Enhancing-Government-Effectiveness-and-Transparency-The-Fight-Against-Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES sectors, including air transport, telecoms, banking 2018, in which it committed to stop taking any new and insurance, and real estate, to support its core RBLs (collateralized loans) and limit how much it draws business. In 2018, its turnover was USD18 billion. By down on existing RBLs. 2015 Sonangol was in a deep crisis. The falling price of oil and longstanding inefficiency were draining Researchers55 showed that in total, two-thirds of the company’s revenues. With oil the keystone of the all RBLs went to countries with poor governance Angolan economy, responsible for a third of its GDP and standards. Countries with limited transparency and 90% of its exports, a bankrupt Sonangol would mean accountability of their resource sectors used those economic catastrophe. The government took drastic assets to secure RBLs. The countries with by far the action. By decree of the then president, José Eduardo largest amounts of RBLs in their respective region— dos Santos, a committee to restructure the Angolan Venezuela in Latin America (USD59 billion) and Angola oil sector was constituted, and it invited a Maltese in sub-Saharan Africa (USD24 billion)—both have poor company, Wise Intelligence Solutions, to coordinate resource governance scores. Data56 shows that in a group of consultants to advise on reforms. Wise’s roughly 40 percent of cases (21 cases), the borrowing owner was the president’s daughter, Isabel dos Santos. entity was an SOE operating in the oil or mining Six months later, Isabel dos Santos would be granted sector. Across one dataset, the following national oil even greater influence over the reforms. A second companies (NOCs) were recipients of most RBLs: presidential decree announced her appointment as Petrobras (Brazil), PetroEcuador (Ecuador), Petróleos de chair of the SOE, Sonangol, mandated with overseeing Venezuela (Venezuela), Sonangol (Angola), Société des its turnaround.51 Hydrocarbures du Tchad (Chad), and Société Nationale des Pétroles du Congo (Congo). Sonangol and Resource- Crackdown on corruption Backed Loans (RBL) in and efforts to increase Angola52 transparency in the Angolan SOE sector According to a recent study,53 Angola received the largest amount of RBLs in sub-Saharan Africa. Between In September 2017, President João Lourenço took 2000 and 2016, Chinese lenders committed over office and initiated a crackdown on corruption. After USD24 billion worth of oil-backed loans and credit lines taking office, President Lourenço started delivering on to Angola, most of which have been disbursed. The his pledges by initiating a number of economic reforms national oil company Sonangol has played an important aimed at tackling corruption, graft and patronage as role in RBLs in Angola. In addition to the Chinese RBLs, well as breaking up a number of artificial monopolies in Sonangol independently borrowed large amounts from the economy (most notably in the cement and telecoms Chinese lenders. Furthermore, USD10 billion from the sectors). At the same time, he made numerous high- USD15 billion oil-backed credit line that the Angolan level appointments in key positions and initiated government signed with China Development Bank in investigations against a number of high-level officials 2015 was subsequently lent to Sonangol. linked to former President Dos Santos and his family, some of whom were put under preventive detention. The financial flows between Sonangol and Angola’s government budget were not transparent. In 2012, The former President’s daughter, Isabel dos Santos, for example, the International Monetary Fund (IMF) had been the president of the board of directors of uncovered USD32 billion excess of revenues over the state-owned oil company Sonangol, until she was expenditures in Angola’s state budget from 2007 removed, as part of the anti-corruption and investigative to 2010, which was the result of Sonangol using efforts initiated under the new President. The son of government oil revenues to finance “quasi-fiscal the former President, Jose Filomeno dos Santos, was operations” not recorded in official budget accounts.54 also removed as chairman of the sovereign wealth fund In 2016, Angolan oil-backed loans had reached USD25 (Fundo Soberano de Angola, FSDEA) and subsequently billion, which was more than half of the government’s charged in a fraud case concerning misappropriation of total debt. The country requested an IMF bailout in Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 115

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES USD500 million of public funds. His business partner¸ introduced to reinforce and complement the reforms Jean-Claude Bastos de Morais, was also arrested in to public procurement. In Angola, income and asset relation to the misappropriation case alongside the declaration is regulated principally by the Law on Public former governor of the National Bank of Angola, Valter Probity (Law 3/10 from 2010). Article 18 established Filipe. These are just a few of several high-level cases that public officials must not, in the exercise of their that have received significant attention both within functions, directly or through an intermediary, benefit and outside Angola. Norberto Garcia, another high- from an offer by any natural or legal entity, under ranking member of the MPLA party and former director Angolan or foreign law. Article 27 stipulates the of the Technical Unit for Private Investment (UTIP) was obligation of some officials to declare their income charged with fraud, money laundering and document and assets when taking office using a specific form. falsification. The former transport minister Augusto The types of officials included are those elected or Tomas was also arrested on charges of embezzlement appointed to posts, judicial and public prosecutors, and corruption. Another central component of the senior officials of central and local government, public anti-corruption policy under the current administration institutes, state-owned enterprises, managers of public has been the intent to recover stolen assets first by assets assigned to the armed forces, heads of local creating a legal framework for voluntary repatriation government. of resources under amnesty and subsequently through coercive repatriation and confiscation of assets in lieu In late 2018, regulations were issued for the declaration of stolen assets.57 of income and assets, declaration of interests, and declaration of impartiality and confidentiality in public Reforms in public procurement (Presidential Decree 319/18 of December procurement and the income 31). The regulations were issued alongside several and asset declaration tools, including the ethical code of conduct in public system procurement, a guide for denouncing indications of corruption in public procurement, and a practical Contracting of goods and services has been deeply guide for preventing and managing risks of corruption affected by corruption and improving public in public contracts (anti-corruption guide). Combined, procurement constituted a key element of fighting the regulation and tools have been referred to as the corruption in Angola. The public procurement law was strategy for the moralization of public procurement. updated to include lowering the threshold for contracts that are required to be subject to public tender, the The regulations extend the requirement for income and creation of a national procurement portal and a list asset declarations (IAD) specifically related to public of companies certified to undertake construction procurement to include both senior public officials and work for the government (Presidential Decree 198/16 technical staff preparing bidding documents, members of September 26). The thresholds for authorization of the procurement committee and contract managers. of expenditure were updated in 2018 to adjust for Senior officials in the public sector, including SOEs, inflation, although the thresholds for requirements for and members of the procurement committee are also the type of procurement were not altered (Presidential required to declare any interests in companies, business Decree 281/28 of November 28 and Rectification 26/18 groups, consortiums or other business interests that of December 31). The law also included a chapter on could result in a conflict of interest (Article 2). The ethical behavior in the planning and execution of public regulations establish that the IAD of public officials must contracts, including requirements for impartiality and be submitted to the highest level of authority within the avoiding conflicts of interest, fraud and corruption, legal procuring entity and handled in line with law 3/10 on compliance and confidentiality. In the past, compliance public probity. Declarations of interest, however, must and enforcement of the legal anti-corruption framework be submitted to the Inspectorate-General of the Public had been a bigger problem than the legal framework Administration (IGEA), which is entitled to use them as itself. they see fit to deliver their mandate (Article 7 and 8). This represents a shift in the IAD framework, which has Reforms to income and asset declaration were to date been a closed system (IADs are submitted in closed envelopes and only opened by the prosecutor’s office as part of an investigation) to a semi-open system for matters concerning public procurement. 116 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES More transparent and state assets have been sold through international privatization efforts competitive bids. Sonangol, the national oil company, is involving the SOEs implementing its own “Regeneration Program,” which includes divesting non-core businesses and reducing Angolan SOEs have been used in the past to extend stakes in oil blocks. The company is expected to start favors and lucrative contracts to party loyalists. The divesting in early 2020. early 2020 ‘Luanda papers’ leaks58 by the international consortium of investigative journalists showed the To improve transparency and accountability of SOEs extent of the misuse of state assets for personal gain by and reduce opportunities for corruption, the authorities the Angolan elite—and in particular Isabel dos Santos began publishing reports on its SOE portfolio,59 and her entourage. Ongoing SOE reforms in Angola including audited annual reports of the 15 largest include efforts to address flaws in past SOE governance SOEs, at the end of 2019.60 Ongoing structural reforms and privatization processes and increase transparency aim to reduce the large State footprint in the economy, and predictability, thus leveling the playing field. The reduce fiscal risks, and foster private sector-led Privatization Law was published in the spring of 2019 and development. The authorities’ home-grown reforms— a privatization program was presented in September. including Sonangol’s “Regeneration Program” and The large and ambitious privatization program is being the privatization of several SOEs—are expected to implemented over four years. A number of minor SOEs reduce State presence in the economy, curb fiscal risks, improve governance, mitigate price distortions, and increase economic efficiency. In turn, these efforts Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 117

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES should pave the way for private sector-led development required by the law. The government also committed to and economic diversification.61 Under the IMF program, increase the share of public contracts awarded through important fiscal risks in the economy are expected open tender (concurso público) to at least 50 percent to be mitigated by the proposed restructuring of the by end-2020.63 largest SOE, Sonangol, the improved transparency of all SOE accounts and the timely implementation of the Conclusion SOE privatization program, whose proceeds could be used to reduce mounting debt. Fighting corruption in SOEs remains a huge challenge in Angola, and the early policy actions need to be Institutional changes to carefully watched for sustainability and impact. The increase transparency and few corporate governance codes that were passed over efficiency in the oil SOE and the years had limited impact and action was needed beyond beyond the regulatory level. With the arrival of the new government in mid-2017, a concerted effort has been The authorities continue to make progress on the made to address systemic corruption by targeting both privatization program and reform of SOEs, yet enforcement and prevention. The SOEs were front challenges remain. The public offering of the first set and central in that effort. Some results can already be of SOEs/state assets took place in September 2019. seen, as evidenced by reports of the donor community, Moreover, the authorities plan to continue with the but progress is slow. A new and reinforced SOE unit disposal of non-core assets of Sonangol and to reduce in the Ministry of Finance is now collecting data and is some of its stakes in oil blocks. As part of an effort to preparing regular monitoring reports. Most SOE board streamline the operations of Sonangol, the authorities of directors have been replaced. Many state assets, established the National Oil and Gas Agency in which were ‘privatized’ (at low or zero costs) in the February 2019, which has taken over the function of past have been taken back by the state and are now concessionaire in the oil sector. The first phase of this being prepared for a new and transparent privatization change was completed in June 2019 and involved the process. Corporate governance in the state oil new agency absorbing human resources and assets company Sonangol is being strengthened to help the from Sonangol.62 SOE become an efficient company rather than a parallel public sector arm of the authorities, and the state’s There have been many positive indications of the concessionaire responsibilities have been transferred Government of Angola’s commitment to strengthening to a separate institution, which will somewhat reduce governance and fighting corruption. In January 2019, the opportunities for using it as an extended arm of the National Assembly approved a new Penal Code, the executive. In addition, the SOE has been asked to which includes harsher punishment for both active and sell most of the 150+ subsidiaries. The same concerted passive corruption. The Attorney General’s Office, efforts are now targeting the diamond holding which is in the process of implementing the anti- company ENDIAMA. On the other hand, there have corruption strategy published in December 2018, has been setbacks: privatization is proceeding slower than stepped up its investigations and two members of expected, lending practices of state-owned banks have Parliament have been indicted on several corruption raised new concerns, and the transparency of Sonangol charges. The creation of a specialized anti-corruption remains a work-in-progress. While the eventual impact unit in 2018, under the Executive branch, is expected on corruption of Angola’s reforms remains to be seen, to further support the fight against corruption. To help the country’s vigorous approach to tackle corruption in enforce laws on SOE transparency and accountability, the SOE sector is commendable and can serve as an the 15 largest SOEs (by assets) will have to publish inspiration to practitioners and policy makers in other their audited annual reports on the website of countries that are facing similar challenges. the SOE oversight institute (the Institute of Assets Management and State Holdings [IGAPE]). Starting in 2019, the government enforced the publication of these companies’ annual reports on IGAPE’s webpage, as 118 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Notes 1. OECD (2018), State-Owned Enterprises and Corruption: What 21. Sohai, M. and Cavill, S., (2006). Combating corruption in Are the Risks and What Can Be Done?, OECD Publishing, the delivery of infrastructure services. [Paper presented Paris, https://doi.org/10.1787/9789264303058-en. at:] Conference on Institutions and Development, Reading, 22-23 September, https://pdfs.semanticscholar. 2. South China Morning Post (2016), “Corruption found cross org/274d/1efb699d1b8fdd99d353d2d7d20ed589af2f.pdf. China’s financial industry,” February 5, 2016. 22. John Sullivan (2009). “The Moral Compass of Companies: 3. David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). Business Ethics and Corporate Governance as Anti-Corruption Resource-Backed Loans: Pitfalls and Potential, Natural Tools.” IFC. Focus 7. Resource Governance Institute. 23. Coatsworth (2003). “Roots of Violence in Colombia: Armed 4. World Bank (2019). Increasing SOE Integrity in Brazil: Case Actors and Beyond”. Revista, Har vard Review of Latin Study. America. https://revista.drclas.har vard.edu/book /roots- violence-colombia 5. Public Protector of South Africa (2016), State Capture Report, 14 October 2016. 24. Id. 6. Public Protector of South Africa, 2016. 25. The Law of Domiciliary Public Services (Law 142 of 1994) and the Electric Law (Law 143 of 1994). 7. United States District Court Southern District of New York (2015), In Re: Petrobras Securities Litigation, Consolidated 26. Empresas Públicas de Medellín. EPM. Corporate Governance. Fourth Amended Class Action Complaint, Case No. 14-cv-9662 ht tps://w w w.epm.com.co/site/investors/corporate- (JSR), http://securities.stanford.edu/filings-documents/1053/ governance. PBSP00_01/20151130_r01c_14CV09662.pdf. 27. Empresas Públicas de Medellín. EPM. About Us. https://www. 8. OECD, Ibid. epm.com.co/site/investors/general-information/about-us. 9. This was the case with Petrobas at the time of corrupt activities 28. OECD (2015). OECD Review of the Corporate Governance of (Vianna M.P. (2014). See Vianna M.P. (2014). Brazilian State State-Owned Enterprises. Colombia. Page 96. Available at: Owned Enterprises: A Corruption Analysis. The Institute of https://www.oecd.org/daf/ca/Colombia_SOE_Review.pdf. Brazilian Business & Public Management Issues, The George Washington University. 29. Transparency International (2018). 2018 Corruption Perception Index. Available at: https://www.transparency.org/cpi2018 10. Lewis, Davis. 2018. Gordhan Shows Way Forward for Cleaner Public Corporations. Corruption Watch. ht tps://w w w. 30. LAPOP, USAID (2017). The Political Culture of Democracy c o r r u p t i o nw atc h.o r g. z a /g o r d ha n - s h o w s - w ay - f o r w a r d - f o r- in the Americas, 2016/2017. A Comparative Study of cleaner-public-corporations/. Democracy and Governance. https://www.vanderbilt.edu/ lapop/ab2016/AB2016 -17_Compar ative _ Repor t _ Englis h _V2 _ 11. United States District Court Southern District of New York, FINAL_090117_W.pdf. 2015, and Sunday Times (2017), How Eskom lavished its boss’s daughter with R1bn in contracts, 26 March 2017, https://www. 31. World Bank. (2020). Doing Business 2020. Washington D.C.: time s live.co. z a /s u n d ay-time s /new s /2017- 03 -26 - how - e s ko m - The World Bank. https://www.doingbusiness.org/en/reports/ lavished-its-bosss-daughter-with-r1bn-in-contracts/. global-reports/doing- business-2020. 12. United States District Court Southern District of New York, 32. OECD, 2015. 2015. 33. See the Hidroituango project for example. The Hidroituango 13. Revenue Watch Institute (2013), The 2013 Resource Governance dam is one of South America’s largest infrastructure projects, Index, A Measure of Transparency and Accountability in the a colossus of engineering intended to furnish nearly a fifth Oil, Gas and Mining Sector. of Colombia’s energy needs. In 2018 the massive structure nearly collapsed, sparking a national emergency that forced 14. SWFI (n.d.) , 4th Quarter 2016 LMTI. https://www.swfinstitute. the evacuation of tens of thousands of people. EPM, and some org/statistics-research/4th-quarter-2016-lmti/. of its managers, are currently under criminal investigation for alleged corruption and environmental damage in its 15. World Bank (n.d.), Transparency of State Owned Enterprises development of the dam. See: Above Ground (2019). EPM’s in Vietnam: Current Status and Ideas for Reform, http:// disastrous dam: How Canada financed a high-risk energy documents.worldbank.org/curated/en/618601468132616527/ venture gone away. https://aboveground.ngo/edc/epms- pdf/898100PN0P14340G0Jul0240201400FINAL.pdf disastrous-dam/. 16. See, for example, Georgian Young Lawyer’s Association (2015), 34. EPM’s net worth is reported annually to all citizens in a public Transparency and Accountability of State Owned Companies, event that is broadcasted on local television with live questions https://gyla.ge/files/news/sawarmoebi_eng.pdf. from journalists, together with other community engagement and educational programs. 17. World Bank, 2019. 35. Sohai, M. and Cavill, S., 2006. 18. OECD (2013), Boards of Direc tors of State - Owned Enterprises: An Overview of National Practices, Corporate 36. Users can pay public utilities in cash or by debit card, topping Governance, OECD Publishing, Paris, ht tps://doi. up prepaid energy cards, generating payment coupons, org/10.1787/9789264200425-en. obtaining certificates of prepaid services, among others. More than 311,000 transactions were processed during 2018. 19. G20 High Level Principles on Public Procurement. The EPM mobile app continues gaining strength— in 2018, it reached 26,500 active users and customers, 65% more 20. Transparency International (2013), Anti-Corruption Helpdesk: than the previous year. In addition, during 2018, more than Transparency of State-Owned Enterprises, https://www. 75,000 customers and users received their bill only via e-mail, transparency.org/files/content/corruptionqas/Transparency_ and about 320,000 coupons were paid electronically, that is, of_state_owned_enterprises.pdf. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 119

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES 16.25% of the total coupons collected in the year. June 2016 to November 2017. Gavin, Michelle (2020). Learning What We Always Knew: Corruption in Angola. https://www.cfr. 37. World Bank. 2019. World - Rethinking the 1990s Orthodoxy on org/blog/learning-what-we- always-knew-corruption-angola. Power Sector Reform: Flagship Report (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/ 48. WB Mapping of the Legal and Institutional Landscape for Anti- curated/en/597911563520308282/ World-Rethinking-the- Corruption in Angola, June 2019, Soren Kirk Jensen and Kjetil 1990s-Orthodoxy-on-Power-Sector-Reform-Flagship-Report. Hansen. 38. Odebrecht is the largest construction company in Brazil, 49. lei da probidade publica, 2010 established in 1944 in the northeast of Brazil, and was embedded in the traditional politics of Brazil, expanding its 50. GAN (2016). Angola Corruption Repor t. https://w w w. links with political structures during the military dictatorship. ganintegrity.com/portal/country-profiles/angola/ It had a whole department whose only purpose was to channel funds to politicians in Brazil and much of Latin 51. Pegg, David (2020). How Angola’s state oil firm was left with just America. This department was formally called the “Setor de $309 in its account. The Guardian. https://www.theguardian. Operações Estruturadas” but was more commonly known as com/world/2020/jan/19/angola-state-oil-company-sonangol- the Department of Bribes. What started out as a small family isabel-dos-santos-investigation construction group, grew quickly and at its peak, around 2010, the company had 181,000 employees across 21 countries. 52. David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). Resource-Backed Loans: Pitfalls and Potential, Natural 39. CFA Society Brazil. (2016). CORPORATE GOVERNANCE OF Resource Governance Institute. STATE-OWNED ENTERPRISES IN BRAZIL. http://cfasociety. org.br/media/uploads/bsk- pdf-manager/policy_brief_for_ 53. Id. brazil_50.pdf. 54. Wroughton, Lesley. (2012). IMF finds most of Angola’s missing 40. Kiernan, Paul (2015). “Brazil’s Petrobras Reports Nearly $32 bln. Reuters. https://www.reuters.com/article/ozatp-imf- $17 Billion in Asset and Corruption Charges”. The Wall angola- 20120125-idAFJOE80O00O20120125 Street Journal. ht tps://w w w.wsj.com/ar ticles/brazils- p et ro b r a s - re p o r t s - n ear l y -17- b illio n - i m p air m e nt- o n - a s s et s - 55. Muihalyi et.al., 2020. corruption-1429744336. 56. Id. 41. Paul, 2015. 57. WB Mapping of the Legal and Institutional Landscape for Anti- 42. G20 Anti-Corruption Working Group meeting, 3 -6 February Corruption in Angola, June 2019, Soren Kirk Jensen and Kjetil 2020, Riyadh, Saudi Arabia Hansen. 43. See http://enccla.camara.leg.br/ and https://www.justica.gov. 58. “Luanda Leaks”. https://www.icij.org/investigations/luanda- br/sua-protecao/lavagem-de-dinheiro leaks/ 44. Baleroni & Figueira (2018). Brazil: Two-year balance of 59. IGAPE. https://igape.minfin.gov.ao/PortalIGAPE/#!/ infrastructure in brazil: refocus of state-owned enterprises. International Financial Law Review. https://www.iflr.com/ 60. IMF (2019). Angola: First Review of the Extended Arrangement Article/3852829/Brazil-Two-year-balance-of-infrastructure-in- Under the Extended Fund Facility, Requests for a Waiver of Brazil-refocus-of-state-owned-enterprises.html Nonobservance of a Performance Criterion, and Modifications of Performance Criteria, and Financing Assurances Review- 45. OECD (2016). Transparency and disclosure measures for state- Press Release; Staff Report; and Statement by the Executive owned enterprises (SOEs): Stocktaking of national practices. Director for Angola. IMF Staff Country Reports. June 2019. ht t p s: //w w w.o e c d.o r g /d a f/c a /2016 -SO E s - i s s u e s% 20 p a p e r- Available at ht tps://w w w.imf.org/en/Publications/CR / Transparency- and-disclosure-measures.pdf I s s u e s / 2 019/ 0 6 /19/A n g o l a - F i r s t- R e v i e w - o f - t h e - E x t e n d e d - Arrangement-Under-the-Extended-Fund- Facility- 46. See BM&FBOVESPA’s SOEs Governance Program: available Requests-47003. at www.bmfbovespa.com.br; IBGC’s Guidelines for SOEs, available at www.ibgc.org.br, Publicações/Cadernos de 61. Id. Governança; Article on the governance of SOEs written by Ana Novaes, CFA, member of CFASB’s Advocacy Committee: 62. Id. http://www.ibgc.org.br/inter.php?id=19628. 63. Id. 47. 2020 is off to a rough start for “Africa’s richest woman,” Isabel dos Santos, the daughter of former Angolan President References José Eduardo dos Santos, who led his country for 38 years until being succeeded in 2017 by current President João David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). Lourenço. Ms. Dos Santos is involved in the Luanda Leaks, a Resource-Backed Loans: Pitfalls and Potential, Natural Resource series of investigative reports developed by the International Governance Institute Consortium of Investigative Journalists and informed by a voluminous amount of documentation that a hacker shared Georgian Young Lawyer’s Association (2015), Transparency and on the Protect Whistleblowers platform in Africa. The reports Accountability of State Owned Companies, https://gyla.ge/files/ detail how Ms. Dos Santos used access to the state’s resources news/sawarmoebi_eng.pdf. for private gain, including by transferring funds from state- owned enterprises to offshore private companies that she and World Bank (2020). Increasing SOE Integrity in Brazil. Case Study. her allies controlled. Angolan authorities have frozen her bank accounts, and the Angolan attorney general announced that John Sullivan (2009). “The Moral Compass of Companies: Business she had been indicted for money laundering, mismanagement, Ethics and Corporate Governance as Anti-Corruption Tools.” and other economic crimes, largely committed during her IFC. Focus 7. tenure as head of the state-owned oil company Sonangol from 120 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Lewis, Davis. (2018). Gordhan Shows Way Forward for Cleaner Empresas Públicas de Medellín. EPM. About Us. https://www.epm. Public Corporations. Corruption Watch. ht tps://w w w. com.co/site/investors/general-information/about-us. c o r r u p t i o nw atc h.o r g. z a /g o r d ha n - s h o w s - w ay - f o r w a r d - f o r- cleaner-public-corporations/. LAPOP, USAID (2017). The Political Culture of Democracy in the Americas, 2016/2017. A Comparative Study of Democracy OECD (2013), Boards of Directors of State-Owned Enterprises: An and Governance. ht tps://w w w.vanderbilt.edu/lapop/ Overview of National Practices, Corporate Governance, OECD ab2016/AB2016 -17_Comparative_ Repor t _ English_V2_ Publishing, Paris, https://doi.org/10.1787/9789264200425-en. FINAL_090117_W.pdf. OECD (2018), State-Owned Enterprises and Corruption: What OECD (2015). OECD Review of the Corporate Governance of Are the Risks and What Can Be Done?, OECD Publishing, Paris, State-Owned Enterprises. Colombia. Available at: https://www. https://doi.org/10.1787/9789264303058-en. oecd.org/daf/ca/Colombia_SOE_Review.pdf. Public Protector of South Africa (2016), State Capture Report, 14 Transparency International (2018). 2018 Corruption Perception October 2016. Index. Available at: https://www.transparency.org/cpi2018 Revenue Watch Institute (2013), The 2013 Resource Governance World Bank. (2020). Doing Business 2020. Washington D.C.: The Index, A Measure of Transparency and Accountability in the Oil, World Bank. https://www.doingbusiness.org/en/reports/global- Gas and Mining Sector. reports/doing-business-2020. Sohai, M. and Cavill, S., (2006). Combating corruption in World Bank. (2019).  World - Rethinking the 1990s Orthodoxy on the delivery of infrastructure services. [Paper presented Power Sector Reform: Flagship Report (English). Washington, at:] Conference on Institutions and Development, D.C. : World Bank Group. http://documents.worldbank.org/ Reading, 22-23 September, https://pdfs.semanticscholar. curated/en/597911563520308282/ World-Rethinking-the- org/274d/1efb699d1b8fdd99d353d2d7d20ed589af2f.pdf. 1990s-Orthodoxy-on-Power-Sector-Reform-Flagship-Report. South China Morning Post (2016), “Corruption found cross China’s Case Study 8: SOE Reforms in Brazil following “Lava financial industry,” February 5, 2016. Jato” Sunday Times (2017), How Eskom lavished its boss’s daughter with Baleroni & Figueira (2018). Brazil: Two-year balance of infrastructure R1bn in contracts, 26 March 2017, https://www.timeslive.co.za/ in brazil: refocus of state-owned enterprises. International sunday-times/news/2017-03-26-how-eskom-lavished-its-bosss- Financial Law Review. https://www.iflr.com/Article/3852829/ daughter-with-r1bn-in-contracts/. Brazil-Two-year-balance-of-infrastructure-in-Brazil-refocus-of- state-owned-enterprises.html. SWFI (n.d.) , 4th Quarter 2016 LMTI. https://www.swfinstitute.org/ statistics-research/4th-quarter-2016-lmti/. CFA Society Brazil. (2016). CORPORATE GOVERNANCE OF STATE- OWNED ENTERPRISES IN BRAZIL. http://cfasociety.org.br/ Transparency International (2013), Anti-Corruption Helpdesk: media/uploads/bsk-pdf-manager/policy_brief_for_brazil_50. Transparency of State-Owned Enterprises, https://www. pdf. t r a n s p are n c y.o r g /f il e s /c o nte nt /c o r r u pt io n q a s / Tr a n s p are n c y_ of_state_owned_enterprises.pdf. Kiernan, Paul (2015). “Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges”.  The Wall Street Journal. United States District Court Southern District of New York (2015), https://www.wsj.com/articles/brazils-petrobras-reports-nearly- In Re: Petrobras Securities Litigation, Consolidated Fourth 17-billion-impairment-on-assets-corruption-1429744336. Amended Class Action Complaint, Case No. 14-cv-9662 (JSR), http://securities.stanford.edu/filings-documents/1053/ OECD (2016). Transparency and disclosure measures for state- PBSP00_01/20151130_r01c_14CV09662.pdf. owned enterprises (SOEs): Stocktaking of national practices. h t t p s : // w w w.o e c d .o r g /d a f /c a / 2 016 - S O E s - i s s u e s% 2 0 p a p e r- Vianna M.P. (2014). Brazilian State Owned Enterprises: A Corruption Transparency-and-disclosure-measures.pdf. Analysis. The Institute of Brazilian Business & Public Management Issues, The George Washington University. Case Study 9: SOE Reforms in Angola World Bank (2019). Increasing SOE Integrity in Brazil: Case Study. David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). Resource-Backed Loans: Pitfalls and Potential, Natural Resource World Bank (2019). Increasing SOE Integrity in Brazil: Case Study. Governance Institute. World Bank (n.d.), Transparency of State Owned Enterprises GAN (2016). Angola Corruption Report. https://www.ganintegrity. in Vietnam: Current Status and Ideas for Reform, http:// com/portal/country-profiles/angola/. documents.worldbank.org/curated/en/618601468132616527/ pdf/898100PN0P14340G0Jul0240201400FINAL.pdf. Gavin, Michelle (2020). Learning What We Always Knew: Corruption in Angola. https://www.cfr.org/blog/learning-what-we-always- Case Study 7: Enhancing SOE Accountability in knew-corruption-angola. Colombia Pegg, David (2020). How Angola’s state oil firm was left with just Above Ground (2019). EPM’s disastrous dam: How Canada financed $309 in its account. The Guardian. https://www.theguardian. a high-risk energy venture gone away. https://aboveground. com/world/2020/jan/19/angola-state-oil-company-sonangol- ngo/edc/epms-disastrous-dam/. isabel-dos-santos-investigation Coatsworth (2003). “Roots of Violence in Colombia: Armed Actors Wroughton, Lesley. (2012). IMF finds most of Angola’s missing and Beyond”. Revista, Harvard Review of Latin America. https:// $32 bln. Reuters. https://www.reuters.com/article/ozatp-imf- revista.drclas.harvard.edu/book/roots-violence-colombia angola-20120125-idAFJOE80O00O20120125. Empresas Públicas de Medellín. EPM. Corporate Governance. https://www.epm.com.co/site/investors/corporate-governance. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 121

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 Customs Administration Corruption in Customs: How can it be Tackled?

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Introduction Why is it important to tackle significant incentives for traders to try to reduce import corruption in customs administration charges and speed up transactions by bribing customs in developing countries? officials to undervalue or under-declare goods.7 Many cases of extortion by customs officials are reported Modern customs administrations perform a where they threaten to use their authority to administer number of tasks, including revenue collection, ambiguous tax laws against traders.8 trade facilitation and protection of national borders. Corrupt practices often stand in the way of As a border protection agency, customs’ role is also accomplishing these tasks, actively compromising to prevent the import of illegal goods. Smuggling revenue collection, trade facilitation, and internal of drugs and weapons, and large-scale smuggling security requirements such as trafficking in illicit goods, of alcohol and cigarettes, places customs directly in including weapons and narcotics.1 Trade taxes—tariffs, the realm of organized crime. There is no scarcity of excises and import value added tax—account for a examples where criminals use any means, from extensive significant portion of government revenues, commonly bribery to intimidation and violence, to promote their 30-50% of total tax revenues in low-income countries.2 illegal transactions.9 Given the high financial stakes, In fragile states, customs typically account for an even rent-seeking opportunities are huge. In such settings, higher share of total tax revenues. However, estimates customs officials may have strong incentives to accept suggest that 30% or more of customs revenues are or ask for bribes in the execution of their duties. lost in some developing countries due to rampant corruption.3 Another important characteristic is that the relationship between customs and traders is Corruption in customs affects a country’s capacity normally managed through third parties (customs to benefit from the global economy. This is because brokers and logistics operators). Over time these corruption in customs delays the processing of imports third parties may develop close relations with officials and exports, increases the costs of doing business, and and exploit opportunities to act as facilitators of reduces the competitiveness of firms.4 As business and bribes. The participation of intermediaries in these investment decisions by multinational companies are relationships provides additional challenges in terms of increasingly subjected to international competition, the communication, transparency, and accountability. For presence of widespread corruption in customs can act instance, complex procedures for customs clearance in as a major disincentive to foreign investors.5 In addition, the Philippines in the late 1990s required face-to-face corruption in customs takes on new significance interactions between operators and customs officers in the current environment of heightened concern in practically all transactions—import entries, export about national security and international terrorism. entries, requests for transit and others.10,11 Excessive Sophisticated systems and procedures designed to discretion was also common in the management of detect weapons offer little protection if they can be customs operations in Bolivia.12 Consignments were circumvented by bribing customs officials. selected for physical inspections on a discretionary basis, without the application of objective criteria, and What are the characteristics of with little use of technical methods. Even with modern, corruption in customs? sophisticated clearance procedures, direct contact between customs officers and clearing agents cannot There are few public agencies in which the be avoided while goods are being physically inspected. preconditions for corruption are as clearly present Customs checks carry the risk of being conducted by as they are in customs administrations.6 Corrupt individual officers, especially in small offices and during practices easily materialize in a working environment night and weekend shifts. Opportunities for corruption where officials enjoy discretionary powers over are high. Since customs administrations also operate in important decisions, and where risk-based systems geographically dispersed, remote posts, with relatively of control and accountability are absent or easily few staff, adequate supervision of a customs office or breached. High tariffs and complex regulations offer individual officer is difficult. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 123

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Entrenched corruption is likely to affect the human service career plan, affects the continuity and resilience resource management systems. When appointments of reform and modernization efforts after changes in and promotions are influenced by corruption, this top leadership.20 It also offers opportunities for the facilitates the formation and maintenance of networks appointment of key strategic customs management of accomplices. At larger border stations, harbors positions based on political alignment. In April 2015, and airports, corruption may be conducted by the International Community Against Impunity in reasonably well-organized networks, where trust and Guatemala accused the political elite of the country to reciprocity are found between network members.13 be part of a sophisticated network of corruption and Such relationships are likely to reduce transaction smuggling in customs. The corruption scandal (“The costs, as well as any moral costs that may arise from Line”) became famous due to the mass protests that being involved in corruption. The peer networks often ultimately led to the resignation, investigation and function as ‘repositories of knowledge’ for members, arrest of then President Otto Pérez Molina.21 for example, on the attitudes of the top management to corruption, how the internal monitoring unit works, and The role of family and social who is potentially bribable among staff members and relationships must not be management. Establishment of a corruption network underestimated affecting an entire customs office is not unknown. Customs officers and managers may also remain Political interference is a major under the strong influence of traditional patterns concern of social relations and kinship.22 These relations operate at cross purposes to the formal bureaucratic In some countries, customs administration has been structures and positions. The informal traditional an attractive target for political interference.14 system may rule over the formal “modern” one. Because This is because it offers both relatively well-paid jobs ordinary citizens perceive that customs officers receive and considerable rent-seeking opportunities.15 Political high salaries, extended family members expect to control over the customs administration can pay get their share of the high wages (and rents acquired high political dividends.16 Politicians may intervene in by other means). A person in a position of power is customs to grant favors, such as attractive managerial expected to use that influence to help his or her kin positions and tax exemptions to supporters, or to harass and community of origin. It is one’s social obligation to political opponents through excessive audits and delays help and share. in the clearing of goods. A recent study from Tunisia, for example, found that firms owned by the then president In such cases, customs staff are seen by their and his family were more likely to evade import tariffs. family members and social networks as important Tariff evasion in Tunisia led to considerable fiscal losses, potential patrons who have access to money, and resulted in substantial competitive disadvantages resources, and opportunities that they are morally for companies not aligned with the president’s’ family. obliged to share. To accumulate, even in corrupt ways, is not necessarily perceived to be bad in itself. It is Experiences from some developing countries accumulation without distribution which is considered demonstrate that the public sector may become unethical.23 Only someone who accumulates can an instrument for the political elite to build public redistribute and be identified as “a man of honor”. support based on patron-client reciprocity.17 Patronage undermines the implementation of policies It is also in the customs officer’s own interest to and rules-of-law more generally. For instance, help others because he or she might be the one who distribution of civil-service positions based on non- needs help the next time around. Thus, a manager meritocratic criteria results in a civil service less apt in the customs administration may “forgive” a customs for the task with which it is charged.18 Meritocratic officer who is caught taking bribes or embezzling recruitment and promotion are overshadowed by the money, because next time he or she may be the one politics of who knows whom.19 Clientelistic structures who needs forgiveness. Instead of being fired, common and patronage may pervert integrity and modernization practice in some countries is to transfer customs officers reforms. The absence of a cadre of committed detected for corruption to other positions within the professionals and managers, structured in a robust civil- revenue administration.24 Favors of this kind may also 124 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION be understood as a way of consolidating and building and that a comprehensive approach is needed. These social capital. In other words, customs officers are documents identify a number of factors that contribute building up networks made up of family, friends, and to high integrity in customs administrations. However, acquaintances that are based on trust and reciprocity they provide less insight into how to implement as a way of banking assistance for the future. The larger measures to reform a corrupt administration.30 the network, the greater the accumulation of social capital that can be drawn on in a future time of need. How does the principal-agent One possible explanation for the persistent corruption relationship play out in practice? in customs administrations in some countries may be the fact that people at the middle and low end of the Much of the policy debate on anti-corruption political-economic spectrum are just as involved in strategies in revenue administrations is rooted in vertical networks of patronage as the elite patrons who the principal-agent (incentive) theory. Klitgaard’s31 benefit the most.25 popularization of this approach has been widely promoted and applied in a number of developing What do we know about fighting countries during the last two decades, as reflected in corruption in customs? the World Bank’s Customs Modernization Handbook.32 Klitgaard’s work has also been used extensively in the Recent international reports and declarations development of the Revised Arusha Declaration on have sought to address the problem of corruption Integrity in Customs, as well as in a range of the WCO’s in customs administration, but effective reform integrity-related tools. measures are not easy to implement. The Revised Arusha Declaration provides a global framework to Policy instruments need to be directed at both address corruption in customs and increase the level the incentives and opportunities for corruption. of integrity of customs officials for World Customs Following Klitgaard,33 corruption is most likely to occur Organization (WCO) members.26 There are only small when agents (customs officers) enjoy monopoly power differences between the WCO Arusha Declaration27 and over clients (traders), when agents enjoy discretionary recommendations by other international organizations decision power over the provision of services (for such as the IMF’s integrity paper Practical measures instance, assessments of origin, value and classification to promote integrity in customs administrations,28 and of goods), and when the level of accountability is low. the OECD’s29 report Integrity in customs. Taking stock At the theoretical level, this approach explains how of good practices. They all emphasize that there is no customs officers have a number of incentives and quick solution to the problem of customs corruption opportunities for engaging in corrupt transactions. At Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 125

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION the more practical policy level, the approach indicates and influence how state actors relate to the general that policy instruments may be divided into those public.38 What makes such informal social networks which influence the number of corrupt opportunities, relevant in the context of customs reforms is that they and those influencing the incentives. This includes generate strong moral imperatives, including a sense of policy instruments that affect the expected (gross) obligation to provide mutual assistance and reciprocity gain of the corrupt act, the probability of being caught, for favors given, which go above and beyond any and the size of the penalty if detected. If the expected consideration for the formal legal framework. gains of corruption are higher than the expected costs, the agent will, according to the theory, choose to be Efforts to address these factors have corrupt. For example, the expected gain for customs not always been successful officers is higher when they have wide discretionary powers and considerable monopoly power in their Addressing the root causes of corruption goes jobs. beyond legal and regulatory reform. A major challenge to the effectiveness of mainstream anti- Understanding the role of the principal reveals a corruption technical assistance is that it usually does major difficulty in implementing reforms. While not take into account the evidence that corruption the principal-agent-client model is a useful analytical often is deeply embedded in the norms and framework to explore incentive problems in customs expectations of political and social life.39 Even if most and other public agencies, its dependency on the role customs officers may morally disapprove of corruption of the principal reveals one of the greatest obstacles and are fully aware of its negative consequences for to reform. There are (at least) two objections to this society at large, few rational actors have a clear-cut approach: First, there may be several principals interest in establishing or defending clean institutions. involved, each with incoherent objectives and interests. The functional relevance of informal practices also Second, the principal(s) may also be corrupt and not points to the problems with the tendency to address acting in the interests of society but pursuing his or corruption by means of adopting tougher formal her narrow self-interests. Thus, part of the explanation laws. An adequate legal framework is, of course, why anti-corruption reforms in countries plagued important to establish, and so are measures to reduce by widespread corruption fail, is that they are based opportunities for corruption, including simplification of on a theoretical mischaracterization of the problem processes and rate structures, automation, etc. But laws of systemic corruption, taking the existence of non- and regulatory reforms must also be supplemented corruptible principals for granted. Thus, Persson et al.34 with other approaches that address the root causes of argue that in thoroughly corrupt settings, corruption corruption. Otherwise one risks ending up designing rather resembles a collective action problem. and implementing reforms that have little impact on the incidence as well as perception of corruption. How important are social norms and Misalignment of legal practice and ethical norms may informal practices? result in mere law-based compliance and “lawful, but awful” practices.40 Collective behaviors like corruption can be sustained by social norms. These norms are rooted in “shared Important progress can be achieved through understandings about actions that are obligatory, modern compliance management. Beyond the permitted, or forbidden within a society”.35 Such norms update of the legal framework and simplification provide the unwritten rules of behavior. Especially of procedures, modern compliance management when formal rules such as laws fail to regulate conduct, demands that customs administrations not only as is often the case in countries riddled with corruption, identify and sanction non-compliant behaviors but also social norms structure many social interactions by promote transparency and provide better guidance, dictating the rules of the game.36 Thus, there may also as well as recognize compliant operators and offer be social sanctions for violating these norms.37 different treatment (e.g. the Authorized Economic Operator Programmes). The adoption of modern Informal practices are pervasive in some countries. risk-based compliance management changes the These practices decisively shape the interactions relationship model with the private sector and traders among power networks of political and business elites and contributes to integrity improvement. 126 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Would private management and outsourcing of Should customs officers’ salaries be increased? revenue collection be an option? Development Some scholars argue that increasing civil service wages agencies have in some cases helped fund what will reduce corruption.47 The basic idea is that a rise in might appear to be experiments in the privatization the tax collector’s salary is like an increase in the fine for of tax collection.41 Historical evidence42 and more bribery, since that is what (s)he will lose if detected and recent experiences from developing countries, fired. Van Rijckeghem & Weder48 find that corruption including Angola and Mozambique43 give reason for seems to be lower in countries where bureaucrats concern: such reforms have achieved few sustainable are relatively well paid compared to private sector results; the transfer of skills has been limited and the employees. However, in order to eliminate corruption, contract has been expensive for the government. Tax very large increases in salaries are needed49 and this is practitioners are therefore increasingly questioning not socially acceptable because customs officers are the value of outsourcing customs administration. already the best paid of public service employees in Outsourcing of some customs activities, for instance, most low-income countries. Hence, fighting corruption verification, convoy security and warehousing, might only on the basis of wage incentives may be extremely be appropriate, though experience suggests it may be costly to the authorities both financially and politically, expensive and susceptible to corruption especially in and will most likely have limited impact if not combined a medium- to long-term perspective. Outsourcing of with other measures such as improved auditing and other activities, such as valuation and entry processing monitoring of tax officers.50 This is also reflected in can also be challenging, since it places the collection experiences from reforms in Tanzania and Uganda.51 of government revenue directly into the hands of non- Despite a dramatic increase in pay rates in the revenue government interests. authorities compared to normal rates in the public sector, it was not enough to compensate the tax officers Pre-Shipment Inspection (PSI) programs have had for the expected gains from corruption. This argument mixed results. During the past three decades, several is supported by Foltz & Opoku-Agyemang.52 Based on developing countries have adopted PSI programs detailed survey data and experimental evidence from to improve the efficiency of tariff collection, and to West Africa, they find that the salary reform generally fight customs administration corruption.44 In these worsened petty corruption, caused by the increased programs, the inspection of imports is outsourced to effort by civil servants to get bribes, which made them a private surveillance company (a PSI firm). Foreign PSI- increase the value of each bribe taken. The results inspectors are tasked to verify the tariff classification suggest that merely raising salaries without changing and the value of individual incoming shipments before the context and incentives within which civil servants they leave their countries of origin and forward this operate will not have the desired effects on corruption. information to the client government. Pre-shipment inspection aims to complement information provided Raising salaries to combat corruption fails to in customs declarations and is used to evaluate customs fully recognize the important role played by social duties. This additional information is expected to limit obligations. Economic research on human behavior the discretionary power of customs officers and thus also indicates that reformers and economists have be an efficient means of reducing customs corruption. an inclination to exaggerate the impact of monetary Experiences with PSIs are mixed. In a study covering incentives because of a too narrow understanding 19 developing countries that have implemented PSI, of intrinsic motivation and group dynamics.53 It is a Yang45 finds that these programs increased import well-known fact in sociological management theory duties on average by 15-30% during the first five that workplaces are social environments and that years. However, Anson et al. (2006) find less clear-cut people in them are motivated by much more than results; PSI programs may decrease or increase fraud. pure economic self-interest.54 An additional aspect This is consistent with Dequiedt et al.46, who find that of wage incentives that has received little attention entering a PSI program is not optimal for all countries. in connection with institutional reforms in developing They conclude that for countries with a high level of countries is associated with the role of family networks corruption, PSI programs are not the solution. In highly and obligations (as mentioned above). Increased pay corrupt environments, there is no reason to believe rates may in some cases also imply more extensive that private interests are any less corrupt or more social obligations, which in turn may lead to an actual transparent in their dealings than staff of the customs net loss to the individual.55 This state-of-affairs can administration. develop into a vicious circle with higher wages leading Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 127

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION to more corruption because the tax officer has to make and a robust human resource development plan that up for the loss caused by such obligations. should address adherence to desired values and attitudes) (see the Madagascar and Afghanistan case The international customs community has studies). It is important to build an esprit de corps, with recognized that integrity development cannot be a common spirit of purpose, devotion, observance addressed exclusively by incentives associated with of institutional values and a collective commitment higher wages. The WCO advocates a comprehensive to guard integrity and report corruption cases. In approach for customs professionalism, addressing addition to the customs staff, it is important to work relevant aspects of management of people (long- with traders and other operators and establish clear term attractive career plan, competency-based human rules for expected behavior, for instance through resources management, merit-based recruitment and joint development of codes of conduct with customs promotion, including for key management positions, brokers. What is needed to reduce corruption in customs? Making customs reforms part of a particular events in the two countries’ history. In both broader reform of the public sector countries a new leadership came to power who was not dependent on informal ties and obligations to the Rwanda and Georgia are two success stories, networks associated with the previous regimes.58 Still, where customs reforms were not carried out in some lessons of broader relevance can be identified. In isolation. There have been many prescriptions and both countries, a combination of measures addressing initiatives on how to tackle corruption in customs, but the broader social and political roots of corruption the results have often been disappointing. However, and technical measures based on the principal-agent there are a few success stories, with Georgia and framework were applied. Rwanda as notable cases. In Georgia, the tax code was simplified, including the elimination of many tax 1. Send a clear signal from key leaders. Leaders at loopholes and a reduction in the number of taxes and the top can provide a strong signal that there import tariffs.56 One-stop windows were introduced for is a “new order” under which corruption is no customs clearing procedures. In Rwanda, reforms led longer tolerated. Changing norms from the top to significant improvements in collection efforts and is challenging. However, they can happen when auditing procedures. The tax and customs reforms in specific events open a window of opportunity in these countries were not implemented in isolation but which to take advantage of social discontent with were part of larger and radical reforms of the public the status quo.59 Opportunities to establish pro- sector.57 The reform packages involved a drastic integrity norms within institutions are not always reshaping of the bureaucracies. Discredited public triggered by revolutions such as the one in Georgia. agencies were dismantled and replaced with new They can also be created by a whistleblower ones based on principles of leaner bureaucracies and exposing corruption, a major political scandal, or administrative simplification. The new rules were strictly public frustration with ineffective anti-corruption enforced based upon effective monitoring mechanisms efforts (as described above in the case of and little or no tolerance of deviations. Thus, the Guatemala).60 When these opportunities arise, it is opportunity space to engage in corrupt practices was important to “seize the moment”. Incentives and dramatically reduced. interests matter for potential reform, and leaders may only support reform if it is in their interest to do What can we learn from the cases of Rwanda so. Thus, reformists need a strong understanding and Georgia? The experiences from Georgia and of the underlying political economy of a country Rwanda are, of course, context specific and refer to and of the interests and incentives that influence 128 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION key leaders who may be in a position to flip norms between easing red tape, such as simplification and instill a sense that corrupt practices are no of trading procedures, and having appropriate longer tolerated. controls, while taking into account the local context and inherent risk areas.62 Relevant actions of a 2. Create a new organizational culture that values technical nature include: integrity. If provided with the autonomy to do so, pro-integrity leaders and managers in customs • processes that reduce compliance costs and can demonstrate exemplary behavior, build up are based on a risk-based approach; organizational values, and create an environment where it is safe to challenge norms. Shared • effective internal audit units; responsibility and a sense of moving together • revenue administration processes that are are important in creating a new organizational culture. Getting everyone on board may require digitalized and automated (including an some additional resources. For example, support automated system of internal controls and risk for a new human resources management system assessment); and may be important in establishing more secure • ongoing performance assessments of relevant employment arrangements. When an individual tools, procedures and controls cannot be certain of future income, this insecurity may heighten the influence of horizontal pressures Providing ongoing education and to engage in self-enriching acts,61 a situation training that is not conducive to normative shifts within organizations. Strengthening employment security The education and training of staff are identified as may provide a basis for nurturing a culture of important factors affecting customs performance, integrity over the long term. and key to building technology absorption capacity, as well improving the transferability of 3. Establish ownership of the reform within the skills.63 Regular training of customs officers has been revenue administration. Ownership of the particularly important when introducing new electronic reform among the officials involved in reforming systems, such as customs management systems or the revenue administration is a critical issue for national electronic single windows. A comparison sustainability. An administrative reform is unlikely among regions of the average time for export clearance to succeed if the main source of energy and shows that requiring a college degree is not necessarily leadership for it comes from outside. A locally associated with better customs efficiency.64 Many other grounded policy intervention is also less likely variables impact the efficiency of customs procedures, to have unintended side effects. International such as technology, legal support and infrastructure. development agencies should therefore not play a However, customs administrations that offer regular leading role and they should not dictate the content, training for customs officials have shorter customs pace and direction of the reforms. Integrity reforms clearance times than those that do not.65 The World are often highly political processes that may pose Bank’s Doing Business data indicate that the average a threat to important local stakeholders. Thus, a time required to clear customs (for both exports and strong and well-placed leadership of the customs imports) is about 34% lower in economies where administration is essential for overcoming the customs officers receive regular training compared political and bureaucratic obstacles it is confronted to those where no regular training is provided. Sub- with. Saharan Africa and the Middle East and North Africa are the regions where the difference in clearance time 4. Design mechanisms that create a balance between is largest between economies where regular training is simplification and controls. Opportunities for offered and where it is not. corruption in customs and border control can be reduced by designing mechanisms that create Introducing individual performance appropriate incentives, limit discretion by public contracts servants and include enhanced controls (see Box 4.1 for experiences from some Latin American Implementation of reforms can be strengthened countries). It is important to establish a balance through individual performance contracts. A Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 129

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION BOX 4.1 Standard Operating Procedures and Internal Audit Capacities in Latin America The customs administrations in Chile, Uruguay, Peru, Paraguay and Bolivia have adopted quality management as part of their integrity strategy. They have invested in the implementation of standard operating procedures and internal audit capacities to ensure consistency, improve the quality of service provision, and better frame the application of discretionary powers and accountability. A common feature in these administrations has been the adherence to ISO 9001 standards for selected procedures. For further information see: https://www.aduana.cl/aduanas-mantiene-y-amplia-certificacion-iso/aduana/2014-08-28/181638.html http://www.sunat.gob.pe/legislacion/aduana/certiso9000.htm https://www.aduana.gob.bo/aduana7/content/aduana-obtiene-certificaci%C3%B3n-iso-90012015-para-su-archivo-central- de-regional-santa-cruz major problem identified in recent studies is that collection and reductions in clearance times. Further, reforms often do not cascade to the level of frontline customs officers seem to have become more aware officers due to an information asymmetry between of their responsibilities, and the relationship between the senior management of customs and frontline customs agents and their managers has improved. officers.66 Recent experiences from Cameroon and One important insight from these experiences is that Madagascar demonstrate that the hierarchical link can administrative reforms in customs is about behavioral be strengthened by individual performance contracts.67 change, which requires internal leadership who is A performance contract is a formalized agreement trained to use the internal performance measurement between the customs managers and the customs policy. Individual performance measures and the threat officers. It has at its core a system of non-financial that poor results can be measured, compared and incentives and sanctions to be applied to an individual publicly released, may protect senior managers from officer’s performance.68 The contracts detail the results appointing officials as subordinates in their units based that must be met by individual customs officers in a on political allegiance.69 It also requires cooperation specific period of time for a set of specific indicators. with external control authorities and consultations The indicators go beyond the revenue targets fixed by with private sector operators and intermediaries that the government to include organizational and good provide services to traders. practice issues. Customs officers who are successful in meeting their performance goals will receive mainly Incentivizing stakeholders to make non-financial incentives such as options to participate customs administrations accountable in training courses and congratulatory letters from the management that are put in the officer’s permanent file Another insight from these experiences is that and disseminated publicly to provide wider recognition. motivation for reform must also come from If the performance contract commitments are broken, taxpayers and traders. Business communities, warnings are issued of possible disciplinary action if import-export associations, clearing agent associations, performance does not improve. and other influential stakeholders have a critical role to play in pressuring the customs administration to do a The effect of the contracts program on trade better job of serving society. It is important to provide facilitation has been positive in Cameroon and incentives for stakeholders in the private sector to Madagascar. The volume of declarations processed adopt anti-corruption policies and practices, and to generated substantial improvements in revenue 130 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION collaborate with customs and other relevant public upfront costs and risks associated with searching for sector actors to identify integrity vulnerabilities and new markets or negotiating deals. The internet and appropriate mitigation measures. Establishment of e-commerce are prompting customs brokers to offer formal spaces between customs and the private sector more sophisticated services rather than merely filing for exchanging information and reporting complaints documents for customs clearance. These insights might be an effective trust-building device.70 are echoed in several recent studies,72 with the WCO recommending that modernization and customs The customs broker profession is evolving. reforms are accompanied by the required training and Customs brokers play a crucial role due to their in- sharing of information between the government and depth knowledge of the industry, customs laws, tariffs brokers. Box 4.2 illustrates how this has been put into and regulations.71 Brokers are often the only channel practice by the Uruguay Customs Administration. In through which domestic companies can sell their addition, the International Trade and Customs Broker goods internationally. By hiring an agent, firms gain Association recommends capacity-building for brokers access to international markets without incurring the through certification programs and examinations. BOX 4.2 Comprehensive Modernization of Customs: The Uruguay Case From 2010 onwards the Uruguay Customs Administration embarked on a comprehensive modernization program with a number of complementary projects that included further automation and adoption of technology (e.g. electronic filing system, single window (Ventanilla Única de Comercio Exterior), risk management, electronic seals, and a cargo tracking and tracing system); improvement of management systems and procedures (strategic planning, project management and business processes management, establishment of a results framework and monitoring system); development and professionalization of customs staff (including the update of career plans and review of salaries, a performance based incentive system and management agreements); renovation and maintenance of customs infrastructure (which raised internal morale). One of the highlights of this development cycle was the cooperation with the private sector and customs brokers to tackle integrity. The Customs Administration implemented a communication strategy (with public campaigns and open doors policy to disseminate information and raise awareness of how customs works); developed a Code of Ethics and Conduct; and established procedures for reporting integrity breaches. The Customs Administration signed 11 Integrity Agreements with private sector associations and representatives, making explicit the expected behaviors and commitment with a set of values. Communication channels were established to address concerns and manage conflicts. A strategic Public and Private Sector Consultative Forum was established, which also supported the development of the Authorized Economic Operator (OEA) program. The Customs Administration implemented regular anonymous perception surveys to traders on the quality of services rendered by the administration. The perception of integrity and the reputation of the Customs Administration have improved after the reform and modernization program. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 131

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Coordinating and sharing information efforts and in building stronger institutions.74 More with relevant authorities countries are following the example of the US Foreign Corrupt Practices Act, which makes it an offense for Since tax crime and corruption are often linked, US firms to pay bribes to get business abroad. These tax and law enforcement authorities can benefit efforts include coordinated action through international from more effective cooperation and sharing of initiatives, such as the OECD Anti-Bribery Convention. information.73 Improving the sharing of information on However, enforcement by individual countries has been international trade could also help to reduce corruption uneven, and the flow of information between countries in customs. International cooperation is becoming is slow and unreliable, making it harder to investigate an increasingly important element in anti-corruption and prosecute corrupt acts.75 ‘How to’ matters a lot Taking a measured approach to and inevitable part of the process. The big challenge is reforms to use failures as learning opportunities, rather than as excuses for abolishing reforms. Overambition has been cited as a common cause of project failure in various countries.76 This does Understanding the prevailing not imply that governments should keep the scope environment of customs administrative reforms limited. But when governments decide what measures to take as part of Anti-corruption efforts require an understanding their reform programs, they should bear in mind the of the norms and incentives of key players and state of the economy and the resources at hand. Most should therefore be based on thorough analysis of developing countries have neither the political capital the customs administration and the environment nor the administrative capacity to sustain more than a of which it is a part. Baez-Camargo & Passas78 argue limited range of concurrent initiatives. An incremental that a nuanced understanding of the political economy process of change can add up to a radical transformation of corruption will help practitioners to recognize that, if it is sustained long enough. Nevertheless, experiences in the “challenging” cases, we are confronted with from Madagascar suggest that ‘quick wins’ in the form complicated systems comprising powerful and tightly of fast revenue growth might be necessary to establish interwoven interests; this calls for an evidence-based, credibility and trust in customs reforms.77 systematic, and collective response. Understanding social normative pressures in a given context can help Encouraging stability of leadership practitioners design interventions to relieve those and management pressures, allowing collective behavior to change.79 While it is well documented that peer networks can Sustainable change demands sustained effort, impose social pressure to engage in corruption, such commitment and leadership over time. In the networks can also be employed to mitigate the same countries referred to in this chapter as examples of pressures. progress, like Uruguay, Georgia, Madagascar and Rwanda, the modernization process was strongly Adopting a whole-of-government supported by a management team that remained in approach place for longer than usual or by a cadre of middle managers that obtained support and sustained the The international customs community, represented initiatives even when there were changes at the top by the WCO, advocates that integrity reforms management and executive levels. Reformers need should be placed at the highest policy level, and political backing, and one must accept that some should have a whole-of-government approach. initiatives will fail. Mistakes and setbacks are a normal 132 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION This would require the commitment of other external • Continue to commit to transparenc y and control authorities (such as the police, prosecutors and anti-corruption requirements through trade judicial power) and also private sector operators and agreements. intermediaries that provide services to traders. The development strategies should be comprehensive (as • Enforce the Convention on Combating Bribery of proposed by the Arusha Declaration) and sufficiently Foreign Public Officials in International Business resilient to be sustainable when the top leadership of Transactions to dissuade businesses and individuals the customs administration changes. from engaging in corrupt cross-border transactions and encourage the world’s major exporters and Building integrity on a broader scale investors to ratify the Convention. The reform strategies discussed above should • Implement effective internal management tools in take place in the context of wider efforts to build the administration and ensure transparency and integrity through increased enforcement of anti- accountability in internal procedures. corruption legislation, and better checks and balances targeting the customs administration • Incentivize the private sec tor to be more and the private sector.80 Such efforts include: transparent and push for integrity within private sector associations. • Simplify the tariff structure to the maximum with a limited number of tariff peaks and variation within harmonized classification chapters. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 133

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Conclusion: How can the fight against corruption be further strengthened? As a first step, it is important to understand how In addition to ownership, several other measures things actually function in the specific context, can promote sustainability. Reforms can fail because independently of how we would expect customs enthusiasm wanes and people return to their former to perform according to good governance logic. practices. It is therefore essential that training become This calls for more robust analysis of country and local a key component of each officer’s work program. contexts. Anti-corruption efforts require a thorough Given the increasing use of technology, which can also analysis of the customs administration and the reduce the opportunities for corruption, officers must environment of which it is a part, in order to understand be adequately trained to ensure that such technology the norms and incentives of key players. facilitates their work rather than becoming a burden. Other measures include (i) performance contracts Based on this analysis, a two-pronged approach to that provide incentives, albeit largely non-financial, reform needs to be adopted. The first prong relates to individual officers who meet their work objectives, to the development of policy instruments that are and (ii) incentives to stakeholders in the private sector directed at both the incentives and opportunities for to adopt anti-corruption policies and collaborate with corruption. Unless customs officers recognize that the customs to build trust and stamp out corruption. penalties for being caught are much more severe than the potential gains, they are going to continue to take Successful reforms in customs administrations the risk. This, of course, requires enforcement of the are not achieved overnight. Reformers must keep rules, which depends on the willingness at the top to this perspective in mind and not be discouraged when eradicate corruption. In addition, the current structure they face challenges in implementing their reforms. of most customs administrations is not conducive to the Nevertheless, significant progress can be made if the implementation of reforms as the principal-agent-client foundation blocks discussed above are put in place model places too great an emphasis on the role of the at the beginning of the process. Should unexpected principal. New approaches to address this situation difficulties arise during implementation, senior need to be explored. leadership will need to identify the root cause and make adjustments that will bring the reform back on The second prong must go beyond legal and track. Thus, achieving the goal of tackling corruption regulatory reform to address the root causes will require both time and a strong commitment from of corruption. Many efforts to adopt stricter rules senior leadership. for customs administrations have failed because the informal practices have continued. Changing culture and mindsets is much more difficult than bringing in new regulations because social norms are deep rooted. The experiences of Rwanda and Georgia, in particular, provide guidance on approaches and actions that have been successful. It is important that customs reform be part of a broader reform of the public sector with a clear commitment from the country’s leader that corruption will not be tolerated. This message is then taken on board by the leadership of the customs administration, who tries to inculcate a new organizational culture that values integrity. Where this leads to ownership of the reform by the customs administration, the sustainability of the reforms can be achieved. 134 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION CASE STUDY 10 CUSTOMS ADMINISTRATION CASE STUDY 10 Customs Reforms in Madagascar Using customs reforms and performance contracts in Madagascar to curb tax evasion, facilitate trade and enhance revenue Overview Introduction While the Malagasy customs collected half of the With a tax to GDP ratio of 10 percent, Madagascar’s country’s overall tax revenues, it was at the same time revenue mobilization is among the lowest in Africa. Like an institution permeated with corruption, with large in many developing and least-developed countries, revenue losses due to tariff evasion. Collusion between revenue mobilization is highly dependent on customs, inspectors, importers and brokers was widespread, which alone accounts for 48 percent of Madagascar’s while customs management was crippled by information overall tax revenues. With a customs officer collecting asymmetries on practices on the ground. As a response, on average 1.5 percent of total annual tax revenues Malagasy customs, in close collaboration with the World each year (about USD1.4 million per inspector per Bank, introduced individual performance contracts month), inspectors play a key role in mobilizing for customs inspectors in Madagascar’s main port of revenues. However, tariff evasion by colluding customs Toamasina, incentivizing them to curb tax evasion and inspectors and brokers has led to an estimated revenue illicit financial flows, and expedite customs clearance. loss equivalent to at least 30 percent of non-oil This was accompanied by continual data mining and revenues for the government.81 Information asymmetry monitoring, which helped to detect corrupt individuals about fraudulent practices on the ground constrained and practices, such as the manipulation of the customs’ customs management in its ability to adequately IT system, and enabled the design and implementation address these issues. Limited information also entailed of an evidence-based and locally-tailored reform the risk that top-down reforms would not cascade to the program. As a result, the intervention reduced some level of frontline officers. Consequently, an approach corrupt practices of inspectors, facilitated trade, and was needed that would strengthen the hierarchical link, doubled customs’ revenues within four years. The provide the head of customs with sufficient information success of this type of performance contract may serve as on practices on the ground, and finally remedy corrupt an important mechanism toward modernizing customs practices. and revenue administration (when complemented with other measures). Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 135

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION In 2016, under a newly appointed Director General, the of USD1,000, representing 2.5 times the GDP per capita Malagasy customs introduced individual performance of Madagascar; (ii) training opportunities at home and contracts for customs inspectors in Madagascar’s abroad; and (iii) accelerated career progression. More main port of Toamasina, incentivizing them to curb tax importantly, the negative incentive was to sanction poor evasion and illicit financial flows, and expedite customs performance by reassigning inspectors to less desirable clearance. This was undertaken in close collaboration positions where corruption opportunities were much with the World Bank, which provided financial smaller. The focus of the individual performance incentives for customs reforms through investment contracts for customs inspectors has been on non- project financing82 and supported the reform efforts financial incentives, since the extent of corruption was by providing training, analytic and advisory support, so high for some officers that financial incentives could including on-site visits to countries with similar systems. not offset illegal payments. In customs, the threat of reassignment is, in general, a strong deterrent because The implementation process the role of an inspector is also prestigious, especially a position at the main port of Toasmasina. In 2017, for The reform approach to address tariff evasion and example, 15,000 candidates applied for a 300-position improve customs performance can be divided into four recruitment program launched by Madagascar principal steps: customs.87 Generation of operationally relevant The contracts contained seven objective indicators knowledge (at the beginning) covering trade facilitation with an expedited clearance process, but also the fight against The initial step (January 2016) was to generate the fraud and maximizing revenue collection. Setting operationally relevant knowledge for designing an explicit performance targets required a structured effective and context-specific program. The World stakeholder dialogue, particularly through consultations Bank supported the Malagasy customs by studying and negotiations with inspectors, to overcome tariff evasion channels using mirror trade statistics,83 resistance to measures that would reduce opportunities which made it possible to identify higher risk for corruption.88 A project implementation unit was importers and customs brokers as well as the dominant established to lead this dialogue and to monitor each corrupt mechanisms, such as misclassification84 and inspector’s performance by using data on import undervaluation85 of imported goods.86 Estimates declarations collected from the Automated System for suggested that, in 2014, customs fraud reduced non-oil Customs Data (ASYCUDA). customs revenues (duties and import value-added tax) by at least 30 percent. The performance contracts were signed in September 2016 and came into force the following month for 15 The presentation of these study results to the private inspectors at the main port of Toamasina. Launched as sector and to customs inspectors helped the Malagasy a six-month pilot, it has been gradually expanded to authorities to identify two priorities: reforming the several other offices. accelerated clearance program and improving human resource management. Evaluation and adjustment Design and implementation of individual Data mining and monitoring of individual performance performance contracts for customs almost on a real-time basis revealed sophisticated inspectors in Madagascar’s main port of IT manipulation and collusion between some IT Toamasina staff, inspectors and some brokers and importers. A randomized control trial, conducted in 2018-2019, As a next step, contracts were designed rewarding good showed that import declarations suspected of involving performance with (i) bonuses, such as merit awards, collusion are significantly riskier, as measured by risk where the best performer in a quarter receives a bonus scores from a service provider,89 with a greater likelihood of being recommended for physical inspection and of being subject to reference value advice. Moreover, declarations suspected of involving collusion were 136 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION FIGURE 4.1 Excessive Interaction between Inspectors and Brokers Distribution of Declarations Across Inspectors Shares by Broker .20 .15 Frequency .10 .05 0 5 10 15 20 25 0 Inspector share of a given broker’s declarations (%) Predicted Observed Source: Chalendard et al. (2018) found to have significantly higher ex-ante declared Transparency values, taxation rates and undervaluation, and hence embody higher potential tax revenue losses.90 Analysis Transparency through publicizing performance metrics of customs data also demonstrated clear-cut evidence and rewarding good performance contributed to more of a differential treatment provided by inspectors to the merit-based promotion and recruitment. This was declarations of brokers they may be colluding with. For important, since, according to a survey conducted example, inspectors give priority to such declarations during contract implementation, only one out of every and assess them significantly faster; they also scan ten inspectors in Madagascar believed promotions were them less frequently and change less frequently the fair. To enhance transparency, a vacancy announcement inspection channel (Figure 4.1). to replace the transferred inspectors in Toamasina was published internally to all of the country’s inspectors The detection of the fraudulent practices of individual (more than 120), and a panel selected the best inspectors enabled the transfer of 6 out of the 15 candidates.93 This type of recruitment was the first of customs agents.91  As a result, the most common its kind to fill positions in Toamasina and a critical step. practice from inspectors, which was to stop cargo until a bribe payment was received, was reduced. The From a trade facilitation perspective, customs reforms likelihood of being sanctioned became higher, which have shown a strong positive impact on aggregate started to act as a deterrent for some non-compliant customs outcomes, such as expedited customs importers.92 This triggered a virtuous circle, which has clearance times (Figure 4.2)—which have increased been increasingly put in place. in other ports—and reduced frequency of physical inspections (red channel) from 60% in 2014 to 20% in However, some non-compliant practices continue. 2018. At the same time, inspection targeting and the In this regard, several indicators in the performance detection and recording of fraud improved.94 Among contracts were adjusted during the process due to general improvements in customs administration, these some ‘gaming’ and evolving collusion practices. performance enhancements have contributed to the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 137

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION FIGURE 4.2 Evolution of Average Delays Average delays: Date of assessment - Date of submission 5 Average delays (Days) 4 3 2 1 Q1 2015 Q1 2016 Q1 2017 Q1 2014 Reform port Nonreform port Source: Raballand et al. (2017) TABLE 4.1 Revenues Doubled in 4 Years Collected Revenues by the Customs DG 2014 2015 2016 2017 2018 (in bn Ariary) 1255 1459.2 1682.7 2047.1 2427.9 16.3% 15.3% 21.7% 18.6% Evolution of Revenues 7.1% 5.1% 5.3% 5.7% (in %) Nd Revenues of Customs DG as % of GDP 4.9% Source: World Bank data rapid growth of collected revenues since 2015 (Table environment enabled inspectors to deliberately not 4.1), which doubled within four years. Average revenue detect fraud, tax evasion and the associated corruption per container increased from USD3,435 in 2016 to of most customs inspectors were a logical corollary. USD5,020 in 2018. This highlights the importance of incentives in Reflections institutions, especially customs. Yet, the key to the behavioral change of inspectors was to combine An important finding is that customs inspectors in targeted incentives with improved monitoring. Data Toamasina have the required capacity and information mining and analysis on a regular basis—not just a one- to detect fraud, but they usually have strong financial time exercise at the beginning of the project—have incentives not to do so. Consequently, since the working proven to be extremely helpful in documenting and demonstrating evidence of collusion in customs. This, in turn, has enabled the design of context-specific reforms 138 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION and the making of evidence-based adjustments during contracts have been modified with much less teeth the implementation process. Positive reform outcomes (but expanded to several offices with less monitoring were achieved without any expensive infrastructure and a hardly credible sanction mechanism), which investments, such as information technology or could undermine the previous successes, as observed equipment, or lengthy legal changes. Instead, applied at the end of 2019. Moreover, key personnel in the IT research has paid considerable dividends. department have been kept, which, without strong monitoring, may have important consequences on the The relatively low-cost of this approach facilitates integrity of the IT system. upscaling and replication in other contexts.95 In this regard, having a good understanding of political While individual performance contracts have shown economy aspects and customs practices, including to generate positive outcomes in the social sectors, corruption patterns, is paramount, especially when this case study provides a novel example that this setting financial and non-financial incentives. Since approach can positively impact multiple outcomes also strong internal vested interests make reforms relatively in customs, at a relatively rapid pace and low cost for difficult in Madagascar, performance contracts were the administration. implemented with the aim of gradual improvement, but with important gains in terms of revenues already in the However, it requires a strong investment from short term. international financial institutions in terms of personnel, policy dialogue, and advice almost on a weekly basis Government reform leadership, particularly the support over many years. The higher pace of support to from the Director General and the Minister of Finance Madagascar customs began in 2016 but was built on an and Budget, has been central to the success of the engagement that started several years before. A mutual intervention.96 However, with a new President elected trust relationship between the customs administration in 2019, the Director General and a number of key and donors like the World Bank is essential to fight officers were replaced in customs. The performance corruption in customs. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 139

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION CASE STUDY 11 CASE STUDY 11 CUSTOMS ADMINISTRATION Customs Reforms in Afghanistan Reducing parallel customs structures through automation of clearance processes in Afghanistan Overview decreased substantially. Major challenges persist, however, with facilitation payments being routinely Anyone transporting goods in Afghanistan has to demanded and collusion and criminal corruption negotiate parallel tax structures: the official customs continuing to take place. system, run by the government, as well as others run by powerful interests, including provincial chiefs and Introduction various insurgent groups. All collect taxes and/or fees at border crossings, on goods transiting domestic In May 2019, The Economist repor ted on the transport routes, and in domestic markets. This revenue corruption lorry drivers in Afghanistan experienced collection process—often facilitated through informal when transporting goods across the country. The negotiations—hinders the growth of legitimate trade newspaper spoke with Muhammad Akram, one of and contributes to ongoing problems of tax evasion those lorry drivers, who said that both the Taliban and and smuggling at the borders. the government demanded payments from drivers. “But when the Taliban stop [Akram] at the checkpoint, Beginning in 2004, the Afghanistan Customs they write him a receipt,” The Economist reported. Department in collaboration with the World Bank “Waving a fistful of green papers, [Akram] explains started a countrywide computerization of customs how they ensure he won’t be charged twice: after he clearance operations. The goal of computerization and pays one group of Talibs, his receipt gets him through automation was to improve the release of legitimate subsequent stops. Government soldiers, in contrast, goods in an efficient manner and reduce opportunities rob him over and over.”97 for corruption. Throughout the implementation process, the customs department faced numerous capacity While the Afghanistan Customs Department (ACD) and security constraints. Security in border areas was made remarkable progress in improving the release constantly evolving, which impacted the extent to of legitimate goods in a fair and efficient manner from which the government could effectively control various 2004 to 2019, Muhammad Akram’s story illustrates the customs points. magnitude of the challenge that ACD faces. Given the persistence of insecurity and conflict in Afghanistan, the Through 15 years of efforts to improve processes and threat posed by corruption in customs extends beyond reduce opportunities for parallel customs structures, just fiscal losses and high trade transaction costs. Major revenue collection increased, and truck release times 140 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION national security issues associated with terrorism and While the ACD had to rely on other parts of the drug trafficking are also at stake and are well beyond government to directly tackle the parallel customs customs’ capacity to manage on its own.98 structures—like those run by insurgent groups—the automation reform would contribute to those efforts by In countries like Afghanistan, combating corruption and reducing personal interactions and formally connecting illicit trade is not simply a matter of collusion between border posts to the central government, increasing the inspectors, importers, and brokers—a problem government’s ability to exert control. faced by customs all around the world—but rather a problem that extends across the fabric of society. The implementation process ACD operates in a fragile country environment with parallel systems that undermine government efforts. Automation of ACD’s customs procedures was rolled The ACD’s efforts are part of a broader State building out in three phases, starting in 2004; an initial phase in process, legitimizing the State’s authority and control which 8 out of 25 customs offices were connected to over territory and establishing a robust environment headquarters’ central system, followed by a second and of sound governance. Revenue collection efforts are third phase aimed at countrywide coverage. All three at the core of establishing the State’s legitimacy. Like phases were supported by the World Bank and other in many developing countries,99 customs payments international donors (see Box 4.3). in Afghanistan account for a significant portion of government revenue, with the ACD collecting roughly Automation started with the computerization of the 40% of total revenues. Expanding the domestic revenue domestic transit process and was rolled out across base is crucial to Afghanistan’s self-reliance, as external three trade corridors. The first corridor connected the assistance is expected to decline in the years to come. busiest border crossing point (Torkham, on the road Establishing good governance is a key component of from Peshawar and the port of Karachi, Pakistan) to this process. Kabul, the capital city, via the Jalalabad inland clearance post (see Figure 4.3). This involved computerization of In 2004, ACD began the long process of switching customs processes from scratch and equipping border to automated customs procedures. Automation was posts with the basic essentials of reliable power supply expected to significantly reduce face-to-face contact and communications.101 and the resulting informal negotiations that were then a central feature of the relationship between customs Automation was then carried out in the second busiest and traders.100 Automation was the driver of ACD’s corridor, connecting to Iran via Islam Qala to Herat, reform agenda, facilitating overall rationalization and followed by the northern corridor from Uzbekistan via streamlining of business processes and procedures. Hairatan to Mazar-e Sharif. This automation allowed Moreover, it was meant as the vehicle to increase state ACD to gain better control over customs revenues from legitimacy through enhanced control over revenue provincial governments and implement a domestic streams, reducing corruption and space for parallel transit policy for the first time, allowing traders to structures from illicit actors. clear goods at inland customs points as opposed to border posts. Prior to that, if goods were not reported Introducing automation across the board was a risky to the ACD at the border, they tended to be lost for decision, however, since the government did not good. Moreover, without the automation of customs fully control all border posts, and it was not clear points, revenues declared at the border were hard to that inland and border customs departments would track, verify, and consolidate and thus easily subject to collaborate and agree to send more revenue to diversion. customs headquarters by declaring goods through the system. These border posts were—and still are— In Torkham, the first customs border post to be often heavily intertwined with local non-state actors, automated, brokers and traders initially resisted using constituting a complex negotiated equilibrium of the automated system. Most of them had never worked official and illicit payments around the clearance of with computers before. Whereas before they were able goods. Infrastructure weaknesses, such as unreliable to process goods using paper forms, moving from one electricity, limited satellite connectivity, and poor fiber- customs official to the next, they now had to enter the optic cable availability added further challenges. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 141

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION FIGURE 4.3 ACD Presence and Main Transit Trade Routes Source: ACD details of shipments into the automated system at the Revenue collection during the first phase increased start of the process, after which the digitized forms fivefold and clearance time reduced from 1.5 days to provided the basis for subsequent clearance checks 1.5 hours.103 The trade volume also grew during the and verifications. For automation to work, ACD had to same period but far more slowly than the revenue gains. train brokers and traders on how to use the systems. In Improvements were also reflected in the perceptions order to facilitate computerized declarations, the ACD of the business community: Afghanistan’s rank in the provided a computer center in Torkham where brokers World Bank Logistics Performance Indicator improved and traders could access the system to declare goods. significantly. In 2007, Afghanistan was rated as the In subsequent implementations at border crossings, worst performer in the world, whereas in 2010 it had brokers and traders were required to provide these jumped to 104th out of 155 countries. facilities themselves. Under the second phase of automation, the focus was One challenge that quickly emerged was the diversion on (i) upgrading the ASYCUDA ++ version to ASYCUDA of illicit trade and smuggling from automated customs World;104 (ii) computerizing three more trade corridors offices to non-automated ones. To counter this “border (Turkmenistan, Tajikistan and Southeast Iran); and (iii) shopping,” the government wanted to automate addressing human resource issues associated with remaining offices as fast as possible.102 By 2010, eight the retention, motivation, and competence of some of customs points had been automated. The remaining 17 ACD’s key ASYCUDA staff. were automated in subsequent phases. 142 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION BOX 4.3 Donor Support to Afghanistan Customs Department Throughout the reform process, ACD has been supported by the international donor community. The automation effort of the ACD has been sustained through three different World Bank funded projects: the Emergency Customs Modernization and Trade Facilitation Project (2004 – 2010), the Second Customs Reform and Trade Facilitation Project - (2010 – 2018), and more recently the Fiscal Performance Improvement Support Project (2018–2021). UNCTAD has been an active implementation partner during this time, working closely with the ACD on supporting the implementation of the Automated System for Customs Data (ASYCUDA), a computerized customs management system. Other donors, such as USAID, have provided bilateral support to the ACD on various other customs functions (e.g., export facilitation), complementing the ongoing automation reform effort. Donor support is coordinated through an Informal Customs Network that meets at regular intervals. Upgrading the systems to ASYCUDA World required automating core customs functions, specifically in the considerable skills from the national ASYCUDA staff, area of risk management. In addition, new technology which until 2010 were hired as civil servants under such as fingerprint readers to avoid unauthorized use the Ministry of Finance. But the national ASYCUDA of log-ins to the ASYCUDA system was installed, a team was experiencing human resource issues due to problem that had emerged over time as automation was difficulties in retaining highly qualified staff, a common being rolled out. E-payment is also underway, which will issue experienced by governments when dealing with contribute to further reducing clearance time, as well as in-house Information Technology systems. To address eliminate cash payments from the clearance process. this issue, 20 local ASYCUDA staff were contracted by the United Nations Conference on Trade and Reflections Development (UNCTAD), the main UN body working on trade issues. Working under a UN contract provided At the end of 2019, almost all border customs posts, staff with better job security and more competitive as well as inland customs departments, were fully remuneration.105 This national team built significant automated, except for 3 border posts in particularly capacity over time and the rollout of ASYCUDA post- remote and insecure locations—Paktika, Ghulam Khan 2012 was largely implemented by them. The team and Badakhshan. guaranteed the functioning and integrity of the system, supported by access to international expertise through While on the one hand, ASYCUDA greatly facilitated and UNCTAD. The UNCTAD contracts were supposed to be to some extent formalized customs processes, a parallel a medium-term solution; however, the return of these paper trail still exists for each transaction. In addition to officers to a sustainable ASYCUDA structure within the submitting declarations through the automated system, ACD, with appropriate job security and better salaries, a paper-based declaration package forms the basis did not eventuate. for clearance decisions along the various steps in the clearance procedure and moves from customs officer A third phase of reform began in 2018. It involved further to customs officer for approval. This impacts clearance expanding coverage of border and inland customs times and also weakens potential gains in reducing offices, as well as expansion of ASYCUDA modules corruption by failing to eliminate discretionary and such as risk management and post-clearance audit. These modules allowed for further streamlining and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 143

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION unnecessary human contact. The barriers to removing implemented, largely due to political reasons. The the parallel paper trail are both legal (e.g. Afghanistan Cadre Regulation has many opponents, who prefer does not yet have an e-governance law)106 and political, keeping the current system of patronage appointments as there are incentives within the customs offices to at customs in place. Indeed, there are widespread maintain the parallel paper trail as this provides an allegations of political appointments, of pressure opportunity for much needed supplements to income, leading to the rehiring of dismissed staff, of preference which is currently very low at between $100–$200 a given to individuals with links to the political elite (at month. Indeed, even though the number of signatures the central or local level), and of the sale of lucrative and interactions between customs officers and clients posts.108 These pressures keep the Cadre Regulation decreased with the introduction of automation, from being effectively implemented. anecdotal evidence suggests that the actual bribe price at other points has increased, seemingly compensating Over time, traders, brokers and customs officers have for eliminated collection opportunities.107 also learned how to game the new system. Traders in Afghanistan can shop around for the border station that A Customs Cadre Regulation allowing for higher pay offers the best deal, even if it will increase transportation through competitive recruitment was developed and costs. While automation should have reduced this approved in 2018, aimed at addressing the human practice, turning a blind eye to undervaluation or resource problems. However, the regulation is not yet misclassification can go a long way in facilitating these FIGURE 4.4 Customs Revenue (in USD) Exchange Rate (AFN/USD) 90 Revenue (USD Million) 80 1200 70 1000 60 50 800 40 600 30 400 20 200 10 0 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012* 2013 2014 2015 2016 2017 2018 2019 Total Revenue (in USD) Exchange Rate (AFN/USD) Source: Afghanistan Customs Department. All figures prior to 2005 may not be accurate. * In 2012, the Afghan calendar was changed from starting the new calendar year on March 21st to starting the new calendar year on December 23rd. 2012 as recorded here thus only covers nine months (March 21st – December 22nd, 2012). The previous year covered March 21st, 2011 – March 20th, 2012. The next year covers December 23rd, 2012 – December 22nd, 2013. 144 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION kinds of offers and deals. Discounts offered at customs remote areas, human resources, technical capacity, posts are partially an unintended response to officials security, and finally vested interests and political trying to meet ever increasing revenue targets with challenges. Tackling corruption in environments like the idea that offering informal discounts will bring in Afghanistan needs a multi-pronged approach that has more traders and thus result in more revenue for that to be revisited on a continuous basis as vested groups particular customs post. From a national perspective, find loopholes that need to be repeatedly plugged. however, the Treasury loses out as goods are cleared at discounted rates. Not only does this impact revenue The next steps for the ACD in further eliminating collection, it also greatly distorts trade statistics and corruption and facilitating trade will be to work towards growth estimations of the economy. The ACD has a fully automated self-assessment, eliminating the recently started to combat this practice, moving parallel paper trail, and optimizing the functionalities towards a new negotiated equilibrium with traders ASYCUDA World has to offer. In this case, traders and and brokers and also customs personnel, where more brokers would submit their self-assessed declarations accurate valuation and classification is being applied online through the automated portal and pay taxes and corresponding higher taxes are being paid, but based on their preliminary assessments, which would implementation will likely take time. subsequently be verified and checked by the ACD, supported by automated controls and (post-clearance) Indeed, it appears that the ACD is at a critical assessments. This will be a gradual process, however, as crossroads where initial gains from automation now the existing business processes must first be formalized require further, politically difficult, decisions in order to across the various customs offices in the country, move to the next level. The first phase of reforms saw supported by appropriate regulations and formal large gains in terms of revenue increases and improved procedures. To date, automation has contributed to processes, but the subsequent phases failed to deliver reducing opportunities to engage in corrupt behavior similar progress. Between 2007 and 2010, Afghanistan but has done little to tackle incentives. For this, some customs jumped from being the worst performer in the politically difficult decisions will be required, such as World Bank’s Logistics Performance Indicator to being addressing weaknesses in the ACD’s human resource ranked 104 out of 155 countries, but by 2018 it again capacity and effectively negotiating a new equilibrium ranked as one of the worst performers (158 out of 160 with traders and brokers in which proper taxes are countries). As Table 4.2 illustrates, revenue collection being paid and directed to the government. Unless increased fivefold in the first 5 years of reform, from these challenges are addressed in parallel, it may be USD138 million in 2004/5109 to over USD733 million in difficult for the ACD to sustain and improve on the 2009/10. Customs revenues increased at a slower rate progress it has already made. during subsequent phases of reform, reaching over USD1 billion in 2016 and then plateauing. Since then, improvements in revenue collection have been mostly driven by depreciation in the exchange rate. In summary, the endeavor to automate Afghanistan’s clearance process brought major benefits to the government, including increased revenue and improved clearance time. Other gains include improved transparency of trade transactions, better (although not yet accurate) customs and foreign trade statistics,110 simplified procedures, standardized documents, and the possibility to declare goods online. Automation also increased transparency of customs operations and national consistency across borders and has resulted in better predictability of the trade environment.111 While automation helped the ACD to boost revenue, this technocratic approach can only go so far. Ongoing challenges relate to the extension of automation to Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 145

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Notes 1. Cantens, 2010; Hors, 2001; Ferreira, Engelschalk & Mayville, 13. Baez-Camargo, C. (2017). Corruption, Social Norms and 2007; Maoro et al., 2019; Raballand & Rajaram, 2013; WCO, Behaviours: A Comparative Assessment of Rwanda, Tanzania 2017; World Economic Forum, 2014; World Bank, 2019. and Uganda. Basel: Basel Institute on Governance. 2. World Customs Organization [WCO]. (2019). Annual Report Jackson, D. & Köbis, N. (2018). Anti-corruption through a social 2018-2019. Brussels: World Customs Organization. norms lens. U4 Issue 2018: 7. Bergen: U4 Anti-Corruption Resource Centre. 3. Chalendard, C. (2017). Using internal and external sources of information to reduce customs evasion. ICTD Working Paper Platteau, J.-P. (2000). Institutions, Social Norms, and Economic 62 (January). Brighton, UK.: International Centre for Tax and Development. Amsterdam: Harwood Academic Publishers. Development.; Chalendard, Cyril Romain; Raballand, Gael J. R. F.; Rakotoarisoa, Antsa. 2016. The use of detailed statistical Fjeldstad, O.-H. (2009). The pursuit of integrity in customs: data in customs reform: the case of Madagascar (English). Experiences from sub-Saharan Africa. Published in Policy Research working paper; no. WPS 7625. Washington, French: «Vers plus d’éthique dans les douanes en Afrique D.C.: World Bank Group. http://documents.worldbank.org/ subsaharienne ». Afrique Contemporaine, 230(2): 33-54. curated/en/512741468196174563/ The - use - of- detailed - statistical-data-in-customs- reform-the-case-of-Madagascar. Fjeldstad, O.-H., Kolstad, I. & Lange, S. (2003). Autonomy, incentives and patronage. A study of corruption in the 4. OECD/WTO. (2015). Aid for Trade at a Glance 2015: Reducing Tanzania and Uganda Revenue Authorities. CMI Report Trade Costs for Inclusive, Sustainable Growth. Paris: OECD. R2009: 3. Bergen. Chr. Michelsen Institute. https://www.wto.org/english/res_e/booksp_e/aid4trade15_e. pdf 14. von Soest, C. (2007). How does neopatrimonialism affect the African state’s revenues? The case of tax collection in Zambia. OECD. (2016). Fighting the hidden tariff: Global trade without The Journal of Modern African Studies, 45(4): 621–645. corruption. Background Document for the 2016 OECD Integrity Forum. Paris: OECD 15. Taliercio, R. jr. (2002). Designing performance: the semi- autonomous revenue authority model in Africa and Latin- 5. Cantens, T. (2015). Mirror analysis: Customs risk analysis and America. Mimeo (September), Washington DC: World Bank. fraud detection. Global Trade and Customs Journal 10(6): 207–216. 16. Rijkers, B., Baghdadi, L. & Raballand, G. (2017). Political connections and tariff evasion: Evidence from Tunisia. The 6. Ferreira, C., Engelschalk, M. & Mayville, W. (2007). The World Bank Economic Review, 31(2): 459–482 challenge of combating corruption in customs administrations. Chapter 11 (p. 367-386) in J.E. Campos and S. Pradhan (Eds). 17. Gauthier, B., & Reinikka, R. (2001). Shifting tax burdens The Many Faces of Corruption. Washington D.C.: The World through exemptions and evasion: An empirical investigation Bank. of Uganda. Journal of African Economies, 15(3): 373-398. World Customs Organization [WCO]. (2017). Compilation Arifari, N.B. (2006). ‘We don’t eat papers’: corruption in of Integrity Practises from WCO Members. Brussels: World transport, customs and the civil forces. Chapter 6 (177-224) in Customs Organization. G. Blundo & J.-P. Olivier de Sardan (Eds.) Everyday Corruption and the State. Citizens & Public Officials in Africa. ZED Books: 7. McLinden, G. (2005). Integrity in customs. Chapter 4 (p. 67- London & New York. 89) in de Wulf, L. & Sokol, J.B. (Eds). Customs Modernization Handbook. 18. Thomas, M.A. (2007). The governance bank. International Affairs, 83 (4): 729-745. Washington DC: World Bank. Hors (2001: 18) reports that recruitment, postings, transfers International Monetary Fund [IMF]. (2019). Fiscal Monitor and promotions in customs in Pakistan were not merit-based. (April). Washington D.C. https://www.imf.org/en/Publications/ Postings, which would lead to large receipts from bribery, FM/Issues/2019/03/18/fiscal-monitor-april-2019 were auctioned to highest bidders who, in addition to making down payments, made regular payments of specified amounts 8. Campos,J.E.&Pradhan,S.(2007).TheManyFacesofCorruption: to higher officials from their corrupt earnings. Tracking Vulnerabilitiesat the Sector Level. Washington D.C.: The WorldBank. https://openknowledge.worldbank. 19. Kiiza, J. (2006). Institutions and economic performance in o rg / b it s t rea m / ha n dle /10 986/68 4 8/39 9850 R EPL ACEM101 Africa. A comparative analysis of Mauritius, Botswana and OFFICIAL0USE0ONLY1.pdf Uganda. Research Paper 73/2006. Helsinki: WIDER, United Nations University. Ardigó, I.A. (2014). Corruption in tax and customs authorities. Anti-Corruption Helpdesk. Berlin: Transparency International. 20. Every year, at the WCO Council Session, approximately one- ht t p s: //w w w.t r a n s p are n c y.o rg /f ile s /co nte nt /co r r u pt io n q a s / third of the Heads of Delegation are Customs Directors who Literature_Review_of_Corruption_risks_in_Customs_and_ have been appointed during the previous 12 months. Tax_2014.pdf 21. The corruption scheme was organized by a telephone Martini, M. (2014). Approaches to curbing corruption in tax contact, known as “The Line”. Senior tax and customs officials administration in Africa. U4 Expert Answer 11: 2014 (June). and customs brokers were involved in the case. For more Bergen: U4 Anti- Corruption Resource Centre. information see: https://es.wikipedia.org/wiki/Caso_de_ La_L%C3%ADnea_en_Guatemala 9. McLinden, 2005; Ferreira et al., 2007. 22. Fjeldstad, O.-H. (2006). Corruption in tax administration: 10. Hors, 2001. lessons from institutional reforms in Uganda. Chapter 17 (p. 484-511) in Rose-Ackerman, S. (Ed.) International Handbook on 11. As of April 2020, the Bureau of Customs has completed a the Economics of Corruption. Cheltenham, UK/Northampton migration to a fully online portal that has eliminated most MA, USA: Edward Elgar. face-to-face transactions. Zuleta, J.C., Leyton, A. & Ivanovic, E.F. 2007. Combating 12. Ibid. corruption in revenue administration. The case of VAT refunds 146 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION in Bolivia. Chapter 10 (p.339-366) in J.E. Campos and S. (Fisman & Golden, 2017; Köbis et al., 2018). Current directions Pradhan (Eds). The Many Faces of Corruption. Washington in anti-corruption increasingly make use of the concept (Kubbe D.C.: The World Bank. & Engelbert, 2018). For instance, research on corruption in East Africa, Nigeria, and the Democratic Republic of Congo 23. Médard, J.-F. (2002). Corruption in the neo-patrimonial states has started to incorporate social norms as a key feature of of Sub-Saharan Africa. Chapter 22 in A.J. Heidenheimer & M. analysis (Jackson & Köbis, 2018: 2). Johnston (Eds.). Political Corruption. Concepts and Contexts. Third edition. New Brunswick: Transaction Publishers. 38. Baez-Camargo, C. & Passas, N. (2017). Hidden agendas, social norms and why we need to re-think anti-corruption. OECD 24. For example, Arifari (2006: 209) reports from Niger that the Global Anti-Corruption & Integrity Forum. Paris: OECD. posting of a customs officer to head office in Niamey was considered a punishment, since there was no extra source of 39. Diamond, L. (2007). A quar ter-centur y of promoting income on top of their salaries there. democracy. Journal of Democracy 18 (4): 118–120. Fisman, R. & Golden, M.A. (2017). Corruption: What Everyone Needs to 25. It is important to emphasize that such corruption networks Know. Oxford: Oxford University Press. Kubbe, I. & Engelbert, are not a specific developing country phenomenon. In 2013, A. (2018.) Corruption and Norms: Why Informal Rules Matter. investigations revealed deep rooted corruption within the Palgrave Macmillan. Australian Customs and Border Protection Service at Sydney International Airport (WCO, 2017: 16). Widespread corruption 40. Passas, N. (2005). Lawful but awful: Legal corporate crimes. was the result of long-term collusion between Customs officers Journal of Socio-Economics, 34(6): 771-786. at the airport to facilitate the importation of illicit drugs. The officers used their inside knowledge to defeat surveillance. 41. Duran, P. & Sokol, J.B. (2005). Policy and operational lessons They had privileged access to databases. By working learned from eight country case studies. Chapter 6 (p. 103- together, they exploited weaknesses in the supervision 126) in L. de Wulf and J. B. Sokol (Eds.) Customs Modernization system and exploited connections that they had developed in Handbook. Washington, DC: The World Bank. the workplace to gather information and to cover their tracks. 42. Webber, C. & Wildavsky, A. (1986). A History of Taxation and 26. World Customs Organization [WCO]. (2003). Revised Arusha Expenditure in the Western World. New York: Simon and Declaration Brussels: World Customs Organization. Schuster. World Customs Organization [WCO]. (2014). Revised Integrity 43. Fjeldstad, O.-H. & Moore, M. (2009). Revenue authorities and Development Guide. Brussels: World Customs Organization. public authority in sub-Saharan Africa. Journal of Modern African Studies, 47(1): 1-18. 27. See http://www.wcoomd.org/home_about_us_our_profile. htm. 44. Yang, D. (2008). Integrity for hire: An analysis of a widespread customs reform. Journal of Law and Economics 51 (1): 25–57. 28. Walsh, J.T. (2003). Practical measures to promote integrity Also published as chapter 18 (p. 512-545) in Rose-Ackerman, in customs administrations. Chapter 11 (p. 154-166) in M. S. (Ed.). 2006. International Handbook on the Economics of Keen (Ed.) Changing Customs. Challenges and Strategies Corruption (484-511). Cheltenham, UK/Northampton MA, for the Reform of Customs Administration. Washington D.C.: USA: Edward Elgar. International Monetary Fund. 45. Yang, 2008. 29. OECD. (2017). Integrity in Customs. Taking Stock of Good Practices. Paris: OECD. http://www.oecd.org/gov/ethics/G20- 46. Dequiedt, V., Geourjon, A.-M-. & Graziosi, G.R. (2009). integrity-in-customs-taking-stock-of-good-practices.pdf Mutual supervision in preshipment inspection programs. Mimeo (November 30). CERDI-CNRS, Université d’Auvergne. 30. Almost two decades ago, Hors (2001) provided a similar Clermont-Ferrand. observation and wrote (p. 11): “It is one thing to define the characteristics of what an ideal corruption-resistant, efficient 47. See, for example, Klitgaard, 1988; Mookherjee, 1997; Chand customs administration would be like; it is quite another & Moene, 1999. actually to drive and manage the transformation.” 48. van Rijckeghem, C. & Weder, B. (2001). Bureaucratic corruption 31. Klitgaard, R. (1988). Controlling Corruption. Berkeley/London: and the rate of temptation: Do wages in the civil service University of California Press. affect corruption, and by how much? Journal of Development Economics, 65 (2): 307–31. 32. de Wulf, L. & Sokol, J.B. (Eds.) (2005). Customs Modernization Handbook. Washington DC: World Bank, 49. For instance, van Rijckeghem & Weder (1997) estimate that to reduce the corruption level in Ghana and Colombia to the low 33. Klitgaard, R,. 1988. Singapore level, one needs to raise the public sector’s pay by 975% and 660%, respectively. 34. Persson, A., Rothstein, B. & Teorell, J. (2013). Why anti- corruption reforms fail - systemic corruption as a collective 50. Besley, T. & McLaren, J. (1993). Taxes and bribery: the role of action problem. Governance: An International Journal of wage incentives. Economic Journal, 103(416): 119-141. Policy, Administration, and Institutions, 26(3): 449–471. 51. Fjeldstad, O.-H. (2003). Fighting fiscal corruption: lessons 35. Ostrom, E. (2000). Collective action and the evolution of social from the Tanzania Revenue Authority. Public Administration norms. Journal of Economic Perspectives, 14 (3): 137–58. and Development, 23(2): 165-175. 36. Jackson, D. & Köbis, N. (2018). Anti-corruption through a social Fjeldstad, 2006. norms lens. U4 Issue 2018: 7. Bergen: U4 Anti-Corruption Resource Centre. 52. Foltz, J.D. & Opoku-Agyemang, K.A. (2015). Do higher salaries lower petty corruption? A policy experiment on West Africa’s 37. The importance of social norms in sustaining corrupt practices highways. IGC Working Paper (June). International Growth is increasingly recognized in the literature. Behavioral research Centre. in economics and social psychology points towards social norms as an important lens for understanding corruption 53. See Frey, B. (1997). Not Just for the Money: An Economic Theory of Personal Motivation. Edward Elgar: Cheltenham. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 147

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION 54. Gillespie, R. (1993). Manufacturing Knowledge: A History of development: Lending in the Western Africa Department. p. the Hawthorne Experiments. Cambridge University Press: 325–45 in Langseth, P., Nogxina, S., Prinsloo, D. and Sullivan, Cambridge. R. (Eds.) Civil Service Reform in Anglophone Africa. Pretoria: Economic Development Institute, Overseas Development 55. Platteau, J.-P. (2000). Institutions, Social Norms, and Economic Administration, and Government of South Africa. Development. Amsterdam: Harwood Academic Publishers. Polidano, C. (2001). Why civil service reforms fail. IDPM 56. IMF, 2019. Public Policy and Management Working Paper no.16 (March). Manchester: Institute for Development Policy and 57. Baez-Camargo & Passas, 2017. Management, University of Manchester. 58. Ibid. 77. Rijkers, 2019. 59. Jackson & Köbis, 2018. 78. Baez-Camargo & Passas, 2017. 60. Panth (2011) provides a collation of 18 case studies from 79. Jackson & Köbis, 2017. around the world, with real examples on how changing social norms have been used to change public services affected by 80. OECD, 2016. corrupt practices. 81. Raballand, Gael J. R. F.; Chalendard, Cyril Romain; Fernandes, 61. Fjeldstad, 2009. Ana Margarida; Mattoo, Aaditya; Rijkers, Bob. 2017. Customs reform and performance contracts: early results from 62. OECD, 2016; IMF, 2019. Madagascar (English). Governance notes; no. 2. Washington, D.C.: World Bank Group. http://documents.worldbank.org/ 63. de Wulf, L. (2005). Human resources and organizational issues c u r a t e d /e n / 714 6115 0 6 0 78 4 0 712 7/ C u s t o m s - r e f o r m - a n d - in customs. Chapter 2 (p. 31-50) in L. de Wulf and J.B. Sokol performance-contracts-early-results-from- Madagascar. (Eds.) Customs Modernization Handbook. Washington DC: World Bank. Chalendard, C., Fernandes, A. M., Mattoo, A., Raballand, G., Rijkers, B. 2018. Collusion in Customs: Evidence from WCO, 2017. Madagascar. Preliminary draft. Unpublished. 64. World Bank. (2019). Doing Business Report 2019: Training for 82. A component of a World Bank Public Sector Performance Reform. A World Bank Group Flagship Report. Washington investment lending included disbursement indicators linked D.C.: The World Bank. to increased confirmation of suspicious customs transactions related to home use at Toamasina Custom Office as well as 65. Ibid., p. 48. a number of revenue offices that have been subject to an external evaluation of their performance contract/programs. 66. Cantens, T., Kaminski, J., Raballand, G. & Tchapa, T. (2014). Customs, brokers, and informal sectors: A Cameroon case 83. Mirror statistics calculate the gaps of foreign trade statistics study. Policy Research Working Paper 6788 (February). between two trading partner countries and can be used to Washington D.C.: The World Bank. detect potentially fraudulent import flows. See Cantens et al. (2012) for detailed discussion. Chalendard, C. (2017). Using internal and external sources of information to reduce customs evasion. ICTD Working Paper 84. Misclassification consists of importing a good on which there 62 (January). Brighton, UK.: International Centre for Tax and is an import tax or value-added tax (VAT) but declaring it as Development. another good for which there is no import tax or VAT. 67. Raballand, G. & Rajaram, A. (2013). Behavioural economics 85. The value declared is lower than the actual purchase value and public sector reform. An accidental experiment and of imported goods leading to lower tax payments for the lessons from Cameroon. Policy Research Working Paper 6595 importer because taxes are paid as a percentage of declared (September). Washington D.C.: The World Bank. value. Rijkers, B. (2019). Improving customs performance: Lessons 86. Chalendard, Cyril Romain; Raballand, Gael J. R. F.; from 5 years of reform in Madagascar. Powerpoint presentation Rakotoarisoa, Antsa. 2016. The use of detailed statistical data (undated). Washington D.C.: World Bank. in customs reform: the case of Madagascar (English). Policy Research working paper; no. WPS 7625. Washington, D.C.: 68. Raballand, G. & Rajaram, A., 2013. World Bank Group. http://documents.worldbank.org/curated/ en/512741468196174563/ The-use-of-detailed-statistical- 69. Cantens, T. (2010). Is it possible to reform customs data-in-customs-reform-the-case-of- Madagascar. administration? UNU-WIDER Working Paper No. 2010/118 (November). Helsinki: United Nations University: World 87. Raballand et al., 2017; Chalendard et al., 2018. Institute for Development Economic Research 88. Despite initial resistance, the majority of inspectors when 70. WCO, 2017. surveyed said they preferred performance contracting after being trained on using the new monitoring system. However, 71. Cantens et al., 2014; World Bank, 2019. some inspectors have not accepted the change. 72. OECD, 2017; WCO, 2017; World Bank, 2019. 89. Risk management systems generate a risk score for the shipment. The risk score determines the probability of 73. OECD. (2017). Integrity in Customs. Taking Stock of Good inspection and the rigor of the inspection should it occur. Practices. Paris: OECD. http://www.oecd.org/gov/ethics/G20- High-risk shipments face the highest degree of scrutiny via integrity-in-customs- taking-stock-of-good-practices.pdf physical inspection whereas lower-risk shipments are given less scrutiny, being subject to documentary inspection only 74. IMF, 2019. (Chalendard et al. 2018). 75. Transparency International [TI]. (2018). Exporting Corruption. 90. Chalendard et al., 2018. Progress Report 2018: Assessing Enforcement of the OECD Anti-Bribery Convention. Berlin: Transparency International. 76. Schacter, M. (1995). Recent experience with institutional 148 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION 91. Some of them were reintegrated with a new DG appointed in 107. World Bank. 2010:38. Afghanistan - Second Customs Reform March 2019. and Trade Facilitation Project: emergency project paper. Washington, DC: World Bank. https://hubs.worldbank.org/ 92. For more information on the rationale of the approach, see docs/imagebank/pages/docprofile.aspx?nodeid=12204315 Raballand and Rajaram (2013), “Behavioral Economics and Public Sector Reform - An Accidental Experiment and Lessons 108. Doyle, Tom; Fanta Ivanovic, Enrique; Mclinden, Gerard; from Madagascar”, mimeo. Widdowson, David Charles. 2010:346. Border management modernization (English). Washington, DC: World Bank. http:// 93. Raballand et al., 2017. documents.worldbank.org/curated/en/986291468192549495/ Border-management-modernization. 94. Raballand et al., 2017. 109. All figures prior to 2005 may not be accurate. 95. Cameroon was the first country in Sub-Saharan Africa to implement such a scheme (Raballand and Rajaram 2013). 110. While before automation trade statistics had to rely on Later, other countries, such as Togo and Liberia undertook reconciling paper records from across the country, the fairly similar initiatives. ASYCUDA system has greatly facilitated the production of trade statistics. However, the practice of undervaluation and 96. The use of Disbursement-Linked Indicators in the program misclassification distorts the picture. funded by the World Bank was also quite effective. 111. World Bank. 2018:44. Afghanistan - Second Customs 97. From: The Economist (May 18th, 2019), ‘Why Afghanistan’s Reform Trade Facilitation Project and Additional Financing government is losing the war with the Taliban’. Projects. Washington, D.C.: World Bank Group. https:// h u b s .w o r l d b a n k .o r g /d o c s / i mag e b a n k /p ag e s /d o c p rof il e. 98. Mclinden, Gerard; Durrani, Amer Zafar. 2007. Corruption in aspx?nodeid=30755272 Customs. World Customs Journal Volume 7(2):7. References 99. See for example Custers, Anna Louise; Sutherland, Richard Anthony. 2019. Pakistan Customs : Mobilizing Anson, J., Cadot, O. & Olarreaga, M. (2006). Tariff evasion and Domestic Revenues for Economic Development (English). customs corruption: Does Pre-Shipment Inspection help? The Governance Notes; no. 15. Washington, D.C. : World B.E. Journal of Economic Analysis & Policy, 5(1): 1-26. Bank Group. http://documents.worldbank.org/curated/ e n / 5 8 3 8 815 5 67270 0 94 8 0 / P a k i s t a n - C u s t o m s - M o b i l i z i n g - Ardigó, I.A. (2014). Corruption in tax and customs authorities. Anti- Domestic-Revenues-for-Economic-Development Corruption Helpdesk. Berlin: Transparency International. https:// www.transparency.org/files/content/corruptionqas/Literature_ 100. World Bank. 2010:35. Afghanistan - Second Customs Reform Review_of_Corruption_risks_in_Customs_and_Tax_2014.pdf and Trade Facilitation Project: emergency project paper. Washington, DC: World Bank. https://hubs.worldbank.org/ Arifari, N.B. (2006). ‘We don’t eat papers’: corruption in transport, docs/imagebank/pages/docprofile.aspx?nodeid=12204315. customs and the civil forces. Chapter 6 (177-224) in G. Blundo & J.-P. Olivier de Sardan (Eds.) Everyday Corruption and the State. 101. World Bank. 2011:15. Afghanistan - Additional Financing Citizens & Public Officials in Africa. ZED Books: London & New for Emergency Customs Modernization and Trade York. Facilitation Project. Washington, DC: World Bank. https:// h u b s .w o r l d b a n k .o r g /d o c s / i mag e b a n k /p ag e s /d o c p rof il e. Baez-Camargo, C. (2017). Corruption, Social Norms and Behaviours: aspx?nodeid=14943926 A Comparative Assessment of Rwanda, Tanzania and Uganda. Basel: Basel Institute on Governance. 102. World Bank. 2011:46. Afghanistan - Additional Financing for Emergency Customs Modernization and Trade Baez-Camargo, C. & Passas, N. (2017). Hidden agendas, social Facilitation Project. Washington, DC: World Bank. https:// norms and why we need to re-think anti-corruption. OECD h u b s .w o r l d b a n k .o r g /d o c s / i mag e b a n k /p ag e s /d o c p rof il e. Global Anti-Corruption & Integrity Forum. Paris: OECD. aspx?nodeid=14943926 Besley, T. & McLaren, J. (1993). Taxes and bribery: the role of wage 103. Note this is a reference point for overall clearance time at incentives. Economic Journal, 103(416): 119-141. the Kabul Inland Custom Department. At Torkham border 91% of trucks were estimated to be cleared in fewer than 90 Campos, J.E. & Pradhan, S. (2007). The Many Faces of minutes in September 2009. World Bank. 2011:31. Afghanistan Corruption: Tracking Vulnerabilitiesat the Sector Level. - Additional Financing for Emergency Customs Modernization Washington D.C.: The WorldBank. https://openknowledge. and Trade Facilitation Project. Washington, DC: World worldbank.org/bitstream/handle/10986/6848/39985 Bank. https://hubs.worldbank.org/docs/imagebank/pages/ 0REPLACEM101OFFICIAL0USE0ONLY1.pdf docprofile.aspx?nodeid=14943926 Cantens, T. (2015). Mirror analysis: Customs risk analysis and fraud 104. ASYCUDA is a computerized customs management system, detection. Global Trade and Customs Journal 10(6): 207–216. developed in Geneva by the United Nations Conference on Trade and Development (UNCTAD). UNCTAD supports two Cantens, T. (2010). Is it possible to reform customs administration? versions: ASYCUDA ++, which was developed in 1992, and UNU-WIDER Working Paper No. 2010/118 (November). Helsinki: ASYCUDA World, which was developed in 2002. As part of United Nations University: World Institute for Development the second phase, ACD upgraded to the most recent version Economic Research of ASYCUDA. Cantens, T., Kaminski, J., Raballand, G. & Tchapa, T. (2014). 105. World Bank. 2018:36. Afghanistan - Second Customs Customs, brokers, and informal sectors: A Cameroon case study. Reform Trade Facilitation Project and Additional Financing Policy Research Working Paper 6788 (February). Washington Projects. Washington, D.C.: World Bank Group. https:// D.C.: The World Bank. h u b s .w o r l d b a n k .o r g /d o c s / i mag e b a n k /p ag e s /d o c p rof il e. aspx?nodeid=30755272 106. Although at the time of writing this case study the e-governance law was under review with the Ministry of Justice. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 149

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Chalendard, C. (2017). Using internal and external sources of Foltz, J.D. & Opoku-Agyemang, K.A. (2015). Do higher salaries information to reduce customs evasion. ICTD Working Paper lower petty corruption? A policy experiment on West Africa’s 62 (January). Brighton, UK.: International Centre for Tax and highways. IGC Working Paper (June). International Growth Development. Centre. Chalendard, Cyril Romain; Raballand, Gael J. R. F.; Rakotoarisoa, Frey, B. (1997). Not Just for the Money: An Economic Theory of Antsa. 2016. The use of detailed statistical data in customs Personal Motivation. Edward Elgar: Cheltenham. reform: the case of Madagascar (English). Policy Research working paper; no. WPS 7625. Washington, D.C.: World Gauthier, B., & Reinikka, R. (2001). 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PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION OECD/WTO. (2015). Aid for Trade at a Glance 2015: Reducing Walsh, J.T. (2003). Practical measures to promote integrity in Trade Costs for Inclusive, Sustainable Growth. Paris: OECD. customs administrations. Chapter 11 (p]p. 154-166) in M. ht t p s: //w w w.w to.o rg /e nglis h /re s _ e / b o o k s p _ e /aid 4t r a d e15 _ e. Keen (Ed.) Changing Customs. Challenges and Strategies pdf. for the Reform of Customs Administration. Washington D.C.: International Monetary Fund. Ostrom, E. (2000). Collective action and the evolution of social norms. Journal of Economic Perspectives, 14 (3): 137–58. Webber, C. & Wildavsky, A. (1986). A History of Taxation and Expenditure in the Western World. New York: Simon and Panth, S. (2011). Changing norms is key to fighting everyday Schuster. corruption. CommGAP Discussion Paper 89849. Communication for Governance and Accountability World Bank. (2019). 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Brussels: World and Institutions, 26(3): 449–471. Customs Organization. Platteau, J.-P. (2000). Institutions, Social Norms, and Economic World Customs Organization [WCO]. (2019). Annual Report 2018- Development. Amsterdam: Harwood Academic Publishers. 2019. Brussels: World Customs Organization Polidano, C. (2001). Why civil service reforms fail. IDPM Public Policy World Economic Forum [WEF]. (2014). The Global Enabling Trade and Management Working Paper no.16 (March). Manchester: Report 2014. Insight Report. Geneva: World Economic Forum. Institute for Development Policy and Management, University ht t p: //w w w3.w e fo r u m.o r g /d o c s / W EF_ Gl o b alEna b li n gTr a d e _ of Manchester. Report_2014.pdf Raballand, G. & Rajaram, A. (2013). Behavioural economics and Yang, D. (2008). Integrity for hire: An analysis of a widespread public sector reform. An accidental experiment and lessons from customs reform. Journal of Law and Economics 51 (1): 25–57. Cameroon. 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Berlin: Transparency International. performance-contracts-early-results-from-Madagascar . van Rijckeghem, C. & Weder, B. (2001). Bureaucratic corruption Raballand, Gael; Rajaram, Anand. (2013). Behavioral economics and the rate of temptation: Do wages in the civil service and public sector reform: an accidental experiment and lessons affect corruption, and by how much? Journal of Development from Cameroon (English). Policy Research working paper; no. Economics, 65 (2): 307–31. WPS 6595. Washington, DC: World Bank. http://documents. worldbank.org/curated/en/234851468012655956/Behavioral- von Soest, C. (2007). How does neopatrimonialism affect the e co no mic s - a n d - p u b lic - s e c to r- refo r m - a n - ac c i d e nt al - African state’s revenues? The case of tax collection in Zambia. experiment-and-lessons-from-Cameroon. The Journal of Modern African Studies, 45(4): 621–645. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 151

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 Public Services: Land, Ports, Healthcare

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Introduction Why is it important to curb a variety of methodologies to estimate the magnitude corruption in public services? of such costs (see Table 5.1). Naturally, these estimated costs differ by country and service delivery sector. Corruption in public services takes many forms. For example, bribe payments to port and customs “Corrupt incentives exist because state officials have officials by cargo shippers were about 14 percent of the power to allocate scarce benefits and impose total shipping costs in Mozambique, in comparison to onerous costs.”1 Consequently, reducing the benefits or 4 percent in South Africa. In another example, truck increasing the costs of malfeasance are the key strategies drivers in Indonesia pay around 13 percent of the for anti-corruption efforts in public service delivery. A cost of the trip in bribes to police; this is significant classic example is a service provider—a government in comparison to the truck drivers’ wages, which clerk issuing passports or licenses, a teacher, doctor, or average about 10 percent of the trip cost. Perhaps police officer—extracting an informal payment from a most staggeringly, in Uganda, only 13 percent of the citizen or business to grant access to a service, expedite education funds from the central government for it, or guarantee a certain quality standard. These forms non-wage spending reached the schools, suggesting of malfeasance are often labeled “petty corruption” that 87 percent of the public money had been lost because of the relatively small amounts involved in to graft. While these estimates must rely on various every transaction; however, these per-transaction assumptions, and as such are subject to critiques, taken amounts add up to significant totals in those systems together they point to the significant magnitude of the where they are common. Yet such “petty corruption” monetary costs of corruption in public services. One in service delivery sectors is often symptomatic of what attempt to estimate the total amount of bribes across the literature refers to as “grand corruption,”2 such as sectors in a single country, Ukraine, arrived at roughly embezzling funds earmarked for government services, USD0.5 billion, or 1 percent of the country’s GDP per receiving kickbacks from private-sector contractors year.4 Additional costs with multiplier effects include responsible for different aspects of delivery, or various poor development outcomes that are sector-specific forms of collusion and realized conflicts of interest. (e.g., corrupt health or education sectors), reduced volume of international trade and investment flows due Whether operating on a relatively small or large to high informal payments, and generally low trust in scale, corruption in service delivery imposes government. Low trust in turn results in a vicious cycle significant costs on the government, citizens, of low investment, low tax compliance, and low citizen and businesses. Olken and Pande3 provide a useful participation. review of the existing country-specific studies that use Adopting a sector-specific approach Unpacking sector-specific issues is crucial to more sector-specific approach allows one to see the diagnose the root causes of corruption in public problem holistically and to laser-focus on appropriate services. Some researchers have argued that binary solutions. For example, the Curbing Corruption7 distinctions of corruption types in service delivery— initiative by a group of international policy experts grand/petty, need/greed, political/bureaucratic, and academics develops a list of corruption types for institutional/individual—may be useful as a framing 11 sectors, including health, land, shipping, defense, device, but are not particularly actionable in terms education, police, and others. The typology includes of formulating a reform approach.5 This is because 20-40 different types of corruption per sector that these different types of corruption, just as the general are common across countries; as an example, Figure phenomena such as bribery, nepotism, or collusion, can 5.1 lists corruption typologies in land and health be present in any sector at the same time.6 Instead, a administrations. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 153

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Understanding the existing corruption types in build stakeholder coalitions. For example, where the a sector enables the design of appropriate and professional integrity has currency, doctors could be feasible solutions. For example, in healthcare, a asked to lead the reform. Where civil society is strong reform could be narrowly focused on rooting out a and vocal, further power could be given to patient groups for monitoring and closing the accountability particular issue, such as bribery in surgery waiting loop. In some situations, a link to an international initiative, such as U4 for healthcare or EITI for mining, lists, or adopt a multi-pronged approach to focus on may provide the necessary alliance to boost the reform and increase its feasibility and credibility. the entire service. The correct diagnostics also allows reformers to assess the feasibility of the program, as well as to identify the loci of leadership and how to TABLE 5.1 Corruption in Public Services: Estimating the Magnitude of the Problem Source Country Service Type of Methodology Estimate of the delivery corruption magnitude of sector corruption Olken and Indonesia Police Bribes paid by Direct observation: 13 percent of cost of Barron (2009) truck drivers to police Enumerators accompanied a trip truck drivers on their (cf. truck driver’s salary regular routes, posing as is 10 percent of cost of truck drivers’ assistants, a trip) and recorded illegal payments Sequeira and South Africa, Ports and Bribe payments to Direct observation: Bribes amounted to 14 Djankov (2010) Mozambique customs port and border Enumerators accompanied percent (Mozambique) post officials clearing agents in ports and 4 percent (South to collect information on Africa) of the total bribe payments respective shipping costs for container passing through the port Reinikka and Uganda Education Graft in public Estimate by subtraction: 87 percent of funds Svensson spending of (2004) educational funds PETS compared the (schools received intended to cover amount of grant sent on average only 13 school’s nonwage down from the central percent of the grants) payments government to the amount received by schools Olken (2006) Indonesia Social Theft of rice Estimate by subtraction: At least 18 percent assistance from a program Administrative data were of the program’s rice that distributed compared to a generally disappeared before subsidized rice administered household reaching households survey Gorodnichenko Ukraine Multiple Bribes received Estimate from market Aggregate amount of and Peter by public sector inference: (2007) employees bribery estimated to Residual wage differentials be is between USD between the public 460 million – USD and private sectors 580 million, or about (consumption levels 1 percent of GDP of are the same in the two Ukraine groups and labor) Source: Olken and Pande, 2012. 154 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE FIGURE 5.1 Disaggregating Corruption Typology within Service Delivery Sectors Corruption Typology - Health Corruption Typology - Land HEALTH FUNCTIONS LAND ADMINISTRATION 1. Poor clinical protocols 1. Bribery and rent-seeking by land administration officials 2. Unnecessary interventions 2. Bribery of judicial authorities 3. Informal payments in interventions 3. Favouritism and nepotism by land in decision-making 4. Informal payments in waiting lists 4. Elite capture and preferential access to land titling schemes 5. Prescribing unnecessary or costly medicines 5. Manipulation and interference of records, adjudication and 6. Over-charging 7. Other cases of illegal contact dispute resolution 8. Inappropriate prescribing and misuse of the electronic 6. Manipulation of land valuation to secure higher prices and/ systems or reduce compensation payable 9. Over-treatment 7. Fraud and production of false claim documentation & LEADERSHIP & GOVERNANCE certificates 8. Embezzlement of public land administration funds & land 10. Capture by special interests 11. Inappropriate care strategies revenues 12. Dereliction by fraud, lax controls 9. Use of the institutions as a platform for private practice 10. Manipulation in public procurement of land administration HEALTH WORKFORCE services to win private contracts 13. Inappropriate selection for jobs, promotion or training 14. Inappropriate absenteeism CUSTOMARY LAND TENURE 15. Nepotism in restrictive expert groups 16. Inappropriate professional accreditation 11. Abuse of power by chiefs 17. Expert-bias in complaints procedures 12. Control over land revenues by influential people 18. Improper inducements for conferences, research, 13. Multiple allocations of the same plots 14. Conversion of customary and rural land for urban placements 19. Fake workshops and fake per-diems development 20. Discrimination against groups 15. Reluctance of officials to provide land services 21. Undeclared or tolerated conflicts of interest 16. National institutions and business interests override local 22. Fake reimbursement claims land rights MEDICAL PRODUCTS, VACCINES & TECHNOLOGIES MANAGEMENT OF STATE-OWNED LAND 23. Substandard, falsified medicines 24. Inappropriate approval of products 17. Collusion of government officials by private interests 25. Inappropriate product quality inspection 18. Manipulation of compulsory land acquisition and 26. Private sector collusion in markets 27. Corruption in new product R&D compensation processes 28. Companies ‘gaming’ the system 19. Inadequate legal framework for conversion to private land 29. Theft and diversion of Products 20. Irregular conversion of property classification status 30. Re-packaging of non-sterile and expired product 31. Legal parallel trade in drugs LAND USE, PLANNING & INVESTMENTS 32. Overly high pricing on non-medical products 33. Inadequate control of non-intervention studies 21. Capture of profits originating from land conversion and 34. Improper benefits from companies re-zoning 35. Improper acceptance of donated devices 36. Improper research, trial & marketing practices by companies 22. Abuse of government officials’ discretionary power to propose developments HEALTH FINANCING 23. Acquisition of land through state capture and/or by insider 37. Corruption in health insurance information 38. Corruption in procurement 39. Complex & opaque tendering procedures 24. Bribery of government officials by investors and/or 40. Decentralised procurement that enables corruption developers 41. Donor collusion in corruption 42. Corrupt invoicing by suppliers LARGE SCALE LAND ACQUISITION FOR INVESTMENT HEALTH INFORMATION SYSTEM 25. Bribery and manipulation of community leaders 26. Payments of bribes and kickbacks to officials involved in Not usually a source of corruption types approving land allocations Source: Curbing Corruption 27. Circumvention of agreed and legally binding consultation procedures 28. Political interference in land acquisition and allocation Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 155

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE What are emerging economies doing to address corruption in public services? Implementation of reforms takes time, providing The solutions being implemented in these three important lessons for emerging economies along sectors vividly illustrate the types of reforms that the way. Rose-Ackerman and Palifka8 offer general have a chance to take root in emerging economies. takeaways: “The most favorable cases are those in They take into account both the service type as well as which the number of beneficiaries builds up over time sector specifics. as reforms take effect to create a constituency for the new policies. In particular, reform is much easier if Some public services, such as land administration, the domestic and international business communities lend themselves to sector-wide “sunlight” reforms believe they will benefit from a reduction in corruption with a primary aim to modernize the sector and and patronage, and ordinary citizens benefit as well.” increase transparency, thus increasing the cost In other words, progress takes time, often decades, of malfeasance and reducing corrupt incentives in and sequencing matters. However, there are plenty service delivery. The case of Rwanda’s reform of land of anti-corruption initiatives focused on service mapping and titling is an example of such an approach. delivery ongoing around the world, many of them The reform was focused on good management practices showing promise, even if the progress is partial or in land administration, including the digitization of its sustainability not yet ascertained. It is this partial records. Even though rooting out corruption was not a progress and the potential reversals that offer lessons stated objective of the reform, the largely informal land for other countries on what works and what doesn’t in transactional system in place prior to the reform was particular sectors and contexts. especially conducive to corruption. Some of the most common types of corruption issues are bribe payments Although the issues and their corresponding to gain access to records; the production of fraudulent solutions are sector-specific, there are common documentation and certificates; circumvention of threads that can be derived when comparing procedures for allocating land or the duplicative reforms across sectors. This chapter focuses on three allocation of land plots; bribery of court officials; and distinctive service delivery sectors: healthcare, land refusal of basic services without payment. The reform administration, and port services. is one of the reasons why Rwanda scores significantly better in regional surveys on managing corruption in • Healthcare is an example of a frontline public land services than neighboring countries. In addition, service that affects virtually all citizens, as proven this reform took place during a period of post-conflict by the 2020 COVID-19 crisis. If plagued by recovery where land was a continuing source of tension. pervasive corruption, the outcomes in human Since corruption was a symptom of the underlying development can be impacted, which in extreme problem, the reform was able to use the post-conflict cases undermine governments’ legitimacy. window of opportunity to solve a number of underlying issues, including corruption. • Land administration – land titling and registration – affects a large proportion of the population and In other public services, such as healthcare, the is often a very sensitive sector that is central to sector-wide approach needs to focus on improving many economies. Especially in historically unequal the sector’s development outcomes that have been or post-conflict societies, corruption in land directly affected by corruption. In these cases, the administration can undermine land reform and fight against corruption moves away from financial citizens’ trust in government as a whole. compliance that “zero tolerance” approaches espouse, focusing instead on improving service delivery across • Port services may seem like a very specific issue; the sector. In Ukraine’s ongoing health system reform, however, they are a good example of a government- changing the incentives of healthcare providers involves to-business (G2B) service. Pervasive corruption decreasing relative benefits from corrupt transactions in ports directly affects trade and the investment as well as increasing their costs, resulting in better climate in the countries relying on maritime health outcomes. The reforms have been initiated for commerce, hampering their development. capitation financing in primary care; raising health 156 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE professionals’ remuneration; initiating transparent, the costs and risks of corruption, and government, merit-based medical university admissions and health which is trying to stem the flow of lost revenues. The staff appointments; and developing an eHealth digital collective action problem of the shipping companies record-keeping system. Even though still ongoing, was partly addressed by an international association these reforms aim to lower out-of-pocket expenditure, called the Maritime Anti-Corruption Network (MACN), reduce the number of acute medical events, and which brings together a group of shipping companies increase patient satisfaction with their care providers. collectively concerned about reducing the prevalence This is an example of a true “ecosystem reform,” of corruption in the sector. MACN and UNDP have in which changes to legislation are going hand-in- piloted some reform programs globally and so were hand with executive implementation and strong civic able to play a constructive key role in Nigeria’s ports engagement to serve as a feedback loop. sector reform. The network worked together with the Nigerian government to initiate and implement Successful sector reforms specifically focused measures with an aim to reduce corruption. These on rooting out corruption in service delivery are included developing corruption risk assessments of possible when coalitions are formed. In the case five ports, followed by standardizing procedures, using of the program to combat corruption in Nigeria’s an e-governance portal, and establishing a grievance ports, such a coalition included private shippers, mechanism. Surveys conducted by the network and its the United Nations Development Program (UNDP) partners suggest the measures had a positive impact and three of the country’s anti-corruption agencies. in improving functioning of the ports, even though Shipping is a sector where it is possible to align the substantial work remains to be done. incentives of private companies, concerned about What can we learn from these examples? The reform approach need not be designed extortion more difficult to hide. specifically to combat corruption, but rather aim to resolve its impact. Sector-wide reforms will have anti- Although each approach was different, it seized corruption effects as long as they increase the costs and/ an existing political window of opportunity for or reduce the benefits of corrupt transactions. When reform. In Rwanda, it meant addressing the land the reforms specifically target corruption in a sector, titling issue during the post-conflict period by creating they seem to work when there is a strong pro-reform more transparency. In Ukraine, the reform was a coalition between the anti-corruption champions in response to a public health crisis, facilitated by the ripe the government and businesses or citizens. In order for political climate. In Nigeria, an international shippers’ businesses and citizens to be able to become agents of association with strong commercial incentives found change, their collective action problem must be solved. willing partners in the UNDP and three anti-corruption To this end, an international network or body may help agencies that were motivated to show positive results in galvanize the effort. combating corruption. In all three cases, employing information and None of the three reforms are fully finished, communication technologies played a role, but uncontroversial, or immune from possible reversals. only insofar as they changed the underlying Rwanda’s top-down approach calls into question the incentives. In Rwanda, the land records were digitized, reform’s sustainability. Ukraine’s success continues to which brought the necessary amount of “sunlight” into depend on the ability of the reformers to sustain their momentum. In Nigeria, despite improvements, there the system, which meant that this basic information is still a long way to go until corruption in ports is fully rooted out. However, intermediate results in all three could no longer be bought and sold. In Ukraine, a digital cases show that progress is possible even in very challenging environments. eHealth platform connected to the reimbursement system was initiated to ensure greater transparency in payments. In Nigeria, an e-governance portal was introduced for the ports, making malfeasance and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 157

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE CASE STUDY 12 CASE STUDY 12 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Land Administration Reforms in Rwanda Improving land administration through the Land Tenure Regularization (LTR) program in Rwanda Overview Introduction Rwanda set out to address the issue of land ownership Historically, insecurity over land ownership was a critical and land-related challenges through passage of several part of the tension between communities, Addressing laws and policies. The 2004 National Land Policy insecurity around land has consequently been one of the provides general guidance on a rational and planned foremost priorities of the post-conflict reforms initiated use of land while ensuring sound land management and in Rwanda following the 1994 Rwandan genocide. The efficient land administration. The policy was developed long-term solution was found to be the initiation of a to address land-related challenges, including a land land reform. The reform started with a new policy and tenure that was dominated by customary law, resulting law in 2004 and 2005 respectively. in land fragmentation, a practice that reduces further the size of family farms below the threshold of the The problems of conflict and corruption are closely average surface area that is economically viable. A wide- interlinked. As surmised by Apollinaire Mupihanyi, ranging program initiated by the Rwandan government Executive Director of Transparency International between 2008 and 2012 to map and title land parcels Rwanda, “when there is conflict, this increases for the entire country has played an important role in corruption... people with wealth buy their way out of improving service delivery and reducing corruption problems. Vulnerable people are the worst affected, risks. especially poor Rwandans and women.” The reform process did not stop with the land titling Corruption was one of the symptoms of the deficiencies program, and since 2012 the Rwanda Land Use and in Rwanda’s land administrative system in place Management Authority has been grappling with the following the conflict. In its 2007 activity report, the challenge of maintaining digital records for over 10 Rwandan Ombudsman identified the land registry million land parcels. This has required extensive training as the government agency about which it received of officials and campaigns to raise awareness around the third highest number of complaints, including the land registry system. While these challenges are complaints of corruption.9 A qualitative study published ongoing, the country can claim important successes in by Transparency International Rwanda in 2009 on the having formalized its land administrative system. Even land administrative system in Kigali also revealed if reducing corruption may not have been an overt aim widespread citizen dissatisfaction and concern around of the project, this is one of the reasons why Rwanda corruption, particularly related to land expropriation. compares positively to its peers in East Africa for the low prevalence of corruption in land administration. The largely informal land transactional system in 158 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE place before reform in Rwanda gave rise to a range improvements in land governance in Rwanda and of corruption risks. In the absence of consistent and improved integrity in the provision of land services.11 objective land ownership information, land officials and the courts have broad discretion when mediating The implementation process land disputes, increasing their potential susceptibility to improper influence. Some of the most common The process of land reform in Rwanda initiated in types of corruption issues in service delivery, which the 2000s was first premised on changes to its legal occur in informal land administrative systems, are framework for land. The Rwandan Constitution (2003), bribe payments to simply gain access to records; National Land Policy (2004) and Organic Land Law the production of fraudulent documentation and (2005) had all provided a basis for legal recognition certificates; circumvention of procedures for allocating of land rights and established clearer mechanisms for land or the duplicative allocation of land plots; bribery enforcing rights and resolving conflicts. With a legal of court officials; and refusal of basic services without framework in place, the Land Tenure Regularisation payment.10 (LTR) program then set out with the goal of issuing title registers to all landowners in the country. The program While addressing land ownership as one of the sources can be divided into two phases: the land mapping and of conflict may have been the foremost motivation titling project, initiated in 2008 and concluded in 2012, for land tenure reform in Rwanda, important lessons and the development and maintenance of the digital from the program subsequently implemented have registry to make this service available to the public. relevance to anti-corruption practitioners. Faced with a largely unmapped national tenure system, the country Phase I: Land mapping and titling embarked on an ambitious program to formally map and digitize all land titles across the country. After Multilateral agencies such as the African Development the process, the government then had to improve the Bank (AfDB) have cited the Rwandan government’s public’s knowledge and understanding of the new approach to its land titling program as an example of system, and the land registry had to find a sustainable way to maintain and administer the digital database. Overcoming these challenges has led to important Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 159

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE good practice.12 The biggest challenge the Rwandan been integrated into the Rwanda Natural Resources authorities had to overcome was that land ownership Authority (RNRA), a larger government agency whose was largely unmapped: in 2005 the land registry held remit also covered the management of other natural titles for only 20,000 parcels for a population of over resources such as water, forestry and mines, underwent 9 million people. The National Land Centre, the land a transformation from the focus on mapping titles administrative agency and registry which was then to administering the large database that had been responsible for the reform,13 took an important early created. This necessitated investment in skills and decision in the implementation process to pilot the training of registry officers. In 2012, the RNRA rolled out project in four areas between 2006 and 2009, covering new software to record the different categories of land 15,000 plots of land within three districts. This enabled transactions that had been formally established under the agency to test the practicalities of implementing the new system. Again, in a move designed to lower the program, the results of which informed the Strategic costs, the registry made use of existing open source Roadmap for Land Tenure Reform in Rwanda, an software to build its Land Administrative Information organizing document that was adopted by the cabinet System. in 2008. Perhaps the most significant challenge to overcome On the basis of the pilot’s findings, the Strategic was the initially low level of citizen engagement with the Roadmap concluded that the most effective means new administrative system. The processes introduced for mapping the entire country was to use aerial were entirely new to citizens, which was reflected in photography. This had the advantage of being quicker the fact that by 2012 less than a million people had and more cost effective than demarcating parcels collected their title documents, while in 2013-14 only entirely through on-site surveying. It involved using 10,535 transactions were recorded in the land registry. airplanes and helicopters to photograph land parcels The RNRA responded by commencing a large-scale based on visible boundaries. Once the photographers public awareness campaign, which included media identified possible boundaries, staff from the National advertising and holding events, such as a national land Land Centre visited individual parcels to determine week. The registry additionally decentralized services, their ownership. establishing district land commissions supported by committees at sector and cell level, the smallest Completing such a large exercise required a significant organizing units of local government in Rwanda, to increase in personnel numbers at the National Land make services more accessible to citizens. The end Centre. In 2008 the agency recruited 100 permanent result was that by mid-2017, 7.16 million landowners employees, 800 contract workers and more than had collected their titles and in 2015-16 the number of 5,000 casual personnel. The employees gathered data recorded transactions had increased tenfold.16 on parcels, which was then transmitted to a central office and, after allowing for a period for corrections Securing the financial sustainability of the new system and objections, digitized to enable land titles to be has also proven to be a key challenge. The mapping issued. In the correction stage, one innovation was program had received substantial funding from donors the large-scale mobilization of citizens, up to around of around USD67.5 million.17 The funding was due 110,000 people, to assist in adjudicating disputes.14 to end in 2013 and, although the UK Department for This was based on training community members to hear International Development continued its support to the different views on the land ownership information that registry, this was at a lower level, making it necessary had been gathered and establishing land committees to find ways of self-financing. The registry team had in each district. By 2012, the database held information difficulty in fully engaging the finance ministry to provide on 10.4 million land parcels.15 adequate funding, while revenue from administrative fees had not yet been sufficient to entirely fund Phase II: Establishing a land operations due to problems of affordability for citizens administrative structure in obtaining titles.18 While a major achievement in itself, the land mapping As of 2020, the registry is an independent entity and and titling program did not represent the end of this known as the Rwanda Land Use and Management process. The National Land Centre, which by then had Authority, but securing financing has been a challenge. There was some concern that donors may step back 160 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE from supporting the sector with the registry system track changes in land use and provide information in place, threatening what has been achieved to date. for land use planning.20 These two areas are Experts still believe that more awareness around the vulnerable to corruption, given the significant benefits of recording transactions needs to be built, changes in monetary value that occur in land use as a significant number of transactions take place planning. informally, particularly in rural areas. Transaction fees may therefore be a factor inhibiting access to service. An indication of the benefits of this reform process can This points to the need for consistent long-term be seen by comparing survey data on the corruption in financial support in maintaining the registry. land administration in Rwanda to its neighbors in East Africa. The East African Bribery Index captures key data Reflections on corruption in service delivery across various sectors in the region. Analysis conducted by Transparency The land reform program is widely recognized as having International Kenya for the period 2010–2014 found made an important contribution to helping manage that Rwanda scored significantly better in managing the conflicts that are present around land use and corruption in land services than neighboring countries. management in Rwanda. The AfDB considers that the Its aggregate score for corruption in land services in process resulted in a ‘noticeable element of increased 2014 was 12, where scores range from 0 to 100, and efficiency, transparency, citizen participation and 100 is the worst score. This compares favorably with development of viable land governance institutions.’19 Burundi (42), Kenya (55), Tanzania (36) and Uganda (60). The aggregate score brings together five indicators: Apollinaire Mupihanyi, Executive Director of the likelihood of encountering bribery, the prevalence Transparency International Rwanda, believes that of bribery, the average size of a bribe, the share of the the land reform also had an important impact on ‘national bribe’, and the perceived impact of bribery.21 reducing corruption: “Although we can’t say that with As of 2020, more recent data on corruption in the land digitalization all issues were solved, I ascertain that services sector in Rwanda was unavailable. corruption was drastically reduced.” He also cited the benefits that “transparency and clear management” in The scores for land services are consistent with various this sector have for land values and investor confidence. reports and surveys, which have concluded that the While this may not have been the principal, or even prevalence of corruption across different types of an explicit, aim of the project, lessons can be drawn public service delivery in Rwanda is low by regional from this case for reducing corruption risks in service standards.22 However, the same may not be true of all delivery. The system that was established has several sectors. transparency in certain areas of government key characteristics that can help to reduce corruption activity such as procurement or the organization of risks. elections can be limited.23 • Fees for services and obtaining documentation are Notwithstanding this point, the case shows the value of standardized and publicly advertised, including on scrutinizing broader governance reforms to determine the agency’s website; whether gains in reducing corruption have also been achieved. By regularizing the land tenure system and • Citizens can use a mobile texting service to directly making land ownership information readily available, access land registration information without the the reforms implemented have played an important need to obtain this from land officials; role in upholding high standards of integrity in service delivery in land administration in Rwanda. • This independent source of land ownership information can be used to settle contested points and ambiguities, which in an informal system create space for improper forms of influence to be used; and • The database produced has already been used to Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 161

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE CASE STUDY 13 CASE STUDY 13 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Collective Action for Reforms in Nigeria Ports Collective action to spur changes in functioning of ports in Nigeria Overview Introduction Ports in Nigeria face corruption that deeply impacts their Ports in Nigeria face corruption challenges that operational effectiveness with harmful consequences are rooted in the sector-wide issues. A 2018 report for the country’s economy. While the issues persisted prepared by the Lagos Chamber of Commerce and for a long time, an anti-corruption program instigated Industry estimated that illegal charges, bureaucratic by the Maritime Anti-Corruption Network (MACN) and red tape, delays and capacity underutilization in ports its partners in Nigeria since from 2012 has nonetheless cost the country around 3% of gross domestic product demonstrated that progress in countering the problem (GDP) annually.25 These are long-standing problems. is possible.24 Commenting on the situation in the 1990s, Chatham House wrote that “ports in Lagos had a notorious The MACN brought together a global group of over reputation: vessels often had to wait for weeks – 100 companies in the shipping sector that wanted to sometimes months – offshore until a berth became free, reduce the prevalence of corruption in ports around while rampant corruption added hugely to the time and the world. Beginning with a risk assessment of five cost entailed in clearing cargo for onward delivery to its Nigerian ports, the network worked together with final destination.”26 government agencies, port authorities, and civil society to implement a series of measures designed to reduce Challenges of congestion and lack of adequate corruption. These included standardizing procedures, infrastructure resulted in its biggest port Apapa in using an e-governance portal, and establishing a Lagos losing its leadership position as a regional grievance mechanism. Surveys conducted by the gateway for shipping to the neighboring port of Lomé network suggest the measures have had a positive in Togo. In 2017, Lome became the largest port in West impact in improving the functioning of ports. Though Africa by volume of containers handled.27 there is still a long road ahead to tame corruption in Nigeria’s ports, this case study shows how anti- Interaction between government and business in corruption measures can make incremental progress Nigerian ports faced threats of delays, unpredictability in challenging sectors through collective action and and confusion around processes that lead to illicit stakeholder collaboration. payments to circumvent procedures. Based on a survey 162 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE of 79 leaders in the industry, the Lagos Chamber network adopted a clear step-by-step reform strategy, of Commerce estimated that illegal charges added beginning with a risk assessment (2012–2014), before 50% to the cost of imports and 60% for exports.28 In policy implementation (2015–2017) and then collecting addition to being a major source of lost revenue for data for a preliminary impact assessment (2017).30 the government and increasing the cost of goods for citizens, illicit payments increased operational costs for Risk assessment (2012–2014) companies and exposed them to significant regulatory risk. As a result, both businesses and the government The United Nations Development Program (UNDP) had strong incentives to work together to address office in Nigeria, which had an existing relationship with these issues. the Nigerian authorities around the themes of trade and governance, played a critical role in launching and Recognizing the magnitude of the problems in the coordinating the reforms. The UNDP also coordinated shipping industry, a group of shipping companies with three Nigerian anti-corruption agencies involved banded together in 2011 to form the MACN. The in the reforms. These were: group, which included Maersk, the Mediterranean Shipping Company and Stena Bulk, grew to include • The Technical Unit on Governance and Anti- over 100 members worldwide, including vessel owners, Corruption Reforms, which is primarily a research ship managers, commodity trading firms, and service and policy unit. It produces country surveys and providers. Business for Social Responsibility, an develops tools and indicators for monitoring international civil society organization, managed the corruption and governance issues; network. A key guiding principle of the network was to engage with multiple stakeholders in government and • The Independent Corrupt Practices Commission, the private sector. “As soon as you have a stakeholder which is involved in both the prevention and who is out of the room, they take the blame for the enforcement of corruption. This project fitted problem,” said Cecilia Müller Torbrand, MACN’s within the agency’s prevention mandate, which has Executive Director. “Stakeholders become constructive included reviewing the procedures and practices when they work together.” of government bodies to identify weaknesses in managing corruption risks; and Following its establishment, the MACN began researching countries where it could work with • The Bureau for Public Procurement, a federal government authorities to test a series of anti-corruption agency which makes recommendations on best measures. After surveying its members on the most practice and supervises public procurement. It has challenging ports globally in terms of corruption, and a track record in anti-corruption work and has built assessing the willingness and capacity of the local a reputation as an effective agency. government to support reform, the MACN decided to launch a pilot program in Nigeria. The program covered The involvement and coordination of these three five ports: Lagos Apapa, Lagos Tin Can, Port Harcourt, agencies, which generally operate independently, Port Calabar, and Port Warri. MACN’s decision to provided an important foundation to implement the choose Nigeria to pilot its approach was a significant program. The three government agencies carried challenge, as it was expected that many businesses and out a corruption risk assessment, which followed a government officials would resist any change. methodology developed by the UNDP. The agencies put together a team of 20 assessors who conducted The implementation process inter views and reviewed data from 17 different stakeholder groups in the ports sector, ranging from the When confronted with corruption entrenched in the Nigerian Ports Authority, to Customs and Immigration functioning of a sector, it can be difficult to find an entry Services, and shipping companies and freight point for reform. To overcome this difficulty, MACN forwarders. The assessment was structured around consulted widely within its network to determine that three levels of risk: the environmental level, focusing on conditions for reform were present in Nigeria. The broader macro factors that influence corrupt behavior, such as economic, political and social issues; the organizational level, reviewing the internal processes Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 163

PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE and controls across port organizations for gaps; and the The Port Service Support Portal, which aims to personnel level, identifying specific individuals at risk of standardize cargo handling and import-export involvement in corruption.31 operations across Nigeria’s ports, also seeks to improve the efficiency and transparency of the ports’ The assessors initially faced opposition, with agencies systems. Installed at a cost of USD159,000 by the at some ports refusing to participate in the exercise Nigerian Shippers Council, companies are able to out of fear that the assessments would expose illegal track online the status of port service enquiries and practices. The assessors were able to overcome this complaints, data which can also be used to assess the problem due to high-level support from the leadership performance of agencies.34 Research in ports in other of the Nigerian Ports Authority, the federal government countries has shown that technology and automation agency which oversees all the ports. The government of procedures are two tools which can help counter agencies themselves were also able to push back on corruption. Technology reduces the frequency of this opposition by emphasizing both the value of the interaction between companies and multiple layers of exercise for improving operational effectiveness and government officials and agencies, often conducted in the support from shipping businesses and the UNDP. time-pressurized circumstances in this sector.35 Even when the ports fully participated in the exercise, In addition, a grievance mechanism provided an the assessors faced challenges. Most of the port outlet for shipping companies to report incidents and agencies lacked clear process maps and had not raise concerns, thus improving the level of data and established standard operating procedures (SOPs). knowledge collected on corruption in the ports. The Without those in place, the assessors could not compare number of incidents reported by members, including actual practice with established standards.32 safety-related incidents, increased from 6 in 2011 to 155 in 2017.36 The Nigerian Ports Authority also set up The assessment identified several key risks in the an anti-corruption and transparency unit to investigate operating practices of the ports. The biggest was the concerns in 2016, although it is still to be seen how excessive level of bureaucratic red tape. For example, effective the agency can be in ensuring implementation the assessors found that getting clearance for a vessel of appropriate responses to the complaints raised.37 and its cargo in Lagos could require as many as 140 signatures from officials at local authorities and port While the measures introduced helped to reduce agencies.33 Other risks highlighted in the assessment opportunities for corruption, progress is not linear. included facilitation payments made by ship captains, A fundamental reform of routine practices is a much unpredictable and unclear decision-making processes, longer-term process. In this regard, a train-the-trainers and a lack of internal communication and training module led by the Convention on Business Integrity around anti-corruption. These points all informed the (CBi), a leading Nigerian civil society organization, recommendations subsequently developed by the showed how a large number of personnel could be MACN and its government partners. reached to raise awareness. The training focused on professional ethics and was structured around several Policy implementation (2015–2017) scenarios, which had been developed around the problems in the sector garnered from the corruption Over a two-year period, the MACN and its government risk assessment. Both public and private stakeholders partners implemented a series of reforms in the ports attended the training. The co-founder and CEO of the sector. Many of these measures go hand in hand CBi, Soji Apampa, said in interview that the training with improving organizational effectiveness. One key had been well-received and “confirmed something priority, for example, was to develop and distribute that we have long known: people are corrupt because SOPs for vessel clearance at the ports. The aim was to they have no alternative. It is not because they are evil improve transparency around a process which has been but because they are trapped in a system… If you give highly susceptible to corruption. Publishing standards people the option of integrity, they will take that path, meant that companies had a clearer reference point but they have to be made aware.” when assessing the legitimacy of demands for payment for alleged violations of procedures. 164 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption