March 2002 The World Bank Page No. Executive Summary i Chapter 1: Poverty, Governance And The Performance Of the Public Sector 1 Chapter 2: Obstacles to Governance Reform 11 Chapter 3: Strengthening Accountability 21 Chapter 4: Tightening Financial Management 39 Chapter 5: Decentralizing to Improve Service Delivery 55 Chapter 6: Energizing Administrative Reform 69 Chapter 7: E*Government for Better Governance 83 Chapter 8: A Strategy for Improved Governance and Better Performing Institutions 89 Annex 1: Learning from a Decade of Institution Building 105 Annex 2: Bibliography 125 Box A: Villagers Perceptions of Ups v Box 1.1: Structure of the State 2 Box 1.2: Voices of the Poor 4 Box 1.3: Government That Works (1996) 7 Box 1.4: Privatization at Snail’s Pace 8 Box 2.1: Why I am a Corrupt Businessman 13 Box 2.2: Home grown Management of Institutional Change – The Case of BWDB 17 Box 3.1: Combating Corruption with Information in Rajasthan 32 Box 4.1: RIBEC – A Successful Reform Initiative 39 Box 4.2: Making the Budget and Public Accounts Transparent The Example of Guatemala 47 Box 5.1: The Good, the Ordinary, and the Ugly -- Portraits of Three Unions 58 Box 5.2: Public Expenditure Tracking in Uganda – Promoting Transparency 60 Box 5.3: Overcoming Arsenic Poisoning of Water Supplies -- A Community Approach 65 Box 5.4: Village Organizations in Kishorenganj 66 Box 6.1: Motivating Accounts Staff to Work Better 74 Box 6.2: Protecting the Common Citizen from State Abuse the Peruvian Ombudsman: Defensoria del Pueblo 76 Box 7.1: E*Government in Andhra Pradesh 84 Box 8.1: Governance Score Cards 97 Box 8.2: Moving from Projects to Program Support in Uganda 103 Table 5.1: Adequacy of Services and attention received from UPs 61 Table 5.2: Services rendered by UPs 62 Table 5.3: Problems in their relations plus obstacles and constraints faced by UPs 63 Table 5.4: Possibilities of mutual support between Union Parishads and NGOs 64 Chart 4.1: Gross Reserves 38 Chart 4.2: Inflation 38 Chart 4.3: Exchange Rate Movements 38 Figure 1: Institutions and Growth: Capacity improves economic growth viii Figure 2: Enhancing State Capability viii Figure 1.1: % Investment Share in GDP 5 Figure 1.2: Income per Capita Growth Rate 5 Figure 3.1: External horizontal and vertical checks on the executive 22 Figure 4.1: Types of Financial Irregularities 46 Diagram 5.1: Services Received from the UPs 61 The Review has been prepared by a team lead by Pierre Landell-Mills and including: Khurshid Alam, Jorge Barenstein, Nurunnabi Chowdury, Phil Keefer, Rick Messick, Shirin Pasha, Habibur Rahman, Vinod Saghal, Robert Schware and Geof Wood. Case studies were contributed by Helen Abadzi, Guy Alaerts, Asarul Islam Chowdhury, Henry Gassner, Mohammad Iqbal, Reazul Islam, Tajul Islam, Keiko Miwa, Thampil Pankaj, Mohi Uz Zaman Quazi, S.A.M. Rafiquzzaman, Paul Thornton, and Jan Weijenberg. Valuable comments were received from Fakhruddin Ahmed, Sadiq Ahmed, Rashid Faruqee, Ashraf Ghani, Kapil Kapoor, Reidar Kvam, Yashiku Masuda, Michael Stevens, Frederick Temple, Tara Vishwanath and Roberto Zagha. This Review has drawn heavily on a very substantial literature on governance, institution building, and public management relating to both Bangladesh and other developing countries. Only a selection of these are noted in the Bibliography. The Review also benefited from a series of focus group discussions in June 1999 with young businessmen, middle level civil servants, researchers, and representatives of NGOs. Lastly, two surveys were conducted: one (undertaken by CAPRe) covering the views of representatives of local government, NGOs and citizens in a sample of Unions; the other (undertaken by Professor Muzaffar Ahmed) covering the views of public officials in the Secretariat, Departments and Districts. Five major Background Papers and 12 case studies of public agencies were prepared. These are listed in the Bibliography. This Review aims to analyze the underlying causes of Bangladesh’s poor governance, the consequential weak performance of public institutions, and reasons for the slow response of the government to proposals for pub lic sector reform. In essence, good governance depends on establishing effective checks and balances on the exercise of official power, thereby holding public officials accountable so that they become true servants of the publics they are supposed to serve. And transparency is the handmaid of accountability. Too little attention has been paid to this fundamental prerequisite. The performance of public agencies should be publicly tracked and measured against clearly established benchmarks. This Review outlines ways to help strengthen such accountability mechanisms. A central theme of the Review is that for public sector reform to be successful there must be benefits for all stakeholders whose cooperation is needed. Special attention must be given to the incentives – formal and informal -- that drive the behavior of public officials and the social context in which they operate. The Review concludes that reform of public institutions will be a gradual and laborious, but not impossible, task that requires a clear long term vision, a readiness to investigate and make explicit the factors that drive behavior, pragmatism in exploiting windows of opportunity, a readiness to adjust programs in the light of experience, imagination in circumventing entrenched vested interests, and a willingness to be engaged over the long haul. Institutional reform takes decades not years and even then will only succeed if pursued with a constancy of vision and determined single- mindedness. In conclusion, the Review underlines the centrality of achieving great accountability and transparency in government operations if Bangladesh is to achieve more rapid and sustainable development. To this end priority should be given especially to: human development as a fundamental prerequisite for enhancing the awareness and capacities of civil society; judicial reform to help impose the rule of law and to underpin accountability mechanisms; and by strengthening civil society organizations to help articulate and empower the “voice” of ordinary citizens in demanding better governance. Lastly, the quality of donor coordination needs to be greatly improved to achieve a common and coherent approach to supporting improved governance and institution building. As a follow -up to the management review of the draft World Bank’s policy paper Addressing the Challenge of Reforming Public Institutions (July, 1998), a decision was taken to pilot a number of country institutional reviews. The objectives were: to make an assessment of the status of institutional reforms and the related efforts to strengthen public management and governance; and to propose recommendations for improving the donors’ assistance in this area. This Review is intended to help sharpen the institution building focus of the country’s development strategy, and contribute to the public dialogue among representatives of the government, civil society and development partners on improving governance. Bangladesh was selected as one of the pilots. The Review is based on a preparatory mission to Bangladesh undertaken by Pierre Landell- Mills and Rick Messick in March 1999, a main mission consisting of Jorge Barenstein, Phil Keefer, Pierre Landell-Mills, Rick Messick, Vinod Saghal, and Geof Wood in June 1999, reports on administrative and local government reform prepared by Nurunnabi Chowdury and Habibur Rahman, a review of implementation completion reviews and audit reports of all IDA supported projects completed between 1990 and 1998 and supervision reports of ongoing projects, undertaken with the assistance of Shirin Pasha, and twelve case studies of institution building prepared by Bank staff/consultants. The full list of background papers and case studies is given below. Pierre Landell- Mills drafted the main report. This Review was prepared in parallel with that of the Public Administration Reform Commission. The World Bank team had several discussions with the Commission and shares many of the conclusions and recommendations of their Report issued in June , 2000. The Review has taken as its starting point the Bank’s comprehensive study of public sector institutions entitled Government That Works published in June 1996. The Review seeks to understand why the government has done so little since then to tackle the weaknesses in public sector performance so vividly portrayed in that study and to probe more deeply into the underlying motivational and socio-political factors that have constrained public sector reform. It identifies the core issue in improving public service delivery and policy making and implementation to be the absence of adequate mechanisms to hold public officials accountable for their actions, or lack of action, and recommends focused assistance on nurturing accountability mechanisms. Effective accountability depends on instituting far greater transparency in public agencies than is the current practice and in mobilizing public opinion through participation and education to insist on better public sector performance. Redefining the role of the government -- refocusing the public sector on the core functions of government and leaving business activities to the private sector -- although agreed in principle, largely remains to be done. Privatization has been stalled by vested interests and, in the absence of effective regulation, the private sector has often abused the public’s trust. This undermines public support for