Combating corruption in the Philippines : an update

Report No.: 23687-PH Combating Corruption in the Philippines: An Update September 30, 2001 Philippine Country Management Unit East Asia and Pacific Regional Office Document of the World Bank  CURRENCY EQUIVALENTS (As of September 30, 2001) Currency Unit = Peso (P) $1.00 = P51.34 1 Peso = $0.019 FISCAL YEAR January 1 - December 31 GLOSSARY OF ACRONYMS ADB Asian Development Bank ICT Information and Communications AusAID Australian Agency for Technology International Development LGU Local government unit BIR Bureau of Internal Revenue MBC Makati Business Club BSP Bangko Sentral ng Pilipinas MTPDP Medium-Term Philippine Development BWRC Best World Resources Plan Corporation NBI National Bureau of Investigation CG Consultative Group NEDA National Economic and Development CIDA Canadian Intemational Authority Development Agency NGO Non-governmental Organization COA Commission on Audit OECD Organization for Economic Cooperation CPI Corruption Perception Index and Development CSC Civil Service Commission P Philippine peso DAP Development Academy of the PAGC Presidential Anti-Graft Commission Philippines PCAGC Presidential Commission Against Graft DBM Department of Budget and and Corruption Management PCEG Presidential Committee on Effective DECS Department of Education, Culture Governance and Sports PCGG Presidential Commission on Good DENR Department of Environment and Governance Natural Resources PCIJ Philippine Center for Investigative DILG Department of Interior and Local Journalism Government PW Procurement Watch DOH Department of Health SEC Securities and Exchange Commission DOJ Department of Justice SWS Social Weather Stations DPWH Department of Public Works and TAG Transparent Accountable Governance Highway UNDP United Nations Development Programme GOP Government of the Philippines USAID United States Agency for International IAAGCC Inter-Agency Anti-Graft Development Coordinating Council ICD Institute of Corporate Directors  COMBATING CORRUPTION IN THE PHILIPPINES: AN UPDATE TABLE OF CONTENTS EXECUTIVE SUMMARY ...............................................................i 1. 1999: NINE-POINT APPROACH TO COMBAT CORRUPTION .......................1 2. 2000: A YEAR OF WIDENING GOVERNANCE DEFICIT .................................3 PUBLIC SECTOR CORRUPTION ................................................................5 PRIVATE SECTOR CORRUPTION ...............................................................9 KEY DEFINING EVENTS S INCE MID-1999 .............................................................. 11 3. NEW INITIATIVES AND ALLIANCES IN THE SHADOW OF WIDENING GOVERNANCE DEFICIT .............................................................. 14 ADMINISTRATIVE AND LEGISLATIVE REFORMS ............................................................ 14 OFFICE OF THE OMBUDSMAN .............................................................. 15 PROCUREMENT REFORMS .............................................................. 16 FINANCIAL MANAGEMENT REFORMS ............................................................... 18 PUBLIC SECTOR REFORMS ............................................................... 18 JUDICIAL SECTOR REFORMS .............................................................. 19 ANTICORRUPTION STRATEGY .............................................................. 20 INTER-AGENCY COORDINATION .............................................................. 21 CORPORATE GOVERNANCE .............................................................. 23 INFORMATION AND COMMUNICATION TECHNOLOGY .................................................... 24 INVESTIGATIVE JOURNALISM .............................................................. 24 COLLABORATIVE EFFORTS BETWEEN THE GOVERNMENT, PRIVATE SECTOR AND CIVIL SOCIETY ............................................................... 25 DONOR COORDINATION .............................................................. 28 4. OPPORTUNITY RENEWED .............................................................. 31 STRENGTHENING ANTICORRUPTION AGENCIES ............................................................ 33 TABLES 2-1. AREAS OF PUBLIC SECTOR CORRUPTION ............................................................... 7 2-2. "PERCEIVED TO BE MOST CORRUPT" GOVERNMENT AGENCIES .................................8 2-3. PERCEIVED PORTION OF GOVERNMENT FUNDS WASTED DUE TO CORRUPT PRACTICES ................................................................8 3-1. KEY AREAS OF ANTICORRUPTION PROGRESS IN 2000 ............................................... 14 3-2. OFFICE OF THE OMBUDSMAN: CRIMINAL AND ADMINISTRATIVE CASES ................... 16 3-3. DISTRIBUTION OF GOVERNMENT AND DONOR GOVERNANCE ACTIVInES ................. 29  BOXES 1-1. NINE-POINT APPROACH TO FIGHTING CORRUPTION IN THE PHILIPPINES ......... ............ 1 1-2. SEVEN RECOMMENDATIONS FOR IMPLEMENTING AN ANTICORRUPTION PROGRAM .... 2 2-1. PRIVATE SECTOR PERCEPTION OF CORRUPTION: KEY FINDINGS ................................. 9 3-1. HIGHLIGHTS OF THE ANTI-MONEY LAUNDERING ACT ............................................... 15 3-2. ANTICORRUPTION PLAN: TEN-POINT JUMPSTART ACTION PROGRAM ....................... 21 3-3. OMBUDSMAN'S OFFICE: EIGHT-POINT NATIONAL ANTICORRUPTION STRATEGY ...... 22 4-1. THE NEW ADMINISTRATION'S KEY INITIATIVES, JANUARY-SEPTEMBER 2001 ......... 32 FIGURES 2-1. TRANSPARENCY INTERNATIONAL CORRUPTION PERCEPTION INDEX 1980-2001 ......... 4 2-2. CORRUPTION PERCEPTIONS IN PHILIPPINES GOVERNMENT .......................................... 5 2-3. PERCEIVED GOVERNMENT SINCERITY ABOUT ERADICATING CORRUPTION ................ 6 2-4. IMPEDIMENTS TO BUSINESS .............................................................. 10 2-5. CORRUPTION IN PUBLIC SECTOR, PRIVATE SECTOR, AND MEDIA .............................. 11 APPENDIXES A. STATUS OF KEY CORRUPTION-RELATED INTERVENTIONS ......................................... 37 B. PHILIPPINE GOVERNMENT ANTICORRUPTION BODIES ................................................ 39 C.. DONOR RECOMMENDATIONS ON ANTICORRUPTION ACTION .41 BIBLIOGRAPHY ............ 48 ACKNOWLEDGEMENT This paper was prepared by Rajashree Paralkar, Economist, World Bank, under the overall leadership and management of Vinay Bhargava and Van Pulley, Country Director, Philippines, with inputs from Vineeta Shanker (Consultant) and guidance from Lloyd Mckay, Lead Economist, World Bank. We also thank members of the Philippine government, academe, private sector, and nongovernmental organizations for providing important information for this report. Dharshani de Silva assisted in document processing.  COMBATING CORRUPTION IN THE PHILIPPINES: AN UPDATE EXECUTIVE SUIJM ARY i. This report on Combating Corruption in the Philippines (late-1999 to mid-2001) provides an update of the earlier report on the same issue which was published by the World Bank in May 2000.1 The earlier report documented the prevalence of corruption in the Philippines and examined the key institutions engaged in combating this corruption. It also provided information on the government's anticorruption strategy and plans and recommended a nine-point approach to fighting corruption. The government's plans and the World Bank's recommendations were, by and large, not implemented despite promises to do so. Instead, the atmosphere deteriorated and there were mounting allegations of corruption against the then President Estrada which led to his impeachment trial. ii. The new administration, which took office on January 20, 2001, under the leadership of President Gloria Macapagal-Arroyo, has declared combating corruption one of its top priorities. Public expectations for faster and stronger actions than previous administrations are high. Several initiatives have been announced. However, a detailed plan of action with implementation arrangements for combating corruption has yet to emerge. Against this background, this report reviews negative and positive developments related to the fight against corruption in the Philippines since the last report was issued. It then presents a set of updated recommendations for consideration by the government and other anticorruption champions in the Philippines. However, the limited objective of this report should be stressed. It is not an analytical piece that assesses progress on anticorruption activities but rather a review of such activities in the Philippines during 2000-2001. iii. The year 2000 is widely perceived to be a period of widening governance deficit in the Philippines. Data from national and international surveys reveal a significant rise in the perception of corruption, which contributed to undermining investor confidence and reducing the public 's faith in government's sincerity in combating graft and corruption. Our earlier report had revealed that "corruption in the public and private sectors in the Philippines is pervasive and deep-rooted, touching even the judiciary and the media." This unfortunate situation worsened in 2000, judging from the following survey data: > In a December 2000 survey, 72 percent of the Filipinos called the amount of corruption in the government to be very large or somewhat large. The proportion of Filipinos who considered government to be very/somewhat sincere infighting 'World Bank, Combating Corruption in the Philippines (Pasig City, Philippines: World Bank, 2000).  - ii - corruption declined 20 points to 44 percent in December 2000 from 64 percent the previous July.2 > The proportion of Filipinos who view corruption as primarily harmful to national development instead of primarily immoral has steadily grown from 54 percent in October 1999 to 81 percent in December 2000.3 Several high-profile cases of allegedly corrupt behavior and other governance weaknesses4 appeared to have shaped these perceptions. For a decade and a half, corruption has been Filipinos' second most common source of dissatisfaction with their government (after inflation). > Judiciary. While the proportion of Filipinos who believe that most or many judges can be bribed remained unchanged at 57 percent from April 1997 to December 1999, the corresponding percentage for lawyers increased from 60 percent to 65 percent during the same period.5 > Most Filipinos continued to regard corruption in the private sector as also serious but not as extensive as in government. More than half the respondents to a Social Weather Stations (SWS) survey in December 2000 perceived corruption in the private sector to be "a great deal" or "some." Of those who said there is corruption in the private sector, 14 percent said that they have personally experienced or witnessed it. This is a significant increase from 3 percent of respondents in the September 2000 survey. This view was confirmed by business. As part of an October 2000 Enterprises Survey sponsored by the Transparent and Accountable Governance project, 53 percent of the enterprises surveyed responded that there is a "great deal" or "some" corruption in the private sector. Corruption in print media was perceived to be lower than in the government, private sector, or judiciary. Newspaper writers were bribed to say false things "very often" or "somewhat often," according to 39 percent of survey respondents.7 > Filipino business executives were even more critical of corruption than average citizens who replied in an October 2000 survey. Public sector corruption is "very large" or "somewhat large," said 88 percent of the business executives but 70 percent of the citizens.8 In the most recent 2000 Corporate Performance Survey by the Economist Intelligence Unit, multinational companies operating in the Philippines identified corruption/cronyism/ethics/transparency/governance as the 2 Social Weather Stations (SWS) National Surveys, Manila, Second and Fourth Quarters, 2000. 3 SWS National Surveys, Third Quarter 1999 and Fourth Quarter 2000. 4 For instance, allegations of stock manipulation and insider trading in the BW Resources Corporation stock market case, lack of transparency in transfer of control of the Philippine National Bank from the government to a private sector group, allegations of mismanagement and eventual bankruptcy of the Urban Bank, the impeachment trial of Mr. Estrada, inclusion of the Philippines by the Financial Action Task Force of the Organization for Economic Cooperation and Development (OECD) in a 15-country list of countries considered non-cooperative for anti-money laundering measures. 5 SWS National Surveys, First Quarter 1997 and Fourth Quarter 1999. 6 SWS National Surveys, Third and Fourth Quarters 2000. ' SWS National Survey, Third Quarter 2000. S SWS, National and Enterprises Survey, Third Quarter 2000.  - iii - most glaring weakness in the Philippines. This is a significant indicator of the rising governance deficit, since, in the previous two surveys (1998 and 1999), poor infrastructure was identified as the main disadvantage of operating in the Philippines and corruption as the fourth most important factor. > In the Transparency International survey of perceptions of corruption, the Philippines' ranking slipped from 55 in 1998 (out of 85 countries surveyed) to 65 in 2001 (out of 91 countries surveyed). On a scale of I to 10 on a Corruption Perception Index (where a higher value means lower perceptions of corruption, 10 being perceived to be least corrupt), the Philippines' scores deteriorated from 3.6 in 1999 to 2.8 in 2000, and then improved slightly to 2.9 in 2001. This is significant because prior to 2000 the Philippines had steadily improved its Corruption Perception Index from an average low of 1.04 between 1980 and 1985 to 3.6 in 1999.9 > In another international comparison (International Credit Risk Group), on a scale of 0 (bad) to 6 (good) the Philippines was downgraded to 2 in March 2001 from 3 in February 2000.10 iv. Despite the real and disappointing deterioration in the Philippines' governance environment in 2000, based on above indicators, significant useful progress was made on several fronts. These positive developments-combined with the all-time high public outrage with corruption in the Philippines-provide hope and a foundation for concrete progress. The key positive developments since late-1999 were as follows: > Public procurement reforms. Under the leadership of the Department of Budget and Management, key reforms included: passing of executive orders to facilitate increased competition and reduce delays in bidding; launching of the electronic procurement system; and establishment of a civil society-based monitor, the Procurement Watch. > Financial management reforms. Spearheaded by the Commission on Audit, key measures included: simplification and computerization of the government accounting system; implementation of the Audit Team Approach as an alternative to residency auditing; and adoption of a participatory audit with civil society organizations. > Judicial sector reforms. Under the widely praised leadership of the Chief Justice, the Supreme Court: adopted the Action Program for Judicial Reform, a comprehensive and holistic approach to judicial reforms; agreed with a nongovernmental organization, Bantay Katarungan, to monitor court proceedings and screening of applicants to the positions in the Regional Trial Courts and Courts of Appeals; and stepped up disciplinary actions against corrupt judges. Between November 30, 1998, and April 2, 2001, the Supreme Court took 9 Transparency International www.transparency.org. '0 PREM/DEC Indicators (Washington: World Bank, March 2001 and February 2000).  - Iv - disciplinary action against 230 judges by either dismissal or administrative sanctions on graft and corruption charges. "I > Corporate governance reforms. The new Securities Regulation Code was approved, and a major program to improve corporate governance was launched by the Institute of Corporate'Directors (ICD). ICD is involved in director training and in advocacy of improved corporate governance. In this regard, it has conducted several conferences and other events to publicize key issues. > Increased engagement of civil society. Civil society, the private sector, and the media became noticeably more active in demanding transparency and accountability in government. Respect for investigative journalism increased, and new information technologies (mobile phones and the internet) increased corrupt officials' risk of detection. Several conferences and studies made recommendations on what can be done to combat corruption. Critical alliances were formed between the private sector and civil society (Transparent Accountable Governance Project), between government and civil society (Government and Budget Watch Projects), and between civil society, the private sector, and academe (Transparency and Accountability Network). > Anticorruption strategy. In response to the World Bank report on Combating Corruption, the Development Academy of the Philippines formulated a Comprehensive Framework and Program Strategy to fight corruption in the Philippines. The Development Academy of the Philippines came up with an anticorruption blueprint in consultation with civil society organizations, the private sector, anticorruption agencies, cabinet members, the media, and academe. This National Anticorruption Plan features a long-term sequencing of anticorruption actions and a centerpiece 10-point jumpstart program for immediate execution. > Increased donor supportfor anticorruption programs. Corruption and governance issues gained prominence during discussions at the Consultative Group of Donors for the Philippines meeting held in the Philippines in June 2000 and in subsequent government-donor dialogues. Several donors used their ongoing assistance programs to intensify support for anticorruption efforts and in some cases scaled up their assistance for anticorruption programs in the government as well as nongovernmental sectors. 12 In April 2001, the same group of donors submitted their joint, recommendations to the new government proposing steps to fast track implementation of an anticorruption action program. "Francis Initorio, "Policing the Judiciary," Benchmark, Centennial Issue, vol. 2, no. 3 (May-June 2001). (Benchmark is published by the Public Information Office of the Supreme Court.) The 230 judges were from the entire judiciary comprising the Metropolitan Trial Courts, Regional Trial Courts, Shari'ah District Courts, Sandigabayan, Court of Appeals, and the Supreme Court. 12 These donors included the World Bank, the Asian Development Bank (ADB), the United Nations Development Programme (UNDP), the Australian Agency for International Development (AusAid), the U.S. Agency for International Development (USAID), and the Canadian International Development Agency (CIDA).  > Office of the Ombudsman. The Ombudsman's Office continued to implement earlier programs and took several new initiatives to combat corruption. Noteworthy among them are: installation of resident ombudsmen in key government agencies, an action credited with a dramatic decrease in corruption detection in 19 out of 25 government agencies using the number of cases filed as an indicator; accreditation of 384 nongovernmental organizations as Corruption Prevention Units and 1,204 Junior Graftwatch Units with an assigned role to educate and monitor activities in the government and society; and 'filing of corruption cases against President Estrada. > Inter-Agency Coordination. Executive Order No. 79 of August 1999 formalized an Inter-Agency Anti-Graft Coordinating Council, composed of representatives from the Commission on Audit, the Ombudsman's Office, Civil Service Commission, National Bureau of Investigation, and the Department of Justice. In April 2001, the council adopted Guidelines for Cooperation to strengthen these agencies' working relationship and joint activities for detecting and prosecuting graft and corruption cases. v. The sense of optimism that anticorruption reforms can and will be implemented has been renewed since early 2001. This is best illustrated by the survey data showing a rise in the proportion of Filipinos who said that government can be run without corruption. A proportion of Filipinos said this increased to 66 percent in March 2001 from 59 percent in September 1998 and 50 percent in July 2000.13 However,'a historical perspective on such optimism is revealing. In a July 2001 report prepared for the World Bank, Mahar Mangahas, President of Social Weather Stations, pointed out that his organization's surveys: Reveal the existence of a political cycle, led by a brief initial period of public satisfaction, followed by prolonged public dissatisfaction, with national government performance in fighting corruption. The honeymoon period occurs at the start of an administration, obviously due to the public's renewed hope for good governance under the incoming officials. The honeymoons regarding anticorruption performnance lasted for the first two years of the 6.3 year Aquino period, the first 3 months of the 6 year Ramos period, and the first year of the 2.6 year Estrada period.14 vi. Since taking office in January 2001, the new Government has announced several preliminary measures to combat corruption and improve governance but has yet to make public a sequenced and detailed action program and concrete organizational ' arrangementsfor formulating and implementing such a program andfor monitoring and reporting on its progress. So far, the Government has taken the following initiatives:'5 > President Macapagal-Arroyo, in her inauguration speech in January 2001, proclaimed good governance as one of the pillars of her administration. 13 SWS National Surveys, Third Quarter 1998, Second Quarter 2000, and First Quarter 2001. 14 Mahar Mangahas, "Update on Surveys Concerning Corruption" (Manila: SWS, July 17, 2001). "5 Through end-September 2001.  - vi - > The first Administrative Order of the new Government prohibited government agencies from entering into any business contracts with the president's relatives or those of her husband. > The Presidential Anti-Graft Commission (PAGC) has been reestablished to investigate allegations of corruption involving presidential appointees and recommend appropriate actions to the President. > The Presidential Committee on Effective Governance (PCEG) has been created to oversee formulation and implementation of an agenda for strengthening and streamlining the public sector. At this point, PCEG is the highest level anticorruption body in the government since it is headed by the Executive Secretary, with the Secretary of the Department of Budget and Management as its Vice Chairman. > A privately funded Governance Advisory Council has been created to complement PCEG's work, serve as a watchdog against corruption, and promote good governance. > The revised Medium-Term Philippine Development Plan (MTPDP) has designated improving governance as one of the objectives and has outlined the key measures the government plans to take in this area over the next three years. > Full computerization of elections. > Within 12 months of the new administration being in place, all government agencies will implement measures to cut in half the number of signatures required for their service. > Cabinet secretaries will have to deliver tangible results of progress in fighting graft by July 2002. > The Bureau of Internal Revenue and the Bureau of Customs will have to show cases in the fight against graft and corruption. > An E-procurement program has been initiated to save billions and minimize anomalies. vii. The wayforwarde Corruption issues dominated the public's attention throughout late- 1999 to end-2000 and were a major factor in the change of Government in January 2001. As a result, public awareness and interest in combating corruption are at an all time high. The new Government therefore has a huge challenge ahead of it to fulfill the public's expectations and faith that the government can be run without corruption. The Philippines' history suggests that this optimism can be short-lived and cynicism can quickly return. It is therefore imperative that the new administration seize the opportunity to articulate a detailed, realistic, and bold anticorruption program and to build a track record of success. It is recommended that the government keep the following considerations in view as it moves forward.'6 16 For details, see Annex C of this report.  - vii - viii. Corruption in the Philippines is systemic and deep-rooted. It will take many years to overcome it. However, the experience of last 15 years has shown that progress can be made by reducing the discretion in government decision making and increasing competition, transparency, and civil society monitoring of public and private sector governance. This report highlights many positive recent initiatives that should be nurtured. > Global experience suggests that efforts to combat systemic corruption have to go beyond consciousness raising and prevention measures. The effort has to be focused on determining the points of vulnerability and corruption within the Philippines' government and markets. Then the systems most susceptible to corruption (e.g., tax administration, public works) should be analyzed to find out exactly how corrupt buyers and sellers find each other. How do they make and enforce their implicit contracts? What footprints do they leave? To break up whatever pattern that is disclosed, countermeasures should be designed.'7 > For maximum results, the government is advised to seek and build a partnership (coalition) with several citizen, business, professional associations, and donor alliances that have coalesced to fight corrupt practices in the Philippines. To empower these groups to monitor government performance, they must be provided with highly disaggregated information on planned and actual public expenditures and capital projects-as a matter of legal right. This reform is crucial. > Most citizens and enterprise managers emphasize punishment as the best way to fight corruption. More than half the Social Weather Station survey respondents considered punishing wrong-doers one of the most effective measures suggested for reducing government corruption.'8 Therefore, increasing the success rate in prosecuting corrupt officials at every level should be made a goal and performance indicator in any effective anticorruption program in the Philippines. ix. A strong and broad-based national coalition is essential to design, implement, and monitor a successful anticorruption program, one that draws on global experience but which is firmly grounded in the realities of the Philippine governance environment. Donors are willing to support such a country-led program with policy advice, technical assistance, and financial resources. During a dialogue with the government in April 2001, a subgroup of six donors presented a list of eight priority action areas where, in their view, faster paced and results-oriented implementation will greatly strengthen the anticorruption program and help improve investor confidence at home and abroad.'9 The eight comments and suggestions were to: '7 Robert Klitgaard, "Subverting Corruption," Finance and Development, vol. 37, no. 2 (June). '1 SWS National and Enterprises Surveys, Third Quarter, 2000. 9 The subgroup consists of ADB, AusAid, CIDA, USAID, UNDP, and the World Bank. These suggestions were presented by the subgroup at a meeting of the government's economic team with the Philippine-based consultative group representatives on April 3, 2001.  - viii - > Increase civil society involvement in the oversight of government activities through such activities as "Procurement Watch," a participatory audit program with the Commission on Audit, and through access to public information and civil society involvement in budget monitoring and implementation. > Accelerate budgetary, financial management, and procurement reforms, including introducing a medium-term budget framework and performance budgeting for government agencies and local government units. > Strengthen mechanisms for disclosing public officials' assets and liabilities and initiate reforms in the structure of public employees' remuneration. > Implement reforms in the judiciary, as outlined in the Supreme Court's Judicial Reform Action Program, including measures to unclog the courts and shorten decision periods. > Amend bank secrecy laws, pass and implement an anti-money laundering bill, and improve the quality and transparency of bank supervision. > Introduce electoral campaign finance reforms. > Implement corruption-prevention programs for the most corruption-prone government agencies. > Create a strong management structure with a full-time manager of cabinet rank, preferably under the President or Vice President's leadership, to push implementation of agency-specific anticorruption programs and communicate progress to the public, and form a multi-sectoral advisory council to provide guidance on the anticorruption plans and their implementation. x. The government has already passed an Anti-Money Laundering Bill, formed a Governance Advisory Council, and extended its support for a judicial reform program. But much more has to be done. We hope to see concrete progress this year.  1. 1999: NINE-POINT APPROACH TO COMBAT CORRUPTION "Good governance rests on three pillars. First, a sound moral foundation to guide our leadership at all levels. Second, a philosophy of transparency in all government actions. Third, an ethic of effective implementation throughout the bureaucracy. These are high standards to be held up to, but the people deserve no less. "-President Macapagal-Arroyo1 1.1 At the request of the administration of President Joseph Estrada, the World Bank submitted its findings and recommendations on Combating Corruption in the Philippines to the government in November 1999. In this report, the Bank proposed a nine-point approach to fighting corruption in the Philippines (Box 1-1). Box 1-1: Nine-Point Approach to Fighting Corruption in the Philippines * Reduce opportunities for corruption by policy reforms and deregulation . Reform campaign finance * Increase public oversight * Reform budget process * Improve meritocracy in civil services