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Governance Global Practice

Middle East & North Africa

Issue 4

June 2015

www.cvmena.org

1 Governance Global Practice Middle East & North Africa Issue 4 June 2015 www.cvmena.org The Governance

The Governance Global Practice

Unity in Diversity

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CV MENA

In-a-Nutshell

Connecting Voices (CV) Middle East and North Africa (MENA) is a regional initiative and partnership that promotes governance and improved financial management practices in the public and private sectors. The ultimate aim is to support the demands of citizens throughout the Arab World for jobs, better governance, a voice in public affairs, and social and economic inclusion as reflected in the World Bank’s MENA Regional strategy. CV MENA plans to seize on the windows of opportunity available in the region. It will support capacity building in the area of governance, facilitate the development of a professional community, as well as the sharing and transfer of knowledge both within countries and within the region as a whole. CV MENA will help foster greater transparency and accountability, thereby engendering enhanced public trust. In addition, building public and private sector governance and financial management capacity will also help attract and provide comfort to much-needed foreign direct investment in the region.

2 CV MENA In-a-Nutshell Connecting Voices (CV) Middle East and North Africa (MENA) is a regional

CVMENA won the World Bank’s 2013 MENA Vice President Team Award

2 CV MENA In-a-Nutshell Connecting Voices (CV) Middle East and North Africa (MENA) is a regional

The Exchange is a major annual forum that provides a channel for dialogue, enabling countries to share experiences and promote societal-governmental consensus building. It fosters intra-regional cooperation and stimulates interest in improving public sctor governance, public financial management, and corporate governance and financial reporting in MENA. The Exchange facilitates knowledge-sharing from transitional democracies and showcases successful experiences from fragile and conflict states. The Exchange starts where public sector and public financial management diagnostics leave off, that is, in supporting the creation of an enabling environment for reforms to move from concept to reality. It helps catalyze innovative activities to develop

regional public goods and enables the World Bank to fulfill its mission as a

“Solutions Bank.”

2 CV MENA In-a-Nutshell Connecting Voices (CV) Middle East and North Africa (MENA) is a regional

In partnership with the Wold Bank’s Global Development and Learning

Network (GDLN), CV MENA connects participants across the MENA region (once each quarter) in finding solutions on topics related to public sector, financial management, and corporate governqance and financial reporting. The Solutions Lab realizes that an answer is not necessarily the solution: a time-tested “best practice” may not be optimal in a particular situation because it may not be politically or socially feasible at the time. The Labs help our clients fashion an attainable solutionan alternative answer to the problemby bringing in other perspectives and different, yet relevant, experiences from other countries. The Labs also feed into the design of The Exchange.

2 CV MENA In-a-Nutshell Connecting Voices (CV) Middle East and North Africa (MENA) is a regional

www.cvmena.org

cvmena@worldbank.org

2 CV MENA In-a-Nutshell Connecting Voices (CV) Middle East and North Africa (MENA) is a regional

A Boot Camp is a practical and innovative concept. It involves gathering a group of decision-makers and experts to address a particular issue through focused and intensive discussion that takes into account both technical and non-technical factors. After thoroughly examining the issue, the group develops possible solutions and a work program to help implement them. The experience is documented in a Solutions Papera brief note describing how a specific challenge or problem is addressed in a collaborative and pragmatic fashion. The Boot Camps, together with the Solutions Lab and discussions in Maarefah (“knowledge” in Arabic), feed into the design of the Exchange and CV MENA’s workprogram.

2 CV MENA In-a-Nutshell Connecting Voices (CV) Middle East and North Africa (MENA) is a regional

Maarefah responds to the need to implement, sustain, and build on the results of The Exchange, as well as to extend these benefits to those unable to personally attend Boot Camps and Solutions Labs. Maarefah (“knowledge” in Arabic) is a Community of Practice (CoP) that serves as a forum for ongoing dialogue and continuous peer-to-peer and expert knowledge exchange. The CoP—established by the Financial Management Unit of the World Bank’s Middle East and North Africa Region in 2011 as a response to popular demand for change, accountability, transparency, and inclusivenessis designed to serve as a robust base for extending the dialogue and refocusing it on the needs of CV MENA.

Publisher: Governance Global Practcie, MENA, The World Bank Managing Editor: Hisham Waly Art Director: Denis Largeron Contributing Photographers: Denis Largeron Images: World Bank Images, Shutterstock

Note: The posts in the Connecting Voices magazine should not be reported as representing the views of The World Bank. The views expressed are those of the authors and do not necessarily represent those of the The World Bank or its policy.

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Editor’s Note

Hisham WALY

Practice Manager Governance Global Practice / MENA The World Bank

From

Vulnerability

To

Resilience

The concept of VUCA volatility, uncertainty, complexity, and ambiguitywas introduced in the late 1990s after the end of the Cold War. It followed a shift from a world of problems which demanded speed, analysis, and elimination of uncertainty, to a world of dilemmas which demand patience, sense- making, and an engagement in the midst of uncertainty. Volatility (the rate of change), uncertainty (a lack of clarity about the present situation and future outcomes), complexity (a multiplicity of key decision factors), and ambiguity (conflicting interpretations) shape the

new “normal” in many parts of the world

where attempts to develop elegant, immediate and complete solutions are unrealistic, naïve and even detrimental (1)

Today in the Middle East and North Africa (MENA) region, we are living mostly in a VUCA environment, where we are faced with a diverse and discouraging pictureespecially with Iraq, Libya, Syria and Yemen mired in violent conflicts that are

devastating people’s lives, infrastructure

and national economies. Conflict spillovers are also impacting neighboring countries such as Jordan, Lebanon and Tunisia. The transition countries of Egypt, Jordan, Morocco and Tunisia are slowly but steadily reforming their economies, albeit in a context of anemic growth, high fiscal deficits, rising youth unemployment and security concerns. Also, low oil prices are dragging down economic growth in oil-exporting countries. The Gulf

Cooperation Council (GCC) countries are expected to lose about US$215 billion or 14 percent of their combined GDP from lower oil prices this year. In addition, the Palestinians are still feeling the impact of the 2014 Gaza war and attendant precarious political and security situation

(2).

In addition, the Arab Spring showed that the old social contract, where the state provided jobs, free health care and education, and subsidized food and fuel, in return for limited voice and accountability to citizens is broken. However, developing a new social contract between the state and its citizenry (vertical process) is challenging in a region where a number of countries have limited social cohesion between different societal groups due to diverse identities (religious, ethnic, or tribal), and with little trust in the state. In this context, a new social covenant where the major groups within a society come together and agree on a new framework for cooperation is crucial (horizontal process).

In the World Bank, we are faced with the challenge of finding ways to operate in this VUCA environment, and to respond in an adaptive and timely manner to help the people and institutions of MENA mitigate, adapt to and recover from exogenous and endogenous shocks and stresses in a manner that reduces chronic vulnerability. In other words, we are working to enhance resilience and reduce vulnerability.

The Organization for Economic Co- operation and Development (OECD) defines a resilient state as one that is “capable of absorbing shocks and transforming and channeling radical change or challenges, while maintaining political stability and preventing violence.

3 Editor’s Note Hisham WALY Practice Manager Governance Global Practice / MENA The World Bank From
3 Editor’s Note Hisham WALY Practice Manager Governance Global Practice / MENA The World Bank From
3 Editor’s Note Hisham WALY Practice Manager Governance Global Practice / MENA The World Bank From
3 Editor’s Note Hisham WALY Practice Manager Governance Global Practice / MENA The World Bank From

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Resilient states exhibit the capacity and legitimacy of governing a population and its territory. They can manage and adapt to changing social needs and expectations, shifts in elite and other political agreements, and growing institutional complexity.” (3)

Strengthening resilience thus demands a twin-track approach. On the one hand, it is important to create policies that place resilience center stage (for example, those that are based on an assessment of the risks to which a country is exposed and its relative vulnerability).

On the other hand, the adaptive capacity needs to be reinforced so as to strengthen a state’s inherent ability to take decisions and renew itself in light of changes in its environment ( for example, at the subnational level). It is important to note that there is a risk that too much emphasis will be placed on the resilience of state institutions while other sources of resilience outside the state will be ignored. (4)

According to a World Bank 2009 Policy Note on The Global Economic Crisis:

Assessing Vulnerability with a Poverty Lens, the capacity of governments to

cope with the impacts of the crisis on poverty depends on: (i) the fiscal capacity/space to incur an increased fiscal deficit; and (ii) institutional capacity to implement programs aimed at mitigating the poverty impact of the

crisis. This includes the country’s

institutional abilities to manage the budget process, design and implement policies, provide services, and deliver

accountable and transparent government

(5).

In this context, the ability of governments to design and implement the right combination of short-, medium- and long- term policy measures is critical, yet complex. On the one hand, it requires specific technical capacities in the institutions and, on the other, it is affected by the overall functioning of country systems (for example, the civil service, public financial management, procurement mechanisms), institutional qualities (performance, adaptability and stability) and governance structures that largely set the rules of the game (6).

Compared to a number of other regions

of

the

world,

MENA’s

governance

indicators tend to have lower scores, particularly in areas such as transparency, government effectiveness, civil liberties, media freedom, participation and social accountability. As a consequence, overall governmental accountability, trust in government institutions, and public sector service delivery are all negatively affected.

Complicating matters, the VUCA environment compounds these difficulties, bringing one crisis after the other. In some instances, this has acted as a trigger for embarking on reforms, whereas in other cases, it has made the design and implementation of programs much more challenging.

Although not unique to MENA countries, most suffer from significant gaps between laws and procedures (de jure) and actual practice and implementation (de facto). Another issue is the low execution rate of investment budgets due to ineffective public investment management systems.

On the corporate governance and financial reporting (CGFR) front, there are serious deficiencies in structure and function of the CGFR framework, as well as a lack of awareness among national policy makers of its importance. For instance, a mere 20 percent of countries maintain independent audit regulators.

In Iraq, the country is currently faced with volatility in oil prices at a time when oil accounts for more than 90 percent of total government revenues. The conflict is also affecting its non-oil economy (for example, in the destruction of infrastructure), and is leading to more spending on security and humanitarian activities. Also, Iraq’s wage bill is very high. At an average of 30 percent of total expenditures or 18 percent of gross domestic product (GDP) during 200510, it is the most rapidly growing budget item. In the past, higher oil revenues translated into higher wage bills. However, payroll and human resource practices are weak as a result, and now significant resources are being wasted through inappropriate practices,

including “ghost workers” and “double dippers.” A World Bank policy note estimated the potential cost to the government to be as much as US$260 million a year (7).

4 Resilient states exhibit the capacity and legitimacy of governing a population and its territory. They
4 Resilient states exhibit the capacity and legitimacy of governing a population and its territory. They
4 Resilient states exhibit the capacity and legitimacy of governing a population and its territory. They
4 Resilient states exhibit the capacity and legitimacy of governing a population and its territory. They
4 Resilient states exhibit the capacity and legitimacy of governing a population and its territory. They
4 Resilient states exhibit the capacity and legitimacy of governing a population and its territory. They

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Having sound public administration systems, including civil service and public financial management systems, can help

enhance Iraq’s macroeconomic stability,

efficient allocation of resources, service delivery and state-building activities. These measures would help Iraq become more resilient and better equipped in handling future crises.

We realize that operating in a protracted VUCA environment is challenging and draining. To continue the dialogue on this important topic, we just completed our

annual Connecting Voices conference “The Exchange” in Tunisia from May 27- 28 2015 under the theme: “From

Vulnerability to Resilience”. This was an

opportunity to engage with members of the executive, legislative, judiciary, media and civil society organizations in the region. Discussions helped us define the best way to refine our vision, enhance our

understanding, gain clarity and be more agile in supporting the people and institutions of the MENA region as they seek to rebound from crises.

to provide effective educational systems, efficient healthcare systems, clean drinking water and sanitation, reliable energy, and modern and resilient infrastructure. Moreover, citizens throughout MENA have expressed significant dissatisfaction with service delivery,. Indeed, such socio-economic grievances were the triggers of many of the uprisings in 2011 (8). The participants agreed that helping governments provide these basic services to citizens will be crucial, both for building stronger and more credible institutions and for reaching the most underprivileged populations and regions. This means not only providing greater access for citizens, but also fostering more accountable and efficient governance regarding basic public services (World Bank, 2015b). To this end, several measures were reflected upon: (i) ending the cycle of poor performance; (ii) rebuilding trust in governments; (iii) increasing accountability; (iv) supporting better management of human resources; and (v) promoting citizen feedback (9).

At the Exchange conference, we focused on five key areas that we believe constitute the pillars of our future intervention in MENA to enhance resilience:

  • - Rule of Law

  • - Citizen Engagement

  • - State Institutions

  • - Service Delivery

  • - Jobs and the Private Sector

In our discussions, we reflected on the critical challenges, lessons learned from previous interventions, and successes we can we build on in the future.

In the Jobs and the Private Sector session, we discussed ways of shielding the private sector policies from privileges, discretion, and unequal treatment through policy instruments and operational entry points. We reflected on an organizing framework consisting of: (i) policy formulation (for example, transparency, inclusion and consultation in the process of policy design); (ii) policy implementation (that is, delivery systems and compliance); and (iii) corrective measures (for example, access to information and data).

At the Service Delivery session, we discussed how MENA states over the last decade have been unable, in many cases,

5 Having sound public administration systems, including civil service and public financial management systems, can helpe Thunderbird School of Global Management. (2) MENA Economic Monitor 2015. “Towards a New Social Contract.” The World Bank. By: Shantayanan Devarajan and (3) Lili Mottaghi. April. OECD. (2011). “State -building in fragile contexts: key terms (4) and concepts.” In Supporting State -building in Situations of Conflict and Fragility: Policy Guidance. Resilience: a Trojan horse for a new way of thinking. By: (5) Frauke de Weijer. ECDPM Discussion Paper No. 139. World Bank. The World Bank (2009) Policy Note was prepared by Louise (6) Cord, Marijn Verhoeven, Camilla Blomquist and Bob Rijkers, with inputs by Vivek Suri. Towards Human Resilience: Sustaining MDG Progress in an (7) Age of Economic Uncertainty. UNDP. September 2011. Republic of Iraq, Public Expenditure Review: Toward More Efficient Spending for Better Service Delivery. The World (8) Bank (2014). Hessling, L. (2013), “Water and the Arab Uprisings – the Human Right to Water and Sanitation in Post-Transition (9) Egypt”. The World Bank (2015a), “Trust, Voice, and Incentives: Learning from Local Success Stories in Service Delivery in the Middle East and North Africa " id="pdf-obj-4-47" src="pdf-obj-4-47.jpg">

A cross-cutting theme of discussions concerned governance, with the World

Bank’s new Governance Global Practice

(GGP) leading the agenda. Our cover story for this issue is the formation of the GGP in July 1, 2014. The GGP aims to support countries in building open, effective, and accountable institutions for inclusive development. In this context, the GGP takes an inclusive approach to governance issues by concentrating on the fundamental

aspects of engagement between public institutions and citizens. This positions the GGP at the heart of the discussion regarding helping the people and institutions of MENA become more resilient.

In the cover story, we interview Mario Marcel, Senior Director of the GGP. We discuss with him a number of topics from a global and regional perspective, ranging from ways to give governance more weight in the development agenda, to a new generation of governance reforms, to lessons from the Latin America and Caribbean (LAC) region that might be useful to MENA countries. Then we reached out to World Bank senior management from outside the GGP (for example, MENA’s Strategy Director, Country Directors and Practice Managers) to better understand their perspectives on governance what it is and why it matters. We received responses from around the region and other Global Practices (GPs), reflecting local, regional and international perspectives on the issue. Our staff in the GGP had their say as well. Five governance staff conversed about the opportunities, challenges and future of the governance agenda in the MENA region. Last but not least, we highlight a recent event attended by 250 MENA governance professionals at which we introduced the GGP. We listened to and learned from our clients about their expectations and received valuable feedback on the mandate, structure and plans for the GGP.

We

hope

you

enjoy

this

issue

of

Connecting Voices.

 

Notes:

(1)

Paul Kinsinger and Karen Walch of the Thunderbird School of Global Management.

(2)

MENA Economic Monitor 2015. “Towards a New Social Contract.” The World Bank. By: Shantayanan Devarajan and

(3)

Lili Mottaghi. April. OECD. (2011). “State-building in fragile contexts: key terms

(4)

and concepts.” In Supporting State-building in Situations of Conflict and Fragility: Policy Guidance. Resilience: a Trojan horse for a new way of thinking. By:

(5)

Frauke de Weijer. ECDPM Discussion Paper No. 139. World Bank. The World Bank (2009) Policy Note was prepared by Louise

(6)

Cord, Marijn Verhoeven, Camilla Blomquist and Bob Rijkers, with inputs by Vivek Suri. Towards Human Resilience: Sustaining MDG Progress in an

(7)

Age of Economic Uncertainty. UNDP. September 2011. Republic of Iraq, Public Expenditure Review: Toward More

Efficient Spending for Better Service Delivery. The World

(8)

Bank (2014). Hessling, L. (2013), “Water and the Arab Uprisings – the Human Right to Water and Sanitation in Post-Transition

(9)

Egypt”. The World Bank (2015a), “Trust, Voice, and Incentives:

Learning from Local Success Stories in Service Delivery in the Middle East and North Africa

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Content

Public Financial

 

Corporate Governance

 

Cover

 

Management (PFM)

& Financial Reporting (CGFR)

 
  • 08 Performance-Based Budgeting

  • 19 State-Owned Enterprises

Governance

Strengthening External and Internal

 

Numerous Reform Attempts,

Accountability along Service Delivery Chain

but Limited Results

 
21 Audit Committees Global
  • 21 Audit Committees

Global

The Significance of Audit Committees in

Improving Governance in MENA

Improving Governance in MENA

Practice

   
  • 10 PFM Reform

 

Fragile-, Conflict- and Violence-Affected Environments

35 Overview

 

Centrality of Governance in

12 Procurement under
  • 12 Procurement under

  • 22 Small & Medium Practices

Sustainable Development

 

SMP Quick Poll 2014 MENA

  • 24 Integrated Reporting

24 Integrated Reporting

Three Facts Every MENA Company Should

Know About Integrated Reporting

Public Financial Corporate Governance Cover Management (PFM) & Financial Reporting (CGFR) 08 Performance-Based Budgeting 19 State-Owned

Public Private Partnerships

 

MENA Shares Global Knowledge

37 Interview

Mario MARCEL, Senior Director Governance Global Practice

Mario MARCEL, Senior Director Governance Global Practice

  • 26 Sustainability Reporting

26 Sustainability Reporting

A Corporate Tool for Communicating

Sustainability Performance and Impacts

Public Sector

 

(PS)

  • 14 Procurement

 

A strategy to rebalance implementation

  • 15 Pathways to Fiscal

  • 28 Civil Service

Behaviour Bias

support and institutional development and capacity building

30 Rule of Law
  • 30 Rule of Law

support and institutional development and capacity building 30 Rule of Law

Decentralization

Challenges and Opportunities

Public Financial Corporate Governance Cover Management (PFM) & Financial Reporting (CGFR) 08 Performance-Based Budgeting 19 State-Owned
 

It’s all about the Politics

It’s all about the Politics
  • 33 Anti-Corruption

 

Role of technology in the Fight against Corruption

 
     

7

Story

 

Maghreb

 

Gulf

 
  • 51 Libya

  • 69 Kuwait

“Unity

A Snapshot of Public Investment

Supporting Kuwait’s

Management in Libya

Capital Projects

in

  • 53 Morocco

  • 70 Islamic Finance

More than Ten Years after Morocco’s

Introducing the Newly Launched (IASB)

Diversity”

Family Code Reforms

Family Code Reforms

Consultative Group on Shariah-Compliant Instruments and Transactions

Consultative Group on Shariah-Compliant Instruments and Transactions

41 Why Governance Matters

Perspectives from

  • 55 Morocco & Tunisia

 

World Bank Management

The Evolving Field of Audit Regulation

  • 70 Islamic Finance and the IMF

Role of the International Monetary Fund

43 Point-of-View

43 Point-of-View

  • 56 Libya

Helping Libya Build Strong, Effective and

Accountable State Institutions

Events

74 Exchange
  • 74 Exchange

Integrated Reporting <IR>

Story Maghreb Gulf 51 Libya 69 Kuwait “Unity A Snapshot of Public Investment Supporting Kuwait’s Management

A Conversation about Governance with the GGP Staff

Mashreq

59 Lebanon
  • 59 Lebanon

Interview: Internal Audit Developments

 
  • 81 Maarefah

  • 61 Jordan

Working with Universities to Strengthen the

  • 81 Solutions Lab

Accounting Curriculum in Jordan

  • 82 Bootcamps

  • 62 Egypt

 

Launching “Program and Performance

Budgeting” in Egypt

Cross-Cutting

46 Ma’arefah Member Face-to-Face Meeting

65 KRG-Iraq
  • 65 KRG-Iraq

  • 89 Books

Introducing the Governance Global

Introducing the Governance Global

Suggested New Books

Practice to Governance Professionals Across the MENA Region

Practice to Governance Professionals Across the MENA Region

Interview: Supreme Audit Institutes

  • 67 Iraq

  • 93 In Their Own Words

 

Supreme Audit Institution Parlementary

Governance, Fragility and Conflict

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Public Financial Management

PBB 08 PFM Reform 10 Procurement 12 Decentralization 15

Performance-Based Bugeting

Strengthening External and Internal Accountability along the Service Delivery Chain

Fabian SEIDERER

Senior Public Sector Specialist

Joey GHALEB

Senior Public Sector Specialist

Strategic Objectives

Every year, governments across the MENA region spend billions of dollars for the provision of key public programs and services to foster socio-economic development. However, the results indicate uneven outcomes across countries, sectors and over time. Thus, both governments and parliaments are now considering new ways to: (i) improve the allocative efficiency of scarce public resources to priority policies and services; (ii) strengthen the operational efficiency of public expenditures and services; and (iii) improve the responsibility and accountability for results across the public sector. A forth objective is also gaining momentumincreasing fiscal transparency and citizen voice/engagement in the budgetary process. Demand for quality public services and programs is increasing even as governments operate in a fiscally constrained environment. The public sector is being asked to modernize its public financial management systems in order to strengthen fiscal sustainability, while at the same time improving allocative and operational efficiency and accountability for results. In parallel, there is an increase in the complexity of service delivery and financing, further exacerbating the challenges of existing management and accountability frameworks. Performance-based budgeting may be the answer, as it can help strengthen

both external and internal accountability

8 Public Financial Management PBB 0 8 PFM Reform 10 Procurement 12 Decentralization 15 Performance-Based Bugeting

along the service delivery chain. In many countries, the public service delivery function suffers from weaknesses in the accountability chain and information asymmetry from planning to evaluation. Citizens and their representatives in Parliament have a hard time assessing the link between policy priorities and resourceslet alone the allocative efficiency of the line item budgets. Ministries of finance also have a difficult time assessing the performance of service providers and the efficiency of their expenditures. The spending units of service providers often lack visibility and flexibility regarding the allocation of resources, which undermines managerial flexibility and accountability for results. Users lack information on the services they are supposed to receive, as well as the means to provide feedback to the providers or the State. Performance- informed budgeting is seen by many

countries as a potential lever to address these weaknesses in the accountability framework. It is seen as a way of improving transparency and accountability regarding the allocation and use of scarce public resources. Indeed, it can help strengthen the incentive for more efficient and effective service delivery across the public sector. However, international experience shows that this requires strong fundamentals, as well as a high level and long-term commitment to reform, especially as the public sector ship is not easy to steer. In this context, public service users and taxpayers (both citizens and firms) have an important role to play in terms of demanding change and providing feedback. Strengthening budgeting and performance is a multi- dimensional and complex process. Therefore, it requires a holistic and integrated approach over the medium term. Performance budgeting usually includes the

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following dimensions: strategic budget planning and budget preparation; programmatic budget classification; program costing and budgeting; managerial flexibility and responsibility of program heads; multi-annual budgeting; development of multi-annual performance objectives and indicators (external and internal); performance contracting; performance monitoring and evaluation; and information systems. Maximizing the synergies of these mutually reinforcing reform levers requires careful planning, coordination and change management. Experience shows that such complex reforms require a sequenced iterative and adaptive approach. Those involved in the process should seek to avoid the capability trap 1 during implementation or worse, isomorphic mimicry, 2 or giving the illusion of change.

Fortunately, there is a wealth of knowledge and country experience regarding performance budgeting, its components, reform elements, and implementation processknowledge and experience that MENA countries can use.

Public Financial Management (PFM) systems in the MENA region are at varying stages of development, depending on the country. Corresponding World Bank engagement enables the Technical Practices (TP) to provide technical support for each level of

countries where PFM systems are semi-

learned).

The

TP

will

also

provide

advancedsuch as Lebanon and the United

advice,

expertise

and

knowledge

Arab Emirateswork can focus on themes

resources

to

colleagues

from

the

such as Medium-Term Expenditure

Governance Global Practice (GGP) and

Frameworks, gaps in the budget system law,

other

Global

Practices in order

to

multi-year budgeting, and complete Chart of

respond

to

priority

client

demands.

Accounts classification. The TP can also

Notably,

colleagues

can

request

TP

support countries that are considered to be

members to peer review their

the most advanced in terms of their PFM

operations that have a budgeting and

systems, such as Morocco and Tunisia. For

performance

dimension.

The

TP

will

these, the TP can engage in program

also seek to develop and share

budgeting, multi-year budgeting,

operational

tools,

guidebooks

and

performance monitoring and evaluation, and

training material that might be used in

implementation support to the Ministries of Finance as well as the line ministries.

proposals or to help in deliverables.

 

The Performance and Budgeting Technical Practice in MENA

The Bank set up a new Technical Practice to foster this exchange of knowledge and experience globally and within the region as well. Bank teams and operations are now better positioned to respond to client demands in this area. Specifically, the work will evolve around three dimensions:

1)

Strategic

priorities:

The

TP

will

contribute to the World Bank regional

strategy and associated annual plans.

The

TP

will

work

very

closely

with

management to define the thematic

priorities

 

and operational

opportunities.

3) Knowledge exchange: The TP will engage in the knowledge agenda, reach out to experts and other Global Practices in the World Bank, mentor staff, and take part in relevant events and activities. The TP will organize and participate in internal and external knowledge exchange events such as Webinars, workshops and seminar knowledge products. Further, it will seek to develop a knowledge repository on the subject matter. Such knowledge

activities will be closely coordinated

with relevant existing Communities of Practice (CoP) and TPs, such as the Global Performance and Budgeting CoP, and the Performance Monitoring and Public Investment Management CoP. The TP will maximize synergies with existing knowledge platforms and instruments, such as Maarefah, Connecting Voices and the Bank’s Collaboration for Development Platform.

For more information please contact the Technical Practice coordinators: Fabian Seiderer fseiderer@worldbank.org and Joey Ghaleb jghaleb@worldbank.org.

development. For instance, in countries that 2) Foster and support country do not have the “basics”,
development. For instance, in countries that
2)
Foster
and
support
country
do not have the “basics”, the work of the TP
engagement:
The
TP
will
coordinate

would focus on planning, guiding principles, charts of accounts, economic and functional classifications, a basic Medium-Term Financial Framework, and the like. This would be the case for most Gulf Cooperation Council (GCC) and Mashrek countries. In

with staff on the agenda design and implementation, provide quality assurance through peer review, and contribute to proposals (for example, by sharing documents, providing feedback, and transferring lessons

1 “…many countries in the world remain in ‘state capability traps’ in which the capability of the state to

implement is both severely limited and improving (if at

all) only very slowly: at their current pace of progress such countries would take hundreds (if not thousands) of

years to reach the levels of high capability countries.”

Capability Traps? The Mechanisms of Persistent Implementation Failure, Paper by Lant Pritchett, Harvard

Kennedy School, Michael Woolcock, World Bank, and Matt Andrews, Harvard Kennedy School, Harvard Kennedy School of Government. 2010. See:

2 “… isomorphic mimicry as a technique of failure: the adoption of the forms of other functional states and

organizations which camouflages a persistent lack of function.” Capability Traps? The Mechanisms of Persistent Implementation Failure, Paper by Lant Pritchett, Harvard Kennedy School, Michael Woolcock, World Bank, and Matt Andrews, Harvard Kennedy School, Harvard Kennedy School of Government. 2010. See:

http://www.hks.harvard.edu/fs/lpritch/Governance/cap

ability_traps%28june2010%29.pdf

10

Public Financial Management Reform

Fragile-, Conflict- and Violence-Affected Environments

Mohamed YEHIA

Senior Financial Management Specialist

Michael SCHAEFFER

Senior Public Sector Specialist

Emmanuel CUVILLIER

Senior Public Sector Specialist

Fragile-, Conflict-, and Violence (FCV)- affected environments share many of the public financial management (PFM) reform challenges encountered in other countries.

However, many issues tend to be more pronounced, especially in the initial near absence of technical capacity that face most conflict-affected countries. This article briefly summarizes some of the principal findings that have recently emerged. It also reviews some drivers of PFM reforms in fragile public administration environments and seeks to address the question as to whether public financial management reforms are merely a luxury or a necessary precondition for enhancing stability.

Most

conflict-affected

countries

are

characterized by

low

state

capacity,

depleted social capital, and a lack of

accurate information and data.

In the aftermath of conflict, the short-term objectives of assistance are generally directed toward supporting the political settlement, setting in motion the beginning of an economic recovery, and laying the foundation for long-term capacity development. Under such circumstances, the gradual rebuilding of institutions and establishment of systems are crucial in enabling economic recovery, restoring political stability and reducing the likelihood of renewed conflicts. In addition, laying the foundations for governance and anti- corruption measures is indispensable in restoring public trust in the state. In this context, the appropriate sequencing of reforms is critical to the successful restoration and long-term sustainability of reforms. The primary core functions (that are necessary but not sufficient) that need to be reestablished in a post-fragile /conflict /violent environment include: coordination at the national (central) government level, development and improvement of public financial management, re-establishment of

10 Public Financial Management Reform Fragile-, Conflict- and Violence-Affected Environments Mohamed YEHIA Senior Financial Management Specialist

the civil service and public administration, and local governance reforms.

Countries in relatively early conflict- affected periods have a valuable window of opportunity for incorporating improved public financial management operations.

The momentum created in the aftermath of conflicts can be more conducive to launching reforms. The openness observed at such times represents an opportune time to advocate for transparency, participation and accountability. However, progress will generally be uneven. For example, in middle-income countries that still have a relatively high level of political volatility, there is an opportunity for PFM reforms, but the high degree of volatility means that progress may be more limited (for example, Libya). Figure 1 presents a matrix regarding the potential contextual features of PFM interventions in countries that fit different parameters of fragile and conflict-affected environments.

Conflict-affected situations can offer a window of opportunity for reforms related to budgetary formulation and execution.

However, while budget accountability is regarded as very important in bolstering state governance legitimacy, this aspect of the budget cycle is most dependent on a broader political commitment, as well as on the wider functioning of checks and balances in the system. Remedying key weaknesses in the primary PFM structures and systems is a critical and necessary feature for every

fragile/conflict-affected environment, especially because government revenues fall significantly during civil conflict (IMF 2004). General misuse of public financial resources will undermine the credibility of any newly installed government, as well as impede the recovery of the private sector.

Can public financial reform processes continue to take place in an environment where political dynamics are in continuous flux?

There are two broad schools of thought on the matter of how rapidly reform progress can be madeeven under the best of circumstances in post-conflict environments. Schick (1998) and others emphasize the difficulty of short-term reforms, and the need for internally consistent basic budget structures that reflect their equally basic public sector context. A second school of thought looks at PFM reforms as having a relatively clear end point that is achievable within the scope and timeframe of contemporary budget reforms. The IMF (2004) affirms that fragile states must follow a three-step sequence, starting with a reformed legal framework, then establishing a strong central fiscal authority, and finally designing appropriate fiscal policies.

A

critical

feature

of

public

financial

management intervention in FCV-affected environments is to achieve a measure of expenditure control, especially in low capacity situations.

11

11 In environments with more adequate capacity, where a primary expenditure control system exists or has

In environments with more adequate capacity, where a primary expenditure control system exists or has been implemented, additional public financial management features including the issues of resource allocation and operational efficiency can be added. In FCV-affected environments, public financial management reforms are a necessary pre-condition for building national stability. However, in environments that remain unstable, a focus on PFM options should be limited to measures that can yield very short-term tangible results. Opportunities are likely to be limited to only selected aspects of the budget cycle (execution and/or preparation). As such, PFM reforms should be very targeted and limited with the expectation of achieving only modest success.

Introducing an orderly budgetary process in FCV-affected states has revealed a number of core guiding principles:

It

is

essential

to

be

selective

(and

gradual)

in

introducing

budgetary

reforms in an environment of low-levels

of information and high levels of

uncertainty.

 

Introducing

too

many

reforms at once can risk loss of

credibility (World Bank, 2011);

The limited capacity in many FCV- affected states, whether high or low income, requires that public financial management interventions be simple. Simple systems are more conducive to

transparency and building stakeholder interests; and

The

choice

of

public

financial

management measures should be

dictated

by

the

conditions

on

the

ground, but also significantly flexible to change as conditions change

(UN/World Bank, 2014). environments call for

FCV-affected

unusual

an degree of inventiveness, creativity, and patience in implementing public financial management reforms, while at the same time respecting the established principles of good fiscal and expenditure management.

References

Allen, R. 2009. “The Challenge of Reforming Budgetary Institutions in Developing Countries.” IMF Working Paper

09/96. Washington, D.C. DFID (Department for International Development, UK).

2005. “A Platform Approach to Improving Public Financial Management.”

IMF (International Monetary Fund). 2004. Rebuilding Fiscal Institutions in Post-conflict Countries. Fiscal Affairs Department. Washington D.C.: IMF. Available at:

http://www.imf.org/external/np/fad/2005/022505.pdf

Schick, A. 1998. A Contemporary Approach to Public Expenditure Management. Washington, D.C.: World Bank.

Available

at:

http://www.5m.com.tr/en/kaynaklar/Acontemporaryappr

oachtopublicexpenditure-management.pdf United Nations and World Bank. 2014. Rebuilding Core Government Functions in the Immediate Aftermath of Conflict: Key Issues and Priorities.

World Bank. 2013. Beyond the Annual Budget A Review of Global Experience with Medium-Term Expenditure Frameworks. Washington, D.C.

________. Conflict Countries-Synthesis Report. Washington, D.C.

2012a.

Public Expenditure Reforms in Post-

________. Management in Post-Conflict Countries-Synthesis Report. Washington, DC.

2012b.

Strengthening Public Financial

________.

  • 2011. Conflict, Security and Development. World

Development Report. Washington, D.C.

Figure 1: Public Financial Management Dimensions in Fragile-, Conflict- and Violence-Affected Environments

Context

 

Middle Income

 

Low Income

High Reform Commitment

Substantial opportunity to engage in

Opportunity to engage in a number of PFM

(High Incentives)

various public financial management reforms.

reforms. Shared sovereignity arrangements may be the

National Government can lead these reforms.

most appropriate path.

Intermediate Reform

Traction only with a few key areas in PFM

Stop gap measures likely to be needed.

reforms.

Shared sovereigity arrangements not only

Commitment

Reform steps with shorter implementation

desirable but required to engage in reforms.

(High Volatility)

periods are likely to be more successful.

Reforms likely to be difficult and should focus

Long-termreforms are unlikely to be realized.

on shorter implementation measures.

Low Reform Commitment

Government likely to accept only limited

Government likely to accept PFM reform

(weak Incentives)

support for PFM reforms. Limited traction and sustainability for any

assistance in order to obtain donor financing, but reforms may not gain long-term traction.

reforms.

Building stakeholder interests and

Building stakeholder interests in and appreciation for PFM Reforms are necessary preconditions.

appreciation for PFM reforms are necessary preconditions.

Source: World Bank, 2012a and author compilation.

12

Procurement under Public Private Partnerships

MENA Shares Global Knowledge

Nazaneen Ismail ALI

Senior Procurement Specialist

Rachel LIPSON

Procurement Specialist

Ala AL-KAZZAZ

Procurement Specialist

Introduction: This article highlights the key lessons learned from the workshop entitled:

“Procurement Under Public private

Partnerships (PPP): A Learning Event for the

Water and Energy Sectors,” held in Beirut,

Lebanon on October 13-15, 2014. The event was organized by the Governance Global Practice Team at the World Bank Office in Beirut in coordination with the Public-Private Partnership Cross Cutting Solutions Area (GPCDR-PPP-CCSA). The event provided a platform to expose clients to best practices on PPP procurement, particularly in projects, sectors, and countries with upcoming PPP operations, as well as in countries that are exploring the possibility of utilizing PPP arrangements and are interested to learn more about the approach and the legal

framework to support it.

Responding to client needs: The workshop

had its roots in the efforts of the Kurdistan Regional Government (KRG) of Iraq to modernize its legal framework for procurement. This has been a long-term engagement between the KRG and the World Bank, as part of the Iraq Technical Assistance and Capacity Building Fund (TACBF). The program aims to build capacity and develop practices to bring about more efficient and effective management and use

of Iraq’s public resources. Over the course of

this dialogue, PPPs emerged as an area of particular interest and importance for the

KRG. The government viewed PPPs as a critical opportunity to close both funding and capacity gaps by collaborating with the private sector to deliver needed public services and infrastructure.

However, the KRG’s current legal framework

does not provide an adequate foundation to establish these kinds of long-term partnerships and contracts. Understanding the complexity of the subject and task, the KRG Ministry of Planning made a formal request to the World Bank for support on this important topic. The KRG government was interested in learning from international examples of legal provisions for PPP

procurement. They also requested support

12 Procurement under Public Private Partnerships MENA Shares Global Knowledge Nazaneen Ismail ALI Senior Procurement Specialist

on capacity building for public officials in various KRG ministries who would be

responsible both for writing the KRG’s new

procurement law and regulations and for implementing future PPP projects - particularly in the water and energy sectors.

In responding to this request, the World Bank Team surmised that the KRG was likely not the only client facing challenges in designing or updating their procurement system to facilitate PPPs. Recognizing that other clients and staff could benefit from this event, the team decided to extend the invitation to a global audience. Within just a few weeks, the workshop organizers mobilized a diverse team from across the Bank and the world to convene in Beirut. The workshop featured participants and presenters from India, Indonesia Lebanon, Pakistan, Sri Lanka, the United Arab Emirates, staff from Washington D.C., and included government officials currently working on PPP tenders and legislation from Yemen, Lebanon, and Iraq, including from both Baghdad and Erbil.

A “One World Bank Group” Event: Given the

crucial role that governance arrangements play in the successful execution of PPPs, the team brought in expertise to facilitate collaboration across different parts of the World Bank Group. Nazaneen Ismail Ali, Senior Procurement Specialist in the Public Integrity and Openness (PIO) Department of the Governance Global Practice (GGP) led the preparation and delivery of the workshop from Beirut, in close coordination with Mark Moseley, Lead Counsel of the Public-Private Partnership CCSA. The International Finance Corporation (IFC) also played a major role through their PPP Advisory Services Division, represented in Beirut by Carrie Farley, Senior Investment Officer.

Each collaborating group brought diverse and valuable perspectives to the discussion. The GGP-PIO staff shared their expert technical knowledge on good procurement practices, as well as lessons from their real- life experience with implementing challenging legal frameworks and complex procurements. The IFC brought a keen understanding of the market, what attracts

13

investors, and extensive client-facing experience. Sameh Mobarek, Senior Counsel in the Energy & Extractives Global Practice added a unique view that integrated his PPP experience (including in the Morocco Noor solar project) and combined legal and power engineering training. The PPP CCSA contributed a broad international knowledge of PPP and sector legislation and regulation. The CCSA also shared valuable resources with participants, including their PPP Infrastructure Resource Center (IRC) data base which features sample public- private partnership (PPP) agreements and concessions, checklists, sample clauses, terms of references, risk matrices, standard bidding documents developed by government agencies and sample PPP legislation. Finally, the staff of the MENA region hosted the event, and provided important regional knowledge and information to make the learning more concrete for the participants.

The Importance of PPP for the MENA Region:

This workshop came at an important time for MENA countries. Meeting the exponentially growing demands for infrastructure will continue to strain the pocketbooks of MENA governments in the coming years. 3 In the Mashreq countries, 4 the required infrastructure investment for electricity alone is estimated at US$ 130 billion by 2020 5 . Quite simply, the public budget will not be able to meet these needs by itself. Therefore, PPP is becoming an important project financing option for governments in MENA to respond to the large financing needs to improve infrastructure and service delivery in water, energy, transport, solid waste management and others. In some cases, the public sector budgetary constraints can mean that the only alternative to a PPP project is no project at all.

and

in

many

cases,

successfully

Since the event focused on procurement arrangements under Public-Private Partnerships (PPP), the sessions aimed to help participants better understand PPP as a public procurement method and explain how to create a competitive and fair process. As requested by the KRG Government, the workshop included comparative examples of different legislative, institutional and regulatory arrangements for procurement, as well as commentary on the differences between PPP procurement and conventional public infrastructure projects. Thanks to Sepehr Fotovat (Senior Procurement Specialist), participants also learned about the different private sector arrangements for infrastructure projects such as Build, Own and Operate (BOO), Build, Own and Transfer (BOT); and Build, Own, Operate and Transfer

implemented PPP projects. Today we see other countries like Egypt, Iran, Iraq and Lebanon actively pursuing private sector investment in infrastructure.

Unfortunately, though, many governments in MENA have faced obstacles to successfully procuring PPPs, including a lack of technical know-how to implement these complex, long-term arrangements, and outdated legal and regulatory frameworks. Systemic governance challenges are also prevalent, and lack of transparency can open doors to corruption as well as major delays and inefficiencies. When the private sector perceives that the system is not open and fair, they are less likely to participate in the bidding process. In 2010 an IFC Survey of PPP

13 investors, and extensive client-facing experience. Sameh Mobarek, Senior Counsel in the Energy & Extractives Global

investors in Africa found

that the

“appropriate legal framework for investment” was the primary factor affecting

(BOOT). Other sessions focused on a general approach to preparing and tendering PPP transactions, as well as on prioritizing different infrastructure projects and how to determine which ones might be suitable for PPP.

To illustrate these practices, a number of different case studies were presented from

the World Bank’s portfolio in the MENA

region and beyond, as well as external

examples. These included both PPP “Success Stories,” plus instances in which PPP

arrangements had failed to bring about the desired results. The two principal cases featured were the Morocco - Noor- Ouarzazate Concentrated Solar Power Plant and the New Cairo Waste Water Plant. Anand Kumar Srivastava, PPP Nodal Point on the Procurement Team in Delhi, India, also shared India’s mixed experience with PPPs in water and energy over the past decade and a half, including both operations financed by the Bank as well as projects funded through other means.

 

the

decision

to

pursue

investment

However, the infrastructure financing gap is

opportunities in a particular country, ranking

not the only reason why governments in

above even

the

political

and

economic

MENA have started to think more seriously

stability of the country.1

 

about PPPs. PPPs are often more effective than traditional projects in delivering on- time and on-budget project implementation. A European Investment Bank study found that only three of ten PPP projects financed by the Bank experienced time delay and cost overruns (which were borne by private contractor). In comparison, 60% of the 50 public infrastructure projects under conventional procurement were more than one year late. 6 Similarly, a study of 50 large public procurements in the UK found that capital expenditure for the PPPs in the sample was only 1% over budget, on average, compared to an average cost overrun of 47% for traditional procurement. 7 Given this context, it’s not surprising that MENA countries like Jordan, Morocco, Oman, and Saudi Arabia have embarked on,

Tailoring the Workshop to Realities on the Ground: The Arab Spring opened up the possibility of revamping the traditional ties between the state and businesses and establish a level playing field2 So far, however, the current political and economic environment has not been conducive to attracting private investors to MENA. The uncertainty and insecurity in the region makes it more difficult to establish adequate risk management frameworks and secure the long-term commitments necessary to engage in PPPs. This is particularly true in a country like Iraq, which made it especially crucial that the workshop in Beirut was tailored and responsive to these unique circumstances.

14

The Road Ahead: This workshop was only the beginning of a long work plan ahead for the KRG. Implementation of PPP procurement will have to be systematic and gradual, starting with the current commitment to promulgate a proper legal framework. To ensure success, public officials will need to recognize the potential need for private participation, familiarize themselves with

other countries’ experience and establish a

national capacity building program on how to plan and implement PPP agreements. All

of this would have to take place with a keen focus on transparency and accountability. This is crucial to ensure that the expansion of the role of the private sector in delivering needed infrastructure and public services is successful and sustainable.

ntentServer/IW3P/IB/2014/03/25/000158349_2014032

5092905/Rendered/PDF/WPS6810.pdf

  • 3 http://www.worldbank.org/en/news/press-

release/2014/10/09/world-bank-group-launches-new-

global-infrastructure-facility

  • 4 The Mashreq countries include Iraq, Jordan, Lebanon, and Syria.

  • 5 Over the Horizon: A New Levant.

http://www.pidg.org/resource-library/other-

1

africa/at_download/file

2

See:

http://beta.cmimarseille.org/highlights/report-over-

  • 6 http://www.eib.org/attachments/ev/ev_ppp_en.pdf

  • 7 http://www.parliament.vic.gov.au/images/stories/com

mittees/paec/2010-

  • documents/evaluation-of-the-demonstration-effect-of- horizon-new-levant

ifc2019s-involvement-in-infrastructure-in-

http://wwwwds.worldbank.org/external/default/WDSCo

11_Budget_Estimates/Extra_bits/Mott_McDonald_Flyvb

erg_Blake_Dawson_Waldron_studies.pdf

Procurement

A strategy to rebalance implementation support and institutional development and capacity building

Yolanda TAYLER

Practice Manager, PIO, GGP

In August 2014 the Public Integrity and Openness Department (PIO) of the Governance Global Practice (GGP) established a Task Force to design a comprehensive and actionable strategy to rebalance implementation support and institutional development and capacity building. The Transition Strategy is a culmination of dialogues, contributions, and advice from World Bank colleagues. It is bold and ambitious while remaining grounded in reality and what is feasibly possible. It seeks to demonstrate that procurement is a powerful tool that, when executed well, can have profound, positive repercussions for governance and inclusive economic growth in countries. The Transition Strategy envisions that this will be realized through mainstreaming four Transformational Engagements and creating Global Talent Pools (GTPs).

The ideas set forth in the Transition Strategy are under the backdrop of the four trends at the World Bank: the new twin goals, the new structure which allows for a global approach, the emphasis on output and results-based aid, and the new Procurement Policy Framework. This is an opportune time to implement the Transition Strategy! The Task Force developed four Transformational Engagements, or thematic areas, that are of high impact and unmet client demand. The Transformational Engagements are Professionalization of Procurement; Performance Measurement and Data Analytics; e-Procurement and Value from Innovation; and Open Contracting. For these

consideration of the needs and demands of the GPs. The technical skills needed will likely align with those of the Transformational Engagements but will be adjusted as needed.

Engagement with the GPs at the technical and senior level is critical to informing which thematic areas the GTPs will include and to mainstreaming Transformational Engagements. For the GPs, working on these issues can result in better delivery of projects, since both are aimed at improving procurement in client countries. And, how well procurement works in a client country has a direct impact on how successful a project is delivered.

to be truly ‘transformational’ they need to be

operationalized in projects to ensure a more sustainable approach to capacity building and institutional development. Global Talent Pools will be comprised of staff with technical expertise in certain thematic areas who will be deployed either physically or virtually on an as-needed basis to help projects overcome obstacles. The thematic areas will be determined with due

Operationalizing the Transformational Engagements and creating Global Talent Pools, and making sure that they are mainstreamed in Bank projects, will result in a wholesale, sustainable approach. Stay

tuned for more updates and the positive

impact we’re having!

14 The Road Ahead: This workshop was only the beginning of a long work plan ahead

15

Payhways to Fiscal Decentralization

Challenges and Opportunities

Moad ALRUBAIDI

Senior Financial Management Specialist

Nadi MASHNI

Financial Management Specialist,

Lobna AHMED

Resident Advisor

Fiscal decentralization is the empowerment of people through the empowerment of their local governments to services. It is about the central government’s passing budgetary authority to elected subnational governments in the form of the power to make taxing and spending decisions. 1 Does decentralization thrive amid political and economic challenges? An old question gains momentum within the changing context of the MENA region. At the strategic level, new draft and amended constitutions in Egypt, Morocco, Tunisia and Yemen enshrined decentralization and created the framework for implementation. Do countries take the same pathways to decentralization? A well- known principle is that decentralization reform and sequencing must be tailored to a country’s circumstances.

To determine the country’s pathway, one

must answer questions such as these: Why

decentralization? What to decentralize? When to decentralize? How to decentralize? The success of decentralization depends on a comprehensive approach to political, administrative and fiscal aspects. 2 Designing and implementing decentralization is a complicated process as it is multidisciplinary,

comprehensive, and involves multiple stakeholders. It could also be risky as it could cause potential problems such as macroeconomic instability, increased regional inequality and conflicts, declining service levels, increased corruption and elite capture. Therefore, developing a design and implementation strategy is critical and the result must be country specific. In practice, decentralization is very diverse, and pathways may have similar triggers and

threats depending on the country’s

development status, as illustrated in Table 1.

What is the relevance of decentralization in the context of post Arab Spring in MENA? Is Decentralization the appropriate solution?

Most of the literature supports the argument that decentralization reforms improve the efficiency, effectiveness and accountability of local governments. Indeed, most experts argue the same is applicable to the Arab Spring Countries and that this may be the only way to stabilize such countries. However, some argue that such reforms have been pushed by international organizations and experts without taking

into consideration the country’s history,

current governance structures and complex political economy. Mr. Farea Al-Muslimi, a

Yemeni activist and journalist, published an

article on “The unwarranted embrace of

decentralization - Ulterior motives threaten

an article entitled “Decentralization is Key to

Implement Community Development in Arab

Spring Countries,” notes that while governments may be reluctant to decentralize out of a concern that this process could promote secession and become a cause of conflict, more often it is precisely the lack of empowerment in decision-making at the local level that

heightens political resistance, tension and sectarian conflict and violence.

Would the conflicts that exist in some of the MENA countries be fewer or even absent had the governments adopted a decentralized system before 2011?

the viability of a federal Yemen.” In it, he

emphasizes that the decision to transform Yemen into a federal state was not based on a comprehensive assessment or a strategic approach. He gives an example of the tensions that led to the recent issues in South Yemen, posing the question about whether it was due to an overly centralized government. Specifically, he believes that land disputes, military officers fired from their jobs, local identities quashed and a whole host of other issues played a more important role. He concludes that as the conversations around federalism continue, it will be important to keep in mind that governing a territory as large and complex as Yemen will require much more than mere bureaucratic efficiency. The severe economic and political challenges facing Yemen and other states in the Arab region will not be resolved by a simple move to decentralize power. Dr. Yossef Ben-Meir, in

As unachievable as it seems at the present time, decentralization of power to sub- provincial levels, that is, as close to the people as possible, appears to be the only viable way for citizens to feel more in control of their lives. A form of legitimate local autonomy within an overall context of national sovereignty could have the effect of

decreasing the violence and conflict. Taking the case of Yemen as an example, both arguments made by Al-Muslimi and Ben- Meirthough they appear to be conflictingare actually saying similar things. In essence, if the decentralization efforts which started in the year 2000 in Yemen had been implemented effectively, it is possible that Yemen would have been in a better situation to deal with the events of the Arab Spring as many of the triggers would have been mitigated through decentralization.

15 Payhways to Fiscal Decentralization Challenges and Opportunities Moad ALRUBAIDI Senior Financial Management Specialist Nadi MASHNI

16

 

Table 1: Fiscal Decentralization in Developed, Developing and Fragile and Conflict Countries

Country

 

Triggers for Decentralization

 

Pathway

 

Threats

Developed

Efficient and effective service

Likely to follow normative approach.

Low public participation.

Countries

delivery is the main concern.

The principle focus is on administrative and

Abuse of discretion.

Reflects citizen empowerment.

fiscal decentralization.

 

Financial accountability.

Deliberate and structured.

 

Timeline to implement is relatively efficient.

Developing

Driven by need to address

equitably.

Likely to follow normative approach.

Capacity concerns.

Countries

national equity and marginalization issues.

National debate is critical due to the contested nature of issues and the need for consensus.

Elite capture and devolved corruption.

Need for acceleration of

Most likely will require constitutional change.

Issues with “Finance Follows

economic development.

Likely sequencing would start with political

Function” and unfunded

Citizen demands and

and fiscal decentralization.

mandates.

empowerment of civil society.

Decentralize expenditure allocation first; then

Contest and confusion over

Service delivery benefits are not

heavy reliance on intergovernmental transfers

functions and mandates.

reaching to the lowest levels

with limited borrowing allowed.

Low taxing powers as threats to

(for example, villages), so

Timeline is relatively long.

accountability.

improving access to service

Deconcentration helps maintain service

 

delivery is the concern. The need to manage newly-

delivery.

discovered natural resources

Critical to establish governance of local government and budget rules.

Fragile &

Driven by the need for “cease

Not likely to follow normative approach.

Could cause return to violence

Conflict

fire” management.

Debate is conducted between power elites

and further separation of the

Having a large number of

with heavy involvement of regional and

country.

Countries

powers negatively impacting the

international stakeholders.

Temptation to continue political

country’s development.

Likely to start with political decentralization

decentralization alone by keeping

Pressure from international

and a focus on revenue allocations.

political elite content.

stakeholders.

Likely motive is to decentralize authority and powers within a unified country. New or amended constitutions are expected.

Perverse incentive not to grow capacity.

 

Critical to start enforcement of rule of law.

 

Best to decentralize to the lowest levels possible as opposed to regions.

 

Source: Drawn from Duke University, Sanford School of Public Policy, “Fiscal Decentralization & Local Government Financial Management (PFD) Program.”

 

Decentralization Experiences and Challenges: The Case of Yemen

Key challenges of the Yemeni decentralization experience of the year

2000

Yemen faced a number of challenges in

Decentralization efforts started in the year 2000 when the Local Authority Law was passed. The idea was to translate the principles of decentralization and the general framework of the local authority as prescribed in the country’s Constitution at

the time. The Local Authority Law of 2000 sought to fiscally decentralize the Yemeni government by increasing local budgetary autonomy. The law provides for local authorities to keep revenues collected at the local level. Portions of monies collected by the central government will be distributed to districts based on population density. As a result of the Local Authority Law and its bylaws, local administrative units were given fiscal powers and authorities which define the scope and nature of their expenditures and sources of funding.

decentralization including:

Lack

of

a

comprehensive

strategic

vision

for

the

transition

into

a

decentralized system. Lack of country resources and

poor

investment environment for both local

and foreign investors.

 

Lack of a

good

governance

system,

including a judicial and courts system.

Lack of a system.

 

good land management

Poor citizen awareness

of

the

decentralization system and the roles and responsibilities of both the citizens and the Governmentwhich is one of the major factors in ensuring a

successful implementation of

a

decentralized

or

even

a

centralized

system.

 

The intervention of some traditional

community members,

such

as

tribesmen and their leaders in the work of the local government.

Although the local administration law supersedes others laws, it conflicts with a number of other laws resulting in poor collaboration between local and central government, a duplication of roles and responsibilities and a complicated governance structure.

Yemen’s Transition into a Federal Regime

As

a

result of

the challenges of the 2000

decentralization experience and the recent

political

upheaval,

Yemen’s

pathway

to

decentralization is following the fragile and

conflict approach. The speed and

effectiveness

of

Yemen’s

transition

to

federalism

will

depend

heavily

on

the

political

agreements

and

attendant

availability of appropriate funding for the

newly-devolved

governments.

Plans

to

create a federal Yemen will require a major

effort to clarify the current fiscal

17

arrangements (both revenues and expenditures), as well as developing better systems for their management. While there have been a number of reform efforts conducted in conjunction with the World Bank and the International Monetary Fund, more work will be required to restructure the country into a federal system.

Doing so will require consideration of the philosophy of fiscal federalism and issues such as fiscal discretion and accountability at the local levels. Capacity building for public financial management at the local levels

The Palestinian Territories Case

Local governments in the Palestinian Territories have a long history, and actually predate the establishment of the Palestinian Authority (PA). Indeed, some Local Government Units were created as early as 1950. Over decades, these local authorities performed governing tasks under the complexities of different political and legal regimes. In historical Palestine, there were

22 ‘local councils’ under the British Mandate

(1920-1948). During the Israeli occupation, Palestinian municipalities were the only administrative institutions that were allowed

17 arrangements (both revenues and expenditures), as well as developing better systems for their management. While

must be a priority. To succeed, the philosophy of fiscal decentralization must also be embraced by the national government. It is inevitable that most revenues will be raised by the central government. This means that all governmental levels will have a joint interest in a more efficient, effective and transparent tax regime, especially given the fall in petroleum revenues. A system for allocating revenues to the regional governments will need to be developed. It can include some combination of tax sharing, unconditional fiscal transfers and conditional fiscal transfers. The formula for sharing petroleum revenues is especially sensitive. The sharing issue will focus attention on the current structure of government spending. The local governments will press for more funds for their responsibilities, which will in turn put pressure on the central government to address problematic areas, such as overstaffing and subsidies. Decisions will also need to be made on the restructuring of the civil service, with significant numbers of those now employed by the central government being transferred to the local levels. This will pose additional challenges, including obligations to take unwanted staff and dealing with the ghost worker phenomenon.

to officially exist and function. After the signing of the Oslo Agreements in September 1993 and following the establishment of the

first Palestinian central government administration, the Ministry of Local Government was created in 1994. After its establishment, the role of the Ministry of Local Government was to increase the

territorial administration under the PA’s

autonomous control with a particular focus on large population centers and communities adjacent to East Jerusalem. After Oslo, local governments were particularly weak and their legitimacy was undermined, as many Palestinians viewed them as a legacy of the occupation forces. The political and geographic fragmentation of the Palestinian Territories in connection with the implementation of the Oslo Agreements has meant that local government units play a predominant role in service delivery, especially in areas where the relatively young central government was politically, geographically, and fiscally constrained. Today, there are 378 Local Government Units in the Palestinian Territories, out of which 353 are located in the West Bank (110 municipalities and 243 villages), and 25 in Gaza (all municipalities). At a 74 percent urbanization rate, Local Government Units face increasing pressures

to provide better services to their citizens. The World Bank and other development partners support local governments in the Palestinian Territories in improving basic local infrastructure and services. For example, the Municipal Development Program, managed by the Municipal Development and Lending Fund (MDLF), provides investment funds to municipalities through a transparent performance-based allocation formula. Specifically, municipalities qualify for a higher share of funds and capacity building in line with their administrative, service delivery, and financial performance. However, despite this support, local authorities continue to face significant investment needs. Although the 135 municipalities have access to funds provided by the MDLF, no systematic funding mechanism exists to finance investments in small Local Government Units, that is, Village Councils. Village Councils cannot access funds under the MDP. This leaves a funding gap for the 243 villages and marginalized communities. At the same time, it would not be viable to continue approaching these small communities without a special emphasis on leveraging economies of scale. The majority of villages are too small, with an average population of less than 3,000. This makes it difficult to provide core local infrastructure services in an efficient and financially viable manner.

Key Challenges for Palestinian Local Service Delivery

The large number of Local Government Units makes it difficult to achieve economies of scale in service delivery.

No

consistent

local governance

structure exists.

There is a lack of vision for viable and sustainable service delivery at the small Local Government Unit level.

Quality and access to services remains an issue in small Local Government Units.

The current Local Government Unit consolidation approach progressed with only mixed results. There is a shortage in the availability of land for physical and spatial planning and local economic development.

 

Although Egypt

is

known

as

a

highly

centralized country,

the

concept

of

decentralization has always been a part of

the

political

scene.

The

constitutional

amendment introduced in 2007 to Article

18

18 162 in the Chapter on Local Administration assured the direction of a movement in political

162 in the Chapter on Local Administration assured the direction of a movement in political power to the local administration. It requests a change in the pertinent law to fulfill this requirement. Could the dynamics now in Egypt be seen as a thrust toward the strong reemergence of this concept? This could be taken as an opportunityas much as it also creates challenges. The surge toward decentralization is based on high expectations regarding the public voice to bring government accountability as close as possible to the citizenry.

Decentralization is regarded as a political instrument for power sharing, as well as a means for improving service delivery. However, striking the proper mix between these two overarching targets is a real challenge. Additionally, most of the Arab societies have not experienced a strong deconcentration, whereby power is shared vertically within the central government between the center and the peripheries. This makes the horizontal share of power between the central government and local councils representing their communities a true shift not just in the mode of management, but also in governing. This in turn raises many questions about sequencing of reforms. Is it better to start with a fully functioning deconcentration? What would be the reaction of the political parties? Or would it be preferable to begin immediately with devolution so as not to

lose the momentum? What complicates the dialogue more is the presence of parallel stakeholders (for example, the private sector, civil society, non-governmental organizations [NGOs]) operating side by side with the government? Thus, central and local governments are not the sole players in the decentralized framework. Elsewhere in the new democracies of Eastern Europe, for example, a European Union assessment noted that for decentralization to deliver results, local governments should be capable of engaging with both the private sector and the civil society.

The new 2014 Constitution, as well as the revoked 2013 Constitution, positioned decentralization prominently in separate chapters with elaboration of fiscal and political decentralization. Local councils are to be empowered with the capacity to raise local revenues in addition to receiving intergovernmental transfers to fulfill their roles and responsibilities in local service delivery. Administrative decentralization was not explicitly addressed. Market decentralization, which set the wider institutional relationship between local governments and the private sector and civil society, including NGOs, was not addresseddespite the 2014 Constitution and chapters recognizing the importance of the private sector to growth and employment. Also, it acknowledges the role of civil society. It is not clear whether this is

a new direction that emerged along with the Arab Spring. The concept has been always there, with different understandings and a variety of applications.

In conclusion, although different countries may have different triggers and pathways for decentralization, some things are common across the board— including the citizens’ demand to have a say and participate in the process of budget allocations, monitoring and use of public resources. The best way to respond to this need is to bring the government closer to the people through fiscal decentralization.

  • 1 “The Pillars of Fiscal Decentralization,” Roy Bahl,

December 2008.

  • 2 See Boex and Yilmaz, “An Analytical Framework for

ssessing Decentralized Local Governance and the Local Public Sector,” Urban Institute, IDG WP 2010-06.

  • 3 Deconcentration of decision-making and service delivery powers within a Ministry. Deconcentration, which is often considered to be the weakest form of decentralization and is used most frequently in unitary states-- redistributes decision making authority and financial and management

responsibilities among different levels of the central government. It can merely shift responsibilities from central government officials in the capital city to those working in regions, provinces or districts, or it can create strong field administration or local administrative capacity under the supervision of central government

ministries.” See:

ttp://www1.worldbank.org/publicsector/decentralizatio

n/admin.htm

19

Corporate Governance & Financial Reporting

State-Owned Enterprises 19 Audit Committees 21

Small & Medium Practices 22

Integrated Reporting 24 Sustanability Reporting 26

State-Owned Enterprises

Numerous Reform Attempts, but Limited Results

Lydia HABHAB

Public Sector Analyst

The MENA region has seen the rise and fall (and rise again) of State-Owned Enterprises (SOEs) beginning as early as the 1950s. SOEs play a dominant role in the region, accounting for 20-25 percent of economic value added and close to 30 percent of total employment. SOEs span a wide array of sectors including tourism, manufacturing, transport, banking, public utilities, and retail, to name a few.

Given the central and strategic role that SOEs play in the social, political, and economic fabric of the region, maximizing their performance and efficiency could be a potential entry point to addressing challenges, such as high unemployment, limited fiscal space, and lack of competitionall of which have been exacerbated since the Arab Spring. With regard to assessing performance and efficiency, the latest World Bank study looks at the governance structure of SOEs in four MENA countries: Egypt, Iraq, Morocco, and Tunisia.

The study analyzes the legal and institutional framework of SOEs along four of the Organization for Economic Co-operation and Development (OECD)-formulated corporate governance guidelines:

Transforming the state’s role from

management to ownership; (ii) Increasing SOE autonomy vis-à-vis the state in the areas of staffing, public controls, and procurement;

(iii) Increasing corporatization and strengthening the role of boards of directors; and

19 Corporate Governance & Financial Reporting State-Owned Enterprises 19 Audit Committees 21 Small & Medium Practices

(iv) Increasing transparency through financial reporting /disclosure.

In theory, these ‘good practice’ guidelines

are meant to make SOEs operate in a more

competitive and accountable manner, limiting discretion and opportunity for political interference.

Many reform attempts have taken place in the past decade. (See Table 1). Along the lines of these 4 guidelines, Morocco has achieved some progress toward transparency, the professionalization of SOEs, monitoring, and the provision of more autonomy to some SOE management. By contrast, Egypt, Iraq, and Tunisia have not improved much, despite some reforms on paper. Indeed, they continue with a governance style characterized mainly by strong political interference and opacity. In this context, States intrinsically continue to manage and monitor SOEs without a

permanent or well-staffed structure. Most SOEs suffer from limited autonomy from the State. The powers of the boards of directors remain limited, despite corporatization and ample board mandates on paper. Likewise, transparency and disclosure of information remain limited. It is important to note that when operating in a low governance environment, which is the case for most MENA countries, it is difficult to empirically link economic and social efficiencies with good SOE governance practices, as indicated in the OECD guidelines above. For example, it is less likely that increasing transparency on subsidies or performance contracts will improve SOE spending efficiency if no real civil society environment exists to scrutinize the information, or if political interference prevails over any changes in disclosure legislation.

20

Moreover, in the MENA region, most SOEs operate in a noncompetitive environment and derive part of their revenues from a monopoly situation. There is no pressure to innovate, compete, and increase performance. Even given a monopoly situation, many SOEs still operate at a loss due to a vicious circle whereby a poor governance system results in poor public resource management. This can lead to strengthened political controls, divesting managers of responsibilities and further

weakened management. Increased recapitalizations and/or subsidies would then be given to keep SOEs afloatdespite the weakened financial and economic situation and inefficienciesso the State can achieve its social or political objectives. In terms of a way forward, one must take into consideration the broader political context of operations, in order to make reforms effective. It is important to avoid “institutional mimicry,” whereby there is a gap between what is on paper and what is

actually implemented. Mimicking private sector practices is unlikely to succeed. As long as politicians continue to interfere in SOE management to generate employment, subsidize parts of the population directly (or indirectly) to win votes and popular support, or interfere in public procurement, reforms will probably not have a strong impact on the ground.

Table 1. Study Findings of Country Practices following OECD Guidelines (in law and in practice)

 
 

Egypt

Iraq

Morocco

Tunisia

  • 1. State as Owner

       

(a.) Central permanent structure monitoring SOEs

       

(b.) Frequent Reporting on SOEs

       

(c.) Performance contracting between the State and SOEs

       

(d.) Monitoring of contracts

       
  • 2. SOE Autonomy vis-a-via the State

       

(a.) Did not increase employment substantially in the last 2 years

       

(b.) No frequent recapitalizations or cross-subsidies

       
  • 3. Corporatization and Boards

       

(a.) Independent board members

       

(b.) Board decisions not legally subject to minister's approval

       
  • 4. Transparency and Disclosure

       

(a.) Financial statements published regularly without delays

       

(b.) Annual published reports on SOEs

       
         
   

Yes

   
   

Partial Implementation

 
   

No

   
         

Figure 1: Share of Total SOE Losses as a Share of Gross Domestic Product (GDP) in Selected MENA Countries

7.0 5.8 6.0 5.0 4.0 3.0 2.0 1.2 1.0 0.6 0.0 0.0 Egypt, Arab Rep. Iraq
7.0
5.8
6.0
5.0
4.0
3.0
2.0
1.2
1.0
0.6
0.0
0.0
Egypt, Arab Rep.
Iraq
Morocco
Tunisia

Source: Authors’ calculations from World Bank (2015), Governance Reforms of SOEs in MNA: Limited Results Despite Numerous Reforms. Note: Figures for Egypt, Iraq, and Morocco are for 2011; for Tunisia, 2007.

21

Audit Committees

The Significance of Audit Committees in Improving Governance in MENA

Walid AL-NAJAR

Financial Management Specialist

Anna STASZEWICZ

Senior Risk Management Specialist

Audit committees, a common practice in the private sector, central banks and state- owned enterprises (SOEs), play an important role in effective governance. They strengthen oversight of financial reporting, external and internal auditors, internal control, risk management, and compliance. Public sector entities have been establishing audit committees or similar oversight arrangements as a mechanism for improving governance.

Since the “Arab Spring”, voices in the MENA

public and private sectors have being calling for implementing transparent and effective governance processes. The establishment of audit committees was one of these requests. Keen interest in the formation of audit committees has been expressed by the champions of development of the internal audit profession in MENA. They appreciate the importance of mutual reliance between the audit committees and internal auditors in the development of the internal audit function.

Likewise, audit committees in organizations without internal audit functions usually support the development of the internal

audit function that could help them carry out oversight responsibilities and provide assurances regarding financial reporting, compliance, and effectiveness of internal control. Recently, international organizations such as the Organization for Economic Co-operation and Development (OECD), the Center for International Private Enterprise and the International Finance Corporation (IFC) have made support to good governance, including audit committee development in MENA, a particular priority. In the future, regulators in MENA will likely be pressured to include covenants requiring organizations to form and develop audit committees, whether in SOEs, public agencies or medium-sized companies. As for large companies listed with the stock markets, most MENA countries have laws or codes that require listed companies to establish an independent audit committee within its governance structure. By and large, these audit committees are involved only in financial reporting and auditing matters.

In the rapidly shifting oversight and audit environment, many MENA audit committees, with the exception of those in the banking industry, may consider expanding their oversight role. They could benefit from the experience of audit committees in developed countries which have already expanded their roles in both the financial and operational oversight. However, these audit committees now have

to make an extra effort beyond financial reporting and internal control effectiveness. They have to tackle challenges starting from the expanded oversight of compliance to the analysis of growth and sustainability, economic and political issues and risk tolerance and risk-mitigating measures.

Looking at the broader picture, boards of directors have expanded the scope of the governance agenda, including technical aspects. Audit committees have turned their focus toward external factors and management preparedness, while still keeping a close eye on internal processes such as effective internal control, audit performance, and compliance with laws and regulations. Audit committees are now working more closely with third-party assurance reviewers, including external and internal auditors to put all of the pieces together.

Thus, audit committees are expected to lead the corporate agenda on compliance, risk management, efficiency and business valuation improvements for the foreseeable future. Many audit committees in developed countries have assumed new roles that include social and governance factors. In many instances, they have also assumed the responsibilities of a risk committee. For example, a few audit committees have begun looking at cyber security risks. Audit committees are also overseeing adequate and consistent

21 Audit Committees The Significance of Audit Committees in Improving Governance in MENA Walid AL-NAJAR Financial

22

disclosures from annual financial reports and proxy statements to corporate responsibility

expansion, the audit committee composition and needs for new expertise. The expanded

 

proactive contributor to good governance, their traditional areas of responsibility are

reports and investor presentations. Further, they support the move from financial toward integrated reporting. In this context, audit committees for multinational companies have been keen to consider macroeconomic issues such as market turmoil, transfer

audit committees might consider forming specialized sub-committees with industry professionals. Since such mandate expansions are driven by the stakeholders, it helps companies to determine the best arrangements for their audit committees.

also changing. The evolving changes need to be carefully managed so that the audit committees stay focused on serving organizational objectives and enhancing growth. This evolution has caught the attention of the main players in the

pricing, interest rates, as well as observe global compliance issues.

Boards of directors and management might need to look into the broadening mandate of

However, there is the risk of stretching the audit committee responsibilities too thin, thereby making this function more of a burden for operations.

governance and internal audit profession. Indeed, the Institute of Internal Auditors (IIA), an international professional association, and the Big 4 audit firms, have provided practical insights and resources for

the audit committee, review its cost-benefit

As audit committees are shifting from

a

the evolving audit committees.

analysis, rationale for the mandate

proxy

and

reactive

function

to

a

more

Small & Medium Practices

SMP Quick Poll 2014 Middle East & North Africa

22 disclosures from annual financial reports and proxy statements to corporate responsibility expansion, the audit committee
22 disclosures from annual financial reports and proxy statements to corporate responsibility expansion, the audit committee

Riham HUSSEIN

Financial Management Specialist

The accounting profession plays an important role in the growth and development of any economy and high quality accountancy services are needed by both businesses and government. Small & Medium Practices (SMPs) typically make up a majority of accounting firms in a country. These firms face unique challenges. Recognizing the importance of SMPs and the importance of understanding the issues that face them, the Governance Global Practice and specifically the Corporate Financial Reporting (CFR) technical practice teamed up with the International Federation of Accountants’ (IFAC) SMP Committee to collect feedback for the 2013 SMP Quick Poll which IFAC conducts on an annual basis. The 2014 SMP Quick Poll results have also been released which creates an opportunity to

compare results and highlight any recurring issues.

Small & Medium Enterprises (SMEs) and SMP Relationship

SMEs are an important part of an economy and can contribute substantially to GDP growth. In the Middle East & North Africa, SMEs comprise a vast majority of businesses 1 . The relationship between SMPs and SMEs is an important one. SMPs are firms that cater to the needs of SMEs and provide services such as statutory audit, business accounting and taxes. The SMP role is evolving and more are providing business advisory services to meet the needs of SMEs in a changing environment. SMPs are facing new challenges in meeting the needs of SMEs.

The SMP Quick Poll was an open poll in which any SMP could participate. The MENA region poll results focus on six countries; Egypt, Jordan, Lebanon, Morocco, Tunisia and

Yemen. In 2013, there were 403 responses from MENA countries and in 2014, 383 SMPs from MENA responded to the survey. Most SMP respondents were either sole practitioners or had 5 or less professional staff (55% of all respondents).

Challenges Facing SMEs & SMPs

One of the first questions asked by the poll is the greatest challenges facing SME clients. Economic uncertainty and competition were the highest ranked challenges that SMPs identified for their clients during the last two years. Other highly ranked challenges included compliance with regulation and rising costs. Compliance with regulation was not highly ranked in 2013 which shows an interesting change as it could mean that regulators are more active in regulating businesses or that there is a push for businesses to comply with regulations. The SMPs were also asked the same question about the challenges facing their practice.

23

Attracting new clients and retaining clients were highly ranked as key challenges which is similar to the prior year. Keeping up with new regulations and standards was also a key challenge identified in the current year. Again, this is an interesting change from prior year where only 7% of those surveyed stated that as a challenge. This could also mean that regulators in this industry are more active and that SMPs are more aware of the regulations they have to keep up with.

Sources of Revenue & Drivers of Profitability

Audit and assurance services ranked as the most likely to see a significant increase in revenue in the next year with advisory and consulting services coming in second. This is a change from prior year where most SMPs felt that accounting, compilation and other non-assurance and related services would show the most increase in revenue.

In 2013, SMPs response to a question asking about the main drivers of profitability was that acquisition of new clients would be the top driver with better retention of existing clients coming in as a distant second. This contrasted with global results in that most global respondents stated that retaining

existing clients would be the main driver of profitability.

Technology & Topics of Online Research

In the 2013 poll, SMPs were asked what topics they are most likely to research online, which is a good indication of what topics are of high interest and what areas additional capacity building may be needed. The results showed that the most researched topic was auditing, closely followed by tax consulting and business development.

In terms of technology being used, the 2014 poll asked what technologies will have the biggest impact on SMPs in the next five years. The response indicated that SMPs expected cloud computing to have the highest impact with business intelligence and data analysis software and tools coming in as the second area of highest impact.

Outlook

The SMPs were asked how their revenue streams changed from prior year. Most stated that they either stayed the same or increased moderately (72%). In 2013, the question asked about the outlook for the following year and most answered positively

that they expect business to be the same or better than prior year (86%).

When asked about what outside influences will impact their practices in the coming 5 years, unsurprisingly almost 70% responded that political instability will have a very high impact on their businesses. Perceived trust and credibility in the profession and competition were ranked 2 and 3 respectively in potentially having a very high impact on their practices.

A better understanding of the challenges facing SMEs and SMPs and their areas of weakness and expectations for the future will lead to better designed programs to address their needs. By now having two years of data from the SMP Quick Poll, we are able to see some trends, recurring issues and have a better grasp of what areas present the biggest challenges to SMPs and what will affect their growth and development in the future.

1. Q. Saleem, (2013) Overcoming Constraints to SME Development in MENA Countries and Enhancing Access to Finance p. 2 - IFC

In The News

MENA Day at the Forthcoming World Bank’s Law, Justice and

Development Week in November 2015

Each year, the World Bank sponsors a Law, Justice and Development (LJD) week that brings together partners of the Global Forum on Law, Justice and Development (GFLJD), Bank staff and senior officials from international financial institutions, international practitioners, government officials, lawyers, judges, scholars and representatives from civil society.

23 Attracting new clients and retaining clients were highly ranked as key challenges which is similarhttp://www.worldbank.org/en/events/2014/12/17/law-justice-and- development-week-2015 " id="pdf-obj-22-44" src="pdf-obj-22-44.jpg">

As in previous years, LJD Week 2015 will be organized by the Legal Departments of the World Bank Group. LJD Week 2015 will take place from Monday November 16 through Thursday November 19, 2015, at the World Bank in Washington, DC (LJD Week 2015).

Each year, LJD Week takes an in-depth look at legal, economic and social developments in a particular country or region. This year, LJD Week will focus on the Middle East and North Africa.

Possible themes to be discussed on MENA Day include:

Fragile and Conflict States / Reconstruction and Conflict

resolution / Security Forced Displacement and Property Disputes

Extractives / Energy / Oil

Addressing Climate Change in the Middle East and North

Africa Water and Sanitation

Governance and Anti-Corruption

Rule of Law / Capacity Building

Empowering Women / Gender

Development of Human Rights in the Middle East and North

Africa Employment: Child Labor / Women in the Workforce

Millennial Development Goals / Sustainable Development

Goals in MNA Middle Income Agenda

For more information, see:

24

Integrated Reporting

Three Facts Every MENA Company Should Know About Integrated Reporting

Amy PAWLICKI

Director--Business Reporting, Assurance & Advisory Services and XBRL at the American Institute of CPAs

Raji HATTAR

Chief Sustainability and Compliance Officer for Aramex

The International Integrated Reporting (IR) Framework is a tool that can help local and regional companies go global and compete on a much larger scale. Although it is not now being widely used in the Middle East and North Africa (MENA), companies in the region have good reason to gain a greater understanding of it and consider what it could mean to them. The best way to promote awareness of IR is to gain a perspective on what it has to offer, consider the challenges and opportunities associated with IR and understand the practical aspects of implementation. With that in mind, this article will consider three facts that many companies may not know about IR.

Fact #1: IR Is All About Value

One critical purpose of integrated reporting is to allow organizations to communicate to investors and other key stakeholders about

value creation over time. Let’s take a

moment to clarify that IR should not be confused with sustainability reporting, which provides detailed information on environmental, social and governance performance to a variety of interested stakeholders such as customers, suppliers, employees, regulators, and others. An integrated report, is intended primarily for providers of financial capital, and offers a holistic view of the company and its value creation potential into the future. IR covers elements of sustainability reporting to the extent that management considers them material to the ability of the organization to create value over time.

The

Council (IIRC), a global coalition of regulators, investors, companies, standard

setters, the accounting profession and non- governmental organizations (NGOs),

believes “that communication about value

creation should be the next step in the

evolution of corporate reporting.” According

to the IIRC, “an integrated report is a concise communication about how an organization's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in

the short, medium and long term.”

The starting point for IR is integrated thinking. It is not possible to report externally using the IR model without having effective internal communication across departments and divisions, as well as a coherent strategy to understand what drives value across the business. Even though IR focuses on communicating meaningful value for external stakeholders, the effort starts internally. The advantages of IR for organizations of any size are twofold.

perspective, making it possible to monitor key performance indicators across the company, and, ultimately, to communicate more effectively with key external stakeholders.

Telling your story. IR allows companies to do a better job of communicating with external stakeholders as to how they create value. The traditional financial reporting framework focuses on the short term. When companies invest in projects and initiatives that will offer benefits in the future, the returns on those investments are not reflected in quarterly earnings. IR reflects the value creation potential of the company across the short, medium and long term, allowing companies to express

24 Integrated Reporting Three Facts Every MENA Company Should Know About Integrated Reporting Amy PAWLICKI Director--BusinessInternational Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, standard setters, the accounting profession and non- governmental organizations (NGOs), believes “that communication about value creation should be the next step in the evolution of corporate reporting.” According to the IIRC , “a n integrated report is a concise communication about how an organization's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.” The starting point for IR is integrated thinking. It is not possible to report externally using the IR model without having effective internal communication across departments and divisions, as well as a coherent strategy to understand what drives value across the business. Even though IR focuses on communicating meaningful value for external stakeholders, the effort starts internally. The advantages of IR for organizations of any size are twofold. perspective, making it possible to monitor key performance indicators across the company, and, ultimately, to communicate more effectively with key external stakeholders.  Telling your story. IR allows companies to do a better job of communicating with external stakeholders as to how they create value. The traditional financial reporting framework focuses on the short term. When companies invest in projects and initiatives that will offer benefits in the future, the returns on those investments are not reflected in quarterly earnings. IR reflects the value creation potential of the company across the short, medium and long term, allowing companies to express  A foundation for integrated thinking . When the IIRC conducted a Pilot Programme in which organizations tested IR, the shift to internal how they are focused on investing in the future profitability of the business in addition to covering short-term expectations. integrated thinking over the short and long term and the resulting internal coordination was one of the greatest benefits that participants reported. Internally, the organization is now better able to communicate across departments and to eliminate silos. IR and integrated thinking offer a strategic Fact #2: IR Is Not Only for Large Companies One of the main challenges for reporting in the MENA region is that most corporations " id="pdf-obj-23-64" src="pdf-obj-23-64.jpg">

A foundation for integrated thinking. When the IIRC conducted a Pilot Programme in which organizations tested IR, the shift to internal

how they are focused on investing in the future profitability of the business in addition to covering short-term expectations.

integrated thinking over the short and

long term and the resulting internal coordination was one of the greatest benefits that participants reported. Internally, the organization is now better able to communicate across departments and to eliminate silos. IR and integrated thinking offer a strategic

Fact #2: IR Is Not Only for Large Companies

One of the main challenges for reporting in the MENA region is that most corporations

25

there are privately owned, and the majority

Organizations can also broaden their lens to

Smaller companies may see a new approach

costly, it should involve only an initial outlay

are small and medium-sized entities. There is

to reporting as an extra activity in addition to

for an analysis of a company’s activities.

a common misperception that IR is designed for large public companies. While many of the U.S. companies that participated in the IIRC's Pilot Programme on IR were large, there is a growing excitement about IR among many private companies in the United States and elsewhere. IR helps companies of any size better manage and

existing financial reporting processes. In the United States, there are concerns about perceived legal liability from disclosing information that is not legally required, and it is safe to say that organizations everywhere have concerns about the need to prepare and report more information.

Once this step is accomplished, the implementation of IR strategy and activities, accompanied by proper data analysis, can ultimately offer companies ways to cut costs and become more efficient. The initial investment will pay off, directly and indirectly, through improved competitiveness, brand trust and resilience.

communicate with stakeholders, lenders and customers and proprietors. In the United

It is important to remember, however, that IR is not necessarily an extra report, but truly

A Powerful Tool

 

States, Certified Public Accountants (CPAs) are increasingly recognizing the value of the IR framework in internal communications and coordination across departments and divisions to improve strategic planning and decision making.

look at all forms of capital and how the company's management of such capital relates to its ability to create value in the

something that is meant to provide context to the foundation of financial reporting. Private companies are often already gathering the information required for IR. However, they are not doing it consistently because they do not have a framework in place. IR makes it possible to get a fuller picture over time without spending a lot of money, as well as to incorporate that broader context into their existing reporting practice. (The IR framework and the related

One way to promote the wider adoption of IR in MENA might be to follow the model of South Africa, where all listed companies are required to undertake integrated reporting in order to maintain their listing. “Over the past three years, South African companies have experienced a radical shift in thinking, brought about by the introduction of

integrated reporting to the country’s code of corporate governance,” according to an

short, medium and long term. For CPAs in industry, this richer perspective is also of great interest in external reporting to providers of financial capital and other key stakeholders. For private companies, the benefits of IR include improving external

resources are free.) The IR framework is flexible and allows a company to put it to work in ways that are most useful to it. Some companies also express concerns about the possibility of revealing competitive intelligence, but IR is not about revealing

article in the March 2014 international edition of Accounting and Business magazine. This change “has had far-reaching consequences, forcing companies not only to report--but to think--in an integrated way.”

reporting to creditors, so that they can

trade secrets. It simply offers insights that

With

more

and

more multinational

consider elements of IR in lending

are not now consistently available. For

companies requiring their suppliers to be

decisions. (The IIRC is also preparing to

companies operating in the MENA region

more

active

in

sustainability

and

more

and in many other parts of the world, it is

transparent

in

their

business

practices

true that there is a lack of technical expertise

overall, IR

can

be

a

help

related to IR reports, which means that many

regional

companies

powerful tool to compete on

an

 

international level.

 
 

companies will turn first to multinational consultants for help. Although this may be

 

Did You Know?

 

Remittances in MENA

Remittances to the Middle East and North Africa region will slow considerably in 2015, rising 1.1 percent to $53 billion. The modest growth this year follows a surge in 2014 of 7.7 percent, the fastest growth amongst all regions, largely due to a strong 10 percent growth in inflows to Egypt, the world’s 6th largest recipient in 2014 with $20 billion received. Lebanon saw a 13 percent increase in remittances to $9 billion in 2014, making it the world’s 10th largest recipient for the year. Looking ahead, continued low oil prices could reduce remittances from the GCC countries in the medium-to-long term. In the short term, however, significant foreign exchange reserves and strong fiscal positions could support current spending, thus delaying the negative impact of low oil revenues on migrant employment. Remittances to the region are expected to grow to $55 billion in 2016 and $57 billion in 2017. Conflicts in the region are resulting in international displacement and forced migration across borders, and remain a major risk factor to the outlook for remittances in the region. World Bank Press April 2015

25 there are privately owned, and the majority Organizations can also broaden their lens to SmallerIR framework and the related One way to promote the wider adoption of IR in MENA might be to follow the model of South Africa, where all listed companies are required to undertake integrated reporting in order to maintain their listing. “O ver the past three years, South African companies have experienced a radical shift in thinking, brought about by the introduction of integrated reporting to the country’s code of corporate governance,” according to an short, medium and long term. For CPAs in industry, this richer perspective is also of great interest in external reporting to providers of financial capital and other key stakeholders. For private companies, the benefits of IR include improving external resources are free.) The IR framework is flexible and allows a company to put it to work in ways that are most useful to it. Some companies also express concerns about the possibility of revealing competitive intelligence, but IR is not about revealing article in the March 2014 international edition of Accounting and Business magazine. This change “has had far -reaching consequences, forcing companies not only to report--but to think-- in an integrated way.” reporting to creditors, so that they can trade secrets. It simply offers insights that With more and more multinational consider elements of IR in lending are not now consistently available. For companies requiring their suppliers to be decisions. (The IIRC is also preparing to companies operating in the MENA region more active in sustainability and more launch an IR public sector initiative . ) and in many other parts of the world, it is transparent in their business practices true that there is a lack of technical expertise overall, IR can be a help related to IR reports, which means that many regional companies powerful tool to compete on an international level. companies will turn first to multinational consultants for help. Although this may be Did You Know? Remittances in MENA Remittances to the Middle East and North Africa region will slow considerably in 2015, rising 1.1 percent to $53 billion. The modest growth this year follows a surge in 2014 of 7.7 percent, the fastest growth amongst all regions, largely due to a strong 10 percent growth in inflows to Egypt, the world’s 6th largest recipient in 2014 with $20 billion received. Lebanon saw a 13 percent increase in remittances to $9 billion in 2014, making it the world’s 10th largest recipient for the year. Looking ahead, continued low oil prices could reduce remittances from the GCC countries in the medium-to-long term. In the short term, however, significant foreign exchange reserves and strong fiscal positions could support current spending, thus delaying the negative impact of low oil revenues on migrant employment. Remittances to the region are expected to grow to $55 billion in 2016 and $57 billion in 2017. Conflicts in the region are resulting in international displacement and forced migration across borders, and remain a major risk factor to the outlook for remittances in the region. " id="pdf-obj-24-205" src="pdf-obj-24-205.jpg">

26

Sustainability Reporting

A Corporate Tool for Communicating Sustainability Performance and Impacts

Shirley FORONDA

Financial Management Specialist

Sustainability reporting is a relatively new concept that has rapidly evolved due to increased expectations for public disclosure

about the role of business in society. Indeed, there is a growing need for greater transparency, sustainability and responsibility in business coming from different stakeholders be they investors, customers, employees, civil society or other business partners. Sustainability reporting draws together in a single focused report all

aspects of a company’s economic, social and

environmental operations, its values,

accountable to internal and external stakeholders for organizational performance toward sustainable development. 2 Sustainable development involves meeting

the needs of the present without compromising the ability of future generations to meet their own needs.

Through a sustainability report, “…a

company or organization reports on the economic, environmental and social impacts caused by its everyday activities 3 . Although this is not a mandatory report, companies are increasingly opting for disclosing non- financial information through a sustainability report mainly because of the wide range of benefits that it offers. Sustainability reporting has external as well as internal benefits for a company. Externally, it has the

internally communicating on sustainability matters may have a positive impact with regard to employee loyalty, recruitment and retention. While the benefits of sustainability reporting are evident, there remain some barriers that need to be addressed in order to ensure increased sustainability disclosure worldwide. In this regard, the wide range of reporting frameworks along with the rapidly evolving reporting standards and guidelines may constitute one of the main challenges companies face when collecting sustainability data because it makes the information gathering process quite complex. Therefore, the harmonization and standardization of approaches in the quality, quantity, timeliness and relevance of

26 Sustainability Reporting A Corporate Tool for Communicating Sustainability Performance and Impacts Shirley FORONDA Financial Management

governance model, and commitment to a sustainable global economy. Thus,

potential to help organizations improve financial performance and access to capital,

information to be disclosed will be key to increasing acceptance of sustainability

sustainability reporting

 

gives

the

build or restore company reputation and

reporting. At present, the Global Reporting

stakeholders

 

a

holistic

and

non-financial

consumer trust, and promote stakeholder

Initiative has led the sustainability reporting

view

of

a

company’s sustainability

engagement and communications.

agenda and has developed a comprehensive

performance and impact.

 

Internally, it may help firms in driving

Sustainability Reporting Framework that is

What is Sustainability Reporting?

 

innovation, efficiency and waste reduction through a more efficient decision-making

widely used. The Framework consists of guidelines and sector advice that set out the

According to the Global Reporting Initiative (GRI) 1 , “sustainability reporting is the practice of measuring, disclosing, and being

process, as well as a more informed assessment of emerging risks and opportunities emanating from sustainability- related dimensions of business. Finally,

principles and indicators that organizations should use to measure, report and disclose regarding its sustainability performance. The framework prompts companies to cover key

27

sustainability issues that most stakeholders are concerned with, and to use globally- accepted performance indicators and methods for calculating performance and reporting in a way that it can be compared with peer organizations.

What

is

the future of Sustainability

Reporting?

Sustainability reports are stand-alone reports currently disconnected from the financials. However, as economic, environmental and social issues have an impact on a company’s ability to operate and generate profit, it appears necessary to ensure an alignment of business reporting with business strategy. This helps to show the linkage between sustainability performance and business value. To reach this point, sustainability reporting needs to move from a view that essentially shows the relationship between a business, society, the economy and environment to a more integrated vision that can help stakeholders understand how this relationship is being

managed, as well as the impact that this may have on the creation of value and sustainability of a business. Some advocates of sustainability reporting believe that the next step for sustainability reporting is for this information to be combined into an

‘Integrated Report.’ As defined by the

International Integrated Reporting Council

(IIRC), “integrated reporting or IR is a process

founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding

aspects of value creation. 4 This IR report provides concise communication about how

an organization’s strategy, governance,

performance and prospects, in the context of its external environment, leads to the creation of value in the short, medium and long term. 5 Regardless of the next steps that Sustainability Reporting takes, what is sure is

27 sustainability issues that most stakeholders are concerned with, and to use globally- accepted performance indicators: http://www.theiirc.org/the-iirc/about/ 5 The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting. http://www.theiirc.org/ New Paper Economic Effects of the Syrian War and the Spread of the Islamic State on the Levant World Bank Policy Research Working Paper 7135, By Elena Ianchovichina and Maros Ivanic, December 2014. This Paper uses a global computable general-equilibrium framework with new detail on six countries — the Arab Republic of Egypt, Iraq, Jordan, Lebanon, the Syrian Arab Republic, and Turkey — to quantify the direct and indirect economic effects of the Syrian war and the advance of the Islamic State on the Levant. Syria and Iraq bear the brunt of the direct economic costs, while the other Levant countries lose in per capita but not in aggregate terms. The fact that the Islamic State's spread has undermined regional trade adds in varying degrees to the direct costs in all Levant economies and, in the case of Syria and Iraq, doubles the welfare losses. All of these countries are foregoing opportunities to expand intra-Levant trade and the associated gains in economic efficiency and diversification. The average welfare effects are not indicative of within-country incidence, which varies among workers, landowners, and capitalists. For the entire Paper, see: http://documents.worldbank.org/curated/en/2004/12/22316371/ec onomic-effects-syrian-war-spread-islamic-state-levant " id="pdf-obj-26-45" src="pdf-obj-26-45.jpg">

the positive impact that this form of reporting has had and will likely have on increasing the knowledge and understanding of the sustainability practices and impacts of businesses around the world.

The World Bank’s current initiatives in the

field of integrated reporting aims to bring together the principles of Sustainability Reporting with traditional financial reporting principles and thereby present a comprehensive picture of an organization’s activities.

  • 1 The GRI is a leading organization in the sustainability

field that promotes the use of sustainable reporting as a

way for organizations to become more sustainable and contribute to sustainable development.

  • 2 “Sustainability Reporting Guidelines,” Global Reporting

Initiative.

  • 3 GRI Reporting Guidelines V3.1

  • 4 The International Integrated Reporting Council (IIRC),

  • 5 The International Integrated Reporting Council (IIRC) is

a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting. http://www.theiirc.org/

New Paper

Economic Effects of the Syrian War and the Spread of the Islamic State on the Levant

World Bank Policy Research Working Paper 7135, By Elena Ianchovichina and Maros Ivanic, December 2014.

This Paper uses a global computable general-equilibrium framework with new detail on six countries the Arab Republic of Egypt, Iraq, Jordan, Lebanon, the Syrian Arab Republic, and Turkey to quantify the direct and indirect economic effects of the Syrian war and the advance of the Islamic State on the Levant. Syria and Iraq bear the brunt of the direct economic costs, while the other Levant countries lose in per capita but not in aggregate terms.

The fact that the Islamic State's spread has undermined regional trade adds in varying degrees to the direct costs in all Levant economies and, in the case of Syria and Iraq, doubles the welfare losses. All of these countries are foregoing opportunities to expand intra-Levant trade and the associated gains in economic efficiency and diversification. The average welfare effects are not indicative of within-country incidence, which varies among workers, landowners, and capitalists.

For the entire Paper, see:

28

Public Sector

Civil Service 28 Rule of Law 30 Anti-Corruption 33

Civil Service

Behaviour Bias

28 Public Sector Civil Service 28 Rule of Law 30 Anti-Corruption 33 Civil Service Behaviour Bias

Gaël RABALLAND

Senior Public Sector Specialit

How behavioural biases are important for civil service reforms?

Neo-classical economic models are based on the economic rationality of individuals. However, laboratory experiments show that rationality is often limited, especially from choices made in the face of risk and uncertainty. These results have therefore demonstrated the importance of taking account of the cognitive limitations of individuals, the role of emotions in making decisions, and the influence of social interactions on individual choices. The 2015

World Bank World Development Report (WDR) 1 documents the behavioral biases and shows that there is “enormous scope for psychologically and socially inspired polices and interventionssocial norms campaigns, educational entertainment, aspirational messages, reminders, new default options, commitment devicesto help people make choices that promote their own interests” 2 . Experimental economics has been the subject of growing interest in recent years,

with the creation of ‘nudge units’, the most

well-known being the United Kingdom (UK)

unit set up in 2010 3 . Drawing from the work of psychology and behavioural economics,

inter alia, their task is to ‘nudge’ people into

modifying their behaviour, in order to raise tax revenues, improve the effectiveness of

employment agencies, or encourage people to take out supplementary pensions etc., all

of which should be done at minimal cost 4 . In the UK, for instance, it has been shown how a letter sent to people who were overdue with their income tax payments mentioning that most UK taxpayers paid their taxes on time reduced the number of late payers by an average 15%. Social norms have a big

impact on taxpayers’ behaviour.

How is

it relevant to the design of public

reforms?

Behavioural economics allows a better understanding of why some reforms do not always produce the expected results. Researchers Saugato Datta and Sendhil Mullainathan (2012) have notably given examples of the application of behavioural economics in the field of development economics 5 . Individuals are subject to behavioural biases, such as risk aversion, optimism bias, dynamics of groups and reputation effects, confirmation bias, sunk cost bias and so on 6 . They are all relevant for civil service reforms but also equally neglected, in general, by policy-makers and donors agencies. As examples of behavioural biases, in a context of uncertainty, over the decades one element has been consistent in research results: individuals have an aversion to risk. And so the person at the head of an institution prefers inertia and the status quo to any future improvement of that institution because he or she perceives that it is easier to be viewed as preserving the status quo than to actually initiate

29

reform that is synonymous with significant short-term risks. Behavioural economics also teaches us that the individual, by simplifying reality, often suffers from being too optimistic, that is, individuals always think they can do more than they actually can. Thus, in a context of public sector reform, bureaucrats and donors have a chronic tendency to be over-optimistic about what can be done. And so, together, they may lay down a huge programme of reforms but it will only be partially implemented and, at the end of the project, the blame will often be placed on a lack of political will rather than on the fact that the programme was overly optimistic in the first place. Similarly, experiments demonstrate the dynamics of groups. Group decisions can diminish collective well-being because groups form around shared individual interests which they then defend and are more rational than individuals. For instance, in trust games groups send and return lower amounts of money than individuals. Finally, behavioural economics demonstrates the importance of cultural norms and of the impacts of reputation: individuals take decisions in a specific socio-cultural environment and have to take account of their reputation in that environment when doing so, which can greatly bias their decisions. A decision which may appear irrational at first sight can, on the contrary, be totally rational in view of these factors. Non-financial incentives and building good reputations for certain officials is also crucial. It is increasingly becoming clear that officials in public administrations often have motivations which differ from those in the private sector, and that the

feeling of being part of a State elite and being recognized as such is very important. Hence, communication campaigns (internal and external) must be fully-fledged components

of reforms to give credit to the ‘reformers’ of

the institution. There is often a disproportionate focus on the issue of wages. Although financial incentives are one element, they are not the only element. Social recognition within the institution and outside count as much. Behavioural economics is important because it reminds us that an institution it is made up of individuals. Thus, the simple fact of setting up an institutional structure does not mean that behaviours and practices will change. For example, the fact that an autonomous agency integrating Customs and taxation is created does not mean that the services will cooperate. The fact that post-clearance control appears on an organizational chart does not mean that it actually happens in practice, etc. there are countless potential examples. Therefore, any reform process has to identify the behaviour of an individual in a given context then seek to change it (at the margin), which is obviously much more difficult than creating a new institution on an organizational chart. In practice, these

concepts are very relevant both for decision- makers and for donor representatives.

The potential consequences on donor- funded civil service reforms ...

As mentioned in the World Bank strategy on public sector reforms (World Bank 2012), it is challenging to change the actual behaviour of public agents since they may be built on beliefs/social norms that change slowly. Most of the time such behavioural biases are not even considered as actual constraints for projects design and implementation. However, as Varun Gauri, one of the co- directors of the WDR 2015, mentioned:

“sadly, we ourselves —development professionalsare not exempt from this universal phenomenon [of behavioral biases]. In our survey of World Bank staff, which many staff members were game enough to participate in, the WDR team found that we, too, are susceptible to confirmation bias, sunk cost bias, and other cognitive illusions. In addition, our models of how poor individuals think and behave are sometimes inaccurate” 7 .

First, it

is important for donors

representatives to remember that people

have ‘mental models’ consciously or

unconsciously influencing their thoughts, perceptions and actions, and that the

transposition (or implementation /

application) of international ‘best practices’

may very well not work in another context. Thus, it is important not to simply think that an institutional model which works in country A will also work in country B. That does not mean either that some principles of

reforms do not apply but the ‘best practices’

cannot be transplanted as such in various countries. Moreover, to achieve successful

reform, it is essential above all to understand social and cultural norms and local practices. This is where the use of institutional sociology or anthropology can be useful. Without detailed knowledge of the practices, and of the origins of these practices, reform is bound to fail. To limit risk aversion, starting reform with a pilot project is crucial because it helps convince people that change is possible, but if it fails the risk overall is low. Conversely, a sweeping reform potentially puts the spotlight on a Minister or Director because the risk is higher. To counter the bias of excess optimism, designing a project with limited ambitions is the first thing to do (other goals can be added after the project’s initial successes).

Some possible examples of donor-funded projects?

Recently, we published a World Bank working paper presenting the lessons of two projects implemented in Cameroon on customs reforms implemented at the same time but with a completely different design 8 . One succeeded in bringing about change, while the other failed. The successful one was a pilot project, implementing individual performance contracts of customs inspectors in Douala port with a large number of non-financial incentives to create

a “good” reputation effect. Such projects are

not numerous since they are quite counter- intuitive for task team leaders and management in donor agencies. Like the

2015 WDR states that “since development

practitioners themselves face cognitive constraints, abide by social norms, and use

mental models in their work, development organizations may need to change their incentives structures, budget processes, and institutional structure to promote better

29 reform that is synonymous with significant short-term risks. Behavioural economics also teaches us that the

30

diagnosis and experimentation so that evidence can feed back into midcourse adaptations and future intervention designs”. (World Bank 2014, p. 193). However, this is easier said than done but should be increasingly taken into account to make more successful aid projects in this field of public sector reform projects.

1. http://www.worldbank.org/en/publication/wdr2015

2.

http://blogs.worldbank.org/developmenttalk/story-

2015-world-development-report-mind-society-and-

behavior

 

3.

See the website of the UK “behavioural insights

team”:

www.gov.uk/government/organisations/behavioural-

insights-team.

 

4.

Benefits for the State must be more than 10 times

higher than their cost in the UK.

 

5.

Behavioral Design - A New Approach to Development

Policy”, CGD

Policy

Paper

16,

available at

www.cgdev.org/files/1426679_file_Datta_Mullainathan

_Behavioral_Design.pdf.

  • 6. For more details on those biases, see the WDR 2015.

  • 7. http://blogs.worldbank.org/developmenttalk/story-

2015-world-development-report-mind-society-and-

behavior

  • 8. Raballand, Gael and Rajaram, Anand, 2013. "Behavioral

economics and public sector reform: an accidental experiment and lessons from Cameroon,", Policy

Research Working Paper Series 6595, The World Bank.

Rule of Law

It’s all about the Politics:

Laws, Policies and their Implementation in MENA

Edouard AL-DAHDAH

Senior Public Sector Specialist

Rule of Law Definitions

The rule of law is a multifaceted concept that has taken time to gel. In their recent survey

of the rule of law and development, Trebilcock and Daniels differentiate between

“thick” and “thin” definitions. With thick

definitions, the rule of law is viewed as the backbone of a just and open society. The “open-access order” theory of North, Wallis, and Weingast (2009) provides a good example: the rule of law ensures open access and equality of opportunity for individuals in the political, economic, and social domains. Thin definitions of the rule of law focus more on specific laws and institutions, as well as on their beneficial effects on economic outcomes. These rules do not have to be just or promote open access; their positive impact comes from the fact that they regulate human interactions, thus promoting better coordination within society. Property rights are a prime example of this.

The Rule of Law in the Middle East and North Africa

The MENA region performs poorly on rule of law measures for developing countries. With the exception of the United Arab Emirates, all MENA countries rank below the

developing country average for all aggregate measures on the rule of law according to the Global Integrity (GI), an international NGO (Table 1). The average for the aggregate

‘Overall Score’ was 50 in MENA as opposed

to 67 for all other developing countries. Going beyond aggregate indicators, it is analytically useful to distinguish between formal rules on paper and their application on the ground. Nobel Prize winner Douglas North (1990), for instance, defined an institution (or a law) as the combination of a formal rule, an informal norm, and an enforcement mechanism. All three are needed simultaneously in order for a formal

30 diagnosis and experimentation so that evidence can feed back into midcourse adaptations and future intervention

rule to be successful. Hence, one key aspect to ensure outcomes is that formal laws are consistently enforced, all citizens are equal under the law, and arbitrary application of rules such as favoring powerful or well- connected individuals is minimized. Following this conceptual distinction, the Global Integrity Indicators include measures for both the existence, quality and transparency of formal laws (de jure), as well as for their actual enforcement (de facto). The average for the ‘Legal Framework’ score, a de jure measure of which laws have been passed, was 60 in MENA as opposed to 80 for all other developing countries. The average for the ‘Actual Implementation’ score, a de facto measure of which laws are actually implemented, was 37 in MENA as opposed to 50 in all developing countries.

MENA countries are clearly lagging with regards to their rule of law measurements on both the Legal Framework and Actual Implementation areas. This is troubling as rule of law is a necessary condition for many beneficial outcomes, such as ensuring good governance, human rights, public safety, freedom of expression and religion, quality

education and health outcomes. It may also improve economic outcomes. Although the causal link between the rule of law and economic growth is not fully complete, much evidence exists to support the claim that the rule of law is beneficial to economic growth (Rodrik, Subramanian, and Trebbi, 2004). Some of the most common mechanisms by which the rule of law can promote growth are: the protection of property rights, the reduction in levels of violence, institutional checks on government, and the reduction of incentives to distort public policy, such as from corruption.

A political economy perspective

A political economy perspective helps

understanding the main drivers of MENA’s

poor performance in rule of law outcomes, just as it helps understanding the key institutional incentives that lead to underperformance. According to such a perspective, if a regulatory outcome goes against powerful political interests, the law may be either prevented from being legislated in the first place or, if the law is passed, it may be prevented from being

properly implemented or enforced.

31

Conversely, if a rule, law or regulation

b)

The

nature

of

the

regulatory

incumbents need to reward key elites in

provides concrete benefits to entrenched

agency and the type of service it delivers:

order to stay in power: therefore, the

political stakeholders, it is more likely to be

the international

visibility

of

the

regulatory enforcement of policies/laws that

systematically implemented. This approach

enforcement

agency

is

likely

to

drive

generate rents to core political supporters or

builds on the assumption that he adoption and implementation of formal rules is always

effective enforcement. Similarly, its location in the policy domain is expected to lead to

prevent threats from opponents, is likely to be more systematic (Lieberman 2003, 2009;

the outcome of negotiations and struggles

better

implementation.

If

the

agency

Levitsky and Murillo 2009).

between converging or opposing interests,

governs an economic sector perceived as

and often results in some actors losing out

vital

for

the

state,

applicable

laws

and

  • e) The electoral saliency of the

for example in situations where corruption

regulations are more likely to be

specific law and the timing of elections:

and rent extraction are used as a means to

systematically

enforced

(Schrank

2009,

regulatory policies prioritized by electoral

support powerful interests Consequently,

Gingerich

2007,

Hydemann

2004,

Hibou

agendas are more likely to be enforced by

the identification of specific political

2006). The MENA region seems to be

incumbent parties than less salient issues, as

economy variables that determine which, whether and to what extent laws are passed,

particularly well-suited for a test of these hypotheses. The tourism industry is central

elections approach.

applied and enforced is necessary to better

to

the

economies

of

Egypt,

Jordan,

and

  • f) Ethnic heterogeneity: many

understand the rule of law and its influence

Morocco, whereas

Tunisia

developed

studies indicate that enforcement of laws

on economic development outcomes.

different regulatory regimes for on-shore

and regulations in areas characterized by

Numerous quantitative and qualitative

and

off-shore

investors,

the

latter

ethnic, linguistic, or religious heterogeneity

studies found that the following factors

contributing

significantly

to

economic

may not be systematic. In some cases, the

affect government’s willingness or the incentives of leaders to pass and enforce the

growth.

 

identity of incumbent political leaders leads to discriminatory or selective

rule of law:

c)

The threat of collective action from

implementation practices targeting

In conclusion, the implementation of laws

key groups in society: one of the most robust

members of other groups; in other cases,

a)

The citizens’ willingness to comply

results in political economy argues that

2009).

poor enforcement occurs at the micro-level,

and the government’s anticipation of it: In

policy outcomes often favor powerful groups

and stems from the interactions between

some cases, leaders deliberately decide not to enforce rules and regulations because, in the absence of bureaucratic capacity, they cannot take political credit for tangible and visible policy outcomes (Tsai, 2001). Other times, the lack of willingness to enforce comes from pragmatic policy calculations of anticipated low societal compliance with the law (Tsai 2007, 2010; Von Oenen 2001;

who can effectively mobilize and lobby, to the detriment of the diffuse interests of ordinary citizens. A similar logic is likely to apply in the case of law enforcement; if elite groups organize effectively and resist regulatory implementation, governments may not be willing to go against them (Lieberman 2003, 2009; Levitsky and Murillo

enforcement agents and ordinary citizens on the ground (Wilkinson 2006).

and regulations is induced by political incentives. If systematic enforcement aligns with such incentives in some policy areas, good implementation may occur. In contrast, arbitrary enforcement of de jure laws in

Yashar 2005; Mares and Carnes 2009).

other policy areas is likely to be driven by a

d)

Political

survival

 

considerations

misalignment between outcomes and

and regime type: in non-democratic regimes,

political interests of key stakeholders.

Table 1

 

Global Integrity Indicators for MENA

 
       

Actual

 

Country

Year

Overall Score

Legal Framework

Score

Implement.

Score

Implement.

Gap

United Arab Emirates

2009

68

 
  • 63 68

-5

Jordan

2011

57

 
  • 67 46

21

Morocco

2010

56

 
  • 66 46

20

West Bank

2010

57

 
  • 73 41

32

Qatar

2009

42

 
  • 41 38

3

Algeria

2011

54

 
  • 68 37

31

Egypt

2010

54

 
  • 70 34

36

Iraq

2008

53

 
  • 75 32

43

Syria

2009

29

 
  • 35 16

19