Water Working Notes Are Published by the Water Sector Board of the Sustainable Development Network of the World Bank Group

46829 WaterWater Working WorkingNotes Notes Public Disclosure Authorized Note No. 18, December 2008 Public Disclosure Authorized DETERRING CORRUPTION AND IMPROVING GOVERNANCE IN THE URBAN WATER SUPPLY & SANITATION SECTOR A SOURCEBOOK Jonathan Halpern, Charles Kenny, Eric Dickson, David Ehrhardt, and Chloe Oliver Public Disclosure Authorized Public Disclosure Authorized Water Working Notes are published by the Water Sector Board of the Sustainable Development Network of the World Bank Group. Working Notes are available on-line: www.worldbank.org/ water. Working Notes are lightly edited documents intended to elicit discussion on topical issues in the water sector. They disseminate results of conceptual work by World Bank staff to peer professionals in the sector at an early stage, i.e. “works in progress”. Comments should be emailed to the authors. Acknowledgements This Sourcebook was prepared as part of a broader program of work addressing governance and corruption in infrastructure of the Energy, Transport, and Water Department and Finance, Econom- ics and Urban Department of the World Bank. The sourcebook and a companion dissemination note were prepared by a Bank team comprised of Jonathan Halpern, Charles Kenny and Eric Dickson, sup- ported by Castalia (David Ehrhardt, Alex Sundakov, Seini O’Connor, and Chloë Oliver) with guidance provided by an advisory group comprised of sector and governance specialists across the regional and central units of the World Bank. A number of Bank staff provided valuable contributions at vari- ous stages including Anders Hjorth Agerskov, Alexander Bakalian, Ivor Beazley, Philippe Benoit, Steven Charles Burgess, Ed Campos, Robert Chase, Fook Chuan Eng, Marianne Fay, Meike van Ginneken, Mohinder Gulati, Erica Jorgensen, Brian Levy, Alain Locussol, and Jon Walters. Any errors and omissions are solely the responsibility of the authors. Special thanks are due to the Swedish International Devel- opment Cooperation Agency (SIDA) which provided generous financial support for this undertaking. Disclaimers The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, USA, fax 978-750-4470. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street N.W., Washington DC, 20433, fax 202-522-2422, e-mail: [email protected]. Contact Details To order additional copies, please contact the Water Help Desk at [email protected]. This paper is available online at http://www.worldbank.org/water. Copyright © 2008 The International Bank for Reconstruction and Development/The World Bank. All rights reserved. PREFACE In 1996, then World Bank President James Wolfensohn appealed to the international development community to fight the “cancer of corruption”, bringing corruption to the fore of the World Bank’s agenda. A year later, in 1997, the Executive Board endorsed the paper Helping Countries Combat Corruption: the Role of the World Bank, which “fundamentally reformed the way the World Bank thinks about and acts against corruption”, and set policies for how the World Bank would tackle corruption. In March 2007, the Executive Board unanimously endorsed a new strategy and set of policies to improve governance and fight corruption: Strengthening World Bank Group Engagement on Gover- nance and Corruption. The strategy essentially confirmed the 1997 commitment to fight corruption, but with an important difference in emphasis: “reducing corruption by strengthening governance” rather than simply “stopping corruption”. Six months later, in September 2007, the World Bank finalized the Implementation Plan for the strategy. A key element of the Implementation Plan is to develop sector-level diagnostics and interventions, specifically signaling the need to “mainstream governance and anticorruption [activities] in sectors … where opportunities for interventions are often more immediate”. This Sourcebook is part of a broader program of work on governance and corruption in the water supply and sanitation sector. The Sourcebook is meant as a resource to assist water and sanitation sector practitioners to assess the extent and risks of corruption in the sector and to improve governance in ways that reduce corruption. As this is an emerging field, the sourcebook is not intended to be a manual, nor a set of directives but rather to organize and illustrate approaches and tools which sector practitioners may find useful. The work program on governance and corruption of which these sourcebooks are a part includes an extensive database of academic and operational literature on governance and anti-corruption, a review of global knowledge and of World Bank practice that was presented and reviewed by sector and governance specialists. iii ACRONYMS AND ABBREVIATIONS ADB Asian Development Bank APC Aguas de Puerto Cortés BEEPS Business Environment and Enterprise Performance Survey CAS Country Assistance Strategy CoST Construction Sector Transparency Initiative CPI Corruption Perception Index CPIA Country Policy and Institutional Assessment CRC Citizen Report Card DFID Department for International Development DIR Detailed Implementation Review EBRD European Bank for Reconstruction and Development IBNET International Benchmarking Network for Water and Sanitation Utilities IDA International Development Association IDB Inter-American Development Bank INT Department of Institutional Integrity IT Information Technology KDP Kecamatan Development Project MDB Multilateral Development Bank NGO Non-governmental organization NRW Non-revenue water NWC National Water Commission PACS Project Anti-Corruption System PIP Performance Improvement Plan PMU Project Management Unit PSP Private sector participation QSDS Quantitative Service Delivery Survey SABESP Companhia de Saneamento Básico do Estado de São Paulo Water sector Combined water and sanitation sector WSP Water and Sanitation Program iv TABLE OF CONTENTS 1 INTRODUCTION ...................................................................................................................... 1 1.1 What’s in the Sourcebook .......................................................................................... 1 1.2 How to Use the Sourcebook ...................................................................................... 2 1.3 A Sourcebook, not a Toolkit ....................................................................................... 2 2 UNDERSTANDING CORRUPTION AND GOVERNANCE ........................................................ 4 2.1 Definition of Corruption .............................................................................................. 4 2.2 Dynamics of Corruption ............................................................................................. 6 2.3 Persistence of Corruption ........................................................................................... 8 2.4 To Reduce Corruption, Improve Governance ........................................................ 8 2.5 Four Levels of Governance Analysis ....................................................................... 10 2.6 Dealing with Second (and Third) Best Solutions .................................................... 12 PART I ASSESSING CORRUPTION RISKS ..................................................................................... 17 3 COUNTRY LEVEL SCAN FOR CORRUPTION RISK ................................................................ 19 4 SECTOR ASSESSMENT .......................................................................................................... 24 4.1 Sector Performance and Efficiency Indicators ..................................................... 24 4.2 Asset Observation ..................................................................................................... 24 4.3 Informal Service Provision ......................................................................................... 26 4.4 Stakeholder Complaints and Dialogue .................................................................. 27 4.5 Surveys of Corruption in Infrastructure Sectors ...................................................... 28 4.6 Mapping Corruption Risk across the Water Supply and Sanitation Sector ........ 29 5 DETECTING CORRUPTION AT THE PROVIDER LEVEL ........................................................... 39 5.1 Suppliers and Contractors ....................................................................................... 39 5.2 Connections and Commercial Operations ........................................................... 42 5.3 Human Resources ..................................................................................................... 44 5.4 Company Property and Money

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