Corruption in the Water Sector

Janelle Plummer Patrik Stlgren Piers Cross

World Water Week - Stockholm 22 August 2006

The Challenge

Inefficient use of existing water sector finances Lack of investment Millions dying from lack of clean water and basic sanitation: Reaching the MDGs is unlikely Degradation of water resources and ecosystems Unjust distribution of water services and resources Lack of democratic influence for stakeholders

Corruption affects who gets what water when, where and how. It determines how costs are distributed between different actors and the environment.

How big is the corruption problem?

Varies across the sector and national/sub-national governance settings

World Bank estimates of project corruption in highly corrupt countries could be 30-40% prior to anti-corruption initiative If 30% is correct US$20 billion could be lost in the next decade to meet the MDGs for WSS in Africa* Much need for diagnostics!

WSS in South Asia False readings: 41% of customers had paid a bribe in last 6 months Illegal connections: 20% of households admitted paying a bribe to utility staff Contractors: 15% excess cost because of collusion Kickbacks: 6-11% of contracts value
(Davis,WSP Study, 2003)

* Based on a 6.7 US$ billion annual estimate for WSS expenditure requirements

What is corruption?

Definitions the use of public office for private gain (WB) the abuse of entrusted power for private gain (TI)

Corruption comes in many forms

Bribes: payments to public officials to persuade them
to do something (quicker, smoother or more favorably).

Collusion: secret agreement between contractors to increase profit margin Fraud: falsification of records, invoices etc. Extortion: use of coercion or threats. E.g. a payment to secure / protect ongoing
service (cf. collusive corruption where both sides benefit)

Favoritism/Nepotism in allocation of public office

Grand corruption: high level, political corruption

Petty corruption: corruption in public administration and/or during
implementation or continuing operation and maintenance

Examples of corruption in the water sector

Falsified meter readings Distorted site selection of boreholes or abstraction points Collusion and favouritism in public procurement Bribes to cover up wastewater and pollution discharge Kickbacks to accept inflated bills in production Nepotism in allocation of public offices in water administration Bribes for diversion of water for irrigation Bribes for preferential treatment (spead, service level etc)

Causes of corruption in the water sector

Complementing perspectives
Incentives: Cost/benefit ratio of engaging in corruption. Economic and non-economic rewards. Institutions: Dysfunctional institutions - stucture and capacity creates opportunity and lowers risk of getting caught. Norms: Setting expectations and limitations for legitimate behaviour.

Causes of corruption

Corruption = Monopoly + Discretion Accountability

HIGH

HIGH

LOW

Is the water sector unique?

It is similar to : It combines high risk characteristics: Monopolistic behavior Large flow of PUBLIC money High cost of sector assets Assymmetry of power and information Sector/ technical complexity

Typical civil service behavior The construction industry (most corrupt sector?)

2. A Framework for Understanding Corruption in the Water Sector

An Interaction Framework
Public to public
Diversion of resources Appointments and transfers Embezzlement and fraud in planning and budgeting

Corruption occurs between public officials

Public to private
Procurement collusion, fraud, bribery Construction fraud and bribery
Private

Public Actors

Public Officials

Consumers

Public to citizen / consumer

Illegal connections Falsifying bills and meters

and 3 different sets of actors

An Interaction Framework

PUBLIC PUBLIC interactions

Policy-making Planning / budgeting / financing Management Tendering and Procurement

PUBLIC PRIVATE interactions

PUBLIC CONSUMER interactions

Construction / Operations / Services Payment Systems

An Interaction Framework

PUBLIC PUBLIC interactions

Policy-making Planning / budgeting / financing Management

PUBLIC PRIVATE interactions

PUBLIC CONSUMER interactions

Tendering and Procurement Construction / Operations Services Payment Systems

PUBLIC PUBLIC interactions

PUBLIC PRIVATE interactions

PUBLIC CONSUMER interactions

Distortions and diversion of national budgets

State Capture of policy and regulatory frameworks Bribery, fraud, collusion in tenders Fraud / bribes in construction

Administrative fraud Document falsification

Illegal connections Speed bribes Billing/payment bribes bribery / fraud in community procurement elite capture

PUBLIC to PUBLIC interactions

Policy-making / Regulating Diversion of funds Distortions in decisionmaking, policy-making Planning and budgeting Corruption in planning and management Bribery and kickbacks in fiscal transfers

Early warning indicators

Monopolies / tariff abnormalities Lack of clarity of regulator / provider roles Embezzlement in budgeting, planning, fiscal transfers Speed / complexity of budget processes No.of signatures % spending on capital intensive spending

Anti-corruption Measures
Policy and tariff reform Separation Transparent minimum standards Independent auditing Citizen oversight and monitoring Technical auditing Participatory planning and budgeting

Management and Program Design Appointments, transfers Preferred candidates Selection of projects

Unqualified senior staff Low salaries, high perks, cf. HH assets Increase in price of informal water

Performance based staff reforms Transparent, competitive appointments

PUBLIC to PRIVATE interactions

Early warning indicators

Anti-corruption Measures

Procurement Bribery, fraud, collusion in tenders

Same tender lists Bidders drop out Higher unit costs

Construction Fraud / bribes in construction

Variation orders Low worker

Simplify tender documents Bidding transparency Independent tender evaluation Integrity pacts Citizen oversight and monitoring Technical auditing Citizen auditing, public hearings Benchmarking SSIP support mechs

payments

Single source

Operations Fraud / bribes in construction

supply Change in quality and coverage

PUBLIC to CONSUMER interactions

Early warning indicators

Loss of materials Infrastructure failure Low rate of faults Lack of interest in connection campaigns Night time tanking Unexplained variations in revenues

Anti-corruption Measures
Corruption assessments Citizen monitoring and oversight Illegal connections Report cards access / Transparency in speed payments reporting

Construction Community based WSS theft of materials Fraudulent documents

Operations Admin corruption (access, service, speed)

billing / payment bribery Citizen oversight

and monitoring Complaint redressal Reform to customer interface (e.g. women cashiers)

Payment systems

meter, billing and collection fraud and bribery

Identifying anti-corruption measures

7 sets of anti-corruption measures

Measuring and diagnosing

Transparency and access to information

Improving accountability
Institutional and policy reform Enforcement and regulation

Education and advocacy

Integrity

Areas to explore
What is the viability of specific sector interventions?
How can decentralization be harnessed as an anti-corruption strategy? How are these measures different from current reform efforts? How do we make anti-corruption work for the poor?

3. Making Anti-Corruption Approaches Work for the Poor

Making anti-corruption work for the poor

Why pro-poor anti-corruption approaches?
Understanding the poors interaction with corruption

Identifying hotspots in the water sector

Developing responses to bring benefit to the poor

Why pro-poor anti-corruption approaches?

Why pro-poor?
disproportionate impact regressive differentiated impact the affect on the poor varies unpredictable impact not much is known Loss of water assets and services diversion User pays and cost recovery principles double cost Risk of fallback tightening and shifting effects? Growth, efficiency of services, better governanceall these things support poverty reduction

Understanding the poors interaction with corruption

What are the impacts of corruption on the poor?
Short term issues access to water Differentiated Marginalisation or empowering Coping strategies Bribery decreases financial assets but increases short term water assets, health assets Long term issues efficiency and effectiveness Marginalisation Decrease in physical assets Loss of options

Understanding the poors interaction with corruption

1. Indirect (does not involve the poor in interaction)
Political corruption, state capture Diversion and distortion in the allocation of funds Embezzlement from state, sector, local government budgets Procurement fraud, fraud in construction Elite capture

Understanding the poors interaction with corruption

2. Direct (the poor are involved in the interaction)
Poor users offer bribes or bribes are extorted to access water (for irrigation, drinking water etc) for quality, maintenance to get a fair price Poor officials use their public office for private gain To provide access, quality and price To enable elite capture To defraud program / project funds Act in organizational chain of fraud/ bribery or as an individual or middleman

Identifying hotspots
A flow of corrupt interactions in which the poor are paying bribes to stay in the system and receiving bribes (as officials or de-facto officials) which ones matter most?

Identifying hotspots in the water sector

In the poors water context what matters most? Paying bribes at the point of service delivery To access assets for WSS/irrigation/drainage control (one-off) To access ongoing services for repair / operation (recurrent cost) To get the right price for legal or illegal aupply Taking and extorting bribes and defrauding projects either individually or as a part of a group

Assets captured, controlled by officials Services and Payment systems controlled by officials Procurement and execution controlled by officials Embezzlement of project and community funds

Identifying hotspots in the water sector

In the poors water context what matters most? The sub-sector WRM, water supply, sanitation What characteristics make for more corruption? The public good finding The system Where do the poor get their water? The spectrum of water providers The location Opportunities for corruption at low access points The actors Relationships between poor and leaders / social elite