluation of the Bank's 5. The Panel believes that there are a number of recent work in this area is quite frank and sug- reasons why this may be so, which could have gests important new directions for future strat- been further elaborated in the report. Civil egy. We fully support the Bank's focus on service reform, for example, is limited by fis- anticorruption, transparency, and good gover- cal constraints that many countries face and by nance more generally. Members of the External Advisory Panel Shankar Acharya Indian Council for Research on International Economic Relations Francis Fukuyama School for Advanced International Studies, Johns Hopkins University 82 ENDNOTES Chapter 1 by the IEG team. The process used to select these 1. Updates of the strategy implementation were projects is described in appendix A. These projects produced in 2003 and 2006 and shared with the Board. will sometimes be called "PSR projects." A complete list 2. The European Commission offers the follow- of the projects is provided in appendix B (http://www. ing definition: "Governance refers to the rules, worldbank.org/ieg/psr/appendix.html). processes, and behavior by which interests are artic- 2. Of projects approved in 2000­06 that were man- ulated, resources are managed, and power is exer- aged by other sector boards, 89 percent were adjust- cised in society. The way public functions are carried ment loans. out, public resources are managed, and public regu- 3. Of the 219 adjustment projects from 1998 to latory powers are exercised is the major issue to be ad- 2006 on the IEG list, the Public Sector (and Gover- dressed in that context" (European Commission 2006, nance) Board managed 79 projects, the Economic Pol- p. 14). icy Board managed 88 projects, and other sector boards 3. The evaluation does not cover tax policy, be- managed 52 projects. cause that is not directly related to how the government 4. PSR components made up 75­100 percent of 45 organizes itself. projects, 50­74 percent of 157 projects, and 1­49 per- 4. In the SAP system coding of projects, this is the cent of 201 projects. category called Anticorruption and Governance. Be- 5. On average, this is about $42.5 million per loan. cause governance also refers to a much wider agenda, 6. The number of PSR projects was the highest in however, including more than just the PSR topics fiscal 2005, with 59 projects, about 22 percent of all treated here, and because the topics under the gover- World Bank projects approved that year. nance part of Anticorruption and Governance are 7. PSR lending per year was $429 million (nominal) mainly about transparency, this evaluation calls the cat- in 1987­99 and $1,983 million per year in 2000­06. egory Anticorruption and Transparency. PSR lending was particularly high in fiscal 2002 (espe- 5. This is similar to the one in the 2006 Public Sec- cially via IBRD loans) because of several large PSR loans tor Strategy Update, table 19. to Turkey (two), Pakistan, Argentina, Russia, Mexico, and the Democratic Republic of the Congo. Chapter 2 8. The AAA section is based on the following eval- 1. The word "governance" was added in 2003, mak- uations: IEG 2007; World Bank 2003b, 2004c, 2005, ing it the Public Sector and Governance Board. 2006a; IMF 2006. 2. "There is growing evidence that money lent for 9. An Integrative Fiduciary Assessment integrates the individual projects is, to some extent, fungible because work normally carried out through a PER, CPAR, and it frees up government resources to be allocated else- CFAA and may substitute for them. Comprehensive where . . . " (World Bank 2000, p. xvii). data on ESW and the PSR part of it are not available for years before 1999. Chapter 3 10. The Institutional Development Fund provides 1. The primary source of information in this chap- grants of up to $500,000 to help countries build capacity ter regarding World Bank PSR lending activities has in specific agencies (typically just one per grant) to been drawn from a list of projects carefully identified plan and implement policy reform and poverty- 83 PUBLIC SECTOR REFORM: WHAT WORKS AND WHY? reduction initiatives, promote sustainable economic 22. The percentage of PSR projects with PFM, CSA, development, and manage external assistance. and TAX components does not fall after 2000, even 11. For IBRD countries, AAA seems to be largely de- though the percentage of PSR projects with ACT proj- mand driven. ects increases significantly. 12. There were no obvious differences in PSR pack- ages between the blend and the full IDA countries. Chapter 4 13. Because IDA resources have a grant component 1. The CPIA is an internal World Bank measure of and the countries have little or no access to market fi- each country's present policy and institutional frame- nancing, the Bank presumably has more leverage with work, which is created annually by staff for essentially them than with the IBRD borrowers. all countries with the potential to borrow. "`Quality' 14. For the 21 IDA countries with initial governance refers to how conducive that framework is to foster- CPIAs below 2.5, a larger share of cases (9) had no ing poverty reduction, sustainable growth, and the PSR lending. Nonetheless, the Bank stayed engaged at effective use of development assistance. The CPIA least to the extent of doing some AAA in all but three ratings are used in the IDA allocation process and sev- countries. eral other corporate activities" (from 2005 CPIA 15. Only 4 of 62 had no PSR AAA or lending: Cen- Questionnaire). tral African Republic, Sudan, Kirbati, and Vanuatu. 2. CPIA data before 1999 are not comparable to the 16. The number of projects with PFM components current definitions. The World Bank Group has con- comprising 25 percent or more of the total amount tributed a lot to the production and understanding of increased from an average of 6 projects per year over governance indicators (see World Bank 2007c and the period 1990­99 (59 projects) to an average of Levy 2007 for reviews of this work). Most of the indi- 22 projects per year over the period 2000­06 (157 cators are about the political system, government projects). stability, and the environment for the private sector-- 17. If one focuses only on projects with more than most of which are not the direct concerns of this 25 percent in the PFM theme, the proportion of PFM evaluation. adjustment loans increased from 31 to 67 percent over 3. The case studies did not include any countries the respective periods (see appendix A). where the Bank had no lending for PSR, so there is not 18. The count of conditions here includes only solid evidence on these cases. There were examples in those that were in projects with at least three conditions Chile, Guyana, India, Mexico, and Russia, where each pertaining to the four PSR themes addressed in this re- country successfully pursued some important reforms port. One should be careful in using these numbers be- without lending, but with AAA from the Bank or sup- cause the conditions vary in difficulty and importance, port from other donors. which is not reflected in the simple count of numbers 4. The sample is based on the period in which the given here. projects closed in order to reduce sample selection 19. About 56 percent of these were adjustment problems. If the evaluation had looked at the set of proj- loans in 1990­99, and this increased to about 75 per- ects approved 1999­2006 and already closed and rated, cent during the years 2000­06. then it would have excluded projects that were de- 20. This is in contrast with the comparable data for layed in execution and extended. Because these would the PFM theme--where there was a strong increase in probably have been lower performing, the average rat- the use of policy-based lending and only a modest in- ing would have been biased upward. crease in investment lending since 2002. 5. Projects are matched to the recipient country's 21. As discussed elsewhere in detail, much of the CPIA score at project approval (for projects approved Bank's anticorruption "work" is not explicitly focused in 1999­2006; for others the 1999 CPIA is used). on anticorruption, but, instead is via other channels (in- 6. Since the end of the evaluation period (fiscal cluding the other three themes). This discussion refers 2006), the Mexico team completed an IGR with in- only to explicit anticorruption and governance depth analysis of political issues. The report used local components. academic consultants extensively and was an important 84 ENDNOTES piece to inform the Country Partnership Strategy tionable meaning, except in comparison to the coun- progress report and the forthcoming strategy. tries with no PSR lending. 14. BEEPS is a Europe and Central Asia­specific Chapter 5 variant of a number of enterprise surveys supported by 1. CPIA 14 for revenue administration includes tax the World Bank. policy and customs, as well as tax administration, which 15. Benin, Bolivia, Brazil (Rio de Janeiro), Burundi, is the theme in the projects considered here. Colombia, Ecuador, Ghana, Guatemala, Guinea, Haiti, 2. Recognizes cash transactions only. Honduras, Kenya, Madagascar, Malawi, Mozambique, 3. Recognizes transactions when commitments are Paraguay, Peru, Sierra Leone, and Zambia. http://web. made and accounts for depreciation of capital assets. worldbank.org/WBSITE/EXTERNAL/WBI/EXTWBIGO 4. Audit measuring compliance with laws and reg- VANTCOR/0,,contentMDK:20726148~pagePK:64168445 ulations in the use of resources. ~piPK:64168309~theSitePK:1740530,00.html. 5. Audit measuring economy, efficiency, and effec- 16. The Stolen Asset Recovery Project is a new ini- tiveness in the use of resources. tiative that the Bank has supported as an action against 6. This approach is under active reconsideration grand corruption. It has good potential for bringing by the Bank. stolen resources back to poor countries, and it has 7. Public Expenditure and Institutional Review is done so in some cases, such as Nigeria. It is too soon now often the title. to judge the effects on corruption. Moreover, moni- 8. The PEFA partnership includes the IMF, the Eu- toring what happens with the repatriated assets has yet ropean Commission, the UK's DFID, the French Min- to be addressed. istry of Foreign Affairs, the Royal Norwegian Ministry 17. Research by Khan and his coauthors has exam- of Foreign Affairs, the Swiss State Secretariat for Eco- ined how different forms of corruption or rent seek- nomic Affairs, and the Strategic Partnership for Africa. ing have different impacts on economic growth (for The PEFA secretariat is in the World Bank. example, Khan and Komo 2000; Khan 2004). 9. Outside the Bank, but used and supported by it, there is the Open Budget Initiative of the International Chapter 6 Budget Project, which monitors and rates countries in 1. Hungary and Poland, which joined the European detail for how well they give out public information on Union in 2004, did not improve their governance CPIAs the formulation and execution of the budget (www. from 1999 to 2006, because they were already high in openbudgetindex.org). PEFA, by contrast, looks at the 1999 because of earlier Bank-supported reforms. The process internal to the government, so the two are Czech Republic and Estonia had already graduated complementary. from Bank lending and CPIA ratings by 2006, with high 10. One of the countries, Pakistan, has conducted governance ratings. PEFAs at the provincial level for three of four provinces: 2. Other evaluations, of lending to middle-income http://www.pefa.org/about_test.htm. countries and of PRSCs, have and will examine the 11. PEFA is intended to motivate improvement in ac- overall effectiveness of these instruments. This tual PFM, but this has not happened yet to an extent evaluation considers them only in relation to PSR reflected in median CPIA ratings, which have not im- support. proved 2004­06 (or 1999­2006) for the majority of countries doing PEFA. Appendix A 12. For instance, the Guinea-Bissau PER update 1. That is, "desired action" conditions were not (World Bank 2007b) looks extensively at the fiscal di- included. mension of civil service reform, with no attention to per- 2. The team recognizes that the original coding of formance, quality of personnel, recruitment, or public these percentages is imperfect in that they represent sector organization. an approximation of the actual share of the program 13. Both these indicators are designed to give cross- dedicated to PSR at project design and may differ from section rankings, so the change over time has ques- implementation. 85 BIBLIOGRAPHY Bates, Robert H. 2001. "Institutions and Economic Per- Gill, Jit B. S. 2000. "A Diagnostic Framework for Revenue formance." In The Institutional Foundations of a Administration." Technical Paper No. 472, World Market Economy, ed. Gudrun Kochendorfer and Bank, Washington, DC. Boris Pleskovic. Berlin and Washington, DC: Golden, Mirian, and Lucio Picci. 2005. 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