Report No. 20369-PH Philippines Combating Corruption in the Philippines May 3, 2000 Philippine Country Management Unit East Asia and Pacific Region um Documenf of tbe World Bank CURRENCY EQUIVALENT (as of May 3, 2000) Currency Unit = Peso (PhP) US$1.00 = PhP41.27 FISCAL YEAR January 1 - December 31 Vice-President Mr. Jemal-ud-din Kassum, EAPVP Country Director Mr. Vinay Bhargava, EACPF Sector Manager n.a. Task Team Leader Mr. Vinay Bhargava, EACPF GLOSSARY OF ACRONYMS ABC Anti-Bribery Covenants ADB Asian Development Bank ASEAN Association of Southeast Asian Nations AusAID Australian Agency for International Development BI Bureau of Immigration BIR Bureau of Internal Revenue BOC Bureau of Customs BOT Build-Operate-Transfer CDF Countrywide Development Fund CESO Career Executive Service Officers CG Consultative Group CIA Congressional Initiative Allocations CIDA Canadian International Development Agency COA Commission on Audit CODE-NGO Caucus of Development NGO Networks CSC Civil Service Commission DBM Department of Budget and Management DECS Department of Education, Culture and Sports DENR Department of Environment and Natural Resources DILG Department of Interior and Local Government DOH Department of Health DOJ Department of Justice DOLE Department of Labor and Employment DPWH Department of Public Works and Highway GATT General Agreement on Tariffs and Trade GOP Government of the Philippines GTZ German Development Foundation HIID Harvard Institute for Intemational Development HRD Human Resource Development IICAC Independent Commission Against Corruption, Hong Kong ICCGC Inter-Agency Consultative Committee on Graft and Corruption IPD Institute of Popular Democracy IT Information Technology LGSP Local Government Support Program LGU Local Government Unit MNC Multinational Company MTPDP Medium-Term Philippine Development Plan NBI National Bureau of Investigation NEDA National Economic and Development Authority NGO Nongovernmental Organization NIA National Irrigation Administration NPC National Power Corporation OMB Office of the Ombudsman PALS Philippine-Australia Local Sustainability Program PCAGC Presidential Commission Against Graft and Corruption PCGG Presidential Commission on Good Governance PCIJ Philippine Center for Investigative Journalism PIDS Philippine Institute for Development Studies PTTAF Policy Training and Technical Assistance Facility SAL Statement of Assets and Liabilities SWS Social Weather Stations TI Transparency International UNDP United Nations Development Programme USAID United States Agency for International Development VAT Value-added Tax I.. I COMBATING CORRUPTION IN THE PHILIPPINES FOREWORD ................................................................................... i EXECUTIVE SUMMARY .................................................................................. ii WHY A STRONGER ANTICORRUPTION PROGRAM Now? .................................................................................. ii PREVALENCE OF CORRUPTION IN THE PHILIPPINES .................................................................................. ii GOVERNMENT'S STRATEGY AND PLANS FOR COMBATING CORRUPTION ......................................... ............................ Vi LESSONS FROM ASIAN AND GLOBAL EXPERIENCE ........................... ....................................................... vi A PROPOSED NINE-POINT APPROACH TO FIGHTING CORRUPTION IN THE PHILIPPINES ............... ............................... Viii IMPLEMENT1NG AN ANTICORRUPTION PROGRAM .............................. .................................................... xiii 1. INTRODUCTION: WHY FIGHT CORRUPTION? .................................................................................. 1 2. CORRUPTION IN THE PHILIPPINES ........................... ....................................................... 3 PREVALENCE OF CORRUPTION .................................................................................. 3 SPECIFIC ISSUES OF CORRUPTION .................................................................................. 9 3. KEY INSTITUTIONS ENGAGED IN THE ANTICORRUPTION PROGRAM IN THE PHILIPPINES .................................................................................. 16 GOVERNMENT STRATEGY PLANS FOR COMBATING CORRUPTION ............................................................................... 16 GOVERNMENT INSTITUTIONS .................................................................................. 16 CIVIL SOCIETY ........ .......................................................................... 18 DONORS .................................................................................. 19 4. RECOMMENDED ELEMENTS FOR A COMPREHENSIVE ANTICORRUPTION PROGRAM IN THE PHILIPPINES .................................................................................. 22 LESSONS FROM INTERNATIONAL EXPERIENCE .................................................................................. 22 A PROPOSED NINE-POINT APPROACH TO FIGHTING CORRUPTION IN THE PHILIPPINES ................ ............................... 30 5. IMPLEMENTING A COMPREHENSIVE ANTICORRUPTION PROGRAM ............. ......................... 36 ANNEX A: A HISTORY OF ANTICORRUPTION EFFORTS IN THE PHILIPPINES ............. ........................... 41 ANNEX B: THE PHILIPPINES' GOVERNANCE IMPROVEMENT AGENDA ................ .................................. 43 ANNEX C: PROFILES OF CORRUPTION .................................................................................. 45 ANNEX D: KEY GOVERNMENT ACTORS IN COMBATING CORRPUTION ................... .............................. 59 ANNEX E: SURVEY OF DONOR PROGRAMS FOR GOVERNANCE AND ANTICORRUPTION IN THE PHILIPPINES .................................................................................. 64 ANNEX F: CIVIL SOCIETY INSTITUTIONS IN ANTICORRUPTION WORK ................ ................................. 70 ANNEX G: PERCEPTIONS AND ATTITUDES REGARDING CORRUPTION .................... .............................. 73 ANNEX H: CORRUPTION AND THE PRIVATE SECTOR .................................................................................. 78 ANNEX I: THE ROLE OF CONGRESS IN THE FIGHT AGAINST CORRUPTION .............. .............................. 87 BIBLIOGRAPHY .................................................................................. 98 This paper was prepared under the leadership of Vinay Bhargava, Country Director, Philippines, with inputs from the following World Bank Staff: Robert Beschel, Bernard Funck, Nick Manning, Murray Proctor, Katherine Marshall, William Rex, Sonya Woo, Rajashree Paralkar, Ross Advincula, Sergio Lozoya. Edgardo Campos (ADB) and Vineeta Shanker (Consultant) also made valuable contributions to the report. F. Herrera-Lim, M Lozada and A. Tria assisted in document processing. COMBATING CORRUPTION IN THE PHILIPPINES FOREWORD Early in 1999, H.E. President Joseph Ejercito Estrada's administration asked the World Bank to make recommendations to help the government strengthen its fight against corruption in the Philippines. The World Bank agreed as the links between corruption and a country's development are becoming increasingly clear, and the World Bank is now actively helping a growing number of countries to address corruption problems. We now know that corruption reduces the effectiveness of poverty reduction strategies and hinders growth. Corruption is also known to affect the poor disproportionately, for it is the poor who lack the resources and information to demand services that are their due or to hold officials accountable. Combating corruption is therefore an important element in the World Bank's Country Assistance Strategy for the Philippines which calls for helping the Government reduce poverty. During the course of writing this report, many Filipinos have argued that corruption is not only an economic problem but also a profoundly ethical one. This report does not address the ethical dimensions of combating corruption, not only because such issues extend beyond the mandate of the World Bank but also because ethical issues need to be debated and addressed by the people of the Philippines and their elected representatives. The World Bank submitted its preliminary summary of findings and recommendations (as a draft paper on work in progress) to President Estrada on November 5, 1999. President Estrada announced that he planned to carry out its recommendations, and requested the Development Academy of the Philippines to produce a detailed national anti-corruption program and strategy. With the government's consent, the preliminary summary of findings and recommendations were published in December 1999 in the media, posted on the internet, and made available to the public on request. Since then, numerous articles have appeared in the press, supporting stronger public action against corruption, an issue of great concern to almost every Filipino. This final version of the report has benefited from the participation and feedback of many individuals, and I would like to express my thanks to all of them for giving generously of their time and knowledge. In particular I would like to thank the member agencies of the Inter-Agency Anti-Graft Coordinating Council for their helpful comments on the draft report. It is my hope that this report might make a contribution not only to government actions but also to increase the public's involvement on combating corruption in the Philippines since, as the President of the World Bank, Mr. Wolfensohn, remarked in his February, 2000 visit to the Philippines, "the issue of corruption in many countries is determined by the leadership and by the people of the country. And when they get fed up with it, something happens. And until they do, not a lot happens." Vinay Bhargava Country Director, Philippines World Bank Office Manila -i- COMBATING CORRUPTION IN THE PHILIPPINES EXECUTIVE SUMMARY Why a Stronger Anticorruption Program Now? 1. From an international perspective, a vigorous and credible program to combat corruption in the Philippines is vitalfor three reasons: * The Philippines is cited with increasing frequency (by business surveys, the media, and anticorruption watchdog agencies) as a country where corruption inhibits foreign and domestic investment and may be eroding the country's competitive position. Such investment is vital to economic growth and social well-being. As Asia recovers from crisis, competition among countries will intensify, and an explicit and credible anticorruption strategy, covering transparency and good governance, will be essential to give the Philippines competitive advantage. -o Because corruption undeniably saps resources available for development, distorts access to services for poor communities, and undermines public confidence in the government's will and capacity to serve the poor, an anticorruption strategy is an essential complement to Government's pro-poor and pro-growth stance. Popular opinion surveys in the Philippines (borne out by the World Bank's intensive recent consultations with civil society) make a strong link between good governance and meaningful efforts to combat poverty. * Corruption has emerged as a pivotal international criterion for allocating scarce development aid resources, and countries will increasingly be judged by their actions in combating corruption. Congresses and parliaments, in voting aid funds, expect a clear accounting on how corruption is addressed. The Philippines has the potential to excel in making real strides against this problem and thus stands to benefit from increasing (and better used) aid. Prevalence of Corruption in the Philippines 2. In preparing this study, the World Bank analyzed a wide and significant body of information and published reports from Filipino and international sources. This analysis is summarized in this working paper. As yet, the World Bank has not done any new surveys or research. The World Bank's analysis so far reveals a broad consensus in government, nongovernmental, and international circles that corruption in the public and private sectors in the Philippines is pervasive and deep-rooted, touching even the judiciary and the media. I 3. One recent source of information on this subject is "An Exploratory Study of Graft and Corruption in the Philippines" by Linda Luz B. Guerrero and Steven A. Rood. This 'See Chay Florentino-Hofilefia, News for Sale: The Corruption of the Philippine Media (Manila: The Philippine Center for Investigative Journalism and the Center for Media Freedom and Responsibility, 1998). - 11 - COMBATING CORRUPTION IN THE PHILIPPINES paper was published in the January-June 1999 issue of the PSSC Social Science Information of the Philippine Social Science Council (PSSC). It is based on data collected in September 1998 by the Social Weather Stations (SWS) with funding from the Asia Foundation. Among other things, the survey revealed that nearly two thirds of the respondents thought there was corruption in government-38 percent said "a great deal," 34 percent said "some" (Figures 1 and 2). Figure 1: Perceptions of the Degree of Corruption in the Philippines Govemment How much corruption is there in our government at present? 9% 19% U Agreatdeal U Some I1 A little 34% a None Source: 1998 Social Weather Stations Survey. Figure 2: Perceptions of Government Commitment to Combating Corruption ... is the government doing anything about it? 12% 15% *g A lot 23%. X Something __ Almost nothing 50% o Nothing at all Source: 1998 Social Weather Stations Survey. - 111 - EXECUTIVE SUMMARY 4. Another recent measure of prevalence of corruption in the Philippines is the Corruption Perceptions Index (CPI), published by Transparency International (website: http://www.Transparency.de). CPIs were calculated for 99 countries by conducting a "poll- of-polls." For the Philippines, the CPI was calculated as a composite index of 12 different polls and surveys. On a scale of 1 (high perception of corruption) to 10 (negligible perception), the CPI for the Philippines was 3.6 in 1999. Out of the 99 countries rated, the Philippines was perceived as the fifty-fifth least corrupt. 5. Most estimates of losses due to corruption are imprecise and not very rigorous. Estimates by the Ombudsman, the Commission on Audit, and the Philippine Center for Investigative Journalism suggest, however, that very large amounts of public funds are being lost to both political and bureaucratic corruption.' The above-mentioned study by Guerrero and Rood reported that in a September 1996 national survey by Social Weather Stations, respondents were asked how much they believed was wasted due to corrupt practices. Fifty-one percent of the respondents said that more than 50 percent of funding for road building was wasted. More than 60 percent of respondents said they thought that in the process of collecting taxes, providing free books to children in public schools, and installing modem equipment like computers in government offices, more than 30 percent of the funding was wasted (Table 1). Table 1: How much government funds do you think is wasted due to corrupt practices connected to... Providing free books Installing modem Collecting to children in public equipment in Amount of leakage Building roads taxes schools government offices More than 50% 51% 41% 30% 23% 30 to 50% 29% 31% 32% 39% Source: 1996 Social Weather Stations Survey. 6. Corruption is also perceived to be a problem in the judiciary. In a Social Weather Stations survey released in February 2000, 62 percent of respondents believed that there were significant levels of corruption within the judiciary. 65 percent of respondents believed that "'many" or "most" lawyers could be bribed, while 57 percent thought the same about judges. 7. Corruption is not just a public sector issue. As a frequent source of bribes for public officials, the private sector shares responsibility for corruption. For the first time, in 1999, Transparency International released a Bribe Payers Perception Index. This index ranks 19 leading exporting countries (mostly developed countries) in terms of the degree to which their corporations are perceived to pay bribes abroad. On a scale of 1 (high) to 10 (negligible), more than half the countries scored below 7, and about one third scored below I For details, see: Government of the Philippines, Office of the Ombudsman. Annual Reports; Civil Service Commission. Annual and other Reports; and Shiela Coronel, ed., Pork and Other Perks: Corruption and Governance in the Philippines (Manila: Philippines Center of Investigative Journalism, Evelio B. Javier Foundation and Institute of Popular Democracy, 1998). - iv - COMBATING CORRUPTION IN THE PHILIPPINES 5, indicating perceptions of widespread bribery by leading exporting countries. The Philippines was not a part of this survey. 8. In the Philippines, several instances of corrupt practices on the part of private corporations and individuals have been reported in the media. In a September 1998 Social Weather Stations survey, asked whether corruption happens in the private sector as well, 52 percent of the respondents said it did, even without the involvement of government personnel. Similarly, 66 percent of the respondents said that when corruption involves a businessperson and a govermment official, both parties are guilty. These findings show that, as a major source of the funds used for corrupt purposes, the private sector has to be mobilized to combat corruption. 9. While our analysis so far confirms that corruption is a sizeable problem in the PhUippines, it also reveals that progress has been made in the last decade in reducing opportunities for corruption through policy and regulatory reforms. The usefulness of year-to-year comparisons of the CPI scores is hampered by the changing sample and methodology, but the direction of change can be judged from historical scores over a long period of time. For the Philippines, Transparency International's estimates of CPI have steadily improved from a low of 1.04 in 1980-85, to 1.96 in 1988-92, 2.77 in 1995, and 3.6 in 1999 (a higher CPI on a scale of 1 to 10 means a lower perception of corruption). Though encouraging in the sense that progress has been made, the low score also says there is a long way to go (Figure 3). Figure 3: Transparency International Corruption Perception Index (CPI: Philippines Scores, 1980-99 Scale = 1 to 1 0, Higher Score means lower perception of graft and corruption. 4.0 3.5- 3.0 - 2.5- 2.0 - 1.5 1.-I- 0.5 - 1.0- S0ource Tnac n t W e s 1 91 o Source: Transparency International Website. Reports for 1994 to 1998. - v- EXECUTIVE SUMMARY 10. Our analysis also indicates that the Philippines today meets many preconditions that offer promise for a successful anticorruption campaign. The Philippines' vibrant civil society and media have brought public focus to the issue. Other positive elements include: considerable knowledge about the problem; examples of successful anticorruption programs in key agencies; a legal framework for addressing the issue; and the existence of specific institutions charged with combating corruption in the public sector. Although corruption is a complex and deep-rooted problem in the Philippines, one that may take a long time to eradicate, it is encouraging to note that the public has faith that the problem is not insurmountable, judging by the fact that 59 percent of the respondents in the September 1998 Social Weather Stations survey thought the government could be run without corruption. As shown in Figure 2, two out of three respondents also feel that the government is doing something about the corruption problem. Government's Strategy and Plans for Combating Corruption 11. The government's Medium-Term Philippine Development Plan 1999-2004 (MTPDP) recognizes that improving governance is essential for achieving MTPDP growth and equity objectives. The plan acknowledges weaknesses in public sector capabilities in policy and program implementation; poor national and local government accountability; endemic graft and corruption; lags in law enforcement and justice, with rare convictions in high- profile cases; and faulty delivery of services to the poor. The government presented infornation on plans to fight graft and corruption at the March 1999 Consultative Group (CG) meeting with the donors. It outlined the following initiatives: * Enhancing government efficiency, effectiveness, and accountability by instituting performance-monitoring and evaluation, reengineering all agency operations, rationalizing civil service pay, investing in information technology to strengthen local government unit (LGU) capabilities, and seeking businesses and civil society as partners with the government. * Improving economic governance by establishing a new national accounting and auditing system and a multiyear expenditure framework, pursuing an expanded privatization program at both national and local levels, and involving private sector and civil society in the design, delivery, and monitoring of antipoverty programs. * Eliminating graft and corruption by mounting a multipronged strategy encompassing further liberalization, deregulation, civil service reform, and institutionalization of a participatory approach to social service delivery and its monitoring. * Improving civil peace and order. Lessons from Asian and Global Experience 12. International experience offers many insights and concrete ideas for renewing the Philippines' anticorruption effort. A rich and growing body of experience shows that corruption can be addressed at the national level and that well-led and well-designed anticorruption programs can show significant and rapid results. Clearly essential to success, however, are specific, tailor-made programs, firmly set in each country's culture and history and a sustained political will and leadership (Box 1). - vi- COMBATING CORRUPTION IN THE PHILIPPINES 13. Based on a comparative analysis offive Asian countries (India, Hong Kong, Mongolia, the Philippines, and Singapore), Professor Jon S. T. Quahi of the National University of Singapore, draws six lessons for designing successful anticorruption efforts: * Commitment by the political leadership is crucial. * A comprehensive strategy is more effective than piecemeal drives. - vii - EXECUTIVE SUMMARY * The anticorruption agency itself must be incorruptible. * The anticorruption agency must be removed from police control. * Opportunities for corruption in vulnerable agencies must be reduced. * Corruption can be reduced by raising salaries, if a country can afford to do so. A Proposed Nine-Point Approach to Fighting Corruption in the Philippines 14. Drawing upon our global experience and the Philippine-specific analysis, we recommend that a national strategy for fighting corruption in the Philippines should focus on reducing opportunities and motivation for corruption and should make corruption a high-risk, low-reward activity. International experience suggests that a successful anticorruption program requires sustained efforts over a long time and should focus on the root causes of corruption in the public sector, enhancing the effectiveness of sanctions against corrupt behavior, and increasing public oversight of government. Within this framework, nine key elements are recommended for the national anticorruption program: * reducing opportunities for corruption by policy reforms and deregulation; * reforming campaign finance; * increasing public oversight; * reforming budget processes; * improving meritocracy in the civil service; * targeting.selected departments and agencies; * enhancing sanctions against corruption; * developing partnerships with the private sector; and, * supporting judicial reform. Isolated initiatives, under each of these elements, are already underway in the Philippines and are in various stages of implementation and/or improvement. These initiatives now must be unified under one concerted program under a strong leadership and management structure (paragraph 25) and a strong partnership effort forged with the private sector (paragraph 22), civil society (paragraph 26), donors (paragraph 31), the congress and judiciary (paragraph 30). 15. Reducing Opportunities For Corruption. Through policy reforms and deregulation, noteworthy progress has been made in the last 10 years to reduce opportunities for corruption, but much more can be done. Opportune areas for policy reform in the Philippines include: * tax policy (for example, preferential tariffs, exemptions, investment incentives) and administration (for example, tax audits); * regulation of infrastructure services and public utilities such as power, telecommunications, water, aviation (for example, granting of franchises, government guarantees, competitive arrangements); * corporate governance reforms, particularly in the financial services area; - viii - COMBATING CORRUPTION IN THE PHILIPPINES * environmental and land use regulations; and, * import and trade arrangements. 16. Reforming Campaign Finance. The dynamics of electoral politics as practiced in the Philippines-particularly, the financial requirements to obtain and retain office and placate core constituencies-create dysfunctional incentives that degrade the performance of the public sector as a whole. In its issues, nature, and institutional origins, issues of corruption in politics are bigger than campaign finance reform and different from petty corruption in procurement and bribery in the civil service. Although these issues have been acknowledged in the Philippines and demand due consideration, the World Bank's recommendations do not address them for lack of expertise and jurisdiction in this area. Nevertheless, reforms of political processes and systems should be an integral part of the government's overall anticorruption program. 17. Increasing Public Oversight. Measures to increase significantly the information made available to the general public have special importance because they let citizens know what officials are accountable for and how to judge their performance against those standards. Active efforts to engage civil society to advance accountability and integrity are also needed. Actions that could enhance public oversight include: • establishing a citizen charter, requiring an agency to specify and publish: each step of procedures to obtain a particular service; maximum length of time to conclude the process; and procedures to file complaints on agency failure to follow required procedures; * using government officials' annual statement of assets and liabilities proactively to identify inaccurate data or possible cases of corruption, and strengthening the law to provide simple systems for complaints, investigation and prosecution; * conducting client surveys to get regular feedback on access and quality of government services; - establishing advisory boards made up of prominent Filipino citizens to assist the Office of the Ombudsman as well as each department and agency targeted for anticorruption effort; * limiting the role in the government of advisers who are not governed by public accountability and parliamentary processes, and enhancing the role of cabinet officials who are governed by the process; * strengthening the ongoing initiatives for governance-appraisal systems for cities and municipalities and publishing results annually; * showing strong support on bills in the Congress that seek elimination of graft and corruption by participating in committee hearing and disseminating information to the public; * taking the initiative to push Congress to disclose its financial activities including pushing for a bill that would minimize rampant activities in campaign financing; and, * sustaining its vigilance until erring government and public officials are given sanctions or penalty that is appropriate and just. - ix - EXECUTIVE SUMMARY 18. Reforming Budget Processes. Because the Philippine government relies on domestic and international financial markets to finance its budget needs, the markets act as a disciplinary factor. The formation of a Budget Dialogue Group with multisectoral representation is another plus. In contrast, discretionary funds handled by elected officials and congressional initiative allocations are regarded as areas for graft and corruption. Reforming budget processes to achieve discipline, allocative efficiency and operational efficiency is a promising area for addressing corruption issues. Key potential actions to reform the budget process are: * enhancing the integrity and effectiveness of governmentwide and agency-level financial management systems; * improving program performance monitoring and evaluation; * simplifying public procurement, eliminating noncompetitive aspects, actively rooting out cartels, and opening up tenders to international competition; and, * limiting congressional discretion over detailed line-items and strictly enforcing public finance rules in remaining cases. 19. Improving the Civil Service. The poor incentive framework governing the civil service in the Philippines is another major factor contributing to corruption. During the Social Weather Stations September 1998 survey, respondents were asked why graft and corruption happens in the government. The three top reasons cited were: to be richer; their salaries are not enough; and difficulties of life today. With this in mind, restructuring the civil service to reinforce merit and to provide adequate financial compensation and accountability for performance is recommended as a key element in a national anticorruption program. Some of the actions suggested in this area are: o limiting the scope for patronage in public employment by depoliticizing the civil service and strictly regulating the use of casual and other contractual workers; * decompressing the government pay scale to provide competitive salaries up to senior levels; and, * strengthening performance evaluation, implementing related awards and sanctions, and enhancing meritocracy in appointments and promotions. 20. Targeting Selected Departments and Agencies. Many corrupt behaviors are unique to specific government units and functions. At this level, it is easier to make progress in the Philippines since: agencies and departments are relatively small; their mandates are narrow, well defined, and can easily be subjected to scrutiny and reform; ambiguous legislation and administrative orders can be clarified or rescinded, and business processes can be broken down into discrete components and evaluated. Examples of suggested actions in this area are: * selecting priority department and agencies, based on the public's priority concerns. Opinion surveys suggest the following initial list of targets for intervention: Bureau of Internal Revenue (BIR), Bureau of Customs (BOC), Department of Public Works and Highways (DPWH), Department of Environment and Natural Resources (DENR), - x- COMBATING CORRUPTION IN THE PHILIPPINES Department of Education, Culture, and Sports (DECS), National Irrigation Administration (NIA), Department of Health (DOH), Department of Interior and Local Government (DILG), National Power Corporation (NPC), and Bureau of Immigration (BI); and, identifying areas for a few quick wins that would give momentum to further reforms. One such area may be record agencies such as: Corporate Registration, Land Registration Authority, Land Management Bureau, and Motor Vehicle Licensing. 21. Enhancing Sanctions Against Corruption. Anticorruption efforts should focus on preventing and eliminating root causes of corruption, but government's capacity to detect corruption and sanction corrupt practices should also be strengthened. The goal is to change the current perception of corruption in the Philippines-from a "low-risk, high- reward" activity to a "high-risk, low-reward activity." The present anticorruption effort is diffused among a number of agencies (many under-resourced) and with overlapping jurisdictions. They include the Commission on Audit (COA); the Civil Service Commission (CSC); the Department of Justice (DOJ); the National Bureau of Investigation (NBI); the Office of the Ombudsman; and Presidential Commissions on Good Government and Against Graft and Corruption. The following actions would strengthen the anticorruption institutions: * fast-tracking-for successful prosecution-a few high profile pending cases of alleged graft and corruption; * merging the Presidential Commission Against Graft and Corruption with the Ombudsman's Office and strengthening the latter's capacity; * strengthening capacity of the Sandiganbayan, the anti-graft court; * supporting capacity building in forensic audit at the Commission on Audit and corruption prevention at the Civil Service Commission; - streamlining and simplifying the legislative and regulatory framework involving corruption and civil service codes of conduct; 3 strengthening the functions of the Inter-Agency Anti-Graft Coordinating Council to harmonize rules and joint activities; and, * developing an integrated and efficient case-management system to facilitate the sharing of information and the movement of individual cases between agencies. 22. Developing Partnerships with the Private Sector. The private sector, as a major source of funds used for corrupt purposes, has to be mobilized to combat corruption. Involving the private sector will not only allow the development of more sophisticated and sensitive policy responses to corruption but will also put pressure on the private sector to raise its own standards of behavior. The following actions could be part of a government-private sector partnership against corruption: * involving representatives of the private sector in designing anticorruption strategies in vulnerable departments such as customs, taxation, industrial policy, infrastructure, and investment. - xi - EXECUTIVE SUMMARY * engaging in a dialogue about how to solve the collective action problem associated with bribery: how to prevent some firns from continuing to bribe when others stop, thereby creating incentives for the others to revert to bribery. The model antibribery legislation sponsored by the Organization for Economic Cooperation and Development (OECD) is an example, in that it promises significant penalties for those who continue to pay bribes. Another example is the Integrity Pact concept being piloted in Indonesia, requiring a formal no-bribery commitment from all bidders for government contracts. * encouraging higher standards of corporate governance. The OECD Principles of Corporate Governance (April 1999) provide a useful model for a local initiative. * developing and implementing company codes of conduct and ensuring their effectiveness through internal control mechanisms, personnel training, and sanctions. * adopting improved accounting and auditing rules and standards to ensure transparency in business transactions. 23. Supporting Judicial Reforms. Global experience has shown lower levels of corruption in countries with predictable judiciaries (in the sense of adjudicating cases consistently and efficiently). Factors that make for predictable judiciaries are: merit-based recruitment and promotion; adequate compensation; and accountability for performance. In the Philippines, available data suggest considerable room for enhancing the judiciary's effectiveness and reducing perceptions of corruption within its ranks. A preliminary assessment suggests that an action program for judicial reforms should address the issues of: perception and reality of judicial corruption; case overload and delays; poor working conditions; alternative dispute-resolution mechanisms; and judicial education. Among the actions to support judicial reforms that might be included in the national anticorruption program are: * improving the appointment process to further buffer political interference. This would require a comparative study of jurisdictions with well-respected appointment processes, leading to Philippines-specific recommendations for reform; * improving the disciplinary process to make it more independent, more transparent, more equitable to judges, more consistent in application and penalty, and more efficient in resolving complaints in a timely way; * improving the Codes of Ethics for both judges and support staff in line with the rest of the civil service, articulating expected standards of conduct both on and off the bench and adding a section of annotated hypothetical and historical applications of the cannons of ethics; * improving the salaries of judges and support staff in line with the rest of the civil service. These are inadequate and provide fertile ground for the corrupt practices that exist; * eliminating opportunities for corruption in the judicial process by streamlining the case flow process, computerizing some of the processes, and eliminating delay; - xil - COMBATING CORRUPTION IN THE PHILIPPINES * attracting a full complement of better candidates to the judiciary. A well-functioning judiciary requires judges and support staff of integrity and competence, presiding over and serving both subordinate and superior courts. A high priority is a study to determine why the trial courts have difficulty attracting sufficient qualified candidates and to make remedial recommendations; and, * improving judicial education through institutional development, program development, and facilities and equipment support to the local judicial academy. Implementing an Anticorruption Program 24. Having a good anticorruption strategy is a necessary but insufficient condition for progress-effectiveness in implementing the strategy will be a key determinant of success. In this regard, we have seven preliminary recommendations: * Appoint strong leadership and management. * Set up a multisectoral advisory group. * Develop a sequenced action program of priorities chosen from the nine-point anticorruption strategy. * Launch programs immediately in priority agencies. * Upgrade capacity in anticorruption institutions. * Launch joint intergovernmental and interinstitutional efforts. * Seek donor assistance for the government's anticorruption program. 25. Strong Leadership and Management. Because leadership is of such critical importance in the anticorruption struggle, a talented manager should be appointed. This manager must have impeccable and widely recognized integrity, a track record of sticking to a job and showing results, and the ability to communicate well with a wide public audience. To drive forward the anticorruption strategy and agenda, the manager should be given the support of a strong organization and adequate resources. The manager's mandate would involve spearheading the anticorruption efforts and coordinating a variety of agencies and groups involved in the effort. 26. MultisectoralAdvisory Group. To advise the government on its anticorruption strategy and monitor progress on a regular basis, a multisectoral advisory group of national and international experts should be set up. This group should include prominent Filipino citizens who represent civil society efforts to combat corruption. Efforts should also be made to establish a proactive partnership with civil society institutions to monitor government performance and to encourage the private sector to improve its own behavior. This group should: * Acknowledge the rising concerns of citizens and private enterprises about corruption and announce that the government will give priority to eliminating corrupt practices that impede antipoverty programs and business sector growth. - xiii - EXECUTIVE SUMMARY * Emphasize that combating corruption will require a strong and sustained government and civil society partnership and that the multisector advisory group is being formed to seek such partnership. 27. A Sequenced Action Program (2000-2004). For effective implementation, the actions listed in the nine-point anticorruption strategy-and many others, which will emerge from further analysis and consultation-must be ranked by order of importance. It is recommended that the government develop a sequenced anticorruption action program, based on diagnostic surveys of households, businesses, and public institutions to identify priorities for anticorruption action and to design remedial programs. The surveys should be done by independent survey organizations under the guidance of the multisectoral advisory group. The survey findings should be presented to the public, an essential step in raising its awareness of the exact nature of corruption in the Philippines and what to do about it. Based on the World Bank's experience of such surveys in four countries, we recommend at least three surveys: * Government Sector Survey. A survey of selected government agencies to look at the role of different actors in decision-making, implementation, and evaluation of its activities. This would highlight the processes and procedures within which corruption is embedded, the manner in which it is organized, and the reasons for the failure of regulatory and control mechanisms in place. * Corporate Sector Survey. A firm-level survey to find out the nature and extent of corruption faced by firms and its impact on business costs and investment decisions. * Household Survey. With a special focus on poor households to find out how corruption affects their lives in terms of their employment opportunities and their access to public services and public resources. 28. Anticorruption Programs in Priority Agencies. Specific anticorruption programs may be launched immediately in several priority departments and agencies. Within the selected government departments, citizens boards should be formed to advise on priority action programs for eliminating corruption, improving efficiency in the delivery of services to poor communities and for monitoring progress. Agencies making rapid progress in anticorruption programs might be given priority in budget allocations while those lagging behind could face budget cuts. 29. Institutional Capacity Upgrade. Upgrading the capacities of key anticorruption institutions should be an implementation priority to bring to justice corrupt officials, particularly those in high places. We suggest upgrading three institutions in particular: the Ombudsman's Office, the Sandiganbayan, and the Inter-Agency Anti-Graft Coordinating Council. 30. Intergovernmental Efforts. Problems of corruption embedded within the broader system should be explicitly addressed through joint government, congressional, and judicial reform efforts. Congress should back reform by improving governance through legislation, increasing legislative oversight, imposing more severe sanctions on wrongdoers, and operating transparently itself. - xiv COMBATING CORRUPTION IN THE PHILIPPINES 31. Donor Assistance on Anticorruption. It is recommended that the Philippine government seek a reorientation of assistance provided by the World Bank and other donors in support of its national anticorruption campaign as well as seek additional assistance. This effort could build upon the dialogue on governance issues, initiated at the March 1999 Consultative Group (CG) meeting in Tokyo. - xv - 1. INTRODUCTION: WHY FIGHT CORRUPTION? 1.1 In response to requests from several Philippine government agencies, this paper collects and presents available information about corruption issues facing the Philippines, ongoing anticorruption efforts in and outside the Philippine government, and suggested elements for a national anticorruption strategy, drawing on global experience. 1.2 Global experience shows how, and in how many ways, corruption umdermines development.' Corruption hurts the poor. It diminishes the quality and delivery of public services and raises prices of goods and services. Corruption allows production of poor quality and nonstandardized goods and services, which can result in accidents and fatalities. By reducing funds available to the government, it erodes the extent and quality of public services available to the people. In the recently released Voices of the Poor, a multiyear World Bank study which surveyed more than 60,000 people, corruption emerged as a key concern of the poor across the globe.2 1.3 Corruption has emerged as a pivotal international criterion for allocating scarce development aid resources. Countries will increasingly be judged by their commitment, as evidenced in public stance and effective action, to combating corruption. Congress and parliaments voting aid funds expect a clear accounting of the ways corruption is addressed. As the Philippines has the potential to make real strides against this problem, it could benefit from increased and better used aid. 1.4 Corruption accentuates problems of poor growth and underdevelopment. Its major impact is through loss of scarce resources. Corruption in revenue-generating agencies means less money for the government budget. Misallocation of resources in the budgetary process means less resources to meet development priorities. For businesses, corruption acts like a tax on investment and tends to reduce domestic and foreign investments. The Philippines needs to maintain its competitiveness with neighboring countries in attracting investment. 1.5 Perhaps the most pernicious impact of corruption is its social damage. The costs go far beyond losses to the Treasury and lost opportunities for development. It leads to a corrosion of values and a breakdown of social norms, resulting in a perverse "make do" culture-where the honest are discriminated against, and the role model is one whose success is predicated not on hard work but on skill in "fixing" deals. Corruption thereby acts as a disincentive for hard work and competition, cutting the roots of a competitive, market economy that relies on the rule of law, transparency, and enforcement of honest contracts. 1.6 Viewed from many standpoints, a vigorous and credible program to combat corruption in the Philippines deserves high priority. The Philippines today offers many 'One useful reference source on global practices and programs in this area is the Anticorruption Knowledge Resource Center maintained by the World Bank at: http://www.worldbank.org/publicsector/anticorrupt/ 2 The World Bank, Voices of the Poor (New York, N.Y.: Oxford University Press, 2000). COMBATING CORRUPTION IN THE PHILIPPINES preconditions that auger well for a successful anticorruption campaign. In the post- Marcos era, anticorruption initiatives were launched and an institutional infrastructure created (Annex A). Inclusion of governance and anticorruption as key elements of the Medium-Term Philippine Development Plan are assets (Annex B). Other positive elements are considerable knowledge about the problem (Annexes C and G), a record of successful anticorruption programs in key agencies (Annex D), and donor willingness to support anticorruption and governance initiatives (Annex E). The Philippines' vibrant civil society and media, which have brought public focus on the issue, are also dynamic allies in the effort (Annex F), as is the private sector (Annex H). Congress is another critical player in the fight against corruption, both through its legislative functions, and through setting a good example (Annex I). -2- 2. CORRUPTION IN THE PHILIPPINES 2.1 The term "corruption" serves as shorthand for a wide variety of actions in which public office is abused for private gain. Corruption in the Philippines, in both the public and private sectors, is pervasive and deeply rooted, according to government, nongovernmental, and international sources. As in other countries, the types of illegal and illicit behavior range into the hundreds, if not the thousands, and vary markedly in terms of their sophistication and ultimate burden upon development. Annex C contains a compilation of information gathered from these sources. This information has not been evaluated by the World Bank; rather it is a survey of literature on the silbject of corruption. Prevalence of Corruption 2.2 In his July 27, 1998, State of the Nation Address, President Joseph Estrada singled out the struggle against graft and corruption as his fundamental priority. "To begin with," he stated, "we have to reduce the cost of governance, costs that go higher and higher and higher with each corrupt act, with each wasteful project."' The president noted that most tax money flows into the pockets of Bureau of Internal Revenue (BIR) agents or customs examiners instead of the national treasury and that in 1998 alone PhP34 billion could have been saved by eliminating "pork barrel" projects.2 2.3 The Ombudsman's Office has reported that the Philippine government estimated a loss of US$48 billion over the last 20 years on account of corruption, exceeding the country's entire foreign debt of US$40.6 billion.3 The Commission on Audit (COA) estimated that corruption costs the government about PhP2 billion every year.4 2.4 One recent source of information on this subject is "An Exploratory Study of Graft and Corruption in the Philippines" by Linda Luz B. Guerrero and Steven A. Rood.5 It is based on data collected in September 1998 by the Social Weather Stations (SWS) with funding from the Asia Foundation. Among other things, the survey revealed that nearly two thirds of the respondents thought there was corruption in govemment-38 percent said "a great deal," 34 percent said "some." ' President Joseph Ejercito Estrada, State of the Nation Address, July 27, 1998. 2 The term "pork barrel" originated in the United States in the nineteenth century, where it is used to describe efforts by legislators to allocate resources to projects and activities in their home districts. However, Philippine practice differs from that in the United States by providing lawmakers with predetermined allocations for them to decide when, where, and how these monies are to be spent. It resembles more closely the French system of "reserve parlementaire." 3 Office of the Ombudsman, Republic of the Philippines, Annual Report, Manila, 1997, p. 1. 4Civil Service Commission, Reforming the Bureaucracy, Quezon City, 1998. 5 Linda Luz B. Guerrero, and Steven A. Rood., "An Exploratory Study of Graft and Corruption in the Philippines." Social Science Information, vol. 27, no. 1 (January-June 1999). -3 - COMBATING CORRUPTION IN THE PHILIPPINES Figure 2.1: Assessment of Graft and Corruption in the Philippines How much corruption is there in our government at present? 9% 19% U~~~~~ Agreatdeal~ 19% 15 l%A o 2 Some O A little 34% 0Nn ..is the government doing anything aboUt it? 12% 5 U A lot 23% * Something _1qFP_ D] Almost nothing 50% Eo Nothing atall Source: Social Weather Stations Surveys, 1998. 2.5 Most estimates of losses due to corruption are imprecise and not very rigorous. Estimates by the Ombudsman, the Commission on Audit, and the Philippine Center for Investigative Journalism suggest, however, that very large amounts of public funds are being lost to both political and bureaucratic corruption.6 The above-mentioned study by Guerrero and Rood reported that in a September 1996 national survey by Social Weather Stations, respondents were asked how much they believed was wasted due to corrupt practices. Fifty-one percent of the respondents said that more than 50 percent of funding 6For details see Office of the Ombudsman, Annual Reports; Civil Service Commission, Annual and other Reports; and Shiela Coronel (ed.), Pork and Other Perks: Corruption and Governance in the Philippines (Manila: Philippines Center of Investigative Journalism, Evelio B. Javier Foundation, and Institute of Popular Democracy, 1998). -4 - CORRUPTION IN THE PHILIPPINES for road building was wasted. More than 60 percent of respondents said they thought that in the process of collecting taxes, providing free books to children in public schools, and installing modem equipment like computers in government offices, more than 30 percent of the ftmding was wasted. Table 2.1: How much govemnment funds do you think are wasted due to corrupt practices connected to... Providing free books Installing modern to children in equipment in Amount of leakage Building roads Collecting taxes public schools govemment offices More than 50% 51% 41% 30% 23% 30 to 50% 29% 31% 32% 39% Source: 1996 Social Weather Stations Survey. 2.6 Surveys of international public opinion, including those conducted by Transparency International,' have consistently placed the Philippines in the bottom third in termns of perceived levels of corruption. Another recent measure of prevalence of corruption in the Philippines is the Corruption Perceptions Index (CPI), published by Transparency International. CPIs were calculated for 99 countries by conducting a "poll- of-polls." For the Philippines, the CPI was calculated as a composite index of 12 different polls and surveys. On a scale of 1 (high perception of corruption) to 10 (negligible perception), the CPI for the Philippines was 3.6 in 1999. Out of the 99 countries rated, the Philippines was perceived as the fifty-fifth least corrupt. 2.7 Executives, in the past two years, in the Executive Survey of the Global Competitiveness Report of the World Economic Forum, ranked the Philippines among countries where "irregular, additional payments are common." They also held that tax evasion is common in the Philippines.2 The Philippines also rated poorly in private business disputes, extent of corruption, judicial independence, legal corruption, and additional and irregular payments. In terms of the "institutions" factor, which helps to determine the World Economic Forum's Competitiveness Index of each country, the Philippines ranks forty-fifth among 53 countries. Some key results of the 1999 survey are illustrated in Table 2.2. 'Transparency International, Surveys for 1995 to 1999, available at the TI website: http:\:www.Transparency.de. Such surveys measure only perceptions of corruption, not the level of corruption itself, but the high degree of statistical correlation between various surveys indicates considerable consistency in public perceptions of levels of corruption. 2 Makati Business Club, "Rating Philippine Competitiveness," Research Report 12, Manila, July 1998. - 5 - COMBATING CORRUPTION IN THE PHILIPPINES Table 2.2: The Philippines in Selected 1999 Competitiveness Index Rankinas3 Tax evasion is rampant. 55 Venezuela 2.23 56 Ecuador 2.00 57 Ukraine 1.99 58 Philippines 1.95 59 Russia 1.74 Public sector officials tend to favor well-connected prvate firms and individuals. 55 Philippines 2.76 56 Slovakia 2.59 57 Ukraine 2.57 58 Russia 2.24 59 Indonesia 2.09 Irregular, additional payments connected with import and export permits, business licenses, exchange controls, tax assessments, police protection, or loan applications are common. 55 Russia .81 56 Philippines 2.71 57 Bolivia 2.62 58 Ukraine 12A6 59 Indonesia 1.94 a. Bottom 5 in the Index only b. Scores are the average respondent's rating on a scalefrom I (lowest) to 7 (highest). 2.8 Other information sources provide strong indications that corruption is systemic and a key public policy issue. The July 1998 Makati Business Club survey' identified corruption as a very serious problem for businessmen in the Philippines, second only to crime. A survey of multinational companies by the Economic Intelligence Bureau, Philippines,5 identified arbitrariness in the judiciary as a major source of frustration in doing business in the Philippines 2.9 A survey by Harris Polls Research International identified graft and corruption as a factor in economic growth in the Philippines.6 Other evidence appears to bear out these perceptions: in the last two years, the Ombudsman's Office filed more than three hundred cases with the Sandiganbayan involving high-ranking officials, including 5 congressmen, 12 judges, 6 ambassadors, 8 cabinet members, and 14 generals. Data from the Ombudsman also provide a picture of the incidence of complaints concerning different government departments (Table 2.3). 3 J. Sachs and A. Warner, Year in Review: Global Competitiveness Report (Davos, Switzerland: World Economic Forum, 1999). 4 Makati Business Club, "MBC Executive Outlook Survey," Manila, 1998. 5 Peter Wallace, "MNC's Leaving and Surveys of Perceptions of RP," Economist Intelligence Unit, Manila, 1999. 6 As reported in the newspaper Philippine Star, " BIR Most Corrupt Agency. Survey," August 21, 1998 - 6 - CORRUPTiON IN THE PHILIPPINES Table 2.3: Corruption Complaints Received by Ombudsman's Office, 1993-98 Agency Complaints er~ent pf tota Department of Public Works and Highways 1,762 26.9 Department of Environment and Natural Resources 1,149 17.5 Department of Education, Culture and Sports 1,046 15.9 Bureau of Customs/Philippine Ports Authority 517 7.9 National Irigation Administration 393 6.0 Bureau of Internal Revenue 355 5.4 Department of Health 289 4.4 Department of Intenor and Local Government 247 3.8 National Power Corporation 217 3.3 Bureau of Immigration 199 3.0 Source: Ombudsman Office. 2.10 Data from the October 1999 Social Weather Stations survey support the Ombudsman's data. When asked to identify a government agency with widespread corruption, 14 percent identified the Department of Public Works and Highways, 11 percent the police force, 9 percent the Bureau of Internal Revenue, 8 percent the Bureau of Customs, and 7 percent the Department of Education, Culture and Sports. The majority of respondents felt that almost all employees in these departments were involved in corruption, while more than two thirds of respondents said officials in high positions, those with long service, were involved. Between 15 percent and 33 percent of the survey respondents had actually witnessed corruption in the department they named. 2.11 Filipino perceptions of corruption are strongly influenced by levels of education. Government employees are more sensitive to corruption than the general public, and they are consistently more likely to rank as "always wrong" certain sets of behavior such as bribing traffic police or utilizing "fixers" within government offices. More than 96 percent of the public believes that pocketing money intended for government projects either "very much retards" or "somewhat retards" development. Roughly 22 percent of the public has personally been asked for money by a government official at some point to speed up a transaction. 1l 2.12 Corruption is not just a public sector issue. As a frequent source of bribes for public officials, the private sector shares responsibility for corruption. For the first time, in 1999, Transparency International released a Bribe Payers Perception Index. This index ranks 19 leading exporting countries (mostly developed countries) in terms of the degree to which their corporations are perceived to be paying bribes abroad. On a scale of 1 (high) to 10 (negligible), more than half the countries scored below 7 and about one third scored below 5, indicating perceptions of widespread bribery by leading exporting countries. The Philippines was not a part of this survey. 2.13 In the Philippines, several instances of corrupt practices on the part of private corporations and individuals have been reported in the media. A September 1998 Social Guerrero and Rood, "An Exploratory Study of Graft and Corruption in the Philippines". - 7 - COMBATING CORRUPTION IN THE PHILIPPINES Weather Stations survey asked whether corruption happens in the private sector as well. Fifty-two percent of the respondents said it did, even without the involvement of government personnel. Similarly, 66 percent of the respondents said that when corruption involves a businessperson and a government official, both parties are guilty. These findings show that, as a major source of the funds used for corrupt purposes, the private sector has to be mobilized to combat corruption. 2.14 While our analysis so far confirms that corruption is a sizeable problem in the Philippines, it also reveals that progress has been made in the last decade largely by reducing opportunities for corruption through policy and regulatory reforms. The usefulness of year-to-year comparisons of the CPI scores is hampered by the changing sample and methodology, but the direction of change can be judged from historical scores over a long period of time. For the Philippines, Transparency International's estimates of CPI have steadily improved (Figure 2.2) from a low of 1.04 in 1980-85, to 1.96 in 1988- 92, 2.77 in 1995, and 3.6 in 1999 (a higher CPI on a scale of 1 to 10 means a lower perception of corruption). Though encouraging in the sense that progress has been made, the low score also says there is a long way to go. 2.15 Our analysis also indicates that the Philippines today meets many preconditions that offer promise for a successful anticorruption campaign. The Philippines' vibrant civil society and media have brought public focus to the issue. Other positive elements include: considerable knowledge about the problem; examples of successful anticorruption programs in key agencies; a legal framework for addressing the issue, including a special anti-graft court, the Sandiganbayan; and the existence of specific institutions charged with combating corruption in the public sector. Although corruption is a complex and deep-rooted problem in the Philippines, one that may take a long time to eradicate, it is encouraging to note that the public has faith that the problem is not insurmountable, as is evident by the fact that 59 percent of the respondents in the September 1998 Social Weather Stations survey thought the government could be run without corruption. As shown in Figure 2.1, two out of three respondents also feel that the government is doing something about the corruption problem. -8 - CORRUPTION IN THE PHILIPPINES Figure 2.2: Transparency International Corruption Perception Index (CPI): Philippines Scores, 1980-99 Scale = I to 10. Higher score means lower perception of graft and corruption. 4.0 3.57 3.0 2.5 - 1.5 - 1.0 0.5 0.0 Source Transparency International Website. Reports for 1994 to 1999. Specific Issues of Corruption 2.16 A diagnosis of corruption issues in the Philippines, as reflected in a wide body of research and operational experience, is summarized below. Focal issues are discretionary funding, sanctions against corrupt officials, government salaries, decentralization, and corruption in the judiciary, private sector and the media. Discretionary Funding 2.17 Discretionary funds effectively administered by elected lawmakers for local projects (commonly known as "pork barrel") have been a major source of political debate since the system of allocations was institutionalized in 1989. Funding came from four sources prior to 1997: the Countrywide Development Fund (CDF), Public Works Fund, School Building Fund, and Congressional Initiative Allocations (CIA). Most of these funds were cancelled in 1998, but funding was restored, on a much reduced scale, through: Lingap Para Sa Mahirap [Care for the Poor] program of PhP2.5 billion; the Food Security Fund, also totaling PhP2.5 billion; and the Rural-Urban Infrastructure Development Fund, totaling PhP5.4 billion. 2.18 Legislators contend that the allocations offer a mechanism to correct for the failure of national agency budgets to provide for the needs of the lawmaker's constituencies. However, through the years, numerous accounts and allegations of graft and corruption have emerged from misappropriations, bribery, and kickbacks related to these funds. A 1996 COA report found numerous illegal acts, including making cash -9- COMBATING CORRUPTION IN THE PHILIPPINES advances or claiming checks, signing disbursement vouchers and purchase orders, granting contracts to favored firms, allowing overpricing of goods, and diverting funds to purposes other than those approved7 At that time, unliquidated amounts totaled more than PhP1.8 billion (about $47 million), and examples were discovered where such funds were put to a variety of personal uses such as car and home mortgage payments. Sanctions Against Corrupt Officials 2.19 A fundamental problem confronting the Philippine government is the lack of adequate sanctions against public officials engaged in corrupt or illicit behavior. This problem is multifaceted. Many Filipinos do not report alleged incidents of corruption. Complaints that are reported are often not investigated promptly and thoroughly. Although a significant number of civil servants are singled out for prosecution or administrative sanction, punishment is rare. When sanctions are employed, they can be imposed inconsistently, with draconian punishments being meted out for relatively minor infractions and major crimes receiving lenient treatment-particularly when committed by the rich, the powerful, and the politically well connected. 2.20 The first weak link in the accountability chain is the unwillingness of many Filipinos to come forward with information about abuses (Annex G). Survey data from 1998 and 1999 indicate that some 20 to 22 percent of the public has been asked for money or a gift to speed up their transactions with a government official. However, in 1999 only 4 percent of individuals asked for a bribe bothered to report it. Those who did not come forward offered a range of reasons, including the belief that it was futile (51 percent); "it's too small" (21 percent); concern about retaliation (15 percent), or they did not know where to report (10 percent).8 2.21 Among cases reported, the rate of sanction is low. Data from the Ombudsman's Office from 1997 and 1998 indicate that only slightly more than 16 percent of reported cases are advanced for prosecution, and at best less than 2 percent ultimately result in a conviction.9 Less than 5 percent of the annual complaints received by the ombudsman result in administrative penalties. 2.22 Sanctions are also not pursued effectively against public officials who make false declarations in their statements of assets and liabilities, nor against those who's statement of assets show inexplicable increases. Government Salaries 2.23 In a poll of public attitudes toward corruption in September 1998, low salaries were cited most often as the major reason government employees resort to graft and 7 Commission on Audit Study, 1996. s Guerrero and Rood, "An Exploratory Study of Graft and Corruption in the Philippines." Data for 1999 were taken from Social Weather Stations, "Highlights of the October 1999 Corruption Survey, Manila, October 1999. 9 The data on convictions are estimated from the approximately 22.5 percent of anticorruption cases tried before the Sandiganbayan, the nation's premier anticorruption court. The other cases are tried before local courts, where the number of successful prosecutions is widely perceived to be significantly less. - 10- CORRUPTION IN THE PHILIPPINES corruption.'0 Low salaries are most pronounced at the senior levels of the public sector. Bureau directors, for example, receive monthly salaries ranging from PhP24,000 to PhP27,000 (US$630 to $710)-only four to five times more than a well-paid domestic helper. A 1996 World Bank study concluded that higher level staff members in the civil service are significantly underpaid relative to their private sector counterparts." Most lower grades in the civil service receive salaries closer to those of their private sector counterparts. However, the perceptions of the Filipino public are just the opposite: many see the high-level officials as being overpaid, and lower level officials as underpaid.12 2.24 It is unlikely that any reform of salaries could match the large sums that can be made through illicit or illegal behavior in some agencies and departments. Interviews with the Bureau of Immigration (BI), for instance, indicated that even low-level functionaries could earn large amounts from certain illegal transactions. For senior officials, the rewards are much greater. The challenge therefore is to focus on making the risks much higher. 2.25 The objectives of decompressing salary scales and acting to enhance competitiveness with the private sector in the senior ranks of the civil service deserve high priority in overall public sector reform. Such moves are likely to have positive externalities both in the narrow struggle against corruption and the broader effort to attract and retain talented staff within the public sector. However, to be effective, these measures will need to be linked to a broader anticorruption effort that seeks to enhance the overall framework for performance, probity, and accountability in the public sector, to reduce the opportunities for corruption and to heighten the risk of being detected and sanctioned. 2.26 As a caveat, the relation between pay and employment and corruption is a complicated one. Recent empirical work by the Intemational Monetary Fund indicates some correlation between the ratio of civil service to manufacturing pay and improvements in a "corruption index."'3 However, these data also indicate that a number of intervening variables-particularly measures of rule of law, the quality of the bureaucracy, and the effectiveness of intemal and external controls-also exert a powerful influence in ensuring compliance with civil service norms and rules. 10 Low salaries were cited by 25 percent of the population as the reason for graft and corruption in government, followed by the desire to be richer (22 percent); the difficulties of life today (12 percent), and the need to satisfy their own interests (7 percent). Multiple answers were allowed. See Guerrero and Rood, "An Exploratory Study of Graft and Corruption in the Philippines." "David Steedman and Stephen Howes, "Civil Service Reform in the Philippines," Asia Technical Department Departmental Paper Series, no. 12 (Washington: World Bank, Asia Technical Department, 1996), pp. 8-9, 68-69. 12 Social Weathers Stations, "October 1999 Survey." 13 Caroline Van Rijckeghem and Beatrice Weder, "Corruption and the Rate of Temptation: Do Low Wages in the Civil Service Cost Corruption?" International Monetary Fund Working Paper, WP/97/73 (Washington: IMF, June 1997). - 11 - COMBATING CORRUPTION IN THE PHILIPPINES Decentralization 2.27 The Philippines' Local Government Code of 1991 placed considerable responsibilities in the hands of local governments. Improved accountability needs to be pursued by developing appropriate accounting arrangements. 2.28 Local government is a key area for anticorruption reform. While a 1999 survey by Social Weather Stations suggests that the problem is more serious at the national government level than at the local government level, 40 percent of respondents still perceived significant corruption at the provincial, town, and city levels. Twenty-seven percent of respondents also saw corruption at the barangay level as significant.'4 The most visible aspects of government in peoples' day-to-day lives are handled at this level. The degree to which local governments have to explain or justify what they have done or failed to do also affects the scope for corruption. Improved information about local needs and preferences is one of the advantages of decentralization, but there is no guarantee that leaders will act on these preferences unless they feel accountable to citizens for their behavior. Local elections are the most common and powerful form of accountability, but other mechanisms such as citizen councils can also have influence. 2.29 Public meetings can also be an effective mechanism for encouraging citizens to express their views and obliging public officials to answer them. The cabildos abiertos [open town council meetings) held in many Latin American countries are a good exarnple. In some settings, such meetings may be little more than briefing sessions, but in others they can be effective in getting public officials to defend their actions. A similar approach has been undertaken in India (Box 2-1). Corruption in the Judiciary 2.30 A Social Weather Stations survey conducted in December 1999 focused on the public's perception of the performance of the courts and judiciary." Roughly half the respondents said they trust the courts and judges, but individuals who had some experience with the courts trusted them less. Significant levels of corruption within the judiciary were perceived by 62 percent of all respondents, and by 70 percent of respondents who had dealt with the courts. 2.31 Half the respondents gave bribery as an example of corruption in the courts. Blame for these bribes was spread in the public's mind among clients, judges, and lawyers. "Many" or "most" lawyers could be bribed, according to 65 percent of respondents; 57 percent thought judges could. 14 Social Weather Stations, "October 1999 Survey." 5 Social Weather Stations, "Monitoring Perceptions of Corruption in the Judiciary," February 2000. - 12 - CORRUPTION IN THE PHILIPPINES Box 2-1. Building A Simple (Paper-Based) AccOuntability System To India Operating arn accountability system does not require costly investments in information technology. Indeed, very effective paper-based public information systems can be readily developed. One such system, in India, allows citizens to monitor expenditures on development projects and identify coupt practices. Since 1990, the grassroots organization Mazdor Kisan Shakti Sangathan (MKSS} has been working in the Indian state of RaJasthan to eliminate corwuption and give villagers a direct involvement in their communities development projects. Against numerous reports of fraud, involving hundreds of thousands of rupees from funds earnarked for community development, MKSS has set out to promote the concept of social auditing to put an end to suh malpractice. MKSS organizes public hearings to examine and expose corruption in local governments. Before each hearing, MKSS collects photo copies of bills, vouchers, muster rolls, and other goverment-claimed expenses on development projects, cross-checks them through visits to works sites, and shares the findings at the meetings. As the organizers begin to read the muster rolls, people find that their names appear on projects in which they never participated and for which they were never paid. Others find discrepancies between, the wages indicated on the bills and the amnount of money they received. The names of neighbors dead for more ta 30 years can appear on a muster roll. Since every project requires the signature of the local authrities, frauds are easily identified durin the hearings. Although the meetings are not intended to be confrontational, the pressure on village: leaders and project contracors is evident and someties very effective. The meetings are carfully andjudiciously controlled exercises in public openness. Aruna Roy, a member of MKSS, has described the hearings as a "basic struggle for development as accountability." Corruption and the Private Sector 2.32 The private sector is a stakeholder in the fight against corruption in the Philippines in at least three ways: corruption in the public sector hurts the competitiveness of companies and increases costs of doing business; the private sector is often the source of money for bribes to public sector officials; and corruption also happens in private to private sector transactions. The 1998 Social Weather Stations survey'6 shows that the public and business leaders believe that the private sector contributes to the problem of corruption. Specifically, the survey shows that: * The public views corrupt acts by businesses seriously. Significant majorities indicated that they viewed acts such as deliberately using inferior quality materials in building projects, or winning contracts through bribery, as very detrimental to Philippines' development. 16 Guerrero and Rood, "An Exploratory Study of Graft and Corruption in the Philippines." - 13 - COMBATING CORRUPTION IN THE PHILIPPINES * Where both private and public officials are involved in a corrupt transaction, the public holds both responsible. * Representatives of the private sector surveyed disagreed about including only government officials within the definition of corrupt practice and urged that corruption in purely private transactions should be addressed in anticorruption programs. A narrow majority of the public agrees with this. 2.33 The 1999 version of the Social Weather Stations survey shows that 60 percent of respondents believe that there is "some" or "a lot" of corruption in the private sector., Only 10 percent believe there is no corruption. The survey also suggests that the public views the motivations of businessmen in the Philippines with some ambiguity: 49 percent believe that "businessmen bribe in order to get away with breaking the law," while 49 percent believed that "businessmen bribe because they must do so to compete." 2.34 While the regulatory framework for corporate governance in the Philippines is better than in many comparable economies, it still has significant weaknesses, particularly with respect to enforcement.17 Although solving many of these enforcement problems will require the intervention of government, active cooperation between the private and public sectors will make efficient and effective solutions more likely. Corruption and the Media 2.35 The Philippines has a relatively free media, and its freedom is protected by the Constitution. This is a big plus as the Philippines media regularly carries reports on allegations of bribery and corruption in the public as well as business sectors. The Philippines Center for Investigative Journalism (PCIJ) regularly publishes reports on corruption. The Press Institute of the Philippines helps its members with training and capacity building. Continuing training in economic journalism, particularly in tools of analysis to detect fraud and corruption, will further help in this area. 2.36 While the media has served as a deterrent to corruption, many Filipino sources also point to corruption in the media itself, which tends to reduce its effectiveness. The Philippine Journalism Review, a quarterly journal, has published articles on this subject. PCIJ and the Center for Media Freedom and Responsibility, two nongovernmental organizations, have recently (1998) published a landmark study, "News for Sale: The Corruption of the Philippines Media" by Chay F. Hofilefia. This study, covering various aspects of media corruption, has few parallels among developing countries. In the book, Hofilefna reports results of a survey on media corruption, conducted by PCIJ among journalists covering key beats. Among other things, the survey revealed that: when offered money by sources, one out of every three beat reporter openly admitted to taking it, although some of them later donated it to charity; two thirds of the reporters refused the bribe; and nearly two thirds of the 100 respondents admitted that money influenced their coverage. The PCIJ survey also showed that about 50 percent of the reporters on national papers and 45 percent from broadcast had been offered bribe money. Specific 17 See Annex H for a more detailed discussion of corporate governance and the private sector. -14- CORRUPTION IN THE PHILIPPINES examples of media corruption cited included reporters with monthly retainers, financed foreign trips, nights out in pubs and restaurants, and lump-sum payments. 2.37 The increase in the sophistication and institutionalization of media corruption in the post-Marcos era is also of concern. This is largely a result of an increase in the media's penetration in Filipino homes, thus its enhanced importance in conveying messages to the general public. Another factor that diminishes the media's objectivity is the fact that many of the newspapers and TV stations are owned by businesses that appear at times to influence the editorial direction of the media outlets they own. - 15 - 3. KEY INSTITUTIONS ENGAGED IN THE ANTICORRUPTION PROGRAM IN THE PHILIPPINES 3.1 Government institutions as well as a number of civil society organizations and donor agencies are engaged in the Philippine anticorruption program. (For details, see Annexes B, F and E.) Government Strategy Plans for Combating Corruption 3.2 The government's Medium-Term Philippine Development Plan 1999-2004 recognizes that improving governance is essential for achieving MTPDP growth and equity objectives. It acknowledges weaknesses in public sector capabilities in policy and program implementation; poor national and local government accountability; endemic graft and corruption; lags in law enforcement and justice, with rare convictions in high- profile cases; and faulty delivery of services to the poor. The government presented information on plans to fight graft and corruption at the March 1999 Consultative Group meeting with donors. It outlined the following initiatives: * enhancing government efficiency, effectiveness, and accountability by instituting performance monitoring and evaluation, reengineering all agency operations, rationalizing civil service pay, investing in information technology to strengthen local government unit (LGU) capabilities, and seeking businesses and civil society as partners with the government; D improving economic governance by establishing a new national accounting and auditing system and a multiyear expenditure framework, pursuing an expanded privatization program at both national and local levels, and involving private sector and civil society in the design, delivery, and monitoring of antipoverty programs; * eliminating graft and corruption by mounting a multipronged strategy encompassing further liberalization, deregulation, civil service reform, and institutionalization of a participatory approach to social service delivery and its monitoring; and, * improving civil peace and order. Government Institutions Civil Service Commission 3.3 Mandate. CSC, the chief personnel agency, is mandated to establish an efficient, ethical, and publicly accountable civil service where appointments are made only according to merit and fitness. 3.4 Mission and activities. In fighting graft and corruption, CSC has: a preventive role, setting the standards and norms for appointment to government posts and enforcing the behavioral norms and standards prescribed for public officials; a punitive role, meting out penalties and punishments for transgressions; and a quasi-judicial role, deciding - 16 - COMBATING CORRUPTION IN THE PHILIPPINES administrative complaints instituted by or brought before it directly or on appeal. CSC does not think that poor salaries are a cause of corruption. In the area of compensation, it would like to introduce performance-based salary increases and remove exemptions from salary standardization. Commission on Audit 3.5 Mandate. COA is empowered to examine, audit, and settle all accounts pertaining to revenue, receipts, expenditures, and uses of funds and property of the government and its agencies, constitutional bodies, commissions, and other entities with financial autonomy under the constitution. COA, the chief agency for detecting financial irregularities, can settle administrative cases on its own. Criminal cases are referred to the Ombudsman's Office. 3.6 Mission and activities. COA conducts independent audits to provide adequate, reliable, and current information on the affairs of government so as to promote accountability, transparency, economy, productivity, and effectiveness in the conduct of government operations. Office of the Ombudsman 3.7 Mandate. Created as a constitutional body in 1987, the Ombudsman's Office is the lead agency to enforce public accountability. The office is mandated to act as a watchdog and as a dispenser of justice and charged with five major functions: investigation, prosecution, administrative adjudication, public assistance, and graft prevention. In preventing graft and corruption, the ombudsman has the power to investigate and prosecute acts of omission on its own or on complaints from any person or agency. 3.8 Mission and activities. The Ombudsman's Office takes criminal cases to the courts, the Sandiganbayan in the case of high officials and the regular courts in other cases. The Ombudsman's Office itself adjudicates administrative cases. It also helps determine the causes of mismanagement and corruption in government, and makes recommendations for their elimination. Finally, it has a more general role in nurturing an environment of integrity and honesty. Presidential Commission Against Graft and Corruption 3.9 Mandate. Set up in 1994 by President Ramos, PCAGC has continued under President Estrada. It has jurisdiction to investigate, on its own or on receipt of complaints about violations of the anti-graft laws by presidential appointees. 3.10 Mission and activities. PCAGC looks only at administrative cases, not criminal charges. It deals with officials at the level of director and above. As an advisory body, it can only make recommendations to the president, who decides the penalty. Suspension is the most severe punishment that PCAGC can recommend. Its effectiveness comes from the social embarrassment that investigation causes. - 17 - KEY INSTITUTIONS Inter-AgencyAnti-Graft Coordinating Council 3.11 Mandate. IAAGCC was set up in June 1997 by the Commission on Audit, the Civil Service Commission, the National Bureau of Investigation, and the Presidential Council Against Graft and Corruption. . These original members have since been joined by the Office of the Ombudsman and the Department of Justice. The council was institutionalized by an Administrative Order of the President in 1999. 3.12 Mission and activities. The agency's main objective is to control graft in government by sharing information and resources to enhance each member's success in the joint responsibility of maintaining integrity and efficiency in government. Civil Society The Philippine Centerfor Investigative Journalism 3.13 PCIJ promotes investigative reporting on current issues in Philippine society and on matters of broad public interest. Key activities include: funding investigative projects for print and broadcast media; publishing books on current issues and an investigative journalism magazine; and organizing training seminars for journalists. Transparency International, 3.14 TI is a nongovernmental organization dedicated to increasing government accountability and curbing both international and national corruption. It seeks to form coalitions of all stakeholders, which include the state, civil society, and the private sector. Key activities globally are: * setting standards of conduct. At the international level, TI focuses on eliminating serious corruption in international business transactions by bringing its Standards of Conduct to the attention of the concerned parties; * extending technical assistance to governmnents and corporations looking for assistance and specialist advice in corruption-related areas ranging from investigation to bookkeeping, from law drafting to law enforcement; * doing studies and research on governance and corruption-related issues; and, * publishing a Corruption Perception Index, an annual ranking of countries in order of increasing corruption as perceived by business. This publication plays an important role in raising public awareness. The Asia Foundation 3.15 The Asia Foundation began operations in the Philippines in 1954. The foundation focuses on programs that enhance accountability and public participation in governance, advance regional engagement and voice, and increase access to justice. It assists both government and nongovernmental organizations (NGOs) in reviewing policy options and strengthening institutions and processes required for broad-based sustainable growth. Its main areas of focus are: legal and judicial reform, countering corruption, and NGO sustainability. The foundation works closely with government, business, and civil society - 18 - COMBATING CORRUPTION IN THE PHILIPPINES counterparts at national and regional levels to promote, develop, and implement effective counter-corruption reforms. Institute of Popular Democracy 3.16 IPD, a research institute serving social movement groups and development NGOs, specializes in political research and advocacy. IPD is engaged in: interpreting Philippine realities, with a special focus on the forces that advance or retard democracy; theorizing on reform and democratization in civil society; formulating alternative frameworks and policies on democratization and development; and helping build intellectual and political capacities of progressive forces. Business Associations 3.17 The Philippine Chamber of Commerce and Industry (PCCI) and the Makati Business Club are working with the government, their members, and other civil society organizations to reduce corruption in the Philippines. The PCCI, for example, is working closely with the Bureau of Customs to strengthen and modernize their revenue collection systems and help monitor compliance. Donors 3.18 The donor community already provides considerable resources to the anticorruption issue in the Philippines. The World Bank 3.19 The World Bank has indicated that it intends to work closely with the Philippine government in the implementation of jointly selected activities in its anticorruption and governance-improvement programs; to maintain regular dialogue with government and other stakeholders on progress being made on the overall government-improvement agenda; and to ensure that Bank-assisted activities in the Philippines demonstrate good governance. In consultation with the government and civil society, the following main activities have been selected for Bank assistance during the Country Assistance Strategy (CAS) period (1999-2002): * improving financial, corporate, and public sector governance through a number of regulatory and legislative reforms; * reforming procurement and financial management systems in the Departments of Health, Education, and Public Works and Highways; * strengthening local government and supporting decentralization; and, * involving civil society as a partner in design, delivery, and monitoring of Bank- assisted policies and programs; - 19- KEY INSTITUTIONS * helping the government design and implement its anticorruption programs, particularly reducing corruption in the Customs and Internal Revenue Bureaus, and increasing the capacity of COA; and, * improving governance in Bank-financed projects. Other Agencies 3.20 The United Nations Development Programme (UNDP) has identified a range of issues for funding and is continuing to study corruption issues in the Philippines. 3.21 The Asian Development Bank (ADB) is supporting competitive markets and efficient, effective, accountable, and transparent public adminilstration. ADB has identified two areas of priority: economic policy reforms (including liberalization of licensing regimes, opening up of access to foreign exchange markets, reducing administered prices) and measures that help eliminate market distortions and reduce opportunities for rents. 3.22 The United States Agency for International Development (USAID) works closely with civil society in all its programs to improve governance and reduce corruption. USAID supports the Asia Foundation's program to develop constituencies of watchdog groups, media, and business. The agency also has technical assistance programs supporting procurement, customs, internal revenue, competition policy, decentralizing and strengthening local government, and judicial reform. 3.23 The German Development Foundation (GTZ) has two major projects in governance. The first is the Institutional Strengthening Project with the National Economic and Development Authority (NEDA) to strengthen the organization's capacity and capability to fulfill its mandate in areas of development planning, investment programming and monitoring, and evaluation. The other, the Philippine Tax Administration Project with BIR, aims to increase the skills and competence of BIR officials in order to increase the agency's effectiveness and efficiency in tax administration. 3.24 The Canadian International Development Agency (CIDA) provides assistance through its Local Government Support program (LGSP) and the Policy, Training and Technical Assistance Facility (PTTAF). The facility has funded more than 30 projects since 1993. This has included assistance to the Treasury to automate T-bill auctions, support for the Inter-Agency Anti-Graft Coordinating Council and assistance in collecting and publishing the rules and regulations under which the Commission on Audit operates. Transparency is now a major crosscutting theme for PTTAF, and further projects will be supported in procurement, customs administration, banking supervision and further development of the IAAGCC. 3.25 Support for good governance in the Philippines is also one of the key program elements of the Australian Agency for International Development (AusAID). While most of the activities focus on the public sector, AusAID has also supported institution- building activities of NGOs and other community groups as well as efforts to educate and empower civil society. - 20- COMBATING CORRUPTION IN THE PHILIPPINES 3.26 Steps are underway to increase donor coordination in the area of governance. The government should seek to bring donor support and technical expertise explicitly into any broadened anticorruption strategy. - 21 - 4. RECOMMENDED ELEMENTS FOR A COMPREHENSIVE ANTICORRUPTION PROGRAM IN THE PHILIPPINES 4.1 Because each country, institution, and region has its own variety of corruption, specific, tailor-made programs are essential. Fighting corruption is difficult and needs to be seen as a marathon that will require long and steady efforts over many years. Nonetheless, the Philippines can learn tremendously from the growing body of experience that shows that corruption can be addressed and that well-delivered anticorruption programs can yield significant and rapid results. Successful anticorruption efforts share some key elements. Drawing lessons from that experience, we present our recommendations for a nine-point approach to fighting corruption in the Philippines. Lessons From International Experience 4.2 Lessons from international experience (Boxes 4-1, 4-2, 4-3, 4-4, 4-5) and World Bank research suggest that a comprehensive anticorruption program should include: strong leadership, economic reform, public awareness, prosecution, public sector reform, judicial reform, and revenue and procurement reform.' Moreover, lessons for which there is already evidence include the importance of high-level political commitment, good pre- project diagnostic work, participatory project design, and strong data-recording ability. Strong Leadership 4.3 The personal commitment of a country's leaders to reducing corruption is crucial. They should set an ideal example for government workers to follow by becoming incorruptible themselves. The public must have strong confidence in their leaders' commitment and ability to achieve change. 'World Bank, "Helping Countries Combat Corruption," PREM Report, Washington, 1997. Another useful reference source for up-to-date information on global practices and programs in this area is the Anticorruption Knowledge Resource Center maintained by the World Bank at: http://www.worldbank.org/publicsector/anticorruption/. - 22 - COMBATING CORRUPTION IN THE PHILIPPINES 3ox 4.4. Anatomy of Anticorruption *rograins: Role of Government, Bisiness, and Civil Society Prevention Economic reform. Tailoring the role of the state and the design of economic pohetes to institutional capacity. This includes liberalization and deregulation where possible (to move toward a smaller, more efficient government); privatization of parastatals in competitive a new look at tax and regulatory policy (to match policies as closely as possible to eorcementcapabilies); opening of trade regimes to create "competition" and pressure for reform. * Adm4iiszrqfive reform. Preparing an inventory of proper "checks and balances" in the public sector; esteblishing "competing bureaucracies" (either horizontally-within one level of govetmnent, or vertically-among different levels of government) to deliver imilar services where possible; assigniig responsibilities (including devolution to subnational governments) with institutiutial capacity in mind; identifying and supporting "pockets of excellence." * Civil service reform. Moving toward merit-based processes in civil service recruitment, performance evaluation, promotion, and termination; establishing reasonable salary levels and grades. * Budget reform and fl#rancia( man agemenL Review/audit of government procurenent pctices; service delivery surveys (as an audit device for budget execition) bypassing of government agencies: direct donor fimding of communizydevel service delivery projects or private infrastructure projects; accounting, disclosure, and auditing standards for public an4 private sector institutions; prudential regulations, bankruptcy arrangements, and other oversight mechanisms for financial intermediation. * Reform in tz and customs administration. Functional organization of departments (across types of taxes); establishment of benchmarks for performance; increasing data availabiiiy and transparency; strengthening of taxpayer appeals mechanisms (both internal and external to the revenue departments). Inforeement * ProcuremenL including "No8ribery-Piedge" in bidding documents. (Will make a difference only with political stipport for underlying reforms.) * Encouraging alternative legal institutions (to conventional public rule of law institutions) for settlement of disputes, mediation, etc. * Legal and judicial reform. Reviewing anticorruption and conflict-of-interest legislation to ensure adequacy taking steps toward heightened independence of the judiciary; strengthening incentives and building skills of public prosecutors; reviewing administrative law (to strengthen transparency and public input to regulatory rulemaking); setting up a special anticorniplion agency; requiring income or tax return disclosure by higher level civil servants' and politicians. Continued on next page - 23 - RECOMMENDED ELEMENTS interfaitng (box 431 contiined ^ Societal support action. Promoting awareness raising and collaborative problem- identificadon through workshops; geneating and disseminating information and data; reviewing libel legislation (to strengthen the watchdog role of the press); promoting, jouralist training and support; iden;tifying and supporting 'local champions" (inluding nongovernmental organizations); promoting colledive action by international and domestic institutions, involving political leadership, business communities, finanial institutions, and NGQs * Politicalprocess. Reviewing cmpaign finance laws; supporting political party formation and voice; supporting constitutional reform (to strengthen civil lIb * Self-regulating arrangements. Issuing cdes of conduct for entprises; establis}hig review boards or oversigh committees and sentencing guidelimes reflecting enterprses self-corrective behavior. Source Miguel Schloss, "Combating Corrptionjfor Development The Roe fGovermen, Bsiess and Civi Soct,- working pape preseed atthe Pacifc Basin Ecomic Council, Santiago Chile Mqy 25- 27, 1998 Economic Reform 4.4 Simplifying rules and replacing administrative processes with market mechanisms are strong measures to reduce corruption. Trade regime reforms and licensing changes in areas such as imports and foreign exchange reduce discretionary treatment. In other cases, the appropriate privatization of state enterprises can reduce the size of the economy under bureaucratic control. Box 4-2. Albania: World Bank Anticorruption Assistance A comprehensive survey of corruption in Albania by the World Bank confirmed that corruption costs in two ways: * Corruption lowers tax revenues for governent and profitability for business, especially small- businesses. * Widespread perception of corruption undermines busmess confidence, regardless of the actual situation. Finns would be prepared to pay an additional 10 percent tax if they had to contend with less corion. The survey highlighted the degree of public and business concern about perceived corruption in the judiciary, customs, and tax agencies; in public services, including state hospitals; and in some key institutions and proceduresarticularly procurement and civil service recruitment and professionalism. A comprehensive refonn program was developed to tackle the issues identified by the survey_ Public Awareness 4.5 To hold public officials accountable for their performance, citizens should know what officials are accountable for and what they have done. This implies that sufficient - 24 - COMBATING CORRUPTION IN THE PHILIPPINES information should be made available to the general public and community groups. These groups also need means to influence reform programs. 4. 6 Client surveys give citizens a stronger, unified "voice" to alert the general public to corruption and fraud in specific agencies. Some countries make information on the financial performance of purchasing and other agencies freely available in print or over the Internet. These relatively low-cost forms of monitoring public officials' performance put political pressure on authorities to refrain from corruption and fraud. 4. 7 Credible high-level audit agencies-tasked with investigating, identifying, and prosecuting corruption-make the costs of misbehavior prohibitive for public officials. Public disclosure of government officials' statement of assets and liabilities is another way of improving transparency, which helps curb corruption. Prosecution 4. 8 The clear, fair, and consistent application of sanctions for corrupt behavior raises its financial and social cost for dishonest individuals. Applying such sanctions requires resources to investigate and prosecute corruption in the courts or through specific agencies. 4. 9 A major and successful anticorruption prosecution usefully highlights a government's commitment to this approach. One approach is to pick "low-hanging fruit," where progress can be made without substantial effort. This should be done in an area where the public clearly sees corruption and is most exercised over it. Public Sector Reform 4.10 A skilled and ethical public sector is part of the solution to graft and corruption. A general strategy for fighting corruption should focus on the factors that encourage corruption in the public sector instead of primarily on catching and punishing corrupt officials. If rules and procedures are such that they encourage corruption, agencies can do very little as long as these root causes remain unaddressed. 4. 11 Preventative measures to foster deterrence may include: institutional revamping of government functions and structures; improving human resource policies in central, local, and sector governments; revising the legal and regulatory framework for public administration; providing institutional support for government decentralization; and managing the process through which these changes are implemented. Organizational and management reforms include clearly dividing work responsibilities along functional lines, and relying on transparent, written procedures. Competitive base pay and transparent and nonarbitrary reward procedures are also widely recommended.' Nunberg, B. "Rethinking Civil Service Reform," PREM Notes, no. 31 (October 1999), World Bank, Washington. - 25 - RECOMMENDED ELEMENTS Box 4-3. Hong Kong: An Effecive Antieorruption Agency In the 196s and early I970s. corruption was widespread throughout the police force of Hong Kong, China, then a colony of the British Crown, Hong Kong, with one of the worWs largest police forces, was notorious for the number of its officers engaged in systematic acts of corruption. Corrupt practices were not confined to the police force or the public sector. In the private sector, "comni'ssions' and other forms of kickbacks were regularly used to promote business. Some people thought that govenunent efforts were destined to fail in an endless cycle of scandal legal reform, and renewed corption. No matter how thorough the reforms and how stiff the penalties, corrption always seem.ed to retur. In 1971, the government enacted the Prevento of Bribery ordinance, broadening the punishable offences and r sig theburden of proof in cases ofcouption. As a resulpersosnpossession of unexplinab now had to prove the innocenc to avoid prosecution. These anticorruption measures were reinfoced in 1974 when the goverment decided to create the Independent Commission Aganst Corruption (ICAC). The new agency was given sweepig powers and complte operational independene It could requie any person to provide any informaon, issue restrining orders to feeze asse and properties, and seize travel documents to prevent escapes. The agency was organized around three departments. * the:Operations Depariment, io investigate, arrest, and help prosecute corrupt individuals * the Corruption Prevention Department, to carry out assessments of other organizaions' breakpoints where coruption practices woul be most likely * thie Comnmnty Relaoans Department, to gater support and information fom the public and to chng publ attitudes toward conupion. ICA has developed a remarkable system of interal controls and outside advisory boards to provxie and analyze infomation about possible comuption and abuses of power within the agency. ICAC has achieved considerable success and enjoys widespread support. The following factors have been critical fi its success. * Recognition of the problem and commitment to solving it. The top govemment officials recogized the; senousness of the problem and aknowledged that it could be overcome only over the nmediumto long terlm. - * An unimpWchable anticonppion agency. The ICAC staff is carefuily selected to ensure the agenw's integt and is subject to s1tr disciptliary codes and anticorruon checks& To counter temptations for brbes, all receive generous salaries. Atention to all reports. ICAC encourages people to report wrongdoings and bulds public confidence by investigating every allegation, no matter how small. * Co: fi&nality. Stric management of the ICAC information systems guarantees confidentiality. The identity of an informants is never revealed, &mR Staphenhurst and & Kpundehk Curbig Corruption, EDI Development Series World Bank Washigton IS RM o bedKlirgaard Controlling Coruption Berkeley: University of California Pess, 1988 Judicial Reform 4.12 To maintain low levels of corruption over the long term, an effective judiciary must be established. The factors that make for predictable judiciaries are the sarne as those that make for a well-performing bureaucracy: merit-based recruitment and promotion, adequate compensation, and accountability for perforrnance. - 26 - COMBATING CORRUPTION IN THE PHILIPPINES Revenue and Procurement Reform 4.13 Deregulation and simplification are necessary components of an anticorruption strategy. Extensive and arbitrary regulations generally encourage giving and taking bribes. Reforming public procurement systems can directly reduce corrupt practices. This can be achieved by reforming laws, introducing more transparent procedures, adopting improved competitive bidding processes, and training staff. The modernization of public sector accounting and internal audit capabilities can be particularly important in improving controls and reducing the incentive for corrupt behavior. 4.14 Granting the revenue administration sufficient organizational autonomy, combined with performance-linked budgets, encourages greater efficiency. Tax simplification is a critical method of reducing bribery by limiting opportunity and increasing economic efficiency. Lowering excessive tax rates, broadening the tax base, and eliminating special exemptions are measures that tend to make tax obligations transparent, reduce the compliance cost of honest taxpayers, and help curtail the incentives and reduce the discretionary power of tax inspectors to extract bribes. 2 4.15 Internal audit divisions and anticorruption units can play important corruption- reducing roles within revenue administrations, while important institutional safeguards outside the revenue administration include an independent and effective judiciary, external reviews by government agencies (such as independent external audits), and taxpayers associations that strengthen citizens' voice.3 Strengthening Anticorruption Agencies 4.16 International experience suggests that it is important to develop strong, independent and credible anticorruption agencies. While the central role of such agencies is often to investigate cases of corruption, agencies usually cited as examples of best- practice (such as those in Hong Kong, Singapore, and New South Wales, Australia) also include within their work a focus on prevention and on building partnerships with communities and civil society organizations. While anticorruption institutions have to be shaped by the particular circumstances and priorities of each society, it makes sense to include these three capacities somewhere within the state's corruption-combating apparatus. 2 A. Das-Gupta, M. Engelschalk, and W. Mayville, "An Anticorruption Strategy for Revenue Admin," PREMNotes, no. 33 (October 1999), World Bank, Washington. 3Ibid. - 27 - RECOMMENDED ELEMENTS Box 44. Uganda: A Strategy for Combating Corruption The World Bank Group has been helping Uganda fight corruption since 1994, following a mission to assess the government's anticorruption progrm. When President Museveni took power in 198G6 Uganda was experiencing virtually every kind of corrupt practice imaginable. The new government made clear from the start that it viewed corruption as a key obstacle to Uganda's progress and a threat to its political stability. As a result, the govemment decided to create the office of the Inspector Generl of the Government (IGG), granting it extensive powers to deal with coruption and human rights abuses. IGG had a far wider mandate than tha of a tr onal ombudsman. it was responsible for the general "duty of protectin and promoting humnan rights and the rule of law in Uganda, and elimintaing and fostering the elminabton of corption and abuse of public offcs." The Constitution of 1995 made the agency responsible to the Parliment. It also empowered the agency to stimulate public awareness about its activities and to estabish branches at district or other administaive levels. Uganda has also begun one of the most comprehensive public sector reform programs in Africa. As recommended by the Public Service Review and Reorgaization Commission (I990) Uganda has tranormed its civil service into a smaller, better paid, and more effiient and effective orgnization. It has limited the role of the governnent to "core" functions and services that the private seor cannot provide. It has focused on personnel reductions by weeding out bureaucrats with excessive leaves of absence and ghost workers. More than 42,000 deeased, fictitious, or past employees who remained on the government muster rl have been removed from the payrolL The govenmment has also rognized as necessary actions to establish accountability within the civil service. * Make salary levels more equitabe. Paying a "iving wage" has been one of the most critica issues in the reform progrnm, as low wages in the civil servicehavebeen direcly linked to corruption. * Set a cod of conductfor all civil servans. An oath of commitment is required of all civil servants; anyone breaching the code is banned from public office for at least five years. * Develop a committed leadership. For both elected and appointed leaders, anticorruption efforts call for a new leadership culture in the public sector, based on honesty, transparency, accountability, semitivity to margalized groups, and respect for the rule of law. Source: Sedigh Shahnza4 and Augystine Ruzindana "The Fight Against Corruption in Uganda " n Rick Stapenhurst and Sar J. Kpundeh "Curbing Corrption." ED! Development Series, Word Bank Washington, 1999. - 28 - COMBATING CORRUPTION IN THE PHILIPPINES Bo ~5 Lsosfrmaiseonre frfeigigAtkrutouPorm Batdon" td fcmaaieaayi fteatcruto fet fMnoi, ni,tePiipns inapoe n ogKn,PoesrJnS 7 uh rasteesxlsosfrdsgigatcrut programs.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. g Leso 1 CmmirenodeokcIlaeshpi rc The oliicalleaers ustbe snceely ommtte to e-mcruto.Te us hweep odc RECOMMENDED ELEMENTS A Proposed Nine-Point Approach to Fighting Corruption in the Philippines 4.17 Drawing upon our global experience and the Philippine-specific analysis, we recommend that a national strategy for fighting corruption in the Philippines should focus on reducing opportunities and motivation for corruption and should make corruption a high-risk, low-reward activity. International experience suggests that a successful anticorruption program requires sustained efforts over a long time. It should focus on the root causes of corruption in the public sector, enhance the effectiveness of sanctions against corrupt behavior, and increase public oversight of government. Within this framework, nine key elements are recommended for the national anticorruption program. 1. reducing opportunities for corruption by policy reforms and deregulation; 2. reforming campaign finance; 3. increasing public oversight; 4. reforming budget processes; 5. improving meritocracy in the civil service; 6. targeting selected departments and agencies; 7. enhancing sanctions against corruption; 8. developing partnerships with the private sector; and, 9. supporting judicial reform. Isolated initiatives under each of these elements are already underway in the Philippines and are in various stages of implementation and/or improvement. These initiatives now have to be unified in one concerted program under a strong leadership and management structure, and strong partnerships have to be forged with the private sector, civil society, donors, the congress and judiciary. 4.18 Reducing Opportunities for Corruption. Through policy reforms and deregulation, noteworthy progress has been made in the last 10 years to reduce opportunities for corruption, but much more can be done. Opportune areas for policy reform in the Philippines include: * tax policy (for example, preferential tariffs, exemptions, investment incentives) and administration (for example, tax audits); * regulation of infrastructure services and public utilities such as power, telecommunications, water, aviation (for example, granting of franchises, government guarantees, competitive arrangements); * corporate governance reforms, particularly in the financial services area; * environmental and land use regulations; and, * import and trade arrangements. 4.19 Reforming Campaign Finance. The dynamics of electoral politics as practiced in the Philippines-particularly, the financial requirements to obtain and retain office and placate core constituencies-create dysfunctional incentives that degrade the performance of the public sector as a whole. In its issues, nature, and institutional origins, - 30 - COMBATING CORRUPTION IN THE PHILIPPINES corruption in politics looms larger than campaign finance reform and is different from petty corruption in procurement and bribery in the civil service. Although these issues have been acknowledged in the Philippines and demand due consideration, the World Bank's recommendations do not address them for lack of expertise and jurisdiction in this area. Nevertheless, reforms of political processes and systems should be an integral part of the government's overall anticorruption program. 4.20 Increasing Public Oversight. Measures to increase significantly the information made available to the general public have special importance because they let citizens know what officials are accountable for and how to judge their performance against those standards. Active efforts to engage civil society to advance accountability and integrity are also needed. Actions that could enhance public oversight include: * establishing a citizen charter, requiring an agency to specify and publish: each step of procedures to obtain a particular service; maximum length of time to conclude the process; and procedures to file complaints on agency failure to follow required procedures; * using government officials' annual statement of assets and liabilities proactively to identify inaccurate data or possible cases of corruption, and strengthening the law to provide simple systems for complaints, investigation and prosecution; - conducting client surveys to get regular feedback on access and quality of government services; - establishing advisory boards made up of prominent Filipino citizens to assist the Office of the Ombudsman as well as each department and agency targeted for anticorruption effort; * limiting the role of advisers in the government who are not governed by public accountability and parliamentary processes and enhancing the role of cabinet officials who are governed by the process; * strengthening the ongoing initiatives for governance-appraisal systems for cities and municipalities and publishing results annually; * showing strong support on bills in the Congress that seek elimination of graft and corruption by participating in committee hearing and disseminating information to the public; * taking the initiative to push Congress to disclose its financial activities including pushing for a bill that would minimize rampant activities in campaign financing; and, * sustaining its vigilance until erring government and public officials are given sanctions or penalty that is appropriate and just. 4.21 Reforming Budget Processes. Because the Philippine government relies on domestic and international financial markets to finance its budget needs, the markets act as a disciplinary factor. The formation of a Budget Dialogue Group with multisectoral representation is another plus. In contrast, discretionary funds handled by elected officials and congressional initiative allocations are regarded as areas for graft and corruption. Reforming budget processes to achieve discipline, allocative efficiency, and operational - 31 - RECOMMENDED ELEMENTS efficiency is a promising area to address corruption issues. Key potential actions to reform the budget process are: . enhancing the integrity and effectiveness of government-wide and agency-level financial management systems; * improving program performance monitoring and evaluation; * simplifying public procurement, eliminating noncompetitive aspects, actively rooting out cartels, and opening up tenders to international competition; * limiting congressional discretion over detailed line-items and strictly enforcing public finance rules in remaining cases. 4.22 Improving the Civil Service. The poor incentive framework governing the civil service in the Philippines is another major factor contributing to corruption. During the Social Weather Stations September 1998 survey, respondents were asked why graft and corruption happens in the government. The three top reasons cited were: to be richer; their salaries are not enough; and difficulties of life today. With this in mind, restructuring the civil service to reinforce merit and to provide adequate financial compensation and accountability for performance is recommended as a key element in a national anticorruption program. Some of the actions suggested in this area are: * limiting the scope for patronage in public employment by depoliticizing the civil service and strictly regulating the use of casual and other contractual workers; d decompressing the government pay scale to provide competitive salaries up to senior levels; and, * strengthening performance evaluation, implementing related awards and sanctions, and enhancing meritocracy in appointments and promotions. 4.23 Targeting Selected Departments and Agencies. Many corrupt behaviors are unique to specific government units and functions. At this level, it is easier to make progress in the Philippines since agencies and departments are relatively small, and their mandates are narrow, well defined, and easily subjected to scrutiny and reform. Ambiguous legislation and administrative orders can be clarified or rescinded, and business processes can be broken down into discrete components and evaluated. Examples of suggested actions in this area are: * selecting priority department and agencies, based on the public's priority concerns. Opinion surveys suggest the following initial list of targets for intervention: Bureau of Internal Revenue, Bureau of Customs, Department of Public Works and Highways, Department of Environment and Natural Resources, Department of Education, Culture, and Sports, National Irrigation Administration, Department of Health, Department of Interior and Local Government, National Power Corporation, and Bureau of Immigration. - 32 - COMBATING CORRUPTION IN THE PHILIPPINES identifying areas for a few quick wins that would give momentum to further reforms. One such area may be record agencies such as: Corporate Registration, Land Registration Authority, Land Management Bureau, and Motor Vehicle Licensing. 4.24 Enhancing Sanctions Against Corruption. Anticorruption efforts should focus on preventing and eliminating root causes of corruption, but government's capacity to detect corruption and sanction corrupt practices should also be strengthened. The goal is to change the current perception of corruption in the Philippines-from a low-risk, high- reward activity to a high-risk, low-reward activity. The present anticorruption effort is diffused amnong a number of agencies (many under-resourced) and with overlapping jurisdictions. They include the Commission on Audit; the Civil Service Commission; the Departnent of Justice; the National Bureau of Investigation; the Office of the Ombudsman; and Presidential Commissions on Good Government and Against Graft and Corruption. The following actions would strengthen the anticorruption institutions: * fast-tracking-for successful prosecution-a few high-profile pending cases of alleged graft and corruption; * merging the Presidential Commission Against Graft and Corruption with the Ombudsman's Office and strengthening the latter's capacity; * strengthening the capacity of the Sandiganbayan, the anti-graft court; * supporting capacity building in forensic audit at the Commission on Audit and corruption prevention at the Civil Service Commission; * streamlining and simplifying the legislative and regulatory framework involving corruption and civil service codes of conduct; * strengthening the functions of the Inter-Agency Anti-Graft Coordinating Council to harmonize rules and joint activities; and, * developing an integrated and efficient case-management system to facilitate the sharing of information and the movement of individual cases between agencies. 4.25 Developing Partnerships with the Private Sector. The private sector, as a major source of funds used for corrupt purposes, has to be mobilized to combat corruption. Involving the private sector will not only allow the development of more sophisticated and sensitive policy responses to corruption but will also put pressure on the private sector to raise its own standards of behavior. The following actions could be part of a government-private sector partnership against corruption: * involving representatives of the private sector in designing anticorruption strategies in vulnerable departments such as customs, taxation, industrial policy, infrastructure, and investment. The current arrangement between the Philippine Chamber of Commerce and Industry and the Bureau of Customs is an excellent example of this type of partnership; * engaging in a dialogue about how to solve the collective action problem associated with bribery: how to prevent some firms from continuing to bribe when others stop, thereby creating incentives for the others to revert to bribery again. The model antibribery legislation sponsored by the Organization for Economic Cooperation and - 33 - RECOMMENDED ELEMENTS Development is an example in that it promises significant penalties for those who continue to pay bribes. Another example is the Integrity Pact concept being piloted in Indonesia, requiring a formal no-bribery commitment from all bidders for government contracts; * encouraging higher standards of corporate governance. The OECD Principles of Corporate Governance (April 1999) provide a useful model for a local initiative, although it is essential that new local corporate governance standards be developed through an inclusive process led by local business organizations. There is already evidence of some initiatives and momentum toward improving standards; * developing and implementing company codes of conduct and ensuring their effectiveness through internal control mechanisms, personnel training, and sanctions; and, * adopting accounting and auditing rules and standards to ensure transparency in business transactions. 4.26 Supporting Judicial Reforms. Global experience has shown lower levels of corruption in countries with predictable judiciaries (in the sense of adjudicating cases consistently and efficiently). Factors that make for a predictable judiciary are: merit- based recruitment and promotion; adequate compensation; and accountability for performance. In the Philippines, available data suggest considerable room for enhancing the judiciary's effectiveness and reducing perceptions of corruption within its ranks. A preliminary assessment suggests that an action program for judicial reform should address the issues of: perception and reality of judicial corruption; case overload and delays; poor working conditions; alternative dispute-resolution mechanisms; and judicial education. Among the actions to support judicial reforms that might be included in the national anticorruption program are: * improving the appointment process to further buffer political interference. This would require a comparative study of jurisdictions with well-respected appointment processes, leading to Philippines-specific recommendations for reform. * improving the disciplinary process to make it more independent, more transparent, more equitable to judges, more consistent in application and penalty, and more efficient in resolving complaints in a timely way. * improving the Codes of Ethics for both judges and support staff in line with the rest of the civil service, articulating expected standards of conduct both on and off the bench and adding a section of annotated hypothetical and historical applications of the cannons of ethics. * improving the salaries of judges and support staff in line with the rest of the civil service. These are inadequate and provide fertile ground for the corrupt practices that exist. * eliminating opportunities for corruption in the judicial process by streamlining the case-flow process, computerizing some of the processes, and eliminating delay. * attracting a full complement of better candidates to the judiciary. A well-functioning judiciary requires judges and support staff of integrity and competence, presiding - 34 - COMBATING CORRUPTION IN THE PHILIPPINES over and serving both subordinate and superior courts. A high priority is a study to determine why the trial courts have difficulty attracting sufficient qualified candidates and to make remedial recommendations. * improving judicial education through institutional development, program development, and facilities and equipment support to the local judicial academy. - 35 - 5. IMPLEMENTING A COMPREHENSIVE ANTICORRUPTION PROGRAM 5.1 Having a good anticorruption strategy is a necessary but insufficient condition for progress-effectiveness in implementing the strategy will be a key determinant of success. Effective and sustained implementation will determine whether the fight against corruption can be won (Box 5.1). In this regard, we have seven recommendations: 1. Appoint strong leadership and management. 2. Set up a multisectoral advisory group. 3. Develop a sequenced action program of priorities chosen from the nine- point anticorruption strategy. 4. Launch programs immediately in priority agencies. 5. Upgrade capacity in anticorruption institutions. 6. Launch joint intergovernmental efforts by involving judiciary and congress. 7. Seek donor assistance for the government's anticorruption program. 5.2 Strong Leadership and Management. Because leadership is of such critical importance in the anticorruption struggle, a talented manager should be appointed. This manager must have impeccable and widely recognized integrity, a track record of sticking to a job and showing results, and the ability to communicate well with a wide public audience. To drive forward the anticorruption strategy and agenda, the manager should be given the support of a strong organization and adequate resources. The manager's mandate would involve spearheading the anticorruption efforts and coordinating a variety of agencies and groups involved in the effort. 5.3 Mulfisectoral Advisory Group. To advise the government on its anticorruption strategy and monitor progress on a regular basis, a multisectoral advisory group of national and international experts should be set up. This group should include prominent Filipino citizens who represent civil society efforts to combat corruption. Efforts should also be made to establish a proactive partnership with civil society institutions to monitor government performance and to encourage the private sector to improve its own behavior. This group should: * Acknowledge the rising concerns of citizens and private enterprises about corruption and announce that the government will give priority to eliminating corrupt practices that impede antipoverty programs and business sector growth. * Emphasize that combating corruption will require a strong and sustained government and civil society partnership and that the multisector advisory group is being formed to seek such partnership. - 36 - COMBATING CORRUPTION IN THE PHILIPPINES Won? 1gioxi stbt foitries have coiuptio hr d poicpctiosi,  irg b4 Qeid 1i&w that  can be qiick * both tuonaL iationa WVeJs  Asiaam4es j$inppre iiog Kong, ate  - ey y8), BIiia. Po TT$0p# 8Ye   scesaes ba eet dhe dAt of strong an4 ndvi nc* an4bb sr z4rms  refo*us nee4 ceiflivesererra,ce    The hi1ie 1an p of it t ecto#ai jn  i97D4pko$  % 4eAed  tg* goes d sswng artio & E - audty tbP#*on - ire ovet the in 1igupus e iud #ibe t4tcaI I -37- IMPLEMENTING AN ANTICORRUPTION PROGRAM 5.4 A Sequenced Action Program (2000-2004). For effective implementation, the actions listed in the nine-point anticorruption strategy and many others that will emerge from further analysis and consultation must be ranked by order of importance. It is recommended that the government develop a sequenced anticorruption action program, based on diagnostic surveys of households, businesses, and public institutions to identify priorities for anticorruption action and to design remedial programs. The surveys should be done by independent survey organizations under the guidance of the multisectoral advisory group. The survey findings should be presented to the public, an essential step in raising its awareness of the exact nature of corruption in the Philippines and what to do about it. Based on the World Bank's experience of such surveys in four countries, we recommend at least three surveys: * Government Sector Survey. A survey of selected government agencies to look at the role of different actors in decision making, implementation, and evaluation of its activities. This would highlight the processes and procedures within which corruption is embedded, the manner in which it is organized, and the reasons for the failure of regulatory and control mechanisms in place. * Corporate Sector Survey. A firmn-level survey to find out the nature and extent of corruption faced by firms and its impact on business costs and investment decisions. * Household Survey. With a special focus on poor households to find out how corruption affects their lives in terms of employment opportunities and access to public services and public resources. 5.5 Anticorruption Programs in Priority Agencies. Specific anticorruption programs may be launched immediately in several priority departments and agencies. Within the selected government departments, citizen boards should be formed to advise, and to monitor progress, on priority action programs for eliminating corruption and improving efficiency in the delivery of services to poor communities. Agencies making rapid progress in anticorruption programs might be given priority in budget allocations while those lagging behind could face budget cuts. 5.6 Institutional Capacity Upgrade. Upgrading the capacities of key anticorruption institutions should be a key implementation priority to bring to justice corrupt officials, particularly those in high places. We suggest upgrading three institutions in particular: the Ombudsman's Office, the Sandiganbayan, and the Inter-Agency Anti-Graft Coordinating Council. 5.7 Intergovernmental Efforts. Problems of corruption embedded within the broader system might be explicitly addressed through joint govermment, congressional, and judicial reform efforts. Congress needs to back reform by improving governance through legislation, increasing legislative oversight, imposing more severe sanctions on wrongdoers, and operating transparently itself. An illustrative list of congressional actions to help combat corruption in the Philippines is presented below; it is drawn from a paper prepared by ex-Congressman Margarito B. Teves at the World Bank's request (see Annex I for the full paper). - 38 - COMBATING CORRUPTION IN THE PHILIPPINES Improving governance by means of legislation. At present there are bills filed in Congress to address governance. In addition, a bill on budget reform could also be filed in Congress. * Conducting legislative oversight in a regular and not ad hoc basis. The oversight report should be submitted to the Committee on Appropriations and Senate Committee on Finance, respectively, to make a follow-up on the performance monitoring of the departments and agencies. Corresponding penalty should be imposed on low-performing agencies and an appropriate rewards or incentives to be granted to agencies with good performance. * Exhibiting transparency by starting within the institution. Congress should be transparent in its financial activities which include its internal budget, "pork barrel" fund, campaign funds. . Imposing stricter sanctions that would instill discipline on erring congressional members and government officials. * Reinforcing the technical and structural capabilities of the secretariat in both houses. * Formulating a methodology for legislative oversight. This should include beefing up the manpower, expertise and resources specifically for the conduct of legislative oversight. e Initiating transparency within the institution particularly in the management of Congress budget and "Pork Barrel' funds. Obtaining the participation of media in the drive to clean the institution of inappropriate practices would render credibility to this campaign. * Imposing stiffer sanctions to instill discipline on erring members of Congress. 5.8 Donor Assistance on Anticorruption. It is recommended that the Philippine government seek a reorientation of assistance provided by the World Bank and other donors in support of its national anticorruption campaign as well as seek additional assistance. -39 - ANNEXES - 40 - ANNEX A ANNEX A: A HISTORY OF ANTICORRUPTION EFFORTS IN THE PHILIPPINES A.1 The post-Marcos era marked a new wave of anticorruption movements in the Philippines. The country's Constitution was rewritten to include provisions to eradicate corruption. This subsequently led to the creation of several government agencies, including the Civil Service Commission, the Commission on Audit, and the Office of the Ombudsman, under the Aquino administration. (See Annex D for details on these agencies' mandates and activities.) The Ramos administration maintained this trend by establishing the Presidential Commission Against Graft and Corruption and the Interagency Anti-Graft Coordinating Council. When the Estrada administration took office in 1998, the country's anticorruption initiatives were strengthened in the context of the administration's antipoverty focus. BOX A-I. MAJOR ANTICORRUPTION 1NITIATIES IN THE PHILlPPINES .1955 Republic Act No. 1379, Act Declaing Forfeiture in Favor of the Stat Any Property Fond to have been Unlawfully Acquired by Any Public Ofcer or Employee and Providing for the Procedure Therefore 1%09 . Republic Act No. 3019,Anti-Graft and Corrupt Pratices Act 1985 Social Weather Stations was established 1987 Constitution of the Philippines, Article XI- Accowutability of Public Officers 1987 Civil Service Commission reestablished under the new Constitution 1987 Comnmission on Audit reestbished under the new Constitution 1987 Office of the Ombudsman reestablished under the new Constitution 1987 Sadganbayan retained its position as the country's primary anticorruption court 1989 Philippine Center for Investigative Jounalism founded 1989 Republic Act No. 6770, Ombudsman Act of 1989 1989 . Republic Act No. 6713, Code of Conduct and Ethical Standards for Public Officials and Employees 1990 Asia Foundation funds PCIJ book Pork and Other Pers 1994 Administrative Order No. 129, Directing the Adoption and Observance of Studard Processing Time in the Bidding and Award Process for Infrastrumre and Other Construction works and Consulting Services Contracts of the National Government 1994 Presidential Commission Against Graft and Corruption created under President Ramnos 1997 Interagency Anti-Graft Coordinating Council created by various government agencies to control graft in government 1997 Republic Act No. 8249. An Act Further Defining the Jurisdicdton of the Sadiganbayan 1998 Asia Foundation/Social Weather Stations releases results of Corruption Perception Survey - 41 - COMBATING CORRUPTION IN THE PHILIPPINES A.2 The Philippines' earliest anticorruption law dates to 1955; the post-Marcos period is marked by a series of legislation designed to improve government transparency and accountability. These laws include the constitutional mandates to create new government agencies, place checks on corrupt practices, and provide codes of ethical standards for public officials. A.3 The Philippines has a strong tradition of civic participation, and the involvement of nongovernmental organizations (NGOs) has increased significantly in the last decade. With a relatively free environment for the press, a group of journalists founded the Philippine Center for Investigative Journalism (PCIJ) in 1989. One of the main goals of PCIJ is to increase public awareness of corrupt practices in the Philippines through media coverage. It works with other NGOs such as the Asia Foundation. Other civil society groups include the Social Weather Stations, a survey think-tank established in 1985 and based at the University of the Philippines, and the Institute for Popular Democracy, a research group specializing in political research. (See Annex F for a more information on these groups' activities.) nte uities opto y 1 pint a uccsor wh= $ follow - 42 - ANNEX B ANNEX B: THE PHILIPPINES' GOVERNANCE IMPROVEMENT AGENDA B.1 The Medium-Term Philippine Development Plan (MTPDP) recognizes that improving governance and developing capabilities of public institutions are essential for achieving its growth and equity objectives. The plan acknowledges weaknesses in public sector capabilities in policy and program implementation; poor national and local government accountability; endemic graft and corruption; lags in law enforcement and justice, with rare convictions in high-profile corruption cases; and faulty delivery of services to the poor. B.2 To address these weaknesses, the government plans initiatives in three main areas: administrative governance, economic governance, and political governance. Administrative Governance B.3 To enhance government responsiveness, effectiveness, and accountability, the government proposes to: * Streamline the bureaucracy by: instilling core values in the conduct of public officials, evolving into a more efficient, customer-focused, professional, and innovative service provider; streamlining government procedures for issuing permits and licenses; establishing performance indicators and benchmark standards for government programs and projects and for staff; and depoliticizing the appointment process and strengthening the role of Career Executive Service Officers (CESO). * Rationalize the compensation and incentive system for government personnel. * Continuously build capacities, core competencies, and skills of civil servants, local government units and civil society organizations by supporting capability-building programs (training, professional education), and strengthening inter- and intragovernmental and private sector collaboration. * Expand use of Information Technology (IT) by pursuing proper and judicious use of IT and institutionalizing reforms in the administrative systems and procedures in support of IT. * Sustain a gender-sensitive and ethical bureaucracy. Economic Governance B.4 The government aims to pursue prudent economic policies and a rational and effective privatization program and to promote good governance. The government has identified the following areas of initiative: * Set up an effective public expenditures management system by adopting a Medium- Term Expenditure Framework (MTEF) and establishing a new national accounting and auditing system. - 43 - COMBATING CORRUPTION IN THE PHILIPPINES * Pursue an expanded privatization program at the national and local level by promoting free and open market competition and supporting and accelerating private sector participation. Privatization at local level will be undertaken through divestment, outsourcing of activities, and joint ventures with the private sector. * Focus government's role on core functions, namely: macroeconomic management, maintenance of peace and order, conservation of natural resources, maintenance of an effective judiciary and law enforcement system, provision of adequate and appropriate basic infrastructure, provision of quality basic education and primary health care, economic and political diplomacy, and disaster management. * Enhance government responsiveness to the poor by better targeting government assistance, expanding and strengthening the comprehensive and integrated delivery of social services to the poorest barangays, and involving private sector and civil society in the design, delivery, and monitoring of antipoverty programs. Political Governance B.5 To restore faith in the democratic process and the credibility and integrity of political institutions and processes, the government will focus on: * eliminating graft and corruption; * improving peace and order, law enforcement, and administration of justice by refocusing the country's defense security forces and arrangements, further professionalizing the police force, empowering citizens' organizations in the campaign against crime, strengthening the pillars of the criminal justice system, and opening avenues for peace and conciliation; * enhancing primacy of human rights by implementing governmentwide comprehensive human rights value formation and by strengthening support systems, programs, and mechanisms for human rights enforcement; * sustaining and deepening the devolution process; * institutionalizing consensus-building mechanisms at the local level; * instituting political and electoral reforms; and, * enhancing the Philippines' external security prospects by strengthening cooperation within the Association of Southeast Asian Nations (ASEAN), pursuing an effective defense system modernization program, and supporting multilateral economic and security arrangements. - 44 - ANNEX C ANNEX C: PROFILES OF CORRUPTION C.1 No one knows precisely how extensive corruption is within the Philippines. No systematic data are available on its magnitude, location, or trend. However, several information sources (surveys, publications, anecdotes, and government data) provide a strong indication that corruption is systemic and a key public policy issue. By some estimates, government losses due to corruption have totaled PhP1.2 trillion (about $31.5 billion, at prevailing exchange rates) over the last 25 years.1 In June 1999, President Estrada noted that a recent study by his economic advisers found that 20 percent of government funds for projects in 1998 had ended up as kickbacks.2 Since the government allocated PhPI20.6 billion out of its total 1998 budget of PhP546.7 billion for capital spending, the resulting loss to graft and corruption would be PhP24.1 billion ($634 million). Whatever the exact figure is, the direct costs are likely to be dwarfed by the indirect costs such as opportunities lost to substandard education, poor fann-to-market transportation, or lives lost to shoddy construction, subverted building and fire inspection, and absence of essential medical supplies. Typology of Corruption C.2 Data on corruption within the Philippines come from four sources: * information on complaints received from various investigating agencies (such as the Ombudsman's Office, Commission on Audit [COA] and Civil Service Commission [CSC] and the results of in-house investigations conducted by these bodies; * survey data on public attitudes; * pioneering studies and investigative reports by academics and journalists, who operate independently but often use of information from "whistleblowers" and other sources within government; * interviews with senior government officials and representatives of the private sector; C.3 Although much of this information about corrupt practices remains fragmentary and anecdotal, a rudimentary picture can be obtained of the parameters and costs of corruption in the Philippines; and, C.4 The term "corruption" serves as shorthand for a wide variety of actions in which public office is abused for private gain. The Philippines is not different from other countries, in that the types of illegal and illicit behavior range into the hundreds, if not the thousands, and vary markedly in terms of their sophistication and ultimate burden upon development. Some types of corruption, such as procurement fraud or the payment of lagay [speed money], are common across many different agencies. Others are agency 'The estimate of PhP1.2 trillion in losses due to corruption is from the Philippine Office of the Ombudsman. Philippine Star, May 13, 1999, p. 1. 2 The figures from President Estrada are cited in Philippine Daily Inquirer, June 10,1999, p. 1. - 45 - COMBATING CORRUPTION IN THE PHILIPPINES specific such as the syndicates that operate in collusion with the Bureau of Immigration staff for smuggling illegal aliens into the country, are agency specific. Still others such as the multibillion peso Amari scandal, involving the sale of prime reclaimed property in Manila Bay by the Public Estates Authority, may center around one specific transaction. Some schemes involve dozens of collaborators and millions of pesos; others as little as fifty or a hundred pesos, or no money at all. C.5 This analysis focuses on three separate layers or levels of corruption: corruption related to the dynamics of the broader political system, corruption related to the performance of the Philippine public sector at systemic level, and agency-specific corruption. Within the Broader Political System C.6 Corruption within the broader political system includes the demands of electoral politics, the extensive use of patronage in political appointments, and the existence of "pork barrel" funds.3 A variety of technical fixes are being considered to reduce or eliminate "pork barrel" projects such as the current Department of Budget and Management (DBM) plans to release such funds only upon submission of a viable project proposal. However, because this problem is intimately grounded in the way political power is achieved and sustained in the Philippines, its ultimate resolution will be problematic, barring a major change in political culture and fundamental reform of existing electoral practices. Within the Public Sector C.7 The analysis of corruption related to the performance of the public sector at a systemwide level focuses on three major problems. The first is the spotty performance of mechanisms for identifying and sanctioning employees engaged in corrupt and illicit behavior. Currently, the threat of detection and prosecution for such behavior is not large enough to serve as a significant deterrent. Less than 5 percent of reported complaints to the ombudsman in any year result in administrative sanctions, for example, and less than 3 percent ultimately result in a criminal conviction. Other central government agencies have similar problems with sanctions. C.8 The second major problem relates to considerations of pay and employment, insofar as low salaries throughout the public sector create incentives for employees to augment their income by other means. C.9 The third issue relates to government procurement, particularly in certain key agencies with a reputation for problems in this area (the Department of Public Works 3 The term "pork barrel" originated in the United States in the nineteenth century, where it is used to describe efforts by legislators to allocate resources to projects and activities in their home districts. However, Philippine practice differs from that of the United States by providing lawmakers with predetermined allocation for them to decide when, where, and how these monies are to be spent. It resembles more closely the French system of "reserve parlementaire." - 46 - ANNEX C and Highways, the Department of Education, Culture and Sports, and the Department of Health). Because of the way procurement authority is currently distributed within the Philippine government between the Office of the President, the Department of Budget and Management, and the line agency, these issues will be addressed in this context. Within Specific Agencies C. 10 The final portion of the analysis will look at examples of agency-specific corruption, specifically, the Bureau of Internal Revenue and the Bureau of Customs. A great deal of illegal or illicit behavior in the Philippines is agency specific and will ultimately require solutions at this level. Such corruption can include both grand corruption, involving widespread syndicates and millions of pesos, and petty corruption, involving small payments of "grease" money to facilitate the delivery of goods and services. C. I1 As it is impossible to present a comprehensive catalog, this survey focuses only on the most common and important problems at each level. Corruption and the Philippine Political System C.12 The Philippines has a vibrant democratic system, with 353,000 government positions filled by elections-ranging from the presidency to the local barangay or neighborhood captain. Presidential elections take place every six years. There are 24 senators, half of them elected to six-year terms and half to three-year terms. Elections of the 208 members of the House of Representatives take place every three years. The 78 provinces hold elections every three years for governor, vice governor, and 722 provincial board positions. There are 83 cities, with elections for mayor, vice mayor, and 13,146 city council positions, and 1,525 municipalities, with elections for mayor and vice-mayor. The barangays elect 41,940 barangay chairpersons and 293,580 barangay councilors. Expensive Elections C. 13 Elections in the Philippines are typically very expensive. Some observers estimate that a successful presidential campaign costs PhP3 billion (about $80 million) and that a successful congressional campaign can run as much as PhP100 million ($2.6 million). According to one rather dated study, in 1961, candidates spent per voter an estimated 1.6 percent of per capita income, and election expenditures that year amounted to an estimated 13 percent of the national budget. In 1998, Senator Ernesto Maceda observed that the administration would need up to PhP5 billion to PhP1O billion to support its slate of national and local candidates.4 C.14 Such figures place enormous pressure upon candidates and political parties to come up with the requisite funds to support their bid for office. Nor do the demands stop 4 Isagani de Castro, "Campaign Kitty," in Sheila Coronel (ed.), Pork and Other Perks. (Quezon City: Philippine Center for Investigative Journalism, 1998), pp. 220. - 47 - COMBATING CORRUPTION IN THE PHILIPPINES after election. At its core, Philippine politics is patronage based.5 Once elected, representatives are expected to serve as conduits for distributing the fruits and privileges of office to their supporters, particularly jobs and public works contracts. Furthermore, congressional representatives are often called upon to serve as patrons or "godfathers" in many districts, where they attend numerous weddings, funerals, and festivals and make generous contributions at each occasion. C.15 Since the monthly salary of a congressman is PhP17,000 and that of a senior government official is less than PhP27, 000 (about $450 and $710, respectively), it is virtually impossible for any but the most wealthy to come up with enough money to capture and retain office. In response, legislators and public officials have developed a range of mechanisms for augmenting their income. At times in the past, these measures have involved the outright theft or embezzlement of government monies. During the 1986 election, for example, Ferdinand Marcos is estimated to have diverted around $150 million from the national treasury to support his bid for reelection. More sophisticated techniques have involved gaining access to certain off-budget revenue sources, such as those of the Philippine Amusement and Gaming Corporation, or diverting revenues to regions and municipalities whose officials support administration candidates. Pork Barrel Funds C. 16 Recent campaign finance and antigraft legislation has made it more difficult to resort to such schemes. However, other mechanisms have been developed to fund the cost of obtaining and staying in power. Among the most controversial is the use of "pork barrel" projects-a phrase used to cover a variety of different funds under the direct supervision of individual senators and congressmen and intended for their districts. C. 17 The best known source of "pork" is designated development funds such as the Countrywide Development Fund (CDF). Dating back to 1989, these funds include the Visayas Development Fund, the Mindanao Development Fund, and the Inter-Regional Development Fund. Initially, an annual CDF sum of PhP12.5 million was allotted to each congressman and PhP18 million to each senator. These monies were intended for infrastructure projects, livelihood programs, health and social services, calamity assistance, and equipment purchases. By 1998, additional "special purpose funds" and insertions in agency budgets were providing legislators with at least five different sources of revenue, including special funds for the construction of school buildings, farm-to- market roads, and other public works. Some estimates put the size of these funds at more than PhP35 million per legislator.' C.18 In addition to CDF and other special funds, each legislator is allowed at least PhP15 million in budgetary items under direct legislative control. (For senior senators With a few notable exceptions, most political parties in the Philippines are not arrayed along an ideological spectrum or have frmly crafted positions. Instead, they represent shifting coalitions held together by regional, factional, and personal loyalties and perceived self-interest. 6Earl Parreno, "Pork," in Sheila S. Coronel (ed.), Pork and Other Perks: Corruption and Governance in the Philippines (Manila: Philippine Center for Investigative Journalism, 1998), pp. 32-55. - 48 - ANNEX C and congressmen, these amounts are much higher and can run as much as PhP 100 million per year.) Such funds, called Congressional Initiative Allocations (CIA), are a part of agency budgets but at the discretion of the legislator to determine when, where, and how these monies are to be spent. CIAs are more open to misuse. At PhP3 billion for 1998, they are greater than CDF funds. C.19 To their proponents, such funds allow legislators to be more responsive to the needs and priorities of their constituents and ensure the equitable division of resources among electoral districts. However, opponents have noted that they are frequently a source of graft and corruption. A 1996 report of the Commission on Audit found numerous illegal acts, including making cash advances or claiming checks, signing disbursement vouchers and purchase orders, granting contracts to favored firms, allowing the overpricing of goods, and diverting the funds to purposes other than those approved.' At that time, unliquidated amounts totaled more than PhPI.8 billion ($47 million), and examples were discovered where such funds were put to a variety of personal uses such as car and home mortgage payments. C.20 Some investigative journalism reports paint a particularly disturbing picture of resources lost and diverted. According to these estimates, the largest kickbacks are typically made in the procurement of books and medicines, where as much as 60 percent of the allocated monies can be skimmed off.' Legislators allegedly get a 45 percent cut, with 5 percent going to their congressional aid and 10 percent to staff from the implementing agency. By some estimates, the amounts lost in textbook purchases alone could procure an additional 2.5 million textbooks annually in a country where the textbook-to-pupil ratio is 1:6 for elementary students and 1:8 for high school students. Public works projects are less lucrative but still result in the diversion of over 35 percent of the funds, with 16 percent going to the lawmaker; 10 percent to the provincial, city, or municipal engineer; 10 percent to the mayor; and 3 percent to the local barangay captain. C.21 The Philippine government has taken some measures to promote greater accountability in the use of "pork barrel" funds. Under the 1999 General Appropriations Act, allocations have been made for three funds: Lingap Para Sa Mahirap [Care for the Poor] program of PhP2.5 billion; the Food Security Fund, also PhP2.5 billion; and the Rural-Urban Infrastructure Development Fund of PhP5.4 billion. These funds serve as a common fund and are not divided equally among various legislators. DBM is preparing guidelines that will require representatives to submit project proposals before disbursing the funds. Compensation Allowances C.22 In addition to "pork barrel" funds, legislators can take advantage of generous compensation allowances. Although official salaries totaled only PhP17,000 per month, in 1997, the Presidential Commission Against Graft and Corruption reported that the average member of the House of Representatives received a total of PhP2.84 million in 7 Commission on Audit, 1996. s Parreno, "Pork," pp. 39-43. - 49 - COMBATING CORRUPTION IN THE PHILIPPINES 1995, and the average senator received PhP6.21 million, in compensation for offsetting various expenses.9 These expenses included funds for research, communication, supplies, contractual consultants, travel, and other miscellaneous expenses that are neither taxed nor audited. Many of these funds are widely believed to end up either flowing into campaign coffers or being diverted to personal use. Patronage C.23 Patronage is the second major area where elected officials seek to reward their supporters. Patronage considerations influence recruitment and promotion within the civil service in several ways. By any standard, an extraordinary number of positions at all levels of government are filled through political appointments. The 1997 World Development Report using the Marcos era data ranked the Philippine Civil Service as among the most politicized in the world, with political appointments going as far as service director-six levels down into the bureaucracy.'0 C.24 By some estimates, the president has the power to name people to 3,175 career executive positions in various government departments and agencies." In such line departments as education, for example, this includes everyone from the secretary down to provincial superintendents. It includes ambassadors, military officers from colonel on up, and justices for various courts. It also includes 2,488 positions in 60 govermment-owned corporations. (For example, in the Social Security System, the president has discretion over 229 posts) Such numbers are excessive, even in comparison with the United States, which has a much higher proportion of political appointees than other parliamentary or presidential systems. Adjusting for the difference in civil service size, the Philippines has at least twice as many political appointees. Under the Aquino administration, Congress became so concerned about the proliferation of political appointments-which sometimes numbered as many as seven undersecretaries per department-that it eventually passed a law limiting to three the number of departmental undersecretanes and assistant secretaries. With the passage of time however, this measure is now, more often than not, honored in the breach. C.25 In addition to political appointees, other devices are used to advance patronage and nepotism. Although recruitment into technical and professional positions is prohibited without the requisite qualifications, other positions-such as advisers-are not subject to civil service qualifications. C.26 Other strategies involve hiring friends, relatives, and political supporters as consultants or contractual workers. Few figures exist as to how pronounced these practices are, but preliminary evidence indicates that-at least for contractual workers- it could be fairly widespread. One potential indication of the level of patronage within 9 Presidential Commission Against Graft and Corruption, The Need of Transparency in Government, Office of the President of the Philippines, 1997. 1° World Bank, World Development Report: The State in a Changing World, (New York, N.Y.: Oxford University Press, 1997), pp.92-93. " Sheila Coronel, "The Pare Principle," The Investigative Reporting Magazine (October-December 1998). - 50- ANNEX C civil service recruitment and promotion is the degree to which casual and contractual workers are hired to circumvent regulations requiring applicants to pass the civil service entrance examination. In 1995, for example, there were 157,000 casual employees within the civil service, roughly 11.8 percent of the entire civil service. These casual employees were hired despite the existence of more than 120,000 civil service vacancies. Problems were particularly pronounced at local government level, where 85,000 casuals were hired despite 43,000 regular vacancies. C.27 In light of this evidence, the CSC chairman concluded: "The somewhat unpleasant reality is that casuals and contractuals are indicative of the pervasive patronage factor in government."'2 By 1997, the ratio of career positions to contractual positions had deteriorated further, from 1:7.47 to 1:6.14. Again, this change was particularly visible at the local level, where more than 112,000 contractuals were employed despite 43,086 career vacancies. These data further reinforce the finding that patronage is a particular concern in local governments. At the national government level, the ratio of career to contractual labor in 1997 was 16:1, and about 1.5 contractual workers were hired for every vacancy; at the local level, these figures stood at 2:1 and 2.6, respectively.-3 C.28 Finally, even among civil service positions at the national level, patronage considerations can influence appointments that should fall strictly under civil service protection. In one instance the only information provided to the Secretary as a basis for a round of senior appointments was the name of applicant and that of their sponsors. Although some prescreening may have taken place to weed out applicants whose credentials were unsatisfactory, the decisive consideration advanced for the Secretary's decision was clearly the political heft of their patrons. Corruption in the Public Sector C.29 The discussion immediately above focuses upon problems of corruption linked to the practice of democracy in the Philippines. Other pathologies at a systemwide level degrade the performance of the public sector as a whole. Two major problems will be addressed at this level: sanctions and salaries. Sanctions C.30 One of the most fundamental problems confronting the Philippine government is the lack of adequate sanctions for public officials engaged in corrupt or illicit behavior. This problem is multifaceted. Many Filipinos do not report alleged incidents of corruption. Complaints that are reported are often not investigated promptly and thoroughly. Although a significant number of civil servants are singled out for 12 Corazon Alma G. de Leon, chairman, Civil Service Commission, Championing Good and Honest Governance (Quezon City: Civil Service Commission, 1997), p. 31. 3 These figures are derived from Civil Service Commission, Office for Planning and Management, Research Statistics Division, Government Personnel/Positions Inventory. 1997, Office for Planning and Management, Research Statistics Division. Quezon City, 1997. -51 - COMBATING CORRUPTION IN THE PHILIPPINES prosecution or administrative sanction, many avoid reprimand or conviction. When sanctions are employed, they can be imposed inconsistently, with draconian punishments being meted out for relatively minor infractions and major crimes receiving lenient treatment-particularly when committed by the rich, the powerful, and the politically well connected. C.31 The first weak link in the accountability chain is the unwillingness of many Filipinos to come forward with information about abuses. Survey data from 1998 indicate that perhaps 22 percent of the public has been asked for money or a gift to speed up their transactions with a government official. However, only 8 percent of those asked for a bribe ever bothered to report it. Those who did not come forward offered a range of reasons, including "it's too small" (40 percent); nothing would be done about it (36 percent); they did not know where to report (13 percent); or they were concerned about retaliation (7 percent).14 C.32 Among cases that are reported, the rate of sanction is very low. Data from the Ombudsman's Office (the premier anticorruption agency within the Philippine government) from 1997 and 1998 indicate that only slightly more than 16 percent of reported cases are advanced for prosecution, and at best less than 2 percent ultimately result in a conviction."5 Less than 5 percent of the annual complaints received by the ombudsman result in the imposition of administrative penalties. C.33 In this regard, a benchmarking comparison between the Philippine's Ombudsman and Hong Kong's Independent Commission Against Corruption (ICAC)-widely considered to be among the world's most effective anticorruption agencies-is highly instructive. One of the most telling statistics is that in 1997, ICAC successfully prosecuted 8.24 corruption cases per 10,000 civil servants. In the Philippines, the comparable figure is less than 0.25 per 10,000. In short, after adjusting for the differences in size between the two civil services, the probability that a Hong Kong civil servant will be successfully prosecuted for corruption is almost 35 times greater than his or her counterpart in the Philippines. C.34 Where does the leakage occur? As a result of ICAC's extensive public relations campaign, Hong Kong citizens are more than five times more likely to report alleged incidents of graft and corruption than their Filipino counterparts. ICAC also practices more robust triage up front, launching investigations on only slightly more than half of the reports that come in. About 10 percent of these reports result in prosecution or the imposition of administrative sanctions. ICAC pursues administrative sanctions on less than 2 percent of the reports and seeks to prosecute about 8 percent of these cases-a 4:1 ratio in favor of prosecution. ICAC wins about four out of every five cases when it opts 14 Social Weather Stations report, "Personal Experience of Paying to Speed Up Transactions," Manila, September 1998. Some similar categories of response were combined. 5 The data on convictions is estimated from the approximately 22.5 percent of anticorruption cases tried before the Sandiganbayan, the nation's premier anticorruption court. The other cases are tried before local courts, where the number of successful prosecutions is widely perceived to be significantly less. - 52 - ANNEX C for prosecution. In other words, about 6 percent of all corruption-related reports end in a successful criminal prosecution. C.35 The Philippines actually advances a significantly higher proportion of cases- roughly 28 percent-for prosecution and administrative sanction. Of these cases, the preponderance (about 7:1) is for prosecution. At an average of 5 percent of the number of reports received, the rate of administrative sanctions imposed compares favorably to that of Hong Kong. However, at best only 12 percent of the cases advanced for prosecution result in a sustained conviction. The net result is that less than 2 percent of the reports result in successful criminal prosecution. C.36 Furthermore, although the evidence is largely anecdotal, it appears that even when sanctions are imposed, it can be in an ad-hoc and idiosyncratic fashion. The following examples are cited from the Ombudsman's 1997 Annual Report: * The mayor of a town in Negros Occidental was ordered suspended for three months when found guilty of placing his niece on the payroll while she was enrolled full time as a student in another city. According to Section 22, Rule XIV, of the Omnibus Rules Implementing Book V of the Administrative Code of 1987, the only penalty for nepotism within the civil service is dismissal, disqualification from holding public office, and forfeiture of benefits. * Three officials from the Light Rail Transit Authority were placed under preventive suspension for six months with full pay and benefits when it was discovered that they conspired to award an additional PhP63 million surcharge over the original contract bid to a certain construction firm. At the end of their suspension, they were returned to their original positions.'6 C.37 Several Commission on Audit officials confirmed that, despite regulations to the contrary, it is common practice to allow employees caught embezzling or misappropriating monies to simply repay the amount in question without further criminal or administrative sanction. Salaries C.38 To what extent does poor pay in the public sector contribute to corruption? In a poll of public attitudes toward corruption in September 1998, low salaries were cited most often as the major reason government employees resort to graft and corruption.'7 Many senior government officials interviewed by the mission underscored this problem 16 Office of the Ombudsman, Republic of the Philippines, Annual Report, Manila, 1997. 17 Low salaries were cited by 25 percent of the population as the reason for graft and corruption in govermment, followed by the desire to be richer (22 percent); the difficulties of life today (12 percent) and the need to satisfy their own interests (7 percent). Multiple answers were allowed. Social Weather Stations, Survey Results of an Exploratory Study of Graft and Corruption in the Philippines, September 1998. - 53 - COMBATING CORRUPTION IN THE PHILIPPINES as one of the fundamental contributing factors-as one noted jokingly, "If you pay peanuts, you get monkeys." C.39 Despite its visceral appeal, the relation between pay and employment and corruption is a complicated one. Recent empirical work by the International Monetary Fund indicates some correlation between the ratio of civil service to manufacturing pay and improvements in a "corruption index."'8 However, these data also indicate that a number of intervening variables-particularly measures of rule of law, the quality of the bureaucracy, and the effectiveness of internal and external controls-also exert a powerful influence in ensuring compliance with civil service norms and rules. By itself, the cost of increasing wages to reach the point where corruption can be "quasi- eradicated" is likely to be prohibitive; it would entail paying civil services wages three to seven times higher than the prevailing manufacturing wage. C.40 The disparity between public and private sector wages in the Philippines is most pronounced at the senior levels of the public sector. Bureau directors receive salaries of between PhP24,000 and PhP27,000 a month ($630 to $710)-only four to five times more than a well-paid domestic helper. A 1996 World Bank study concluded that it is "definitely the case that higher level staff in the civil service are significantly underpaid relative to their private sector counterparts."'9 However, it is less clear that similar findings hold for lower levels of the bureaucracy. The study holds that most lower grades in the civil service seem to receive salaries equivalent to those of their private sector counterparts. C.41 Any reform of salaries is unlikely to keep pace with the tremendous sums that can be made through illicit or illegal behavior in some agencies and departments. Interviews with the Bureau of Immigration, for example, indicated that even low-level functionaries could earn large amounts from certain illegal transactions. For senior officials, the rewards are much greater. C.42 The results of this analysis suggest that the Philippine government should clearly proceed with efforts to decompress salaries and ensure more competitiveness with the private sector in the senior ranks of the civil service. Such moves are likely to have positive externalities, both in the narrow struggle against corruption and in the broader effort to attract and retain talented staff within the public sector. However, to be effective, these measures will need to be linked to a broader anticorruption effort that seeks to: enhance the overall framework for performance, probity, and accountability in the public sector; reduce the opportunities for corruption; and enhance the risk of being detected and sanctioned. Otherwise, they are likely to "buy" relatively little integrity for the large expenditure involved. 18 Caroline Van Rijckeghem and Beatrice Weder, "Corruption and the Rate of Temptation: Do Low Wages in the Civil Service Cost Corruption?" International Monetary Fund Working Paper, WP/97/73, June 1997. 19 David Steedman and Stephen Howes, "Civil Service Reform in the Philippines," Asia Technical Department Departmental Paper Series, no. 12 (Washington: World Bank Asia Technical Departnent, 1996), pp.8-9, 68-69. - 54- ANNEX C Agency-Specific Problems C.43 A wide number of corrupt behaviors surround the functioning of individual agencies and departments and are unique to their missions and tasks. Two of the more notable examples are the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC). C.44 Robert Klitgaard identified eight different "pathologies" within BIR during the 1980s.2" As outlined in Box C-1, they included three types of "external" behavior that involved efforts to cheat or extort money from taxpayers and others outside the agency. There were also five types of "internal" behavior that involved efforts to divert money from government coffers or to subvert established procedures for investigation and human resource management. Many of these problems are widely believed to persist within BIR today. Box C-1. Typology of Corruption at the Bureau of Internal Revenue External Corruption * Payment for licit services. Lagay ["speed moneyl' is used to move a tax matter more rapidly through the BIR bureaucracy. Also, payments are demanded for providing taxpayers with an accurate assessment of their taxes due, which is typically significantly lower than the initial, unrealistically high assessment. * Pament for illicit services. Taxpayers often bribe tax collectors in exchange for an arreglo [arrangement], in which they pay less tax than they owe. In a typical arrangement, collectors sign off on excessive deductions, understated income. or incorrect tax computation. * Ei'ftortion. Taxpayers can be subject to harassment and the threat of legal or financial sanctions unless they pay bribes to corrupt officials. Internal Corruption * Embezzlement through falsification of records. Official receipts for tax payments received by BIR agents allegedly suffer many kinds of manipulation and falsification. * Overprinting of labels and stamps. Some BIR agents have arranged to print extra, unreported documentary strip stamps, auxiliary labels, and cigarette stamps. One instance involved 108 clerks and collection agents. * Personnel scams. Choice positions within BIR have been sold, and the use of nepotism, patronage, and influence has been common. * Delaying of remittances. BIR agents have been known to delay remitting the taxes paid through them, enjoying the illicit fitancial benefits of the "float." * Corruption of the internal investigative systems. The Intemal Security Division was responsible for monitoring BIR employees, but bribes were made so that the officials charged with investigation would sit on cases, delay the investigation, and dismiss the complaints. Source: Adapted from Klitgaard, Controlling Corruption. 20 Robert Klitgaard, Controlling Corruption (Berkeley: University of California Press, 1988), pp. 19-21. - 55 - COMBATING CORRUPTION IN THE PHILIPPINES C.45 Similarly, former Customs Commissioner Guillermo Parayno, Jr., discovered a number of different schemes at work within BOC when he undertook a major program to streamline and computerize its clearance and remittance processes (Box C-2). Though intended to improve BOC efficiency and effectiveness, this initiative resulted in side benefits, including a major reduction in the undervaluation of imports, a decline in the payment of "speed money" for quick release of goods, and a precipitous drop in incidents of forged remittances. B!:Ox C-2. Refrm at the Bureau of Customsi Under the old system, all s sand pssnr arrivals were subject to regular customs inspection and clearance procedures. The prcess relied upon the manal ssig of multiple paper documents and was very labor intensive. More than 10 diferent duments hdto be submitted to BOC and other o ffces, and in cetain,cases moreth had to be mae. esuyreveaWl that these pars went ithrugh 91 steps before im potesreceive their goods. The ppr ere red int least 20 log books by receiving and recor c,whorep ted a n fid, andre dtheir authenticity, and 52 signatures wXere requir to release a sipmnt Tenet result was thatwshiens took a minimum of 6 to 10 days to clear customs, a v jav value could run into millions of dollars. Thsc t s oprniyrieffi anotion,an papersnd could be lost, misplaced, or imply mnot acted upn at ny processin onts. With the support of tbusness comut, BOC began a major pro computerize its customs procedures in 1993. The computerization process has had a bi impact on three difeettyps of illiit beavior 0undervalaion,0]3 spe amns n bogs remittances.;t000000it0000000f00;;t *S U Jndervaluaton. Theconsiderable0discretion formerly allowed customs officers wase an nvitaton to bribery and undervaluanTh ent ss upon a number of independent data s verification, andallinformationregardin ashi nt's weig, quanti and vau0eis gahee by comter and the dutiesa riffsarecalculed atically: * : Speed paymenti Streamlining and automating the clearance process simply eliminated mny opportunities for illegal gains. Since almost 70 percent of all imprts cl wit"in fourhs te incentive for bytoensure rapid procssighas also been cut drasi . * Btsemittances. Computeriing the remittance process has had perhaps the most significant imIpact. Previously, unscpulous importers, in collusion with staff in local banks, could issue bogus remittance notices, indicating that duties had been paid t the National Treasury. Since these renittances Icame ffrom the banks themselves, they were indistinguishable from authentic notices, and BO: staff ould unwittingly clear the goods for release. Estimated losses fron 1l and the first quarter of 1992 from suchi schemes ran intote hundreds of millions of pesos. in coopration with more than 1601 local banks, which charge a fee for the service, BOC has worked out a Computerized Collection System that ensures that data on the amount of customs duties and taxes paid by mporters are transmitted accurately and secuTely to BOC. The sstem also matches paments against duties and taxes owed (a procedure fornerly perfomed manually) and can facilitate on-line releases after receipt of payment is confirmed. As a result of these changes, all remittances are accounted for quickly and acc l,and opportunites for embezzlement have been eliminated because customs personnel are never in contrl ofca. - 56 - ANNEX C C.46 Which government agencies are perceived to be most susceptible to corruption? Before reforms started at BOC-both BOC and BIR were reputed to be among the most corrupt government agencies (Table C-1.) Table C-1. 1990 Survey on Perceptions of Corruption in Government QuiZSTtO: In your opinion, could graft and corruption in thefollowing government offices or agcies be considered big, smal or none? AGENCY BIG SMALL NONE Bureau of Customs 74 25 1 Bureau of Internal 73 24 3 Revenue Cabinet as a whole 65 33 3 Presidential 64 34 3 Commission on Good Government Police force 63 36 1 Court of Justice 46 50 4 Military 40 57 3 C.47 Since Parayno's reform efforts, BOC's reputation has improved, although it is still among the top five in terms of number of complaints received. The Bureau of Immigration, long perceived to be one of the most corrupt government agencies, also is trying to change. However, it is too soon to know if these changes are sustainable. C.48 Table C-2 provides a breakdown of the number of anticorruption complaints received by the Ombudsman's Office from 1993 to 1998. The Department of Public Works and Highways topped the list, receiving more than a quarter of all complaints during this period. C.49 Perceptions of corruption are heavily concentrated on afew agencies, making it presumably easier to deal with, than if it was endemic. The top five agencies-DPWH, the Department of Environment and National Resources, the Department of Education, Culture, and Sports, BOC and the Philippine Ports Authority, and the National Irrigation Administration-account for almost three fourths of all recorded corruption complaints. The top 10 departments account for almost 95 percent of all corruption complaints received by the ombudsman during this period. - 57- COMBATING CORRUPTION IN THE PHILIPPINES Table C-2. Corruption Complaints Received by the Ombudsman Office, 1993-98 Departnent of Public Works and Highways 1,762 26.9 Departnent of Environment and Natural 1,149 17.5 Resources Department of Education, Culture, and Sports 1,046 15.9 Bureau of Customs/Philippine Ports Authority 517 7.9 National Irrigation Administration 393 6.0 Bureau of Intemal Revenue 355 5.4 Department of Health 289 4.4 Department of Interior and Local Government 247 3.8 National Power Corporation 217 3.3 Bureau of Immigration 199 3.0 All others 384 5.9 Total 6,558 100.0 C.50 Although there are no recent polling data regarding perceptions of the amount of corruption in the cabinet, a number of cabinet departments have recently been alleged to be involved in a number of irregularities. These include the Department of Interior and Local Government and the Department of Education. The Philippine National Police has been stung by allegations of high-level corruption in protecting syndicated crime rings and is still widely perceived to have problems with corruption. C.51 In many respects, these findings are not surprising. They involve agencies with either significant revenue or expenditure assignments or those tasked with enforcing the rules in certain sensitive areas such as law enforcement or monitoring the use of natural resources, where they are vulnerable to payments to "look the other way." - 58 - ANNEX 0 ANNEX D: KEY GOVERNMENT ACTORS IN COMBATING CORRPUTION Civil Service Commission D. 1 Mandate. CSC, the chief personnel agency, is mandated to establish an efficient, ethical, and publicly accountable civil service where appointments are made only according to merit and fitness. In fighting graft and corruption, CSC has: a preventive role, setting the standards and norms for appointment to government posts and enforcing the behavioral norms and standards prescribed for public officials; a punitive role, meting out penalties and punishments for transgressions; and a quasi-judicial role, deciding administrative complaints instituted by or brought before it directly or on appeal. D.2 Mission and activities. CSC does not think that poor salaries are a cause of corruption. In the area of compensation, it would like to introduce performance-based salary increases and remove exemptions from salary standardization. It would also like to put in place systems that would ensure that merit and hard work are rewarded. D.3 Recent CSC activities in the anticorruption area are: * Brightest for the Bureaucracy Program. A pool of the best students for govemnment careers from which agencies can recruit. CSC, the Department of Labor and Employment, and the Department of Budget Management (DBM) have hired from this program. * Alay sa Bayan Induction Program. A basic behavioral intervention programn for all new entrants * Inspections and audits of government departments to ensure compliance with civil service law and rules. * Value Orientation Workshops. Training government employees to understand the norms and standards of behavior spelled out in their Code of Ethics * Human Resource Management Training Training managers with the Development Academy of the Philippines, sponsored by the Canadian International Development Agency (CIDA) * Training Program on Seven Habits of Successful People. Training all 7,000 executives in government bureaucracy (by Ateneo University) * Performance Budgeting Dialogue with DBM to introduce performance budgeting to ensure that the government gets "value for money." * Civil Service Examinations. Changing the civil service examinations to include questions about ethics. Commission on Audit D.4 Mandate. COA is empowered to examine, audit, and settle all accounts pertaining to the revenue, receipts, expenditures, and uses of funds and property of the government, - 59 - COMBATING CORRUPTION IN THE PHILIPPINES its agencies, constitutional bodies, commissions, and entities given financial autonomy under the Constitution. As the chief agency for detecting financial irregularities, it can settle administrative cases on its own but refers criminal cases to the Ombudsman's Office. D.5 Mission and activities. COA conducts independent audits to provide adequate, reliable, and current information on the affairs of government so as to promote accountability, transparency, economy, productivity, and effectiveness in the conduct of government operations. D.6 Its key activities include * Enforcing Revenue Audit. * Running the Value for Money Audit Through the Team Approach, a pilot project * Reducing opportunities for corruption through conducting evaluations of internal control systems, cash examinations, review of contracts and monitoring of unliquidated cash advances. - Monitoring and evaluating Audit Service performance. * Evaluating Organizational Structure of COA for flexibility and adaptability to changing COA strategies. * Formulating Standards for Computerized Accounting Systems for Government Agencies. * Enhancing the COA Public Accountability Program with support from the United Nations Development Programme. * Conducting policy review and professionalization of audit services through Training and Research with CIDA support. C Enhancing transparency of Government Purchases Information System by making available computerized information on bids and offers to all government agencies. * Running the COA Web Project and publishing COA rules and regulations on the Internet. * Carrying out the Transparency and Internal Control Study for the World Bank. * Designing the Financial Information System for Foreign-Assisted Projects with the help of the World Bank. * Organizing the Inter-Agency Anti-Graft Program. Office of the Ombudsman D.7 Mandate. Created as a Constitutional body in 1987, the Office of the Ombudsman is the lead agency for enforcing public accountability. It is mandated to act as a watchdog and a dispenser of justice and charged with five major functions: investigation, prosecution, administrative adjudication, public assistance, and graft prevention. D.8 Mission and activities. In preventing graft and corruption, the ombudsman has the power to investigate and prosecute on its own or on complaints of an act of omission - 60 - ANNEX D received by it from any person or agency. It adjudicates administrative cases, takes criminal cases to court or, in the case of high officials, to the Sandiganbayan It also helps determine the causes of mismanagement and corruption in government, and makes recommendations for their elimination. Finally, it has a more general role in nurturing an environment of integrity and honesty. D.9 Its key activities include: * Researching government systems and procedures through its Research and Special Studies Bureau in order to identify and eliminate weaknesses in these systems. * Running the Materials Development Program with the Department of Education, Culture and Sports to develop educational modules to raise school children's awareness of the ill effects of graft. * Running the Synergy for Graft Prevention Project to protect youth from assimilating distorted values and imitating behaviors that propagate graft and corruption. * Managing Junior Graft-Watch Units, a youth and community-based watchdog program wherein the young monitor the activities and lifestyles of government officials and employees and report to the ombudsman. * Offering a Research and Thesis Assistance Program to help senior college students with research and studies in prevention of graft and corruption. D Maintaining the Databank on Graft and Corruption to educate the public, make available material to researchers and public administrators, and provide inputs for lectures, workshops, and conferences. * Managing Corruption Prevention Units, civic-minded, nongovernmental organizations accredited to assist the office in graft detection. * Building Partnerships with Public Sector Unions, which are often aware of corrupt actions within government departments. * Holding Orientation Seminars on Public Accountability for new government entrants. * Holding Values Orientation Workshops to reinforce public accountability for middle managers. * Raising public awareness via Information Dissemination in newspaper articles and other publications. * Setting up, institutionalizing, and making operational the Inter-Agency Anti-Graft Coordinating Council. D. 10 Proposed activities include: * Computerizing Statements of Assets and Liabilities of Public Officials. The Office of the Ombudsman is the repository of public officials' Statements of Assets and Liabilities. The information available is scattered among the regional offices and even when available at Headquarters is not easily accessible. - 61 - COMBATING CORRUPTION IN THE PHILIPPINES * Establishing a Roster of Technical People and Lawyers to overcome the shortage of technical staff and lawyers needed to expedite case prosecution. * Forming a Coalition with the Private Sector against graft and corruption in bidding by contractors on work for the Department of Public Works and Highways. Sandiganbayan D.1 I The Sandiganbayan, the main antigraft court, adjudicates criminal cases brought to it by the Office of the Ombudsman. Only the cases pertaining to high officials, from the director level and above, are referred to it. It has a bench of 15 judges. Since the role of the judiciary is to decide on the basis of evidence presented, this institution does not have a proactive role in anticorruption. However, as an agency, it is reputed to be free from graft and corruption. Presidential Commission Against Graft and Corruption D.12 Mandate. Set up in 1994 by President Ramos, PCAGC has continued under President Estrada. It has the jurisdiction to investigate on its own, or on receipt of complaints, violations of the antigraft laws by presidential appointees. D. 13 Mission and activities. PCAGC looks at only administrative cases, not criminal charges. It deals with officials at the level of director and above. It is an advisory body and can make recommendations only to the president who decides upon the penalty. Suspension is the most severe punishment PCAGC can recommend. Its effectiveness comes from the social embarrassment that investigation causes. D.14 Key activities include: * Running the Inter-Agency Anti-Graft Coordinating Council, one of the original five members actively involved in operationalizing the council. 3 Conducting The Need of Transparency in Government, a study of the financial transactions of Congress. Department of Justice D. 15 The Department of Justice, as the primary criminal prosecuting arm of the government, is responsible for ensuring the successful prosecution of graft cases. Department of Justice prosecutors may be deputized by the Ombudsman to prosecute its cases in regular courts, which is particularly common where the Office of the Ombudsman does not have an office in the area. National Bureau of Investigation D. 16 Operatives of the National Bureau of Investigation act on complaints and/or information coming from intelligence or other sources. The Bureau is responsible for gathering evidence for probable cause hearings and the filing of appropriate charges. - 62 - ANNEX D Inter-Agency Anti-Graft Coordinating Council D.17 Mandate. Set up in June 1997 by the Commission on Audit, the Civil Service Commission, the National Bureau of Investigation, and the Presidential Council Against Graft and Corruption. These original members have since been joined by the Office of the Ombudsman and the Department of Justice. The council was institutionalized by an Administrative Order of the President in 1999. D.18 Mission and activities. The council's main objective is to control graft in government by sharing information and resources to enhance each member's success in the joint responsibility for maintaining integrity and efficiency in government. D. 19 Key activities include: * Holding Skills Training in Fraud Investigation, conducted by the U.S. Academy of Certified Fraud Examiners, for 67 participants. June 23-27 1997 (completed). * Running a Symposium in Graft Prevention and Investigation for 160 participants, October 17, 1997 (completed). * Sponsoring a Dialogue on Team Building among regional heads of the Council's member agencies, October 31, 1997 (completed). - Holding a Capability Building Seminar, sponsored by CIDA, 66 participants, March 9-3, 1998 (completed). - Preparing Inter-Agency Guidelines for Cooperation, a document institutionalizing the interagency cooperation (ongoing). - Sponsoring Seminars on Fraud Investigation and Related Skills for member agencies' personnel, conducted by a pool of interagency trainers and arranged on request by the different agencies (ongoing). - Developing Pilot Testing Guidelines for Cooperation for one year (proposed). * Running Pilot Testing of Interagency Task Forces undertaking investigation of six high-profile collective cases (proposed). * Establishing a Computerized Communications Network among member agencies and a central information data base (proposed). * Running Capability and Team-Building Training Programs of interagency personnel for one year (proposed). * Conducting a study of the pertinent anti-graft laws and civil service codes of conduct to facilitate the prevention, detection, investigation, and prosecution of graft cases (proposed). - 63 - COMBATING CORRUPTION IN THE PHILIPPINES ANNEX E: SURVEY OF DONOR PROGRAMS FOR GOVERNANCE AND ANTICORRUPTION IN THE PHILIPPINES United Nations Development Programme E.1 UNDP has identified a wide range of issues. Some projects are in the stage of preparatory assistance, some have started, and others have been identified for funding through other donor agencies. The key programs are: * Studying tax reform, with the Department of Finance, monitoring excise tax on liquor, exploring possible value-added tax on banks. * Developing bidding and procurement guidelines with the Department of Budget and Management. * Doing a research and development study, with the Philippine Institute for Development Studies, to develop R&D policies. * Advising on macroeconomic policy, with the Harvard Institute for International Development to provide advisory input to the National Economic and Development Authority (NEDA) on macroeconomic policy, infrastructure, poverty, and agricultural policies. * Revising the Government Project Development Manual, with NEDA and the Bureau of Treasury, to include new methodologies, incorporate externalities and social benefit. * Enhancing government appraisal capacity for appraising build-operate-transfer projects. * Reforming the Audit and National Accounting System of the Commission on Audit, with the International Federation of Accounting. * Advancing judicial reforms by: identifying bottlenecks in the judicial administration process; holding round table discussions among Supreme Court, civil society, media, and educational interest groups on social legislation; developing a program to expose the judiciary to economic issues such as tariffs, financial management, the General Agreement on Tariffs and Trade; reviewing judicial education in the Philippines; promoting advocacy for introducing court monitoring systems; and studying alternate dispute-settlement processes. * Developing partnership models between cooperatives and local government units (LGUs). * Sponsoring project to enhance LGU capacity. * Sponsoring urban participatory governance project to develop, implement, and institutionalize participatory processes for metropolitan areas, cities, and towns. - 64 - ANNEX E * Developing a Manual on Investigative Journalism, with the Philippine Center for Investigative Journalism. * Organizing a Forum on Governance for increasing public awareness and to undertake advocacy work on issues of graft and corruption * Doing a country study on accountability, with Social Weather Stations and CODE- NGO. U.S. Agency for International Development E.2 Following the Asian Financial Crisis, USAID/Philippines increased its efforts to build a portfolio of anticorruption assistance. USAID has drafted an anticorruption assistance strategy and is consulting with partners among civil society, donors, the government, and business to develop this strategy further. USAID and other U.S. government sources are cofunding the World Bank Institute's proposed diagnostic study on corruption in the Philippines. E.3 Customs administration, internal tax administration, and government procurement reform have been identified for special emphasis in USAID's strategy. The cause of anticorruption is also served by USAID's assistance for making markets more competitive, rationalizing economic regulation, decentralizing government and strengthening local governments, and improving the judiciary. • Procurement. Technical assistance to the Department of Management and Budget (DBM) for a comprehensive overhaul of legislation relating to public procurement. Technical and capital assistance to the Coordinating Council for Private-Sector Participation (CCPSP) for competitive solicitation of private investment in public infrastructure. * Customs. Technical assistance and training to the Bureau of Customs (BOC) for implementation of the WTO Valuation Agreement and computerization of trade documentation. * Internal Revenue. Participation in donor support to the Department of Finance (DOF), DBM, and the Presidential Commission on Effective Governance (PCEG) to reengineer the organization of the Bureau of Internal Revenue (BIR). Assistance to the BIR developing computerized management information systems, and in coordinating with the DOF and the BOC in automated data sharing. * Competition. Technical assistance and advocacy for reforming government policies and regulations that create monopolistic privileges in several economic sectors, including transport, power, telecommunications, and others. * Decentralization and strengthened local government. Technical assistance to local government units (LGUs) in being more accountable and responsive to citizens and in managing local finance. Capital assistance to the LGU Guarantee Corporation (LGUGC) to promote LGUs' access to private financial services. Technical assistance to the DOF, congressional staffs, and leagues of local governments in evaluating possible amendments to the Local Govermment Code. - 65 - COMBATING CORRUPTION IN THE PHILIPPINES Judiciary. Participation in donor reviews of judicial reform issues with the government. Assessments of alternative dispute resolution and barangay (village- level) justice, in collaboration with the World Bank-sponsored Judicial Reform Project of the Chief Justice of the Supreme Court. Training and technical assistance in human rights and child abuse. Assessment of the legal and enforcement aspects of combating corruption through a week-long conference with the Office of the Ombudsman and the International Development Law Institute. E.4 All USAID's efforts to improve governance and reduce corruption are associated with programs for building civil society support. USAID's 1999 grant to The Asia Foundation (TAF) will support its program to help develop constituencies of watchdog groups, media, and business (including major international firms and chambers of commerce). TAF's partners include the Makati Business Club, Social Weather Station, the Philippine Center for Investigative Journalism, and potentially Transparency International-Philippines and other NGOs. Asian Development Bank E.5 ADB's anticorruption policy of June 1998 had three objectives, to: * Support competitive markets and efficient, effective, accountable, and transparent public administration. ADB has identified two priority areas: economic policy reform and public administration reform. Economic policy reform includes: liberalizing licensing regimes, opening up access to foreign exchange markets, and reducing administered prices-all measures that help eliminate market distortions and reduce opportunities for rent seeking. Much of ADB's work on enterprise reform and financial markets development, together with its private sector operations, help to increase competitiveness, transparency, and accountability. Public administration reform, the second priority area, will make corrupt behavior more difficult to engage in and more readily detected once it occurs. These reforms include: efforts to strengthen information systems, internal audit functions, procurement reform, civil service reform, streamlining processes, and good governance initiatives in the legislative and judicial branches. * Promote anticorruption efforts on a case-by-case basis and improve the quality of dialogue on governance issues. Such assistance could include efforts to: develop a national anticorruption strategy; improve the ability of courts to try corruption cases; give legal or technical assistance in drafting anticorruption statutes or professional codes of conduct; strengthen legal mechanisms for review of administrative action; or improve the capacity of anticorruption agencies to detect or prosecute illicit behavior. * Promote adherence by staff to the highest ethical standards in ADB projects. These include: maintaining the integrity of bank lending and technical assistance operations; reforming procurement; updating the Code of Conduct and creating independent internal reporting mechanisms; improving the quality of oversight; and advancing staff awareness. E.6 ADB has two ongoing projects: one to build capacity for procurement agencies in the infrastructure sector, the other to strengthen monitoring and evaluation results. A - 66 - ANNEX E project proposed for the next year would focus on building capacity within auditing agencies. Canadian International Development Agency E.7 CIDA has a large aid program in the Philippines, focusing, at the request of the Philippine government, on Western Visayas and Mindanao. A major thrust of its programs is promoting responsible governance through two ongoing programs, the Policy Training and Technical Assistance Facility (PTTAF) and the Local Government Support Program (LGSP). E.8 The Policy Training and Technical Assistance Facility endeavors to strengthen the capacity of NEDA, the Department of Budget and Management, the Civil Service Commission, and other key line agencies to undertake policy development and administrative reforms. PTTAF has two major and interrelated thrusts: * Capacity building. To strengthen the capability of chief administrative officers, agency heads, and program managers to plan, implement, manage, and evaluate policies, strategies, or programs to improve social conditions in the community. X Institution strengthening. To ensure that critical organizations, resources, and support systems work efficiently and effectively. Institution building will be done through training, managing, and retaining manpower; information, communications, and institutional coordination systems; support from political leaders, senior decision makers, and stakeholders; budgetary resources and systems. PTTAF is in its second project phase. * PTTAF Project Phase 1 (1991-98) funded 26 Philippine govermnent projects in 15 different agencies, reaching senior and middle management officials. * PTTAF Project Phase II(1999-2000) will support Phase l-initiated activities. E.9 The Local Government Support Program endeavors to strengthen the capacity of national, regional, and local government authorities to develop and implement policies in support of decentralization. Capability building through research, training, policy advocacy, workshops, conferences, technical and managerial expertise, community organization and mobilization, feasibility studies, and development education. LGSP is in its second project phase. * LGSP Phase I(1992-98) funded 173 projects. * LGSP Phase II will continue capacity development efforts for effective decentralization and operation of existing mechanisms and working relationships. GTZ [German Development Foundation] E.10 GTZ has two major projects in governance: - 67 - COMBATING CORRUPTION IN THE PHILIPPINES * Institutional Strengthening Project. To strengthen the capacity and capability of NEDA to fulfill its mandate in development planning, investment programming, monitoring, and evaluation. * Philippine Tax Administration Project. To sharpen the skills and competence of Bureau of Internal Revenue officials to increase the agency's effectiveness and efficiency in tax administration. The expected output of this project include: institutionalization of a basic training program for Bureau of Internal Revenue personnel; redesign of personnel transaction systems; improvement in the performance evaluation system, and a Human Resource Development Service trained in manpower planning. Australian Agency for International Development E.11 Support for good governance is one of the key elements of the AusAID program in the Philippines. Most AusAID activities focus on the public sector, but the agency has also supported institution-building activities of nongovernmental organizations and other community groups as well as efforts to educate and empower civil society. E. 12 Recently concluded and ongoing activities include: - Good Governance Study Tour for Philippine Government Officials to showcase Australian expertise in public sector management. 3 Assistance to Philippines Anticorruption Conference, 1997, organized by Transparency International on international cooperation between industrial and developing countries to curb corruption and develop a national integrity action plan for the Philippines. * Philippines Regional and Municipal Development Project, with ADB, to improve local government units' institutional capacity to provide, operate, and maintain essential infrastructure and basic services. * Philippine-Australia Local Sustainability Program to strengthen participatory processes and resource management between selected municipalities and community groups in the province of Misamis-Occidental. * Pilot Economic Governance Projects, with key economic agencies, to address systemic problems in public finance, including revenue collection, expenditure management, and the national-local government fiscal relationship. * Governance Facility. Launched in 1999 to improve the efficiency and effectiveness of government policies, programs, and projects in meeting the objectives of reducing poverty and improving equity. The facility will target all levels of government and the nongovernment sector in areas of economic, administrative, and political governance. - 68 - ANNEX E Other Donors E. 13 Norway, which targets its aid program to the least developed countries, does not have a significant development program in the Philippines. The few projects Norway sponsors in the Philippines deal with human rights and the environment. E.14 The Netherlands has no projects on governance with the Philippines. Its only related activity is developing a manual on project assessment for barangay workers with the Institute of Popular Democracy. E.15 The European Union focuses mainly on human rights projects and on strengthening local governnents' planning capacity. A USAID-related project would provide an opportunity to address the issues of graft and corruption. - 69 - COMBATING CORRUPTION IN THE PHILIPPINES ANNEX F: CIVIL SOCIETY INSTITUTIONS IN ANTICORRUPTION WORK The Philippine Center for Investigative Journalism F.1 Mandate. PCIJ promotes investigative reporting on current issues in Philippine society and on matters of broad public interest. F.2 Key activities. Funding investigative projects for both the print and broadcast media; publishing books on current issues and an investigative journalism magazine; and organizing training seminars for jouralists. Political and Economic Risk Consultancy, Ltd. F.3 PERC is a consulting firm specializing in strategic business information and analysis for companies doing business in East and Southeast Asian countries. F.4 Key activities. Customized consulting and publications, including: * Asian Intelligence. A fortnightly newsletter that examines, from the perspective of each country covered, topics such as corruption, business costs, nationalism, and foreign investment trends. - rCountry Risk Reports. Quarterly reports on individual countries on how and why business risks are changing in each of them. * Comparative Risk Report. Annual report comparing various sociopolitical and economic variables in individual countries and changes in relative risks in Asia. F.5 All three publications deal directly or indirectly with issues of governance and corruption. They look, for example, at indicators on flows of foreign direct investment and factors affecting them and on the extent and impact of corruption on different East Asian economies. Transparency International F.6 TI is a nongovernmental organization dedicated to increasing government accountability and curbing both international and national corruption. It seeks to form coalitions of all stakeholders: the state, civil society, and the private sector. F.7 Key activities. TI operates globally and locally. Globally, the organization is involved in: * bringing its Standards of Conduct to the attention of the concerned parties, with a view to eliminating serious corruption in international business transactions. * providing Technical Assistance and specialized advice to governments and corporations in areas from investigation to bookkeeping, from law drafting to law enforcement. - 70 - ANNEX F * doing Studies and Research on governance and corruption-related issues. * publishing a Corruption Perception Index, an annual ranking of countries in order of increasing corruption as perceived by business. This publication plays an important role in raising public awareness.. F.8 The Philippine chapter of TI is involved in: * forming Integrity Circles of government employees in some government offices as part of the Moral Recovery Program (MRP) in all government agencies; * holding Seminars on "AntiBribery Covenants" (ABC). Dr. A. Roldan, who is also a member of the MRP Board, has conducted seminars in various government offices for the formulation and adoption of ABC agreements between each Philippine government agency and its prospective suppliers and contractors. The aim is to safeguard transparency and outlaw any form of bribery in all bidding procedures; * running advocacy campaigns. TI Philippines has prepared concept papers and project ideas and held caucuses to generate support from the public and private sector. As a result, several agencies have entered into arrangements with the Office of the Ombudsman; * promoting the Junior Graftwatch concept, adopted by the Office of the Ombudsman in an attempt to involve young people in fighting graft and corruption; and, a promoting TI Accredited Organizations, a project to establish national and international standards of transparency and register and accredit institutions that comply with these standards. The Asia Foundation F.9 The Asia Foundation started its operations in the Philippines in 1954. The foundation focuses on programs that enhance accountability and public participation in governance, advance regional engagement and voice, and increase access to justice. It assists both government and nongovernmental organizations (NGOs) in reviewing policy options and strengthening institutions and processes required for broad-based sustainable growth. The foundation works closely with government, business, and civil society counterparts at the national and regional levels to promote, develop, and implement effective counter-corruption reforms. F.10 Key activities. Focus on legal and judicial reform, countering corruption, and NGO sustainability: * Funded the PCIJ book Pork and Other Perks (1998), earlier projects on judicial reforns, and a court watch program (1990). * Conducted a Corruption Perception Survey with Social Weather Stations (SWS). Twenty questions on the public perception of corruption were inserted in the regular Social Weather Stations quarterly survey. The preliminary results of the survey, conducted in September 1998, were presented in December 1998. Tentative results - 71 - COMBATING CORRUPTION IN THE PHILIPPINES show that Filipinos perceive corruption not so much as a moral problem as an impediment to economic performance.! The next phase of the survey, scheduled for September 1999, aims to identify the location of corruption, the areas such as government departments, positions and bureaucracy where people feel that corruption is a problem. * Preparing delivery of health and education services. PCIJ is developing print and video pieces (ongoing). * Running Workshops on Code of Ethics for Journalists with publishers and editors. * Preparing Case Material on Successful Counter-Corruption Efforts in Local Governments as part of an exchange program among mayors of different cities. * Developing a Court Watch Program (with the U.S. Agency for International Development). * Planning Sectoral Surveys on Corruption among government officials and businessmen. Institute of Popular Democracy F. 11 IPD is a research institute serving social movement groups and development NGOs and specializing in political research and advocacy. IPD is engaged in: interpreting Philippine realities, focusing on the forces that advance or retard democracy, theorizing on reform and democratization in civil society, formulating alternative frameworks and policies on democratization and development, and helping build intellectual and political capacities of progressive forces. F.12 IPD has two main research wings: * Democracy Watch. Does theoretical as well as theme- and issue-based research on national, local, and regional politics. Ongoing programs include: a political mapping project to build comprehensive profiles of key actors and issues in key areas of the Philippines and an analysis of the dynamics of local politics. * Development Watch. Does quarterly updates of the economic situation, research on fiscal and monetary policy, studies of local economic changes, and studies of NGO and other local development best practices. The ongoing projects involve budgetary processes at the local level, case study of cooperatives, and local tax reforms. Social Weather Stations, An Exploratory Study of Graft and Corruption in the Philippines," Manila, 1998. - 72 - ANNEX G ANNEX G: PERCEPTIONS AND ATTITUDES REGARDING CORRUPTION G.1 At a superficial level, certain cultures and value systems-including those in the Philippines-are often alleged to be more tolerant of corruption than others. However, a more detailed look at Philippine beliefs and attitudes on this topic reveals a complex tapestry that defies easy generalization. Certain aspects of Philippine political culture- such as the propensity to view public office in terms of its extractive potential- complicate anticorruption initiatives. (This attitude has longstanding roots in Spanish colonial administration, when posts were auctioned off to the highest bidder, and the winners had to recoup their investment.) However, cross-cutting elements-such as uniformly negative views regarding the practice of corruption and general agreement over what constitutes corrupt behavior-also give hope to advocates of greater accountability and integrity within government. G.2 Domestic surveys of attitudes toward corruption reveal that the public perceives it as an important issue, though seldom the most pressing dilemma confronting the government.' Asked for their views regarding the country's most serious problems during the last two years, many Filipinos have cited economic considerations as their immediate concern, particularly high prices, inflation, and unemployment.2 Governance issues rank a distant fourth, and less than 4 percent of the population thought problems of corruption the most important problem.3 This perception has varied significantly, from a high of 5.8 percent in June 1996 to a low of 1.6 percent in July 1998. The lower figure most likely reflects a surge of optimism typical at the outset of every new presidential administration in the Philippines; in the September 1998 survey this increased to 3 percent. G.3 The fact that, on average, only 4 percent of the population volunteered corruption as the most pressing concern does not reflect satisfaction with the overall level of corruption within government or with the government's efforts to combat it. It reflects the perception of many Filipinos that corruption is a constant problem, not a "front burner" issue. In fact, 41 percent of the population views corruption as a general fact of life- "part of the way things work in the Philippines." A solid majority of 59 percent, however, believes that government can be run without corruption. G.4 When discussion moves away from open-ended questions about relative priorities to specific questions about corruption, the responses become much more consistently negative. Asked how much corruption is within government at present, 38 percent of the population answer "a great deal," 34 percent, "some," 19 percent, "a little," and 9 percent, "none." Roughly 22 percent of the public has personally been asked for money I For more detail analysis see Linda Luz B. Guerrero and Steven A. Rood, "An Exploratory Study of Graft and Corruption in the Philippines," Social Science Information, vol. 27, no. I (January-June 1999). 2 The figures cited in this annex are from the Social Weather Stations Survey, conducted on September 11 and 29, 1998. 3A majority of the respondents, about 76 percent, ranked economic considerations first; 27 percent cited high prices as their single most important area of concern. The second largest problem cited was crime, with an average of 10 percent. - 73 - COMBATING CORRUPTION IN THE PHILIPPINES by a government official at some point to speed up a transaction. About half the population believes government is doing "something" to combat corruption. Only 15 percent say it is doing "a lot"; 35 percent said "almost nothing" or "nothing at all." G.5 Asked what types of corruption are most costly for development, the public consistently singled out as its single biggest concern officials' pocketing money intended for government projects (particularly infrastructure projects and procurement of goods and services). The theft of building materials, or the use of substandard materials by contractors, is another major problem. Other problems cited, in declining order of importance, include bribing the police to overlook violations, nepotism or giving favors to relatives, using "fixers" in government offices, and revenue and tax fraud. At the bottom of the list is payment of "grease" or speed money or payment of extra funds to receive lawful services such as telephone and water connections. However, 56 percent of the public still described even these payments as "always wrong" or "almost always wrong. G.6 Survey data from 1998 and earlier have measured the public's views on various agencies tasked with combating corruption, among other functions. The Supreme Court and Sandiganbayan have typically ranked among the highest, with 46 percent and 40 percent, respectively, satisfied with their perfonnance, against 22 percent and 21 percent, respectively, dissatisfied. The Ombudsman's Office has a mixed reputation, with 32 percent satisfied with that agency against 28 percent dissatisfied. Survey data from both 1990 and 1998 have indicated greater dissatisfaction than satisfaction with the Presidential Commission on Good Governance, although the level of dissatisfaction appears to have diminished. Survey data from 1990 (the most recent year available) reflect broad dissatisfaction with the performance of the police in reducing corruption, with only 6 percent expressing satisfaction and 55 percent dissatisfaction. G.7 In May 1999, Philippine Ombudsman Aniano Desierto stated that corruption in Philippine government agencies had dropped by an average of 45 percent under the Estrada administration. Desierto cited two factors in arriving at this conclusion: a decline in the number of complaints received by resident ombudsmen in various government departments and agencies and the most recent findings of Political and Economic Risk Consultancy Ltd. (PERC), a Hong Kong-based research firm that conducts regular surveys of expatriate businessmen working in the region.4 The evidence is, in fact, less certain. The decline in complaints could be attributed to factors ranging from an actual decrease in corruption to the failure of resident ombudsmen to report all complaints received to the public's disillusionment that their complaints will be treated confidentially or followed up. G.8 PERC's survey did find that perceptions of corruption had decreased in the Philippines-the only Asian country besides Thailand where this is the case. However, PERC also included a caveat: "The grade is still quite poor, however. Corruption is still widespread in many departments. Moreover, the jury is still out on the extent to which 4 "Desierto: Corruption Down 45 percent," Philippine Star, May 13, 1999, p. 1. - 74 - ANNEX G Estrada is prepared to allow crony politics to stage a comeback."5 In conclusion, despite some hopeful signs, it is too soon to say that corruption has either increased or decreased in the Philippines. No firm conclusions can be made regarding causality on the basis of what is currently known. G.9 Within the Philippines, perceptions of corruption are strongly influenced by educational attainment. Only 14 percent of the population with college and post-graduate education could not give an example of graft and corruption; however, 54 percent with only elementary school education or lower could not give such an example. Perceptions of the negative impact of corruption on development and the importance of combating it are also positively correlated with education and, to a lesser extent, income. With respect to the effect of specific practices on economic development, between 70 percent and 80 percent of the respondents put the blame on officials' pocketing money intended for government projects and contractors' not using the agreed upon quality of materials. Government employees are more sensitive to corruption than other citizens, and they are consistently more likely to rank as "always wrong" certain sets of behavior such as bribing traffic police or utilizing "fixers" within government offices. G.10 Although the impact of cultural factors is often overrated, certain aspects of Filipino beliefs, attitudes, and customs both help and hinder the effort to combat corruption. On the positive side, the influence of religious norms and values is both strong and statistically correlated with negative views about corruption. About 88 percent of the population characterizes itself as either "very religious" or "somewhat religious," and weekly church attendance stands at 53 percent of the population (compared with 40 percent in the United States and less than 14 percent in Britain and France). Numerous government officials express confidence in the basic ethical beliefs and practices of most civil servants as well as the belief that many of them would prefer to be honest but are driven to perform corrupt acts either because of low civil service salaries or systemic corruption in certain agencies. G.11 In addition to religious and ethical qualms, a large majority of Filipinos have practical reservations about the impact of corruption on development. More than 96 percent of the public believes that pocketing money intended for govermnent projects either "very much retards" or "somewhat retards" development. Furthermore, there is a high degree of consistency among Filipinos on the types of behavior generally regarded as corrupt. Between 70 percent and 80 percent of the public, for example, believes that it is either "always" or "almost always" wrong to not receive a receipt for payment, to pay for medicines that should be free, to go to the head of the line if one is a relative of a government official, to be stopped by police even if no traffic rule was violated, or to use "fixers" in a government office. G. 12 Other aspects of Filipino cultural attitudes and social relations may work against a strong anticorruption effort. They include pamilya, the primacy of obligations to relatives and extended family members above those to professional standards or other formal, abstract norms. They also include notions of utang ng loob and pakikisama-a debt of 5 Political and Economic Risk Consultancy, Ltd. "Corruption in Asia in 1999," Excerptfrom Asian Intelligence Issue, no. 531, March 23, 1999. - 75 - COMBATING CORRUPTION IN THE PHILIPPINES gratitude or personal obligation that is incumbent upon the recipient of a favor to repay. Filipino society is hierarchical, with a strong tradition of deference to persons in authority. It is also generally nonconfrontational; intermediaries negotiate most disagreements. These factors, combined with a history of weak protection for whistleblowers, make it difficult for subordinates to report the misdeeds of their superiors. G. 13 A further problem is a traditional pattern of patron-client relations, particularly in rural areas. As Robert Putnam's pioneering work on Italy has indicated, governments are usually more effective when they operate within the dense horizontal networks fostered by a robust civil society and least effective when they operate in very hierarchical societies with a feudal or quasi-feudal legacy.6 G.14 The net result of these complicated, and at times competing, dynamics is to suggest wariness about any generalizations regarding the impact of "Filipino" beliefs and values on a major anticorruption initiative. Well-established and articulated belief systems will support such efforts among a large segment of the populace. At the same time, certain equally well-established social traditions may mitigate against reform. A certain residual amount of the population can be expected to pursue its self-interest, however narrowly defined, regardless of these dynamics. G. 15 The media is also not free of corruption. A recent study shows that media corruption today is "costlier, more pervasive, and even more systemic. It is also disturbingly creative and more difficult to detect."7 The increase in the sophistication and institutionalization of media corruption in the post-Marcos era is also of concern. This is largely a result of an increase in media penetration in the Filipino homes, thereby enhancing its importance in conveying messages to the general public. According to a media exposure survey by the Asia Research Organization in 1997, 84 percent of households watched television; 81 percent listened to the radio. This exposure makes it easier to use the media to influence public debate and voting patterns making the media more vulnerable to corrupt practices. G. 16 What makes a journalist corrupt? A 1997 Philippine Journalism Review noted that newspaper reporters earn between P4,500 and P12,000 per month, depending on experience and seniority. Some journalists therefore live barely above the poverty line, and the temptation to live a more affluent lifestyle by being a little less honest seems to be strong. Other reasons cited for accepting bribes are: the system itself, being used to the practice, peer pressure, and lack of understanding of journalism ethics. Specific instruments of media corruption cited were: reporters with monthly retainers, financed foreign trips, nights out in pubs and restaurants, and lump-sum payments. A more worrisome fact is revealed in a PCIJ survey that showed that about 50 percent of the reporters of national papers and 45 percent from broadcast had been actually offered bribe money. 6Robert Putnam, Robert Leonardi; and Raffaela Nanetti, Making Democracy Work: Civic Traditions in Modern Italy (Princeton, N.J.: Princeton University Press, 1994). 7 Chay Florentino-Hofilefia, News for Sale: The Corruption of the Philippine Media (Quezon City: Philippine Center for Investigative Journalism, 1998), p. 6. - 76 - ANNEX G G.17 Many senior officials interviewed by the mission argued that, given a choice, most civil servants would like to be honest but will take their cues from their environment. In the final assessment, more proximate factors such as organizational culture and socialization often play a decisive role in shaping attitudes and beliefs within a government unit. Organizational culture, in turn, is not immutable but can be reshaped-at times decisively-by factors such as the quality of management, organizational structure and business processes, internal controls, incentive structures, and monitoring mechanisms. - 77 - COMBATING CORRUPTION IN THE PHILIPPINES ANNEX H: CORRUPTION AND THE PRIVATE SECTOR H.1 Private businesses worldwide are an essential part of the solution to corruption by virtue of their central place within the economy. Although individual businesses may benefit from individual acts of corruption-such as paying a bribe to win a contract- corruption is costly to the private sector. Talent is misallocated, resources are targeted to nonproductive ends, business contracts and regulatory environments are undermined, enormous amounts of time are wasted in the corridors of informal influence, and the basic relationships of trust between business, government and society are undermnined by the need to conceal business practices. 1 H.2 Involving business in designing, implementing, and monitoring a national anticorruption strategy is an important step. A constructive partnership between government and business promotes the development of pragmatic solutions that are appropriate to their context. The key challenge in developing such partnerships is to align the interests of different stakeholders: individual entrepreneurs and companies should have a stake in making the system work, not in circumventing it. H.3 Individual companies can try to solve the collective action problem associated with stopping bribery by involving themselves in an active partnership with government. If Company A renounces bribery as a strategy for winning business, it has to find ways to ensure that Company B, by continuing to bribe, does not win business away from it. Bribery is most likely to decline in a system that insists on transparency, monitoring, and enforcement, all more easily achieved with government's help.2 H.4 An active partnership between the private sector and the government is also more likely to help the private sector prevent government officials from demanding bribes of their employees. Corruption and the Private Sector in the Philippines H.5 A number of important factors have converged in the Philippines to create a fertile climate for the private sector to take up the fight against corruption. These include: * increased public scrutiny and pressure following the recent financial crisis and strong press coverage of the issue in the Philippines. * growing recognition among business executives and analysts that corruption impairs economic development and undermines individual companies' competitive abilities. 1 D. Kaufinann, "Economic Corruption: Some Facts, " paper presented at the Eighth International Anticorruption Conference, Lima, Peru, September 7-11, 1997. 2 Irene Hors, "Why the Private Sector Has a Major Role in the Fight Against Corruption in Developing Countries and Emerging Economies," CIPE conference proceedings, Washington, February 22-23, 1999, http://www.cipe.org/events/conf/oecd/hors.html - 78- ANNEX H * a related recognition of the competitive advantages of good corporate governance and managing with integrity. * new public pressure on the private sector internationally to desist from corrupt practices and to operate with integrity and transparency. * new international legal provisions and a focus on the issue by international financial institutions. H.6 These pressures are bringing about action. A variety of conferences, research initiatives, and publications have begun to explore the best ways to engage the private sector in combating corruption.3 This has included an emphasis on developing credible methods of self-regulation (paragraph H. 17). H.7 Evidence from the Philippines shows that the public and business leaders believe that the private sector contributes to the problem of corruption. One survey shows that: * The public views corrupt acts by businesses seriously. Significant majorities indicate that they consider acts such as deliberately using inferior quality materials in building projects, or winning contracts through bribery very detrimental to the Philippines' development. 3 Where both private and public officials are involved in a corrupt transaction, the public tends to hold both of them responsible. - Representatives of the private sector surveyed disagreed with including only government officials within the definition of corrupt practice and urged that corruption in purely private transactions should be addressed in anticorruption programs. A narrow majority of the public agrees with this.4 H.8 Business leaders in the Philippines have said publicly that they want to work with the government to combat corruption and improve the standards of corporate ethics and governance.5 Regional and International pressures H.9 The desire among business executives to reduce corruption and improve corporate governance and transparency is a strong, regionwide trend. A recent regional conference on corporate governance in Bangkok produced an ambitious agenda, including integrating corporate governance standards into ISO 9000 certification procedures, establishing third-party monitoring systems to check compliance with standards, increasing the numbers of independent directors on company boards, building partnerships with government and the media, adopting international accounting 3 See, for example, "Fighting Corruption in Developing Countries and Emerging Economies: The Role of the Private Sector," CIPE Conference Proceedings, http://www.cipe.org/events/conf/oecd/index.html 4Linda Luz B. Guerrero, and Steven A. Rood, "An Exploratory Study of Graft and Corruption in the Philippines," Social Science Information, vol. 27, no. 1 (January-June 1999). 5 See for example, Business World, "As ERAP Airs Warning, Firms Support Drive vs. Corruption," December 2,1999. - 79 - COMBATING CORRUPTION IN THE PHILIPPINES standards, and supporting a broad range of information-sharing and training activities.6 Participants at the conference also agreed to call on their governments to sign the convention on international bribery (paragraph H. 13). H.10 Particularly close public scrutiny and strong pressures are being applied to multinational companies concerning ethical issues, of which corruption is an important one. This scrutiny comes from a variety of stakeholders, including governments, regulators, and interest groups in the large North American and European markets. Corrupt actions by multinationals may backfire as legal penalties or negative public perceptions that cut sales and profits. Increasingly sensitive to reputational risk, multinationals are having to become correspondingly transparent. The response of the apparel industry to public pressures over child labor practices is a good example of this phenomenon. Several companies have chosen to introduce strict work standards and open their factories to independent inspection to protect their markets in North America and Europe. Corruption issues are likely to attract such public pressures in the future. Bribe Payers Perceptions Index H. 11 These public pressures have been given some focus by the publication of a Bribe Payers Perceptions Index by Transparency International. The index, released for the first time in 1999, ranks 19 leading exporting countries in terms public perception of their corporations' propensity to pay bribes abroad. The survey, undertaken by Gallup International, asked more than 770 senior executives in 14 major emerging market countries (including the Philippines) detailed questions about their perceptions of bribery. H. 12 The comparatively low scores overall suggest that many multinational companies are widely perceived as using bribes to win business in developing countries. The index results are reported in Table H. 1. 6 The conference was sponsored by the Thai Chamber of Commerce, Federation of Industries, the Institute for Management Education for Thailand Foundation, and the Center for International Private Enterprise. It included business leaders from Indonesia, South Korea, Malaysia, Philippines, Singapore, and Thailand. - 80 - ANNEX H Table H.1. 1999 Transparency International Bribe Payers Index Ranking 19 Leading Exporters Rank Countyy Scorea 1 Sweden 8.3 2 Australia 8.1 Canada 8.1 4 Austria 7.8 5 Switzerland 7.7 6 Netherlands 7.4 7 United Kingdom 7.2 8 Belgium 6.8 Germany 6.2 United States 6.2 12 Spain 5.3 13 France 5.2 14 Japan 5.1 15 Malaysia 3.9 16 Italy 3.7 17 Taiwan 3.5 18 South Korea 3.4 19 China (including Hong Kong) 3.1 Note: Detailed information on the background and methodologies associated with this index can be found on Transparency International's website at: http://www.transparency.de/documents/cpiVindex.htrnl. a. In the scoring 10 represents a perceived level of negligible bribery; 0, very high levels of bribery. Convention on Combating Bribery in International Business Transactions H.13 Until recently, bribery was an accepted (if rarely publicized) part of doing business for some multinational companies. Though illegal for U.S.-based companies since the introduction of the Corrupt Foreign Practices Act in 1977, bribery was legitimized in many other countries a "business expense" through ambiguous accounting and tax deductions. In an effort to curtail bribery by multinational firms, the Organization for Economic Cooperation and Development (OECD) has developed a Convention on Combating Bribery in International Business Transactions.7 Signed by all 29 OECD countries and 5 others, the convention obliges signatories to develop national legislation making bribery of foreign public officials a crime and requiring those countries to cooperate with other countries in bribery investigations and prosecutions. The convention went into force in February 1999, but takes effect only after each country enacts national enforcing legislation and develops and activates the necessary enforcement systems. By the end of November 1999, 18 of the 34 signatories had adopted enabling legislation. H. 14 By hiking the potential costs of corrupt practices, the OECD convention has the potential to significantly reduce bribery by multinational companies. It therefore improves the likelihood that a multinational firrn that stops bribing will not lose business 7 For the full text of this treaty and information about the monitoring of its implementation, see the OECD website, http://www.oecd.org/daf/nocorruption/instruments.htm. - 81 - COMBATING CORRUPTION IN THE PHILIPPINES to multinational firms that do not. However, the OECD convention should not be expected to end all corruption. It addresses third-party bribery and the role of subsidiaries; it does not attempt to address private-to-private bribery. The treaty's success depends on how energetically signatory countries implement and enforce it. H. 15 The mid-range position of the United States on Transparency International's Bribe Payers Index is a possible illustration of the potential weaknesses of a legislative approach to combating bribery in foreign countries. For more than two decades, bribery has been a criminal offense for U.S. companies under the Corrupt Foreign Practices Act. While most agree that the Act has had a positive impact, it would be reasonable to expect that the United States would fare better than midway down the index. On the other hand, it may be precisely because there was no international approach to the problem that the U.S. approach has been less successful than it might have been. H.16 The OECD convention also creates incentives and mechanisms for companies to monitor and report on each other. Thus, despite its potential weaknesses, the convention will considerably raise the financial, legal, and reputational risks of bribery for multinational corporations. Regulation and Self-Regulation H.17 Self-regulation by the private sector is an excellent first step toward reducing corrupt practices. Each company's management is best placed to identify the steps needed to prevent corruption within its own firm and immediate operating environments. However, although self-regulation is a necessary and important step, it is insufficient. Credible third-party monitoring mechanisms and appropriate government programs are both essential to a successful anticorruption strategy. Corporate Governance H.18 The widespread perception that poor corporate governance was a major contributing factor to the depth of the 1997 economic crisis has brought the role of good corporate governance into sharper focus. Four major studies were published on corporate governance in the Philippines during 1999 alone.8 At its simplest, good corporate governance practices are designed to compel corporate insiders to behave in a way that is consistent with the interests of shareholders, creditors, and other stakeholders of the firm.9 H.19 A key concept underlies this definition: a corporation's investors need to be confident that they know the full range of their investment's risks-including legal and reputational risks associated with bribery and corruption. Capital should cost less when s These studies are J. Estanislau and J. Mondjar-Dy, Selected Results from a Survey of Corporate Governance Practices in the Philippines (Manila: Institute of Corporate Directors, 1999); K. Fogarty, Corporate Governance in the Philippines: An Assessment of Needed Reform Efforts (Washington: USAID, 1999); T. Pilando and L. Ferrer, Study on Corporate Governance in the Philippines (Manila: Asian Development Bank, 1999); C. Saldana, Philippine Corporate Governance Environment and Policy and Their Impact on Corporate Performance and Finance (Pasig City: Asian Development Bank, 1999). 9 A. Shleifer and R. Vishney, A Survey of Corporate Governance, National Bureau of Economic Research Working Paper 5554 (Cambridge, Mass.: NBER), p.2. - 82 - ANNEX H creditors have enough information to weigh investment risk. This includes not only the risks inherent in the operations of the corporation, but the legal and judicial risks associated with protection of property and investor rights. Transparency of corporate disclosure and the workings of the judicial system are both important steps in this direction. H.20 The regulatory framework for corporate governance in the Philippines, though better than many in comparable economies, still has significant weaknesses in rules and their enforcement. These include inadequate protection of shareholder rights, limited enforcement against self-dealing, and some penalties that are too minor to have a deterrent effect.10 Such weaknesses, together with the effects of highly concentrated ownership of firms, undermine the implementation of good corporate governance practices. H.21 Almost one third of the biggest locally owned corporations (238 of 754) belonged to 39 family-owned corporate groups in 1997 and accounted for almost half of all sales by the largest Philippine-owned companies." Only about 8.4 percent of large firms are publicly traded on the stock exchange.'2 Often they include a bank among their component firms and receive preferential treatment from the government. Their directors are often politically influential.'3 Each of these factors lessens the company's transparency to outsiders and increases the chances of influence peddling within the system. H.22 Securities markets are a common way in which the public and investors can obtain information about companies. In the Philippines, however, the use of securities markets to raise capital is low, as many of the large companies rely on their own banks for funding, thereby obviating good credit rationing practice and often resulting in over- leveraged companies. As a result, the minimal proportion of shares that are traded provide insufficient liquidity to make investment in the securities market attractive. Changes in this situation will require more general securities market and banking reform. In the absence of more such general reform, the institution with the greatest leverage may be the central bank, which could work with private banks to require borrowers to adopt key governance standards. H.23 Enforcement is probably the greatest obstacle to sustaining good corporate governance practice in the Philippines. Table H.2 shows the Philippines' ranks at or close to the bottom of almost every category of investor rights enforcement in an international survey: '° Fogarty, Corporate Governance in the Philippines, p.2. " Saldana, Philippine Corporate Governance Environment and Policy, pp. 20-2 1. 12 Ibid. 3 A. Tan Edita, "Interlocking Directorates, Commercial Banks, Other Financial Institutions, and Nonfnancial Corporations." Philippine Review of Economics and Business, vol. .30 (1993), p. 6. - 83 - COMBATING CORRUPTION IN THE PHILIPPINES Table 1.2. Variables Affecting the Enforcement of Investor Rights Average Average score for 8 score (out of other East Ranking of 10 points) for Score for the Asian Philippines out Variable 49 countries Philippines countries of49 countries Efficiency of judicial system 7.67 4.75 7.19 48 Rule of law 6.85 2.73 7.08 46 Absence of corruption 6.90 2.92 6.52 48 Low risk of expropriation/ nationalization 8.05 5.22 8.40 49 Low risk of contract repudiation 7.58 4.80 8.45 48 Accounting standards 6.09 6.5 6.84 20 (out of 43) Source: Adapted from R. La Porta, F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, "Investor Law and Finance," Journal of Political Economy, no. 6, vol. 106 (December 1998), p.] 140. In World Bank, "Social and Structural Review of the Philippines, 2000" (Manila: World Bank Office). H.24 Corporate governance in the Philippines is also weak in its protection of creditor rights.'4 The Securities and Exchange Commission (SEC) has broad discretionary powers in applying debt-resolution procedures, is not transparent in the way it applies its powers, and is generally slow to make decisions-it takes more than a year to resolve the two thirds of cases that are resolved. These factors create opportunities for corrupt practices, and some analysts have suggested that corruption might be a problem at the SEC.'5 Many analysts have identified the need for reform at the SEC, and a program supported by the Asian Development Bank and the U.S. Agency for International Development is underway. H.25 The Institute of Corporate Directors, a not-for-profit organization, was recently founded by Dr. Jesus Estanislao to deepen the awareness among CEOs and corporate directors of international best practice in corporate governance and to introduce these practices into the rules governing their roles and responsibilities in the Philippines. The World Bank is advising the institute in developing its training and education programs advocating the adoption of good corporate governance in the Philippines and the East Asia region. The Bank is also promoting the institute's integration into the Global Forum for Corporate Governance, a network of organizations that the Bank has helped to organize to promote good corporate governance practice worldwide. By promoting the cause of good governance in the Philippines, the institute can help to address one of the top priorities for the regional reform agenda in the aftermath of the East Asian crisis. Codes of Conduct H.26 Corporate codes of conduct, increasingly common and sophisticated over the last 10 years, are a useful starting point to reducing corruption in the private sector. 16 14 Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, "Investor Law and Finance," Journal ofPolitical Economy, vol. 106, no. 6 (December 1998), p.1 137. 15 Fogarty, Corporate Governance in the Philippines, p.38. 16 Ronald Berenbeim, "How Effective Are Corporate Codes in Combating Corruption?" address at the Ninth International Anticorruption Conference, Durban, October 10-15, 1999. - 84 - ANNEX H Inevitably, such codes differ widely in their substance and in their influence over corporate behavior. The results of a survey of best-practice suggest that corporate codes of conduct should include'7: * a clear policy prohibiting employees and representatives from offering anything of value to a govermment official to influence or reward an action; * detailed guidelines on gifts, entertaimnent, travel expenses, political contributions, and other gratuities; * a system of controls and record keeping to ensure that transactions are accurately recorded, accounted for, and externally audited; and, * clear support for whistleblowers exposing corruption within the company. H.27 Ensuring internal compliance is a key to making codes of conduct effective. Managers need to be held accountable for following the code, subject to verification. Some companies, for example, require managers to sign an annual declaration certifying that the code of conduct has not been broken within their area of responsibility.' Wherever they cannot provide certification, they must explain, in detail, why they cannot and what they are doing to follow up. H.28 The OECD and the International Chamber of Commerce have both published principles or guidelines on corporate governance and codes of conduct. Both offer good starting points for individual companies, or for national guidelines, on corporate codes of conduct. H.29 Third-party review is important in establishing the credibility of codes of conduct and can be provided by business associations, professional services, or regulatory bodies. The more independent the third-party reviewer, the more credible the process will be. Involving civil society in this review process can offer important benefits, particularly where trust between the private sector and civil society is tenuous. Integrity Pacts H.30 Transparency International developed the concept of an "Integrity Pact" as a way of facilitating "clean" projects in an environment of endemic corruption. It aims to enable companies to refrain from bribery by assuring them that other companies face the same constraints and by eliminating demands for bribes from government agencies. The integrity pact also attempts to benefit governments by reducing the cost and distortionary impact of corruption in projects. H.31 The Integrity Pact involves a written contract between all parties to a project to refrain from demanding or paying bribes while bidding for or executing that project contract. By specifying all parties' contractual rights, detailed rules for disclosure of 17 See Transparency International USA Chapter's survey of best-practice in corporate anticorruption programs on the web: http://www.transparency-usa.org/survey_96.htm 8 Royal Dutch Shell and SGS are two prominent examples. - 85 - COMBATING CORRUPTION IN THE PHILIPPINES information, and penalties for noncompliance, the pact makes the behavior easier to monitor and eliminates legal uncertainties. H.32 An updated version of the Integrity Pact was developed for Indonesia during 1999 by Transparency International, the govenrment, and donors (including the World Bank and the Asian Development Bank). Though too early to evaluate the impact of these pacts in Indonesia, the idea is worth considering for adaptation to the Philippines context. Detailed information on the Integrity Pact concept and its application to Indonesia are contained on the Transparency International website, http://www.transparency.de. Government Regulation H.33 Government regulation can provide powerful incentives for compliance. For example, establishing legal liability for company managers and directors for corrupt behavior within the company provides a strong motivation for companies to fully implement and monitor codes of conduct. In the United States and several other countries, the courts show greater leniency toward companies that have strong codes of conduct and a strong compliance regime to back them. H.34 Government regulation can also provide for the adoption of internationally accepted accounting and auditing standards, which improve financial transparency and investor confidence. Such standards are not a magic bullet, since corruption will be hidden as skillfully as possible. But they are a foundation on which to build. H.35 Other areas where it may be appropriate for government to establish guidelines or minimum standards include the composition of the boards of public companies, the role of independent directors, the rights of minority shareholders, and access to information that is in the public interest. H.36 Privatization may also reduce levels of corruption within some functions currently managed by government, particularly if it results in a more competitive and transparent environment. However, the process of privatization needs to be driven by a bigger strategic picture, and needs to be well structured and managed, to avoid increasing the opportunities for corruption within the process itself. -86 - ANNEX I ANNEX I: THE ROLE OF CONGRESS IN THE FIGHT AGAINST CORRUPTION By Margarito B. Teves* 1.1 In its report on anticorruption, the World Bank recommended nine points on how graft and corruption activities in the Philippines could be controlled and minimized. The report is a comprehensive and holistic approach where all sectors of the society, namely the government (which is comprised of the Executive, Legislative and Judiciary), the media plus the general public are enjoined to take part in the anticorruption campaign. Among these sectors, Congress has the primary role of laying out the legal foundations for controlling or monitoring graft and corruption, through its legislative function. 1.2 The following sections discuss the proposed roles of Congress proceeding from the nine-point approach recommended by the World Bank. These are: - Taking the lead in improving governance through legislation of necessary bills. * Conducting legislative oversight. 3 Exhibiting transparency from within its institution; and, • Imposing stricter sanctions or penalties to all wrongdoers. A framework of the proposed roles of Congress is attached as Figure 1. 1. 1.3 At present, Congress faces difficulty in performing these roles because of some structural and human deficiencies within the institution. Recommendations are discussed within each section. Proposed Roles of Congress in the Fight Against Corruption Contributions of Congress in Improving Governance 1.4 Good governance is a necessary element for a government to contain graft and corruption. Poor governance precedes presence of corruption and, corrolarily, good governance precedes absence or low presence of corruption. Below are some of the requirements of good governance where Congress could take part: * Departments and agencies should have effective and efficient organizational structure and systems, particularly in the financial and management system. * The Civil Service needs to improve meritocracy. Margarito B. Teves is aformer Congressman of the Philippines. The World Bank commissioned a short paper from him examining the role of Congress in combating corruption, which has been included unedited in this Annex. - 87 - COMBATING CORRUPTION IN THE PHILIPPINES I * There should be continuous policy reforms including the budget process. The budget process should enhance the financial management systems in the entire government, complement legislative and public oversight processes, simplify public procurement with the objective of creating a competitive business atmosphere, and limit congressional discretion over detailed line items. 1.5 The first step to carry out the above requirements is through legislation. As perceived by most regulators, there are a lot of areas for improvement in almost all government departments and agencies. This improvement, especially those involving structural changes could take place faster when there is a law that will permit this to happen. The role of Congress is, therefore, critical in improving governance. For instance, amending the Civil Service Code would be necessary to improve meritocracy in the government. I.6 At present there are a lot of bills that espouse for improvement in governance. Some of these are the government auditing code, government accounting act, civil service code and procurement code. Once the structural changes proposed by these bills are in place and are properly implemented, the incidence of corruption is expected to be controlled and largely minimized. One reason is that corrupt officials will have difficulty engaging in corrupt activities. Under this environment, corruption would then be a high- risk and low-reward activity. 1.7 However, there is much concern whether the Congress will be able to enact these important bills on time, if at all. In the past, many bills of national importance have not been passed into law or were not even discussed on the floor. The status of these bills, which have been refiled twice or thrice, is shown as follows: Status of Proposed Bills* Status Proposed Bill HOUSE SENATE Government Auditing Code Originally filed in the 9th Filed in the 9tu Congress Congress (passed in third (reached committee hearing); reading), 10b Congress (passed filed in the 1 0h Congress in third reading) (reached second reading); In the 1 lb Congress - a Bill was not filed in the I 1k" committee report is prepared Congress Government Accounting Pending with Committee since Pending with Committee Act February 2000 since August 1998 Civil Service Code Pending with Committee since Pending with Committee January 1999 since March 1999 Procurement Code Pending with the Committee Pending with Committee since July 1998 since September 1999 * As of Feb 24,2000 I.8 The delays in the passage of these bills can be attributed to the following: * Long discussions among lawmakers, department heads/officials, cause-oriented groups and the public. On the average, it takes 18 to 24 months before a bill of - 88 - ANNEX I national importance is passed into law. The views of various groups are heard and taken into account. The advantages and disadvantages of the bills are carefully analyzed and weighed before a committee report is submitted. The length of time also depends on how politically and socially sensitive the issues are. * The technical and structural capability of the secretariat in both Houses could also be a factor. The use of advanced technology is necessary to facilitate the conduct of the committee hearings. At present, the secretariat is in need of fast access to information base and better and more complete devices to be made available for presentations. * A bill that is not certified by the Executive as priority or urgent could take a back seat in the Congress calendar. Because of time constraint, many of the bills passed are those that are recommended by the Legislative Executive Development Advisory Council (LEDAC) and certified by the President as urgent; and * A bill with broad scope, and the presence of one or two highly controversial chapters or provisions could stall the passage of the bill. An example is the bill on environment code. This bill tackles clean air, clean water, solid waste management, etc. Since there are controversial provisions on a chapter on clean air, the rest of the chapters, though having general consensus, are stalled. Another example is the forestry code, or sustainable forest management code. It has general consensus on most provisions of the bill, but the sections on log ban drag the entire bill. Both the environment code and forestry code have been filed since 1987. But the debates on a few sections or chapters have stalled the entire bill. Until now, Congress has not yet passed these bills. I.9 Some recommendations to address the above concerns are: * Congress should encourage the participation of reputable advocacy groups in the discussion of the issues in the committee hearings. . Congress, with funding support from multilateral agencies, should reinforce the capability - technical and structural - of the secretariat of both houses. Investing in this project would greatly facilitate and improve the quality of preparation and discussions in the committees and session halls. * Even if the bills are not certified by the President as urgent, both houses, through their key leaders, should frequently communicate with each other to determine which among the bills of national importance filed should be prioritized and included in the common legislative agenda. * Although it is generally better to have a comprehensive bill, it is sometimes advisable to file bills in several components to facilitate deliberations on the floor. When all the pertinent bills have been passed into law, it would be easier to compile and incorporate these in a Code. - 89 - COMBATING CORRUPTION IN THE PHILIPPINES I * There should be a well defined communications plan to get support from various groups and the general public. The public and the Congress members should have a clear understanding of the dynamics of the bill being discussed. It is important that Congress should have support from all stakeholders and the departments that will implement the bill. * The stakeholders should contribute information, skills, and experience that could improve the results desired. The department heads or implementors, on the other hand, should be able to understand what the real intent of the bill is and to be able to give feedback so that any unclear issues would be resolved at the onset. Conducting Legislative Oversight I.10 Legislative oversight as a tool against corruption. Legislative oversight provides a mechanism to bring about greater accountability and efficiency in the use of public resources. It serves more as a deterrent than a remedial measure since it is instituted and designed for early detection against fraud and corruption. Through legislative oversight, Congress is able to monitor the activities of the Executive branch, i.e. whether officials are complying with the laws and statutory intents and how projects were implemented, who conducted the project and at what cost. 1.11 Monitoring the performance of the agencies. Congress should be vigilant in monitoring performances of agencies particularly in the use of the agencies' budgets and whether these agencies are performing in accordance with the intent of the law. There were cases in the past that the implementing agency had a different interpretation of the law from what was really intended. For example, when the Department of Finance drafted the IRR of the Export Development Act (EDA), it reduced the incentives that Congress wanted to give to the export producers and traders under the Act. I.12 Congress should conduct oversight on a regular and not ad hoc basis. At present, Congress conducts oversight more in a reactive manner - conducting Congressional inquiries on reported anomalous government activities only when it calls for public clamor and rather than continually monitoring the Executive branch. I.13 It is critical to stress that for the legislative oversight to be an effective tool in the fight against corruption it should be a deterrent rather than a remedial measure. Unlike in the 9th Congress where the House Rules and Regulations specifically mandated each standing committee to create a subcommittee on oversight, in the 10th and the present Congress, the creation of subcommittees on oversight was made optional. 1.14 Congress should employ an effective and efficient oversight team. Past experience shows that though an oversight subcommittee was created, it was not very effective. During the 9th Congress, an office in the House of Representatives (Congressional Planning and Budget Office), through its own initiative, prepared an oversight report on selected agencies and departments. The report was circulated among congressmen and the agencies and departments. It was the first and the last report on oversight. - 90 - ANNEX I 1.15 Although some of the agencies and departments were alarmed by the report, there was no follow-up or action done. The standing committees also were silent about the report. It could not be determined whether these committees were able to use the report or not. There was even an issue that some of the conclusions drawn in the report were not accurate. But the point here is that there was no follow-up, improvement or revision made even during the following year. 1.16 Even at present, there are many subcommittees on oversight which are not functioning as expected since the committees perceive this to be less important than committee-referred bills and the committees are tied up with day-to-day activities. Some of the reasons why Congress could not perform an effective oversight are lack of staff, expertise and resources specifically for this purpose and, probably, the lack of political will and leadership to conduct a sincere and credible oversight. 1.17 A proposed conceptual framework on legislative oversight. The essentials of an effective legislative oversight should include: * Development of performance indicators that will realistically and effectively measure the performance of the agency or department concerned. It may be through the measurement of inputs, outputs and/or outcomes. • Performance tracking by requiring agency to report regularly on its performance, committee hearings and investigations, submission to Congress of COA reports on the financial condition and operation of all government agencies, and through public surveys. Civil society would play an important role, if not the lead role, in the conduct of public surveys. * Institution of an effective reward and penalty system. This system should be tied up with the budget appropriation process. This system could be applied by reducing the budget for next year of agencies that had poor grading in the oversight review. While agencies with high grades might be granted the privilege to keep their savings for future use. * Creation of a specialized pool of staff in the House of Representatives and the Senate for the sole conduct of legislative oversight. I.18 The oversight report should be made available to the public. The civil society plays an important role by being watchful of the activities of the agencies and departments reported to have questionable activities. The people should be trained to be more aggressive and assertive by reporting to the agency (created to accept complaints on corruption) or to media or NGOs. The participation of the public will enhance transparency and could provide additional source of information to support the findings in the legislative oversight report. Exhibifing Transparency in Its Financial Activities I. 19 Congress should first clean its own backyard. Congress should have credibility in its fight against corruption. One way of doing this is to exhibit fairness, transparency and 91 - COMBATING CORRUPTION IN THE PHILIPPINES I accountability in its financial activities, especially with regard to their budget and the "pork barrel" funds. If Congress members are perceived to be honest then their policies will gain high credibility, both in public and in the agencies where Congress is conducting an investigation or where corruption is being controlled. Transparency in the Budget 1.20 Both houses should be transparent in the management of its budget. The public perceives that there are transactions within Congress that are not fully accounted for. For instance, there was a rumor that the figures in the House Committee on Accounts could not be reconciled. Rumors such as these could be easily cleared if the Committees in charge of internal budget (in both Houses) make a periodic accounting or disclosure to the public. Another example is making foreign travels transparent by posting the destination, purpose, expenses incurred in the travel. The same requirement should be made to the various out-of-town committee hearings. The committees and individuals concerned should file a report on these travels. In addition, Congress should: * appoint a senior and respected member of the minority to head the Committee on Accounts (CA) for a better check and balance of the financial activities. This has long been a standard practice in the British parliament. * issue a quarterly publication of the budget vs. the actual expenses of the House should be made and prepared by the CA. These reports should be made available to the media and any interested party. Transparency in Pork Barrel I.21 "Pork Barrel " funds should be made available only for developmental purposes. There should be more efficient allocation and prudent spending of the "pork barrelr fund. This fund should be used exclusively for priority physical and social infrastructure projects like irrigation, farm-to-market roads, scholarship to deserving students, livelihood projects, etc. These funds should not be used for expenses that are "personal" in nature nor should it be channeled to personal private foundations. 1.22 Enforcing greater transparency and accountability. Contrary to popular belief, the pork barrel per se is not bad. The constituents in different districts need the funds under the '"pork barrel. " Congressmen and senators assist in setting priority needs and facilitating the release of these funds. Lack of safeguards and transparency largely contributed to the abuse in the use of these funds. However, Congress members should report to their respective constituents at least once every six months on how the funds were spent to avoid or substantially minimize the occurrence of incomplete or "ghost" projects. 1.23 The Speaker and the Senate President should take a lead on this by directing the members to submit semestral reports to their constituents. The reports should include, among others: - 92 - ANNEX I * The standard costing of projects certified by the Pre-Qualification Bidding and Awards Committee (PBAC), District Engineer and Commission on Audit (COA). * Project location, name of contractors, date of commencement and completion. I.24 Subsequent releases of the pork barrel funds should be based on the submission of the semestral reports as certified by the DBM. The reports should be collated by the House and Senate Secretariats and the Committee on Appropriations/Finance and subsequently published in at least three major national daily newspapers to generate public knowledge and awareness. 1.25 The general public should participate in the monitoring of the projects to check the work done by the contractors. The NGOs and other cause-oriented groups should actively monitor on-going projects of the national and local government units. These groups should check whether the quality and amount of work supplied to complete an ongoing project is exactly what was in the specifications of the bidding documents. The inspection or checking can be conducted randomly or through surprise visits so that those erring contractors can be caught unaware. Transparency in Campaign Finance I.26 Campaign finance is employed by the politicians to gather enough funding for their election campaign. In return, their supporters will get protection on their personal or corporate businesses in case they win in the elections. Vested interests finance and bankroll the campaign and election expenses of certain candidates whom they perceive to be winnable. Campaign supporters are normally the candidate's relatives, friends and business partners. 1.27 Reforming campaign finance is a worthy cause but difficult to implement since this is already imbedded in the culture of Philippine politics. In the past, various means have been employed by the Commission on Elections (Comelec) like setting a ceiling on the expenses and requiring the disclosure of the expenses made. But these were not effective. The imposition of the advertisement ban may have even hiked the campaign expenses since the politicians had to employ other means of campaigning like the use of helicopters to transport them to far-flung places. Below are two possible alternatives that could help in reforming campaign finance. 1.28 First, government to subsidize campaign of major political parties, say, the top 2 or 3 parties in terms of number of elected candidates, in the last elections. However, the party opting for a subsidy should have a workable party platforms and programs before it could avail of the subsidy. The platforms should be clearly and thoroughly discussed and should include programs for development. Disadvantages include: * This measure needs legislation and might encounter rough sailing in Congress. * This will result in a further deepening of budget deficit. -93 - COMBATING CORRUPTION IN THE PHILIPPINES I * The propriety of subsidizing the big parties composed of rich candidates is questionable. * Smaller and start-up parties will cry "foul" and would contend that they deserve the subsidy more than the bigger parties to improve their fighting chance against the latter. The advantages, on the other hand, include: * Use of "padrino" or political godfather will be minimized and elected officials will not be bound to protect the interest of big businesses. * Promote loyalty within a party. It will discourage some politicians from "splitting" and forming a new party if they lose in the party convention, thereby contributing to the proliferation of small, scattered political parties. * It will encourage start up, small parties to consolidate their efforts and resources so that when they become big, these groups will have a share of the state subsidy. 1.29 The other proposal, which is more difficult to implement, is to make campaign contributions transparent. Donors should be encouraged, if not required, to disclose the kind and amount of support they give to certain parties and/or candidates. This can be done by treating certain contributions as part of business operating expenditures and hence, tax deductible. Disadvantages include: * This can be manipulated to further avoid paying taxes. * This can be used by the victorious but un-supported candidates to exact political "vendettas" and harass the business and political interests of the firm or individual, who supported the losing candidates. But advantages include: * Promote greater transparency on who funded whom. Voters, media and the general public will see who are the interest groups behind certain political parties and candidates; thus, they can anticipate the executive and legislative agenda of the supported parties and candidates. For this to work, active participation of the media and the general public should be required. * Limit the flow of campaign funds since most of the supporters do not like to be identified. Imposition of Sanctions 1.30 Impose stiffer disciplinary action on erring members of Congress. The maximum penalty for erring member who may have committed serious offenses, especially those - 94 - ANNEX I that are criminal in nature, should be increased to more than 60 days, as historically, this has not been enough as grounds for disciplinary action. In addition, penalty should also include expulsion, depending on the gravity of the offense and the extent to which the act of an erring member has damaged the institution. I.31 Legislate bills that would impose stricter penalty on wrongdoers with the objective of instilling good virtue and discipline among officials in the government. I.32 Civil society should be active in reporting for irregularities in the implementation of sanctions. Summary And Conclusions 1.33 Congress will be able to substantially help in the anticorruption campaign of the government by: * Improving governance by means of legislation. At present there are bills filed in Congress to address governance. However, a bill on budget reform should also be filed in Congress. To monitor performance, this should be tied up with the oversight function. * Conducting legislative oversight in a regular and not ad hoc basis. The oversight report should be submitted to the Committee on Appropriations and Senate Committee on Finance, respectively, to make a follow-up on the performance monitoring of the departments and agencies. Corresponding penalty should be imposed on low-performing agencies and an appropriate rewards or incentives to be granted to agencies with good performance. - Exhibiting transparency by starting within the institution. Congress should be transparent in its financial activities which include its internal budget, "pork barrel" fund, campaign funds. . Imposing stricter sanctions that would instill discipline on erring congressional members and government officials. I.34 But to effectively perform its roles, Congress should address structural and human deficiencies within its institution by: * Reinforcing the technical and structural capabilities of the secretariat in both houses. * Formulating a methodology for legislative oversight. This should include beefing up the manpower, expertise and resources specifically for the conduct of legislative oversight. * Initiating transparency within the institution particularly in the management of Congress budget and "Pork Barrel" funds. Obtaining the participation of mesdia in the drive to clean the institution of inappropriate practices would render credibility to this campaign. -95- COMBATING CORRUPTION IN THE PHILIPPINES I * Imposing stiffer sanctions to instill discipline on erring members of Congress. 1.35 Civil society should play an active role in monitoring and reporting of corrupt activities. There should be a civic action group that would initiate the drive and set up offices/headquarters so that people would know whom to approach and where to report graft and corruption complaints. The civil society plays an important part in all the four roles of Congress enumerated above. * On improving governance. Show strong support on bills that seek elimination of graft and corruption by participating in committee hearing and disseminating information to the public. * On conducting legislative oversight. Be vigilant in playing the role of "watchdogs" in the monitoring of government undertakings especially in infrastructure development projects. * On exhibiting transparency in Congress ' financial activities. Take the initiative to push Congress to disclose its financial activities including pushing for a bill that would minimize rampant activities in campaign financing. * On imposing stiffer sanctions. Should not stop in its vigilance until erring government and public officials are given sanctions or penalty that is appropriate and just. - 96 - ANNEX I FIGURE 1.1 PROPOSEO ROLES OF CONGRESS IN THE} FIGHT AGAINSTRT CORtUPT1`N 9-POiNT APPRODACH ON ANTI COI1UPThN Po Reforms and R.I oaP6b0 | rm Campaigrn Epne iSation In D;-: L erCgulation Oes i_|e MeSriJutocac Reform Budget Process Le 'alate Oftl oI . F - - I. I. A i Imprc i i ransaency, a> >Proposed Bills: >Tract agency >Particularly in >Legislate stiffer performance on management of sanctions that are -Civil Service Code regularbasis * Own Budget appropriate and -Auditing Code *"PorkBarref' just -Gen Acctg. Act >Create Oversight >Campaign funds Team >anag ud :; Procurement Code ; > Institute reward and 4; >Tie up with Oversight penalty system -------- --^.-,ve4S ,~>..xr--r .n.r-:. ----- - . .. ----- ---- ---- -- r:-_--------------- #ctu D .-,, - ,- Insuraltitud, Need to Enhance A n | Need f iEm StructureI Stron fitical T of Er 1n Capabiltie wtomeQY Support Bs Unceaartiy Push Congress for Ensure Proper j t i EspousingAnti- moto t G1reeter Sanctons, ae coqion Proe7ts Transparenc k. osed - 97 - BIBLIOGRAPHY Bardhan, Pranab. The Political Economy of Development in India. New York, N.Y.: Basil Blackwell, 1984. Bates, Robert. Markets and States in Tropical Africa. Los Angeles: University of California Press, 1981. Berenbeim, Ronald. "How Effective Are Corporate Codes in Combating Corruption?" Address at the Ninth International Anticorruption Conference, Durban, October 10-15, 1999. Business World, "As ERAP Airs Warning, Firms Support Drive vs. Corruption." December 2,1999. 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