UGANDA

RECOMMENDATIONS FOR STRENGTHENING

THE GOVERNMENT OF UGANDA’S ANTI-CORRUPTION PROGRAMME

Poverty Reduction and Social Development Africa Region

The World Bank November 1998

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Table of Contents

Acronyms and abbreviations....................................................................................... iii

Summary............................................……………....................................................... v

I. Background...................................................................................................... 1

II. Corruption: A Global Concern.........................................................................2

III. Economic Costs of Corruption.........................................................................3

IV. Corruption in Uganda and the Government’s Anti-corruption Efforts............6

V. Problem Areas and Recommended Actions.....................................................8 (a) Government Revenue and Expenditure Management.......................................... 8 (b) Public Procurement.............................................................................................13 (c) Civil Service Reform...........................................................................................20 (d) Deregulation........................................................................................................26 (e) Privatization.........................................................................................................28 (f) Financial Sector Regulation.................................................................................30 (g) The Legal Framework, Law Enforcement, and Judicial Reform........................32 (h) Financing of Political Processes..........................................................................34 VI. Increasing Public Awareness and Involvement of Stakeholders.....................35 VII. Donor and World Bank Assistance.................................................................38

VIII. Conclusions.....................................................................................................40

Annexes

1 The Extent of Corruption in Uganda................................................................43

2 The Uganda Government’s Strategy to Fight Corruption................................45

3 Public Procurement...........................................................................................47

4 Anti-bribery Mechanisms in International Contracting....................................49

5 The Legal Framework, Law Enforcement, and The Judicial System...............52

Table 1 The Mission’s Impressions of the Prevalence of Corruption in Uganda............7

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GOVERNMENT FISCAL YEAR July 1 - June 30

CURRENCY EQUIVALENTS Currency Unit: Ugandan Shilling

Official Rate: US$1.00 - UgS/=1,250 (1998)

ACRONYMS AND ABBREVIATIONS

AG Auditor General and Controller AGJ Attorney General APL Adaptable Program Lending AU Anti-corruption Undertaking BFP Budget Framework Paper BoU Bank of Uganda CAS Country Assistance Strategy CEO Chief Executive Officer CPI Corruption Perception Index CS Civil Service CSRP Civil Service Reform Program CTB Central Tender Board DfID EDI

Department of International Development Economic Development Institute of the World Bank

EMCP Expenditure Management and Control Program EFMP Economic and Financial Management Project FDI Foreign Direct Investment GCA Global Coalition for Africa GOU Government of the Republic of Uganda GTZ Deutsche Gesellschaft für Technische Zusammenarbeit IA Internal Auditors IDA International Development Authority IDF Institutional Development Fund IGG Inspector General of Government IP Integrity Pact ITC LIL

International Trade Centre Learning and Innovation Loan

MFPED Ministry of Finance, Planning, and Economic Development MOW Ministry of Works MTEF Medium-term Economic Framework MP Member of Parliament NBFI Non-bank Financial Intermediaries NBP No Bribery Pledge NGO Non-governmental Organization NPART Non-performing Assets Recovery Trust NWSC National Water and Sewerage Company OOB Output/outcome-oriented Budgeting OAG Office of the Auditor General OECD Organization of Economic Cooperation and Development

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PAC Public Accounts Committee of the Parliament PALMA Procurement and Logistics Management Association PFP Policy Framework Paper PMO Prime Minister’s Office PSI Pre-shipment Inspection ROM Results-oriented Management SAC Structural Adjustment Credit SWIPCO Swiss Procurement Company TI Transparency International TIN Taxpayer Identification Number UCB Uganda Commercial Bank UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Center for Trade and Development UNHCR United Nations High Commission for Refugees UPDF Uganda’s Peoples Defense Forces USAID United States Agency for International Development UIA Uganda Investment Authority URA Uganda Revenue Authority

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Recommendations for Strengthening

the Government of Uganda’s Anti-Corruption Programme

Summary

Background 1. In response to a request from President Museveni a World Bank mission visited Uganda from September 14 to October 2, 1998 to assess Government’s anti-corruption program and to suggest ways in which the World Bank could assist Government in strengthening its anti-corruption efforts. The mission also examined the feasibility of introducing an anti-bribery clause in IDA-funded operations as a means of reducing corruption in public procurement. The mission was able to meet many government officials, businessmen, civic action groups, NGOs, donors and the diplomatic community, the press, academia, and the general public. Background documentation included the National Integrity Survey, a report on the incidence and effects of corruption based on a 1998 sample survey of over 18,000 households, and the Government’s 1997 Policy Document on Strategy to Fight Corruption.

Corruption: A Global Concern

2. The international community has become increasingly concerned with the problem of corruption and its negative impact on economic growth and poverty alleviation. In recent years anti-corruption initiatives have been launched by the United Nations, the OECD, the Organization of American States, and the Global Coalition for Africa, among others. Organizations such as the NGO, Transparency International have conducted surveys to assess the extent of corruption in different countries.

3. The World Bank, recognizing that corruption can occur entirely within the private sector, is concerned, as a lender to governments, about corruption within the public sector or in public/private sector interrelationships. The World Bank defines corruption as the abuse of public office for private gain. Corruption can involve low-level, and usually low-paid, civil servants—the “petty” corruption which is based on “need”—or can involve middle and higher-level officials and political elites—so-called “grand” corruption based on “greed.” The World Bank sees the corruption as a symptom of breakdown in the functioning of government. A successful anti-corruption program must address the underlying causes of this deterioration. When corruption becomes deeply rooted in a society, the government, if it is serious in its desire to reduce it, must attack the problem on many levels simultaneously. Although some aspects of corruption can

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only be addressed over the medium and longer-term, there are concrete actions which a government can take in the short run that will have significant positive impact.

The Economic Costs of Corruption

4. Corruption can take many forms, including bribery, fraud, and embezzlement of public monies or other assets. The economic cost of the various forms of corruption includes, for the government, stolen or wasted public resources, tax revenue lost through tax evasion, higher future maintenance costs for poorly constructed facilities, and a higher burden of public debt when project costs include bribes and kickbacks. For the economy the cost can include lower efficiency due to excessive bureaucratic hurdles and delays, the loss of productive investments not made because of corruption, and the non-availability of public goods and services to the poor who cannot pay the bribes demanded. Some countries have, for a time, experienced a high rate of economic growth despite a high level of corruption, but this situation is unlikely to be sustainable and economic and social goals will eventually be undermined.

5. The areas of public sector activity in which the risks and costs of corruption are likely to be high include: revenue collection, especially of customs duties; management of public expenditures where accounting records are poorly maintained and accountability is lax; the procurement system—perhaps the area with the highest risk of bribery, collusion and conflicts of interest; payroll fraud, including kickbacks to obtain a job or payments to “ghost workers;” the delivery of public services, particularly health and education, where poorly paid health workers and teachers demand bribes to augment their inadequate salaries; the business regulatory framework where often excessive and unnecessary regulations permit bureaucrats to obtain “facilitation payments;” the privatization of public enterprises or the licensing of private operators in public utility sectors which were formerly public monopolies; the financial sector if the regulatory framework for banks and non-bank financial intermediaries is weak and/or poorly enforced; in the judicial system if judges and other court officials are underpaid and thus susceptible to bribes—if the judicial system is corrupt the enforcement of contracts and property rights will be undermined, inhibiting investment and economic growth, and the effective prosecution of corruption cases will be difficult; and in the financing of politicians and political parties—a problem in virtually all countries.

Corruption in Uganda and Government’s Anti-Corruption Efforts

6. The impressions of the World Bank anti-corruption mission are that the prevalence of corruption in Uganda is highest in the areas of procurement, particularly military procurement, and reform and privatization of public enterprises. These are sectors where numerous cases of grand corruption have been alleged or confirmed. Widespread corruption is also reported in the administration of public revenues and expenditures, in the funding of political campaigns, and in the judiciary. Corruption is also pervasive in the delivery of public services, as brought out clearly in the National Integrity Survey. At the same time, corruption appears to be less significant in such other

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areas as the financial sector and the regulatory regime, the latter a direct result of the substantial deregulation of the economy over the past decade.

7. It is understandable that Uganda suffers from entrenched corruption. The period from 1971 through 1985 was marked by a rising trend of political instability, economic mismanagement, corruption and gross human rights abuses. There was a breakdown of the rule of law and of ethics and integrity in government. The drastic decline in the real value of civil service wages forced public servants to resort to semi-legal or illegal pursuits to survive. Many public officials were killed or fled the country, greatly reducing the quality of human resources in government service.

8. Since assuming power in 1986 the National Resistance Movement (NRM) has carried out an impressive program of political, economic and social reform and rehabilitation. This program has included a focus on rebuilding ethics and integrity in both government and society; corruption was among the high-priority issues in the NRM’s action program. In the political sphere the NRM has created a new Constitution, conducted Parliamentary, Presidential and local authority elections, and is undertaking a major program of decentralization of government functions to bring responsibility for service delivery closer to beneficiaries. In the economic sphere Government has implemented sound macro-economic management, liberalization and deregulation of both the domestic economy and the foreign trade sector, tax reform and improvements in tax administration, and improved incentives for private-sector led development. These reforms have contributed to one of the highest rates of economic growth in Africa over the past decade. Other actions have included the establishment of an anti-corruption agency, the Inspectorate General of Government (IGG) in 1998, the adoption of a Leadership Code of Ethics in 1992, a Human Rights Commission in 1996, and restoration of much greater freedom of the press.

9. In 1996 the Office of the Vice President (OVP) was assigned oversight responsibility for the anti-corruption program with the support of a newly-created anti-corruption coordination unit. In July 1998, these oversight responsibilities, and the coordination unit were shifted to a new Minister for Ethics and Integrity in the Office of the President. The new Ministry’s objectives include: developing government policy on ethics and integrity and overseeing its observance; proposing new or revised laws against corruption; helping to strengthen anti-corruption agencies such as the IGG; and under-taking an intensive campaign to instill ethical values and integrity in the population. In 1997 the OVP issued the draft anti-corruption policy and strategy document referred to above, and the new Ministry for Ethics and Integrity is now responsible for issuing a revised strategy and action plan for implementation of the anti-corruption program. This latter document had not been issued at the time of the World Bank mission.

10. In summary, while Government has implemented commendable reforms on many fronts, including efforts to attack corruption in the public sector, Uganda is nevertheless categorized by the international business community as one of the more corrupt

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countries.1 In the following section of the main report we present our detailed analysis of corruption problems in each of the areas cited above, and our recommendations for strengthening Government’s anti-corruption efforts.

Problem Areas and Recommended Actions

11. GOVERNMENT REVENUE AND EXPENDITURE MANAGEMENT. Uganda has made significant progress since 1986 in reforming the tax system and improving tax administration. Overall rates of taxation have been lowered and individual taxes have been rationalized; revenue performance has improved markedly, rising from 4% of GDP in 1986 to 12%. Tax administration has improved with the formation of the Uganda Revenue Authority in 1991 but, revenue is still inadequate to finance all the demands for public goods and services. It is widely believed that many who should be paying taxes are evading the tax net through bribery, falsification of accounts, smuggling, and similar means. This problem is reported to be especially serious in customs.

12. Expenditure management comprises the budget process, the rules and procedures to account for and control expenditures, and the system of ex-post audits and review involving the Controller and Auditor General (AG) and the Public Accounts Committee of the Parliament (PAC). In the first of these areas Uganda has a reasonably well-functioning budget system which has been improved in recent years, and with further improvements planned. The Treasury has maintained aggregate fiscal discipline largely through a process of cash releases tied to revenues. While this has the desirable effect of controlling, to a degree, overspending and resultant unplanned deficits, it is not entirely effective in meeting this objective and creates uncertainty and results in ad hoc spending decisions in implementing Ministries

13. The more serious problem in the management of public expenditures is lack of financial discipline. There is general disregard for accurate record keeping, bypassing of controls and weak accountability, viz., a degree of “informality” prevails in public resource management that raises the risk of corrupt practices. It is the responsibility of the AG to uncover and report on waste and corruption in government. The AG and his staff do a credible job, considering that they often have very poor accounting records to work with, and given the difficulties which the AG has in employing and retaining competent staff on civil service terms. The reports of the AG are submitted to the PAC which holds open hearings and prepares a follow-up memorandum to Government; however, the follow-up on the AG/PAC reports has been weak.

14. A further risk in public expenditure management comes from the ongoing decentralization of governmental functions. The objectives of this policy are laudable, but local government administration in Uganda is today extremely weak. Decentralisation should lead to greater transparency and accountability in the use of public funds, since local authorities are much closer to their clients than officials in the

1 See Annex 1 reference to Transparency International’s Corruption Perception Index.

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capital. But, lack of experience of local officials and a poorly informed citizenry can lead to mistakes and abuses. Previous “expenditure tracking surveys” have indicated substantial leakage of funds allocated for expenditure at the local level. Further, the AG presently lacks the capacity to deal with the much greater workload of auditing 45 district governments. As a vital first step, substantially more resources, hopefully including donor resources, should be devoted to capacity building at the local level.

15. PUBLIC PROCUREMENT. Government procurement is an area where the risks of corruption are high in every country. Most countries, including Uganda, have laws and procedures to regulate each step of the procurement process, but private sector bidders and public officials often collude to circumvent these rules, resulting in corrupt gains for the participants, excessive costs and, often, inferior quality of goods and services for government. In Uganda the procurement system suffers from severe weaknesses. Over 90% of the complaints received by the IGG relate to procurement. Abuses of the system can occur at any stage—preparation of tender documents; advertising of tenders; at bid opening, evaluation, approval, and contract award; and in contract execution. Senior officials may influence the appointment of members of tender boards or of Boards of Directors of public enterprises and expect in return the award of contracts to themselves or their associates; officers responsible for procurement may find ways to circumvent the guidelines governing the thresholds for competitive bidding; tenders may be structured to favor particular suppliers, bidders may attempt to exert improper influence on board members, or officials and contractors may collude during project implementation to unjustifiably escalate project costs.

16. The NRM Government has made a number of efforts to address these problems in procurement. In 1996 Government contracted the Swiss Purchasing Company (SWIPCO) as a procurement adviser/manager, but this organization has had only limited involvement in procurement to date. Over the past ten years Government has commissioned five studies of the procurement system, and adopted some of their recommendations. Recently the UNCTAD International Trade Center (ITC) conducted an extensive review of the procurement system and recommended major reforms. The World Bank mission has considered the ITC report, and the report of a government task force which is reviewing the ITC recommendations, and is in full agreement with the overall thrust of these recommendations. However, the mission has concluded that, in light of the very weak status of public procurement in Uganda today, it would be necessary to make significant progress in adopting and implementing the recommendations contained in the ITC report prior to introducing an anti-bribery clause.

17. CIVIL SERVICE REFORM. When the NRM assumed power in 1986, following 15 years of misrule and economic and social deterioration, it inherited a civil service characterized by excessive numbers, lack of discipline, limited skills, extremely low wages and poor working conditions. The response of public servants to these conditions was to augment official pay by any means possible, ranging from legal, but unconducive to good performance, to illegal. The basic cause of corruption in the bureaucracy, at least at the lower levels, was clearly the inability of the government to pay a “living wage.”

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18. Government has given high priority to reform the civil service, and has made significant progress in divesting functions, reducing numbers, removing “ghost workers” and improving pay and working conditions. In 1997 Government launched a new phase of reform—Public Service 2002—a five year plan to develop a Public Service “which delivers timely, high quality, and appropriate services, at least cost to the nation . . .” This program is designed to improve performance primarily through further increases in pay and linking pay to performance through Results-Oriented Management.

19. While Government has succeeded in improving civil service compensation in recent years, pay is still inadequate to permit the recruitment, retention and motivation of a high-caliber public service. Pay at the lower levels still falls short of a living wage; at the middle and upper levels, while pay is adequate for survival, it is still far below private sector comparators. Various means exist for resolving this remaining shortfall—improve performance in high priority areas through the creation of autonomous executive agencies with the freedom to set market-based salaries (e.g., the URA); continue consolidation of functions and concurrent retrenchment of staff; increase the share of tax revenues in GDP and apply this increment to the wage bill; introduce greater community cost sharing in sectors such as education and health, in effect replacing current informal payments to service providers with formalized payments to improve the level of services. However, there is no easy solution for the problem of inadequate civil service pay and further reforms will need time. Finally, while increasing civil service pay is a necessary condition for eliminating corruption from the bureaucracy, higher pay alone is not sufficient for reducing corruption and rebuilding a professional and motivated service. Broad public sector management reforms must also be put in place, including training, improvements in the work environment, adequate recognition and reward for merit, leadership by example, greater discipline and accountability, and enforcement of sanctions against those implicated in corruption. 20. DEREGULATION. Government deserves credit for the far-reaching economic reforms which have been implemented over the last decade and to which Government remains committed.2 These reforms have reduced many of the monopolistic powers and bureaucratic discretion which foster corrupt practices. The environment for new investment, including international investment, is more favorable in Uganda today than in many other African countries. In the opinion of the business community in Uganda, as shown in surveys of the business sector, corruption linked to the regulatory framework (having to pay bribes to circumvent or move through the regulatory system) is not seen as a serious constraint. In these surveys it ranks well below high utility prices and poor utility services, high taxes and corruption in tax administration, and other forms of corruption. Nevertheless, the regulatory structure is still burdened with cumbersome procedures, unnecessary steps, lack of coordination and duplication of effort.

2 The Government has employed consultants who have carried out a comprehensive review of all

commercial laws. Draft revisions of these laws have been reviewed by Government but not yet submitted to Parliament. The Government has also set up a commercial branch of the High Court to handle commercial cases.

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Streamlining these procedures as part of the continuing deregulation effort would improve the investment climate and reduce the opportunities for rent-seeking.

21. PRIVATIZATION. The privatization of Uganda’s public enterprise sector dates from 1993, although significant numbers of divestitures began only in 1995. While the program has resulted in a substantial number of divestitures and liquidations, primarily of small and medium-sized enterprises, the pace of privatization has slowed significantly over the past 12 months. Furthermore, there have been serious flaws in the management of the process; a number of privatization transactions have been unsuccessful and the program has been widely criticized for non-transparency, insider dealing, conflict of interest and corruption. The unit responsible for carrying out privatizations has been unable to collect many outstanding payments for firms which were sold on a deferred-payment basis and questions have been raised about the use of the funds in the divestiture account. While there has been widespread public and Parliamentary support for the objectives of privatization, there has been growing concern about the process, leading to a recent decision by the Parliament to suspend further privatizations while a Parliamentary Select Committee carries out an investigation. It is the World Bank’s view that much greater transparency and accountability are required in the privatization process.

22. FINANCIAL SECTOR REGULATION. The number of banks and non-bank financial intermediaries (NBFIs) has increased in recent years, primarily through the formation of indigenously-owned institutions. Government concurrently has been divesting its financial sector interests through the partial privatization of the formerly Government-owned Uganda Commercial Bank (UCB) and divestiture of its shares in foreign-owned banks. Until recently the banking sector was dominated by the UCB which held over 50% of deposits and had the largest branch network, but which also had an extremely weak portfolio, with over 50% of its outstanding loans non-performing. In preparation for privatization, UCB’s non-performing loans were transferred to an autonomous collection agency, the Non-Performing Assets Recovery Trust (NPART) which has been reasonably successful in debt recovery. Nevertheless, the past record of UCB illustrates the high costs to Government and the economy of allowing political interference over the years in the lending decisions of a government-owned financial institution.

23. The financial statutes were revised and updated in 1993, but it is now recognized that there are deficiencies in these acts and further amendments are being prepared by the Bank of Uganda (BoU) in collaboration with the Law Reform Commission. A more serious problem than the legal framework has been the number of banks in financial difficulty and the inadequacy, until recently, of BoU supervision and regulation. Such deficiencies in supervision and regulation can have serious negative consequences for the economy; there is a risk of collusion between regulators and private banks, as well as the risk of loss of public funds when government deposits are placed in weak institutions, in some cases in an attempt to avert insolvency. While lax central bank supervision is not necessarily evidence of corruption, it has permitted mismanagement of several banks and the spread of corrupt practices within the system. Fortunately, the BoU has recently strengthened its Bank Supervision Department, commissioned audits of suspected weak and/or mismanaged banks, and taken action to close or temporarily suspend operations of

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certain banks while placing others on strict performance plans intended to return them to full compliance with prudential regulations.

24. THE LEGAL FRAMEWORK, LAW ENFORCEMENT, AND JUDICIAL REFORM. Uganda has a comprehensive legal and regulatory framework which is essentially sufficient to combat corruption. However, the judicial and enforcement agencies are weak, under-funded, and lack human and material resources. Sadly, the National Integrity Survey shows that the highest incidence of corruption encountered by average citizens is found in the police and judiciary—the very institutions which should be in the lead in stamping out corruption. While the judiciary, excepting the support staff, have been given substantial increases in compensation, the institutions most directly involved with anti-corruption—the IGG, Director of Public Prosecutions (DPP), and police—are severely constrained by limited resources, including, for the IGG and police, low pay. These agencies are especially handicapped in monitoring activities at the district level, which are becoming increasingly important with decentralization of government.

25. Government has taken a number of steps in recent years to strengthen the anti-corruption program, including increases in compensation for the judiciary, increased independence for the IGG, and amendments to various anti-corruption statutes such as the Prevention of Corruption Act. Government is also planning to set up special courts to handle corruption cases. Further, Government has prepared amendments to strengthen the Leadership Code by expanding the number of leaders covered by the Code, further clarifying the rules regarding conflict of interest, providing for public access to leaders’ declarations of assets, and for the forfeiture of unexplainable wealth.

26. FINANCING OF POLITICAL PROCESSES. The recently-held national and local elections, while representing major progress in restoring political rights and empowering the citizenry, have imposed a high cost on candidates—the costs of campaigning and of meeting constituents’ demands. The need to fund election campaigns and win votes opens up, in Uganda as elsewhere, the risk of corrupt practices—vote buying, acceptance of under-the-table contributions in exchange for political favors, misuse of public funds and other resources by incumbents, and various forms of patronage. The elimination of campaign-financing abuses is difficult, but steps can be taken, including placing time limits on the length of campaigns, providing public funds and/or free access to the media for candidates, voter education, requiring the full reporting and monitoring of sources and uses of campaign funds, and sanctions for abuses of election laws.

Increasing Public Awareness and Involvement of Stakeholders

27. Uganda has made notable progress in democratization, organizing competitive elections, restoring human rights and the rule of law, and establishing free expression and a relatively free press. Within this more open environment a number of initiatives are

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ongoing to increase the involvement of the public in the anti-corruption effort. Government’s willingness to enter into such partnerships with the private sector is a positive sign. One initiative is the series of Integrity Surveys and Workshops organized by the IGG, with support from the World Bank Economic Development Institute (EDI), UNDP, and donors. The 1998 Survey covered a sample of over 18,000 households, over 1,500 civil servants, and 350 focus groups. The survey results show that: 40% of the sample report having to pay bribes, with the highest incidence occurring in dealings with the police and judiciary; a majority of households think that corruption is getting worse, and 70% think that there is “very much” corruption in the public service. Already a national workshop and two district workshops have been held to discuss the findings of this survey, and it is intended to hold workshops in all 45 districts.

Donor and World Bank Assistance 28. Donors are supporting many programs in Uganda which influence the quality of governance as well as initiatives which have a direct or indirect impact in reducing corruption. These include support for the electoral process and the Electoral Commission, the Public Service Reform Program, the URA, the AG, the police and judiciary, IGG, the Anti-Corruption Unit, and the Human Rights Commission. 29. The World Bank is supporting Government’s program of economic reforms and liberalization, including reform of the budget process and financial management, reform and privatization of public enterprises, and strengthening of the financial system and the BoU. The Bank is also supporting institutional reforms and capacity building in the civil service, the legal/judicial system, and the AG, among others. The EDI has supported the above-mentioned Integrity Surveys and Workshops and held training seminars in investigative reporting for journalists. The Bank intends to continue its financial and technical support in all of these areas, in coordination with other donors, and is prepared to extend new forms of assistance such as direct support to key anti-corruption agencies such as the Ministry of Ethics and Integrity or the IGG, if requested. Conclusions 30. In the opinion of the mission, Uganda has made great strides since 1986 in improving economic management, enforcing respect for human rights and the rule of law, restoring political freedoms and in fighting corruption. However, in the opinion of the interlocutors with which the mission had contact, the country still experiences a significant corruption problem. Unless greater efforts are made to reduce corruption, Government faces the risk that corruption will feed upon itself and spread, which could cause a loss of donor and investor confidence in Uganda’s economic future and an erosion in the Ugandan people’s confidence in government. The past actions of the Government—constitutional reform, restoration of the parliamentary system, decentralization, legal reforms, and establishment of institutions such as the IGG, have provided the base on which to build a stronger anti-corruption program. The mission believes that an intensified anti-corruption effort, involving a continuation of ongoing

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programs plus the additional measures set out in this report, could succeed in returning the country to the low-corruption status which it once enjoyed.

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Recommendations for

Strengthening the Government of Uganda’s

Anti-corruption Program

I. BACKGROUND

1. A World Bank mission visited Uganda from September 14 to October 2, 1998, in response to an invitation from President Yoweri Museveni, to examine ways to support the government’s program to improve economic governance and combat corruption.3 The mission's objectives were to assess the scope and status of the government's anti-corruption program, to recommend additional actions which the government could take to combat corruption, and to suggest areas where the World Bank could provide support. A further objective was to examine the feasibility of introducing anti-bribery mechanisms in IDA procurement as a means of furthering the government’s anti-corruption program.

2. The mission followed an exchange of letters between President Museveni and President Wolfensohn, which was preceded by a visit to Uganda in October, 1997 by Mr. Robert McNamara, former President of the World Bank and Co-chairman of the Global Coalition for Africa. President Museveni and Mr. McNamara discussed the need for strong measures to address corruption and the possible use of a “No Bribery Pledge” as a component of government’s anti-corruption program.

3. In an effort to understand the nature and extent of corruption in Uganda, members of the mission met with key government officials, members of civil society, NGOs, the private sector, the press, the donor and diplomatic communities, and reviewed World Bank and other relevant documents. The mission was able to review the Uganda Government’s Policy Document on Strategy to Fight Corruption (discussed in Section IV and summarized in Annex 2), but did not receive the draft Framework for Implementation of the Anti-corruption Strategy, which was still under preparation at the time of the mission.4

3 The mission members were: Mr. Steve O’Brien, Mission Leader; Mr. Rogati Kayani, Senior Procurement Specialist; Mr. Iraj Talai, Senior Financial Management Specialist; Mr. Aberra Zerabruk, Senior Counsel; Mr. Mike Stevens, Principal Public Sector Management Specialist; Mr. Petter Langseth, Senior Public Sector Management Specialist, Mr. Jack Titsworth Senior Public Sector Management Specialist; Ms. Susan Chase, Researcher and Editor.

4 The Policy Document on Strategy to Fight Corruption, Government of Uganda, Office of the Vice President, Kampala, 1997.

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II. CORRUPTION: A GLOBAL CONCERN

4. The international community is increasingly concerned with corruption and its corrosive effects on economies and societies. Evidence is growing in rich and poor countries of the costs of corruption, its relationship to international organized crime, and its effect on foreign direct investment. Domestically, corruption hurts the poor and inhibits growth of local entrepreneurs. It reduces the effectiveness of delivery of government services and of public policy generally, thereby undermining the very legitimacy of government. It is difficult to say whether at a global level corruption is increasing, but there is much variation across regions, and it seems that everywhere fraud and corruption have become more visible and more frequently reported by the media. In the past few years, initiatives to combat corruption have been launched with support from the Global Coalition for Africa (GCA), the World Bank (WB), the International Monetary Fund (IMF), the United Nations Development Program (UNDP), the Organization for Economic Cooperation and Development (OECD), and others, including NGOs such as Transparency International (TI).

5. Corruption can be defined as the abuse of public office for private gain. It includes bribery, fraud, embezzlement, patronage, nepotism, and influence peddling. While corruption can also occur entirely within the private sector, the World Bank's primary concern is with corruption in the public sector or at the interface between the public and private sectors. Grand corruption and petty corruption often go hand in hand. When grand corruption is practiced by politicians and senior officials, their comportment sets the standard for the people under them. Should petty corruption be initiated by junior staff, the people to whom they report will most likely participate. When seniors and juniors collude, corruption can become syndicated with each member sharing in the proceeds of corrupt practice in a government organization or enterprise. Corruption also has a political dimension, which can arise from the way in which politics is financed and power is managed, either in authoritarian or pluralistic and democratic systems. In some countries, the proceeds of corruption are used not only for personal enrichment but also to fight elections and to pay off political constituencies. It is thus necessary to get the institutions “right” in the political as well as the economic domain.

6. In the fight against corruption investigating and sanctioning corrupt practice is critical, but enforcement and punishment alone will not achieve sustainable results unless accompanied by efforts to correct underlying causes, and to improve governance generally.5 Systemic corruption is a symptom of public sector breakdown, which should be addressed as part of a broad strategy for improving public sector performance. Part of that strategy entails strengthening key public sector institutions, principally the executive branch, but also the judicial and legislative branches. It also involves reviewing policies and regulations to eliminate, when possible, those that give rise to “economic rents.” The 5 Robert Klitgaard, who has written extensively on corruption and economic development, relates the scope of

corruption (C) to the presence of monopoly power (M), discretion (D), and accountability (A) in the formula: C = M+D-A. See Robert Klitgaard, “International Cooperation Against Corruption” in World Bank/IMF, Finance and Development, March 1998, pp. 3-6.

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conditions which make for effective government also work to control corruption. An effective anti-corruption program requires establishment of transparent procedures, holding both public and private sector actors accountable, strengthening the judicial system to handle corruption cases efficiently, and also the active participation of the civil society in the anti-corruption battle. When corruption is deeply rooted in a society the fight against it is a long-term challenge which involves both institutional and attitudinal reform. However, despite the long-term nature of the anti-corruption struggle, a government can take short-term actions, for example, eliminating outdated policies and regulations, which generate “economic rents,” and enforcing existing laws, thereby demonstrating its commitment to fight corruption to the citizenry.

III. THE ECONOMIC COSTS OF CORRUPTION

7. The economic burden which corruption imposes on an economy is the aggregate of the costs of each form of corruption. Countries may experience buoyant growth concurrently with systemic corruption, but it is unlikely to be sustainable, and economic and social goals will eventually be undermined. The following paragraphs discuss the principal arenas where corruption occurs and the associated economic costs and risks. While policies should be devised to limit all forms of corruption, the complete elimination of corruption is an unattainable goal. An effective strategy is one that, in the short-term, addresses the economically most costly forms, and, over the medium-term, builds institutions and systems of internal checks and balances which resist corruption and limit its spread when it occurs. Moving in a determined way against corruption can be expensive for a country, thus an anti-corruption strategy should be informed by costs, and efforts should be focused on reducing the risks.

8. PUBLIC REVENUES AND EXPENDITURES. The immediate cost of corruption in revenue raising is lower inflows to the government budget, resulting in less money for programs (affecting service delivery) or higher deficits (affecting macro-economic stability). Firms and citizens who pay taxes are at a competitive disadvantage to those who avoid taxes and duties through corruption. They face the choice of joining the corruption game or going out-of-business. On the expenditure side, failure to enforce budgetary discipline, maintain proper accounts, monitor expenditures carefully, and impose sanctions for misuse of public funds or supplies, can lead to a drain of resources. Not all such overspending or diversion of expenditures from one category to another is per se corrupt, but lax expenditure controls can open the door for fraud, theft and other forms of corruption. In Uganda, the Auditor General (AG) estimates that diversion and misuse of public funds amounts to as much as 10 to 20 percent of expenditures.

9. PUBLIC PROCUREMENT. The amount of resources passing through public procurement systems in developing countries is large—for Uganda, the mission estimated 7 to 8 percent of GDP through the budget, and more than 10 percent if parastatal procurement is added. The share rises as governments seek to contract out services that hitherto were provided by public agencies. While all governments have procurement rules and regulations, they are often ignored or circumvented. If public procurement is

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distorted by bribery and other forms of corruption, the costs of goods, services, and works rises, as will the risks of substandard work—less reputable firms will be chosen, contractors will be compelled to cut costs and quality of work, and the ability of staff to supervise contracts will be compromised. Bribe-induced change orders are especially costly. Overall, the effectiveness of government programs is diminished. The way to control corruption in public procurement is to ensure that classic principles of open, competitive procurement are applied.

10. PUBLIC PAYROLL AND SERVICE DELIVERY. In many developing countries, real wages of civil servants have fallen over the years as the number of public servants has expanded beyond what is needed, while the aggregate wage bill has been constrained by slow growth of the economy and, correspondingly, of the government budget. The costs to the economy of underpaid civil servants include non-performance on the job and the augmentation of incomes through unofficial—often corrupt—means, including the demand for bribes for providing services. Bribes demanded by officials to deliver a service such as primary health care or education (as the National Integrity Survey demonstrates is happening in Uganda) undermine program outcomes and are a particular burden on the poor who cannot pay the bribes demanded. If bribes interfere with service delivery, donors may become unwilling to continue funding social programs. An additional budgetary cost often arises from the diversion of funds to “ghost workers” through payroll fraud. Many developing countries, including Uganda, have undertaken comprehensive Public Service reform programs designed to reduce numbers, eliminate ghost workers, and restore compensation to levels which provide sufficient incentives for good performance. While adequate pay is not a sufficient condition for a well functioning Public Service, it is impossible to root out petty corruption when large numbers of public servants do not receive a living wage.

11. REGULATORY FRAMEWORK. It has been argued that "facilitation payments" can speed bureaucratic processes, thereby increasing efficiency and providing an overall economic gain. But this is illusory. Underpaid officials may deliberately create unnecessary bureaucratic roadblocks to capture the rents from controlling the issuance of permits or licenses. Further, bribes paid to officials to discharge a duty can easily become bribes paid to subvert a necessary regulation, thereby undermining public policy. Overly regulated systems have clear economic costs; they discourage small-scale entrepreneurs from joining the official economy, and beyond a certain point will deter foreign investors. Where regulations are necessary, they should be transparent and, as far as possible, non-discriminatory.

12. PUBLIC ENTERPRISE REFORM AND PRIVATIZATION. When corruption distorts privatization outcomes, the immediate effect is loss of revenue to the government. More damaging to the economy, however, is the transfer of assets to owners unqualified to manage them, which has a direct effect on growth, and an indirect effect on private sector perceptions of the investment climate. How privatization is handled is a bellwether for foreign investors, and corruption in the privatization process is likely to be deleterious to international businesses’ willingness to invest in the country. The risk of corruption in the "strategic" public enterprise sectors or public utilities is high because these are

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typically public monopolies, which involve large amounts of revenue collection and procurement, particularly large construction projects. Corruption in such enterprises results in high utility costs and poor service delivery, particularly of power. This has serious economic and social consequences, including increased operating costs for industry, which deters investment. As experience elsewhere in East Africa demonstrates, private investment in power generation is another high-risk corruption area.

13. FINANCIAL SECTOR. Corruption in the financial sector can have consequences for the macro-economy, as the experience of East Asia has shown. Where bribes affect deposit and lending decisions, credit is mis-allocated, worthy borrowers are frustrated, and prudence, due diligence, and credit control are weakened, which leads to bank failures, loss of depositors’ funds, and diminished confidence in financial institutions. State-owned banking systems are particularly vulnerable to corruption, if used as a source of cheap credit for political elites. If the volume of non-performing loans is large, central bank and budgetary resources have to be used to prevent financial sector collapse. In extreme cases, monetary control can be lost leading to high inflation. The corruption risks to the financial sector are high, but are controllable with a sound legal framework for banks and non-bank financial institutions, transparency, and energetic supervision.

14. THE LEGAL FRAMEWORK, LAW ENFORCEMENT, AND THE JUDICIAL SYSTEM. A vital function of the legal system in a market economy is to define and enforce the legal framework for economic activity, and to protect property rights. When the people who frame laws can be bought, the laws can favor the bribers rather than the public good. When the police can be bought, illegal and socially harmful businesses can flourish, and bribers can avoid prosecution. If judges can be bought, confidence in the judicial system’s ability to resolve commercial disputes is low. Judges may be honest, but if court staff can be bribed to lose critical files or delay proceedings, the effect is similar. Corruption in the legal framework, law enforcement, and the judicial system can check the growth of a modern private sector, which depends on enforcement of written contracts. When such corruption exists, foreign investment is discouraged, some types of business activity are avoided, inefficient contract enforcement mechanisms are tried, and transaction costs rise.

15. POLITICS. Securing and retaining elected office is costly, and developing countries such as Uganda lack the mechanisms found in industrial countries for financing competitive political activity. As a consequence, informal and frequently corrupt methods are adopted, as politicians seek to recoup election expenses (and amass resources for future campaigns). The economic risks include: promotion of costly public investment schemes or joint ventures in exchange for political contributions; interference in public sector procurement decisions; favored treatment for party-owned firms; and mismanagement of state enterprises. Establishing effective means for financing political activity is a challenge for all countries. The solution involves clear rules, limits on campaign costs, reporting of receipts and expenditures, effective monitoring, and sanctions for violations, and state financing of electoral costs, on a transparent basis.

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16. MILITARY. Corruption risks in the military are frequently higher than in other parts of government, largely because the military budget lacks transparency due to national security considerations. Accounts may not be audited, and the ability of the Treasury to ensure proper use of funds is limited. An especially vulnerable area is military procurement, because costs are difficult to benchmark, and sole sourcing is common. This opens opportunities for bribery. An associated problem can be unrecorded external debt which can throw macro-economic programs off course. Managing corruption risks in the military entails transparency in budgets and enforcement of procurement regulations.

IV. CORRUPTION IN UGANDA AND GOVERNMENT'S ANTI-CORRUPTION EFFORTS

17. Understanding corruption in Uganda requires an appreciation of the country’s political and economic history. Uganda became independent in 1962 after 70 years of colonial administration—a period during which most Ugandans were excluded from acquiring experience in governance. During the regime of the first President, Milton Obote, and the subsequent Governments of Idi Amin and Obote II, the country experienced a rising trend of political turmoil, human rights abuses, economic mismanagement, and corruption. There was a progressive breakdown of the rule of law, and of ethics and integrity in government. The appointment of judges and court officials became politicized. Morale and accountability in the civil service were eroded by a decline in real wages, the necessity to take bribes to survive, as well as political interference and the loss of experienced officials who were killed or fled the country during the Amin years. Another serious erosion of the rule of law affected the police and army. The Ugandan people have suffered more at the hands of their soldiers than those of any East African state. In spheres of public life, informal systems of behavior replaced formal rules and procedures and corruption became a central element at all levels.

18. In January 1986, following five years of civil war, the National Resistance Move-ment (NRM) took control of the government. The NRM embarked on an impressive program to restore the rule of law and respect for human rights, reconstruct the physical and social infrastructure and rebuild the economy through sound economic management and liberalization. The NRM and President Museveni acknowledged the erosion of ethical values within society and the breakdown of systems and institutions which had permitted corruption to become endemic and declared a commitment to root out corrupt practices. In fact, corruption was among the top ten issues on the NRM’s agenda. The government has, since 1986, created new institutions and passed laws designed to establish good governance and combat corruption (see Annex 5). Government action has also included the adoption of a Leadership Code which mandates the declaration of assets by leaders and the creation of an anti-corruption watchdog—the Inspector General of Government (IGG). It must be acknowledged, however, that government is constrained in its fight against corruption by limited resources.

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19. In 1996, the Vice President was assigned responsibility for overseeing the fight against corruption and an anti-corruption coordination unit was set up in the Office of the Vice President (OVP). In 1997, the OVP issued the draft Policy Document on Anti-corruption referred to above. The contents of this document are described in Annex 2 and the mission has attempted to reflect in this report the actions which the government has taken in implementing this strategy, as well as steps which could be taken to intensify the anti-corruption effort. More recently, in July 1998, anti-corruption responsibilities were shifted to a new Minister for Ethics and Integrity in the Office of the President, and the Anti-corruption Unit was redesignated the Department of Ethics and Integrity under this new minister. The objectives of the new Ministry for Ethics and Integrity are to: develop a government policy on ethics and integrity and oversee its observance in all governmental institutions; propose new or revised laws against corruption; promote capacity-building in anti-corruption agencies; undertake an intensive campaign to inculcate ethical values and integrity in the population; and cooperate with international agencies and other governments in implementing Uganda's anti-corruption campaign.

20. Despite Government’s declared stance against corruption and the commendable reforms the NRM Government has undertaken—including a new Constitution, Presidential, Parliamentary, and local elections, a vastly improved record on human rights, freedom of the press, sound economic policies and good economic management—corruption is still widespread (see Annex 1). Table 1 provides the mission's impressions of the prevalence of corruption in Uganda today in the areas described in Section III. The assessments summarized in this table are subjective, with the exception of those for service delivery which are derived from the National Integrity Survey.6 However, while unscientific, they are based on interviews and information provided by a large number of informants, including senior officials in government, private sector, NGOs, and donors. In this regard, they reflect accurately the widely held perceptions of Ugandans today.

Table 1: The Mission’s Impressions of the Prevalence of Corruption in Uganda Category Prevalence Information Source Public Revenue/Expenditures High Media, interviews, AG, Government reports Public Procurement High Media, interviews with businessmen, donors Public Payroll&Service Delivery High/Medium Media, interviews, Integrity Survey, AG, IGG Regulatory Framework Low Interviews, WB reports, donors PE Reform/Privatization High Media, interviews, WB, Parl., AG, IGG reports Financial Sector Medium Media, interviews, WB, IMF reports Legal/Judicial System High/Medium Media, interviews, National Integrity Survey Politics High Media, interviews Military High Media, interviews, AG reports

6 The National Integrity Survey, Final Report, August 1998. Submitted by CIET International to the Inspectorate

of Government, Kampala, Uganda.

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V. PROBLEM AREAS AND RECOMMENDED ACTIONS

21. In its investigation of corruption in Uganda, its causes and possible remedies, the mission focused on the following areas: (a) the government’s revenue and expenditure management, (b) public procurement, (c) civil service reform, (d) deregulation of the economy, (e) privatization and reform of public enterprises, (f) financial sector regulation, (g) legal framework, law enforcement, and judicial reform, and (h) financing of political processes. The following sections present the mission's findings on the extent of corruption and the remedies which government should consider to intensify its anti-corruption program.

(a) GOVERNMENT REVENUE AND EXPENDITURE MANAGEMENT

22. REVENUES. Uganda has made progress over the last twelve years in rebuilding the tax system, which had progressively declined to a state of almost complete collapse during 1971-85. The ratio of tax revenue to GDP has increased from the abysmal level of 4 percent in 1986 to about 12 percent today, due to reforms in tax policy and improved tax administration. But the government's revenue capacity is still low relative to countries at a comparable level of per capita income. While Uganda has supplemented domestic revenue with donor aid equivalent to approximately 6 percent of GDP, total public resources are still inadequate to meet budget needs—universal primary education, primary health care, rural infrastructure, wages for civil servants, national defense, and so on.7 Donor aid is unlikely to increase relative to GDP, and may decline as a share of public expenditure. Domestic resource mobilization, therefore, must be improved.8

23. Revenue collection is the responsibility of the Uganda Revenue Authority (URA). Uganda was one of the first countries in Sub-Saharan Africa to establish an independent revenue authority (in 1991). The URA has a staff of 2,000 employees whose salaries are based on the private market. Senior officers are employed on three-year contracts, with a maximum term of two contracts, and are required to declare their assets. The URA Board includes representatives of the private sector. A tax-appeal tribunal has been established in law, but is not yet operational. The URA has assigned taxpayer identification numbers to registered tax payers, and is developing a computerized system of cross-checking to prevent taxpayers who pay some taxes from evading or underpaying others. The URA still faces severe constraints, however, to eliminating corruption and improving revenue performance. The tax base is small—approximately 60 percent of total revenue is collected from the 200 largest taxpayers. While major progress has been made in reforming and rationalizing the tax system—for example, rates of corporate and personal income tax have been reduced, along with the number and levels of customs duties—the business community still complains of over-taxation. This complaint seems to arise out of a belief that others are not paying their share—evading the tax net through fraud and

7 With the adoption of the policy of universal primary education, primary school enrollment has reportedly

doubled from 2.9 million to 5.8 million. 8 In the most recent Policy Framework Paper, it is stated that improvements in tax administration are expected to

raise the tax revenue/GDP ratio by 11/2 percentage points during 1998-2000.

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bribery of tax collectors. The means of tax evasion include smuggling (for example, of cigarettes and petroleum and undocumented air cargo), non-declaration of income or business transactions, maintaining false accounts, forging customs documentation, and bribing URA customs and tax officers to accept lower than assessed taxes. The generally-held view in the business community is that tax evasion is widespread, and that bribes are instrumental.

24. As an example of the cost of tax evasion in Uganda, it is estimated that 15 to 20 percent of petroleum consumption has been smuggled into the country in recent years, avoiding taxes altogether. Petroleum taxes have accounted for about 25 percent of total tax revenue in recent years, although this share is being gradually reduced. Total tax revenue could be increased by as much as 5 percent, or by an amount equivalent to 0.5 percent of GDP, if petroleum imports were fully taxed. The full cost of tax evasion through corruption across the public revenue system is undoubtedly equivalent to several percent of GDP, and improved collection could make a dramatic difference in the ability of government to deliver public services. It remains to be seen whether the URA will succeed in removing corruption from the revenue system and eliminating tax evasion.

25. EXPENDITURES. There are four issues central to the control of corruption under the general heading of expenditure management: (i) improvement of the budget system; (ii) modernization of the formal system of expenditure control; (iii) decentralization of government functions; and (iv) reinstatement of a culture of financial discipline.

26. (i) Budget system. A well-functioning budget system is an essential instrument in the control of corruption and is the basis for effective public sector management. Budget systems contribute to the control of corruption by reconciling the demand for government programs with resources, thereby ensuring control over aggregate spending and macro-economic stability; allocating resources effectively to politically-determined strategic priorities; and ensuring that agreed programs are adequately funded in terms of payroll and operating costs. A major contributory factor to the spread of corruption in developing countries is the loss of budgetary accountability through over-extension. In Uganda, as in many other aid-dependent countries whose budget-making confronts multiple incentives, the budget is unable to reconcile needs with resources resulting in an historic over-commitment of policies and programs. In turn, this has resulted in over-extension of civil service employment and the erosion, over a long period, of the pay foundation for a well performing Public Service.

27. Uganda’s budget system has been improving in recent years. Government has maintained reasonable aggregate fiscal discipline in an effort to address over-extension, while progressively improving the structure of the budget. A clearly articulated Medium-term Economic Framework (MTEF) is outlined in the budget documents, in sector envelopes in the Budget Framework Paper (BFP), and in the call circular which launches the budget preparation cycle. The BFP provides a textbook example, with a few lacunae,

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of how revenue and spending choices should be articulated to ministers at the outset of budget preparation.9

28. The criticisms against the budget process are its weak links between recurrent budgets (RB) and development budgets (DB), the incremental nature of budgeting—MTEF notwithstanding—and a focus on inputs at the expense of outputs and outcomes.10 These problem areas are being addressed in the budget reform process supported by SAC III and planned for EFMP II, which seeks to balance the focus on inputs with outputs and outcomes, to harmonize classification systems, to implement a sectoral approach to programming recurrent and development expenditure, to improve district budgeting, and to harmonize the RB and DB—under the rubric of Output/outcome-oriented Budgeting (OOB).11 Uganda intends to follow the successful public management reforms adopted in OECD countries, and increase transparency of budgets, thereby enhancing accountability. Obviously these steps would help in controlling corruption. As part of budget and financial management reform, the 1962 Public Finance Act, and its associated regulations and Treasury directives, should be brought up to date and disseminated to staff.

29. (ii) Expenditure control. While the traditional system of expenditure management, essentially unchanged since Independence, has shortcomings compared with more modern systems, it is fundamentally sound. However, it is clearly not being implemented with full effectiveness. The institutional setting for financial management and accountability in Uganda includes the Permanent Secretary (PS) as the Accounting Officer responsible for financial control (Chief Administrative Officer in the case of the Local Authorities), assisted by the Internal Auditor (IA), with ex-post audit and oversight responsibility in the Controller and Auditor General (AG), and the Public Accounts Committee of the Parliament (PAC). The AG prepares an annual audit report on government and public corporation expenditures, which is submitted to the PAC. The PAC scrutinizes the accounts and investigates misuse of public resources. Although the institutional setting does not suffer from structural shortcomings, weaknesses in management of the system, combined with the disincentive effect of inadequate public sector wages, create opportunities for corruption to enter many government operations. The Auditor General (AG) reports document a situation of systemically poor expenditure

9 The principal lacuna in the 1998/99 BFP is defense, which threatens the viability of the budget strategy yet which

is by far the largest ministerial vote. 10 The RB and DB use different item classification systems, the DB is large relative to the RB, suggesting a

recurrent costs fiscal dynamic that could be destabilizing (save that many donor funded investment “projects” are probably “programs” with significant current spending components).

11 The exact nature of OOB remains to be determined. The SAC III documents talk of “Outcome-oriented Budgeting,” in the Background to the Budget, 1998/99 “Output-oriented Budgeting.” The distinction is an important one. Output budgeting would likely take Uganda down the route of performance budgeting, with an emphasis (mistakenly, in our view) on a tight link between allocations and output indicators. A focus on outcomes (which depend on both government supplied outputs and other factors) and a looser link would be more appropriate. PS 2002’s “Results-oriented Management” (ROM) is also outcome oriented, but stands in danger of creating too formal a system of performance measures, if current descriptions are to be believed.

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management, leading to waste or misuse of an estimated 10 to 20 percent of total public expenditures.12

30. One cause for the proliferation of corruption is Uganda’s current reliance on a cash release system to control aggregate spending. This creates funding uncertainty and periodic cash shortfalls resulting in delayed payments, and thereby encouraging informal mechanisms, including bribery. Releases to ministries and departments are based on revenue performance and are usually below original budget estimates. When cash is short, unpaid teachers seek informal contributions from parents, nurses sell drugs, and contractors bribe officials to place them at the head of the queue for payment.

31. One avenue government is following to address these problems is system modernization. With World Bank support, the MFPED is at early stages of introducing a modern Integrated Financial Management System (IFMS), which would be technically superior in capturing information and producing management reports. Such a system is less open to manipulation. This step—though a great challenge—has the potential to better control corruption. This program should be strongly supported, especially in its associated capacity building. The gradual introduction of accrual accounting, beginning with movement to a modified cash basis, should also be considered.

32. (iii) Decentralization. Uganda had an efficient system of local government financial management at Independence, but the local administration system was destroyed under the Amin regime in the 1970s. The NRM government has, in recent years, launched a major program of decentralization of government activities to the local level. This has the desirable potential benefit of bringing accountability for service delivery closer to the intended beneficiaries. However, given the current degraded state of the local system, government decentralization of public services poses a major challenge to financial management and control. This policy—while correct in principle—risks running ahead of implementation capacity, with cash and attendant program delivery responsibilities being channeled to district administrations which currently lack the capacity and systems to manage them. Corruption risks are thus very high. To control these risks requires substantial investment in capacity building at the local level, which calls for external donor support.

33. (iv) Financial discipline. The final issue is financial discipline. Accounting for public expenditures is made difficult by a general disregard for timely and accurate recording and reporting of transactions, inadequate maintenance of ledgers and asset registers, bypassing of controls, and a general lack of accountability and discipline. Accounting Officers are not taking their fiduciary responsibilities sufficiently seriously or paying sufficient attention to audit findings, and penalties are rarely imposed for overspending budgets. The internal audit is not performing its intended function: accountants in ministries report to the accounting officer of that ministry, not to the AG. 12 For example, an "expenditure tracking" study recently carried out by the Economic Policy Research Center at

Makerere University showed that only 36 percent of public expenditures reach the target beneficiaries. In the education sector only 1/3 of the non-salary budget for schools actually reached the schools.

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Improved financial discipline can be achieved through leadership and example, and greater use of sanctions. The discipline of the financial system must be tightened, which requires addressing the underlying causes of "informality" in financial management.

34. It is the AG’s responsibility to uncover waste or corruption in the management of public resources. The AG functions under the Public Finance Act of 1964, and audits both government and public corporation accounts. AG reports show that he has been effective in discovering mismanagement and misappropriation. However, the AG is hindered by many problems, including the weakness of underlying accounting data presented for audit, and lack of manpower and financial resources. The AG is understaffed and has difficulty recruiting and retaining personnel, given that his accountants and auditors are compensated on the Civil Service scale—the AG estimates that professional staff in his office—who start at the equivalent of US$150/month—are receiving one-third to one-fifth the salary of their private sector counterparts. (The AG can, and does, hire private audit firms to conduct some audits.) His audit reports have, until recently, been late but are now reasonably up-to-date. These problems are likely to be exacerbated as the government decentralizes. Since the AG doesn’t have offices in the districts, he is unable to cope with the increased responsibility of decentralization. In addition to documenting irregularities in spending, the AG in his Annual Report should consider giving his judgment on the state of financial management systems—the internal controls—within ministries and departments and make recommendations for their improvement (in the form of a management letter). Accounting Officers should be held accountable by the MFPED for implementation of these recommendations.

35. The PAC holds hearings on the AG's reports. The PAC has limited staff and resources, but the Parliament is currently hiring additional staff to support committee work. Following the submission of the PAC findings a Treasury Memorandum is issued by the MFPED. However, a weakness in the system of accountability has been the lack of consistency in follow-up and remedial action in response to these AG/PAC/Treasury reports.

36. Some donors—DfID and UNDP—are assisting the AG to move towards value-for-money audits (VFM). (Some of DfID’s support is conditional on the AG’s becoming more independent and on improvements in pay and conditions of service). Although useful, the cost of such audits is high and they require significant capacity. They also require cost information, which the present financial management system does not readily provide. The Bank would suggest that consideration be given to re-focusing the AGs attention on improving the completeness and quality of present financial audits.

37. In many countries, military budgets are not reported upon adequately and escape effective audit, creating substantial fiscal risks of overspending, unauthorized debt commitments, and waste of resources. Uganda appears also to be vulnerable to these risks, with the AG regularly reporting that he has been unable to complete a statutory audit of the bulk of the defense budget. This can be done without compromising national security. With respect to the classified accounts (defense and security institutions) which

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are not being audited by the AG, the mission recommends that they be subject to audit by a group of AG staff with security clearance. These audit reports could then be submitted to a closed session of Public Accounts committee.

38. Recommendations:

• Complete steps to operationalize Tax Appeal Tribunal

• Continue ongoing budget reforms, increase transparency, and focus on outputs and outcomes as well as inputs. Ensure that the budget disciplines policy-making in the years ahead, so that gains from right-sizing government are not forfeited, and concentration of functions and staffing efficiencies materialize

• Proceed with planned financial management system modernization; build staff capacity

• Mobilize donor support for a major effort to build budgeting and financial management capacity at the district level

• Give strong support for financial discipline from the top, while working to eliminate underlying causes of financial informality

• Undertake investigation and prosecution of high-level corruption to reinforce the message to the Public Service that civil servants at all levels will be held accountable

• Sanction public officers for corrupt behavior and encourage the general public to report corruption

• Increase capacity and improve independence and terms of service for staff of the AG. Ensure greater attention to the recommendations of the AG through establishment of an effective follow-up system, including disciplinary actions

• Bring up-to-date the 1962 Public Finance Act and associated regulations

• Facilitate training for members of key Parliamentary committees to enhance Parliamentary oversight.

(b) PUBLIC PROCUREMENT.

39. Public procurement is an area of government activity in which the risks of corruption are high, given the value of goods and services procured by governments, the strong interest of the business sector in winning government contracts, and the authority given to government officials to award contracts. The risks of conflict-of-interest are extensive. Every country has rules and procedures in place designed to assure fair and objective procurement decisions, but in many cases these rules are circumvented through

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collusion among public officials and suppliers. For this reason, procurement is a primary area for attention in any government's anti-corruption program.

40. It is the mission's assessment, based on extensive interviews, that corruption does affect a significant share of public procurement in Uganda and that this problem requires Government's urgent attention. Over 90 percent of the complaints received by the IGG are procurement-related. Uganda channels about US$700 million a year in domestic resources and donor funds through the public procurement process. If it were assumed that only 10 to 15 percent of these funds are not used for the intended purpose, this represents an economic loss of US$70 to $100 million a year. While existing procurement structures, policies, and procedures are weak, the main problems are failure to observe the rules and regulations in place, inadequate monitoring, and failure to impose sanctions for violations of the rules. (In addition, some sanctions are totally inadequate; for example, the penalty for failure by a Board Member to declare pecuniary interest in a contract award is only USh5,000.) In the following paragraphs, the mission presents its findings on corruption at various stages of the procurement cycle and our recommendations for addressing the serious shortcomings in public procurement in Uganda today.

41. PROCUREMENT METHODS/PROCUREMENT PLANNING. One of the most common complaints presented to the mission was lack of transparency at the early stages in the procurement process. Although tender board rules state that competitive procedures must be used for purchases above certain thresholds, often these procedures are deliberately avoided by delaying procurement until too late—at which time obtaining goods becomes urgent and standard rules are waived. Alternatively, procurement may be broken into small lots, which fall below the threshold for tender board, or, in the case of public corporations, for board of directors approval. In military procurement the classified nature of goods procured, or the limited sources of supply for specific weapons, can also be used as an excuse to avoid tendering rules. In these cases, contracts can be awarded to firms through sole-sourcing without competition.

42. A major weakness in ministries and parastatals is the lack of procurement plans. While inefficiency may be a contributing factor, lack of planning, in many cases, is deliberate in order to create the preconditions for ad hoc or unwarranted emergency procurement. A procurement plan would specify the goods and services to be procured over a period of time, spelling out the quantities, estimated cost, method of procurement, financing arrangements, and schedule for processing. Procurement planning is also a key instrument for financial planning and should be linked to the budgeting process.

43. PREPARATION OF TENDER DOCUMENTS. The mission was informed of cases where tender documents have been written to favor or exclude a firm. This can be done by tailoring technical specifications or introducing restrictive commercial conditions to favor one contractor or supplier. In other cases, the evaluation criteria may be left out of the tender documents to allow room for maneuver at the time of bid evaluation. These can lead to low response to the tender or suspiciously high rejection of bids because of failure to meet specifications. In some cases, this may arise from lack of technical skill of those

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preparing the tender documents, which leads to reliance on suppliers’ brochures; however, it is more likely due to bribery by the favored bidder.

44. TENDER ADVERTISING. Government procedures require that tenders be widely advertised to ensure that prospective bidders are informed, and with sufficient time allowed for submission of bids. Information obtained from contractors and consultants indicates that they often fail to participate in tenders because they learn about them too late, sometimes after the contract has been awarded. It is the opinion of these contractors and consultants that corruption is involved in most such cases. They suspect that the favored firm/firms receive the tender documents before the tender is advertised and, in some cases, the tender is not advertised at all. Sometimes a lack of funds has been used as an excuse for not advertising, or the urgent need for goods or services is the excuse for the short bid preparation period given to bidders. Requiring advance approval of procurement plans would reduce the occurrence of such problems.

45. BIDDER COLLUSION. The mission was informed that in civil works projects prospective bidders sometimes collude to fix prices and share business. This leads to higher, non-competitive prices for the government.

46. BID EVALUATION AND APPROVAL. Bid evaluations are supposed to be conducted in a professional and objective manner. The bid evaluation committee should, therefore, be composed of individuals of high integrity and professional competence, and with no direct or indirect interest in the tender being evaluated. However, it is generally accepted that most of the corruption in the procurement process occurs at the bid evaluation and approval stage. Conflict-of-interest of committee members was identified as the single most important issue. Since the law allows civil servants to own businesses, the mission was informed that there are many cases where contracts have been awarded in favor of firms associated with senior government officials or tender board members. The mission was informed that it is a common occurrence for the evaluation committee to receive solicitations and even instructions from senior government officials and/or politicians on how the tender award recommendations should be made. Existing tender board guidelines provide for declaration of any potential conflict-of-interest on the part of committee members, but these guidelines are not always observed. There is, therefore, a need for the members to declare their interests, under oath if necessary, to ensure that conflict-of-interest is avoided.

47. The bid evaluation committee should also include individuals with technical knowledge relevant to the type of goods or services being evaluated. Professionals who know their subject are less likely to succumb to pressures that compromise their professional standing. Government needs to review the methodology for appointing tender board members at ministerial and district levels. The mission recommends the involvement of professional societies in identifying qualified people. Appointments should be made on the basis of institutional representation rather than individual selection. Thus, if an engineer is required, the Uganda Institution of Engineers should propose a suitable candidate.

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48. Another problem at the evaluation/approval stage is leakage of information. The mission was informed that bidders bribe to get information on the progress of the evaluation exercise. After obtaining such information the bidder would attempt to change the evaluation if he finds that his bid is not winning. He would normally do this by crying “foul” and alleging favoritism in the evaluation committee. When a complaint of unfair play is lodged, the procurement process often comes to a halt while an investigation is in progress. Unfortunately, some of these complaints are lodged intentionally to frustrate the procurement process. Evidence of leakage is proven when a complaining bidder reveals information which should only be in the possession of the evaluation committee or the bid approval authority. While bidders should be encouraged to come forward with legitimate complaints they must also be held accountable for illegitimate ones. If leakages are to be reduced, appropriate action must be taken against both the bidder who is in possession of confidential information and the official leaking the information.

49. CONTRACT AWARD. Even when a decision has been made to award a contract, a bribe may be solicited from the winning bidder as a condition for contract signing. When an unnecessarily long time has elapsed between the contract award decision and signing, it is an indication that corruption may be occurring. At this stage a successful bidder has invested time and money in the bidding process and may be prepared to pay a bribe to remove any impediments that could jeopardize signing the contract. If the winning low bidder is willing to bribe at this stage, he may cut corners or conspire to negotiate unjustified increases in the contract price during implementation. This is one of the main reasons why contract negotiations for goods and civil works are not encouraged.

50. CONTRACT EXECUTION. Corruption at this stage occurs in at least two ways: collusion in approving unjustified cost escalations or variations; and bribes to government officials to expedite payment of claims. Unjustified cost escalation during implementation can occur because of weak supervision by government or because of carelessness or lack of experience on the part of the consulting engineer. It is, therefore, important for government to employ reputable consulting engineering firms to supervise all major works. During implementation any proposed contract price increase should be carefully scrutinized and approved by the appropriate tender approval body, until appropriate thresholds have been set. (One of the recommendations of the International Trade Centre (ITC) consultants is to establish such a mechanism within the proposed National Procurement Policy Unit.)

51. In the second case accounting staff delay payment to contractors to solicit bribes. Delayed payments are costly to the contractor who has already incurred expenses in executing the contract. He is likely to offset these costs of delay or bribes either by allowing for them in the initial bid, or through reduced quality of work, rather than accept reduced profits. Government needs to set time limits for payment of contractors. The mission proposes a maximum of one month for payment of contractor claims. Accounting officers should be held responsible for failing to meet such standards.

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52. SUPPLIES. Government's system for storage and distribution of supplies needs substantial tightening to establish accountability and eliminate leakage. Many problems can be attributed to the dearth of qualified supplies officers throughout the government, mainly due to inadequate civil service wages. Standard purchasing, storage and issuing procedures are not observed. Record keeping is inadequate in many branches of government. The Central Purchasing Corporation (CPC) was established as an autonomous body to provide procurement services to ministries on a commercial basis. It was allowed to pay higher salaries to enable it to attract and retain qualified staff, and was supposed to compete with the private sector, but partly due to under-capitalization, this objective has not been satisfied. Government has now decided to privatize CPC.

53. DISPOSAL OF GOVERNMENT ASSETS. The CTB disposes of government assets at public auction, following established “Board of Survey” procedures. The mission was informed that the application of these procedures is frequently undermined by “insider trading.” The asset, such as a government vehicle, is stripped of essential components before the auction to make it appear virtually worthless so that it can be sold at a “give away” price. However, the purchaser is someone with inside information who pays a bribe to the official who had removed the parts to reinstall them after the auction. Within a few days a vehicle which appeared completely unusable when auctioned is on the road. Interlocutors in some Ministries told the mission that many donor-funded vehicles have been sold in this manner, while still in good condition, and then replaced with new donor-funded vehicles. Government should follow-up on such allegations and take appropriate action against these “insider traders.”

54. CONCLUSIONS. As stated at the beginning of this section, the underlying basis for problems in the procurement process can be characterized as conflict-of-interest. The mission was informed that senior officials in the government use their authority to influence the appointment of board members of public corporations, tender boards, or evaluation committees. These appointees award contracts to businesses owned by themselves, relatives, business associates, or by those who appointed them. Although the law requires officials involved in bid adjudication to declare their interests, this rarely occurs. These weaknesses can be exploited by corrupt elements in the private sector to advance personal interests. Lack of procurement skills is another problem. Board members may also lack the expertise for making sound decisions. Although past studies have recommended appointing board members based on professional qualifications, this is rarely done. The lack of skills is particularly acute at the district level. Suppliers take advantage of low technical skills by imposing proprietary technical specifications, thus stifling fair competition. In a skills-limited environment, the use of standard procurement documents would help, but except for donor-financed procurement, there are no standard documents. Appropriate information and monitoring systems are also lacking. Consequently, little action is taken to ensure that rules and procedures are observed—which allows many corrupt practices to go undetected.

55. Government has endeavored to address the problems in the procurement system. In September 1996, in an effort to reduce corruption and increase objectivity by removing decision-making authority from public officials, the government contracted the Swiss

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Procurement Company (SWIPCO) as a procurement agent/advisor. This contract called for SWIPCO to oversee all procurements above US$50,000, both government and donor-financed. SWIPCO was reportedly assured oversight of at least US$200 million in government procurement per year at a fee of 1.8 to 2.1 percent of contract value. However, for a variety of reasons including Parliamentary questions over the procedure followed in employing SWIPCO and possible reluctance of some agencies to utilize these services, they have, until recent months, participated in little procurement activity. Also, over the past ten years Government has taken the initiative in commissioning five studies of the procurement system and has adopted some of their recommendations (see Annex 3). Most recently the government, with Swiss financing, has retained the UNCTAD International Trade Center (ITC) to review the current procurement systems and recommend reforms. The ITC has issued a draft report which is being reviewed by a government task force. The mission was able to review this report and discuss it with the task force, and is in agreement with the overall thrust of its recommendations, while recognizing that many of the details for implementation of the reformed system, particularly with regard to procurement of works and consultancy services, remain to be worked out. The mission's recommendations for procurement reform set out below are intended to be consistent with those of the ITC, which are summarized in Annex 3.

56. The possible use of an "anti-corruption undertaking" (AU) (described in detail in Annex 4) in IDA-funded procurement in Uganda is closely linked with the mission's findings on the current status of the government's procurement system. There would be merit in inserting an AU in government tender documents provided such an undertaking could be enforced. However, we believe that, in light of the very weak state of public procurement in Uganda today, and the lack of faith of the business community in the probity of the process, it is necessary first to make significant progress in adopting and implementing the recommendations for procurement reform contained in the ITC study and in this report prior to attempting to utilize an AU in Uganda.

57. Short-term Recommendations:

• Enforce the Leadership Code and Public Service Standing Orders with regard to conflict-of-interest and apply sanctions for violations

• Require advertisement of all tenders, and allow adequate time for submission of bids

• Publish results of all bid evaluations and contract awards

• Develop and enforce standard processing times for all stages of bidding and contract award

• Adopt standard processing times for payments. The mission suggests that contractors should be paid within 30 days of claim submission

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• Pending the possible decentralization of procurement to ministerial level, as recommended by the ITC, strengthen CTB’s capacity to handle procurement on behalf of ministries

58. Medium- and Long-term Recommendations:

• Increase accountability by implementing the ITC and government Task Force on Procurement Reforms recommendation to establish a policy and regulatory body (National Procurement Policy Unit) to provide advisory services, prepare procurement standards, monitor implementation of good procurement practices, and act as an appeals body for complaints from suppliers and contractors. Publish an annual report of the NPPU

• Revise the legal framework for procurement applicable to all governmental agencies and parastatals by enacting legislation modeled after The United Nations Commission on International Trade Law (UNCITRAL) Model Law on procurement of goods, construction, and services

• Require Ministries, agencies and parastatals to prepare procurement plans as part of budget proposals. Funds should not be released to agencies without procurement plans. Procurement plans should be revised on a six-month basis. Repeated ad hoc and emergency procurement should be sanctioned

• Appoint members of tender boards and evaluation committees based on their integrity and professional records. Professional associations should, as far as possible, be involved in selecting individuals to fill tender board positions

• Adopt standard bidding documents

• Formulate a strategy and action plans, and seek donor funding, for skills development in procurement

• Establish a mechanism for periodic procurement audits to ensure procurement procedures are applied by government and parastatals

• To avoid potential conflict-of-interest in procurement, the declaration of assets and liabilities of leaders should include ownership of companies or shares in companies; the new, computerized registry of companies being prepared by the Ministry of Justice should be made available to the public on CD ROM and/or an internet web site; the Uganda land registry, beginning with the city of Kampala, should be put onto a computerized data base and be made available to the public; and the list of firms tendering for government contracts should be published quarterly

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• Open regular dialogue with the private sector on the government's major anticipated procurements, constraints to bidding and execution of contracts, and other factors that need to be tackled if credibility is to be restored in the public procurement process; government is planning to establish a consultative committee comprising private sector and government officials to discuss matters related to public procurement.

(c) CIVIL SERVICE REFORM.

59. During the first decade of Independence, the Public Service in Uganda was widely viewed as well functioning—as perhaps one of the best in Africa. True, it was small and focused on law and order and regulation, but development functions were expanding. While it was hierarchical and top-down rather than client-oriented in its service provision, it was efficient and disciplined and moneys were spent on their intended purposes. Public officials considered themselves well paid (a university graduate on entry received a benefit package greater in real terms than a Permanent Secretary’s monetized package today), and had status in society. Traditional mechanisms of external and internal control were effective and there was little corruption. These qualities were lost during the Amin and Obote II years, when formerly well-functioning institutions were weakened or destroyed, purchasing power of civil service wages declined drastically, and staff were harassed and even killed. The effects of the damage done to the public service during this period remain to the present day.

60. When the NRM assumed power in 1986, it inherited an over-expanded, demoralized, under-qualified, and underpaid Public Service, characterized by pay scales far below a living wage, where staff survival mechanisms—including moonlighting, absenteeism, payroll fraud, theft of government assets, kickbacks and bribe-taking—proliferated. In response, the government has given high priority to Public Service reform, concentrating government around its core functions, decentralizing service delivery to district administrations, removing ghost workers and “right-sizing” the work force and improving pay.13 Government has made impressive progress in these areas in recent years, with support from the World Bank, UNDP, and bilateral donors.

61. In 1997, the government launched, with continuing donor support, a new phase of civil service reform entitled “Public Service 2002”—a five-year plan “to develop a Public Service which delivers timely, high quality, and appropriate services, at least cost to the nation, supports national development, and facilitates growth of a wealth-creating private sector.” The thrust of the program is to improve performance through introduction of Results-Oriented Management (ROM) at the ministerial and district levels, creation of executive agencies, improvements in budgeting and financial management systems, linking pay to performance, and improving service delivery standards and training. PS 2002 is comprehensive, ambitious, and aims to create a culture in the Public Service of

13 Total numbers in the Public Service have been reduced from 320,000 in 1993 to 164,000 in early 1998.

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performance, client responsiveness, and integrity. The first phase of PS 2002 is scheduled for completion by June 1999.

62. In an attempt to answer whether or not this far-reaching program will make a significant contribution to reducing corruption, three issues need addressing: How entrenched is corruption in the Public Service? Is there latitude for improving pay and working conditions? and, What is the appropriate prioritization of the reforms?

63. CORRUPTION IN THE PUBLIC SERVICE. Evidence from the recent National Integrity Survey, media reports, interviews with individuals, businessmen, NGOs, and donor agencies paints a picture of systemic corruption, driven by “need” and “greed.”14 Factors contributing to systemic corruption include: survival techniques inherited from the Amin and Obote years, poor incentives—primarily low salaries and pensions—weak financial controls, and new opportunities for illicit wealth creation in a liberalized and heavily donor-aided economy. From one perspective, the public sector in Uganda appears to function within a set of well-defined formal rules and organizations. From another, the formal rules are a shell within which the public sector functions according to a set of informal norms—unwritten but widely understood—which fosters a behavior far different from that intended by the formal rules.15

64. Clearly, the still inadequate pay levels for civil servants are a primary driving force behind the widespread corruption in the bureaucracy. Civil servants succeed in augmenting their official pay by various means. Not all income-enhancing activities constitute corruption—they include activities which are legal but unconducive to good performance such as operating a business on the side or holding a second job—although this violates Standing Orders if it encroaches on public working hours, or gives rise to a conflict-of-interest. Some officials, however, exploit the “control rights” inherent in their public functions—teachers or nurses extract from parents and patients fees for services that, by public policy, should be free. The driver is need—inadequate and often delayed pay—rather than greed. Usually, the amounts extracted are moderate, but these forms of petty corruption are pervasive, as indicated in the National Integrity Survey. At a higher level, officials seek personal enrichment by exploiting control over government purchasing and contract decisions. In between, there is a myriad of ways in which “rents” are identified and extracted from individuals or businesses that supply services, goods or works to government agencies, or encounter officialdom in seeking business licenses, approvals, or import clearances. Uganda is by no means unique in displaying these manifestations of public service malfunction, and has done more than many states to address them. But the pathology of informality remains the central challenge to public service reform in Uganda.

65. An effective anti-corruption program for the civil service must address the underlying causes—weak incentives and failure to enforce standards of accountability. 14 See: Uganda National Integrity Survey 1998, Final Report, August 1998. 15 See: Informal Health Markets and Formal Health Financing Policy in Uganda, D Asiimwe, F Mwesigwe, B

McPake, and P. Streefland, 1997.

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Moral exhortation alone is insufficient. Breaking through the “Iron Triangle”—civil service pay, numbers, and revenue—is one of the most challenging long-term issues Uganda faces. While pay levels in the Public Service are better today than they were a few years ago, they are still far too low. The lowest paid workers in the government (messengers, drivers, cleaners) earn about USh 45,000 per month (US$36). Primary school teachers earn USh 85,000 (US$68). The graduate entry point is USh 260,000 (US$208), a commissioner earns USh 800,000 to 900,000 (US$640 to US$720), a Director USh 1,600,000 (US$1,200), and a Permanent Secretary USh 2,000,000 (US$1,600).16 Most benefits have been incorporated into the base pay. The large spread between senior and lower-paid public servants—a ratio of almost 50:1—is partly a reflection of the value of non-wage benefits enjoyed by the former prior to monetization. The long-run goal includes reducing this ratio to 20:1 by implementing a broad-based public pay policy reform, which will include rationalization of job grading and improvements in pay for lower and middle cadres of the service.17

66. While the extent to which the government has improved pay in recent years is impressive, it is not clear that a “living wage” has been achieved for all levels. For many groups in the lower grades, official pay falls short of what is required to pay for accommodation, food, clothing, transport, schooling, and medical expenses for a family. Moreover, a “living wage”—even when achieved—is not an adequate basis for running a well-performing civil service over the long run. Wage levels have to be motivating, and should not deviate from prevailing labor market rates, taking into account differences in job security and non-wage benefits. As long as a significant number of staff remains below a “living wage,” those civil servants will be under pressure to augment income by whatever means. At higher levels, the gap between public and private sector wages will continue to fuel pressures to augment income, thereby raising corruption risks and conflict-of-interest. In addition, inadequate pay levels prevent the recruitment and retention of high-caliber staff who can implement the objectives set out in PS 2002. In summary, present pay offset efforts to improve discipline, promote ethical conduct, encourage reporting of fraud and bribery, and enforce conflict-of-interest guidelines. In short, the contract that sustains a well-functioning bureaucracy—adequate pay in return for hard work and professional integrity—is not being fulfilled on government's side. And because it is not being fulfilled, Government cannot hold civil servants accountable for performance and is forced to condone the multiple ways, at best contrary to public service principles, at worst illegal, in which public servants adjust behavior to inadequate remuneration.

16 With allowances, Ministers and Members of Parliament earn substantially more—about USh 4,000,000 per

month—widening the gap between public servants and politicians, and generating resentment among the former. 17 Government announced in November 1995 the following pay objectives:

I. continue making progress toward a reasonable salary for Public Officers—a wage necessary to ensure that the recipient has sufficient income to maintain an adequate standard of living;

II. ensure that the remuneration package of a public officer is as transparent and simple as possible, and consists of a consolidated taxable salary, without the provision of allowances on non-cash benefits;

III. ensure that the cost to the country of Public Service remuneration is within rational and non-inflationary public expenditure policy.

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67. As a partial response to the problem of inadequate pay, the government has taken some functions out of the civil service and created autonomous or semi-autonomous, higher paid enclaves—a tacit admission that, to get an important job done, requires paying salaries above the public scale. Sometimes this can be justified—not all activities of government are best performed under civil service rules and financial regulations. Where functions are well defined, outputs predictable, revenue is earned, or the emphasis is on program implementation rather than policy formulation, executive agency status is an option for serious consideration. Uganda Revenue Authority (URA) is one example, civil aviation another; the Human Rights Commission also enjoys such status which the IGG seeks for his Directorate. Similarly, donors (including the World Bank) have set up project management units (PMUs), employing public officers on leave of absence at higher pay. While such an ad hoc approach may address immediate priorities, and improve the performance of critical functions, it is not the overall answer. As these enclaves proliferate, they undermine public sector pay coherence and the morale of those without such preferred status. Staff in core ministries will seek employment in donor PMUs or executive agencies and statutory bodies, stripping departments of technical competence, and rendering those who monitor the “framework agreements” regulating agency performance at the risk of “capture” by the bodies they are supposed to watch over. 18 Furthermore, this approach has not eliminated corruption in such favored agencies as the URA.

68. Government clearly faces budgetary constraints to further substantial improvements in public sector pay. However, several strategies exist to continue Public Service pay reform.

• Improve pay by applying the annual "economic growth dividend" to the wage bill

• Continue retrenching staff by shedding non-core functions and concentrating resources on core functions

• Increase budget resources by raising URA revenues as a share of GDP

• Explore ways of further community cost sharing in education, legitimizing present informal payments; this may also apply to the health sector.

• Explore with the donor community the scope for a strategic shift from project to general budget support within a medium-term expenditure framework.

69. There are two problems with a “growth dividend” strategy. First, the length of time it takes, which would slow PS 2002 implementation. Second, economic growth tends to generate multiple claimants for the fiscal dividends it yields. Retrenchment and

18 Creation of executive agencies risks repetition of the failure of the ‘contract plan” approach for controlling

performance of state-owned enterprises which was widely adopted a decade or so ago. Central government staff on less favorable pay terms serving on SOE boards or monitoring performance were captured by the interests of those they were supposed to be supervising.

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shedding of non-core functions may be possible, notwithstanding that the curve of aggregate staff numbers bottomed-out in early 1998. But retrenchment—ongoing for several years—has undoubtedly created uncertainty, thereby increasing the incentive for corruption. In addition, staffing gaps need to be filled, including the recruitment of teachers. The structure of the Ugandan economy and the need for a non-distortionary tax regime argue for caution in projecting an increase in government revenues. There does appear, however, to be scope for improving tax administration and reducing tax evasion, particularly from smuggling. With regard to cost sharing, the largest category of public sector employees is primary school teachers—84,000 and projected to grow at 5,000 a year. Community sharing of primary school costs, legitimizing the de facto cost sharing that the National Integrity Survey exposed, and strengthening local accountability should be encouraged. Shifting donor funds from project support under the development budget (DB) to program support under the recurrent budget (RB) should release resources for wage bill enhancement. It would also reduce the fiscal pressure inherent in a large DB.19

70. PRIORITIZATION OF PUBLIC SECTOR REFORM. As central government ministries and district administrations go forward over the next four years with implementation of the PS 2002, a profile of implementation priorities needs to be developed with attention paid to sequencing of the reforms.

• Achieving strategic balance in government budgets is of fundamental importance. Despite reductions in functions and redefinition of the role of government, budgets remain overextended, and resources locally raised and donor provided are insufficient for policies that government seeks to implement. The result is underprovision against allocated votes, and reductions and uncertainty when the budget is remade during the year through the cash-release system. Although MFPED intends to alleviate uncertainty by providing spending departments with quarterly projections of releases, the structural imbalance in the budget remains.

• To avoid a reversal of past achievements in reducing government functions and rationalizing staffing, a strong emphasis must be placed on policy-making processes, ensuring that policy decisions that have financial implications are apparent and the trade-offs addressed.

• Another priority is to improve financial management systems, particularly if spending delegations are to be extended to agencies and district administrations and if progress is to be made in “outcome-oriented budgeting.” Until inputs can be controlled, the foundations for a focus on outputs and outcomes in budgeting will be absent.

• Also to be addressed is pay. As long as staff receive less than a motivating wage, and less than a “living wage,” the incentives for performance will be absent. In short, ROM, which focuses staff attention on the delivery of programs, requires

19 In 1998/99, according to the MTEF, total planned DB spending is Ush 597.4 billion, compared with non-debt

service RB spending of Ush 762.9 billion—a DB/RB ratio of 78 percent, generating a recurrent requirement sustainable only by higher revenue growth rates than Uganda can realistically expect.

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preconditions not yet in place in Uganda. Unless the basics of pay, financial management, and budgeting are attended to, risks are high that declared service standards will not be met, and efforts expended in developing performance indicators and measuring results will be misplaced.

• While increasing pay is necessary, it is not a sufficient condition for reducing corruption and rebuilding a professional and motivated Public Service. Broad public sector management improvements must be in place, including training, a conducive work environment, rewarding merit, discipline, good leadership, and enforcement of effective sanctions against those who illegally augment incomes.

• Improving service delivery, increasing government’s capacity to operate systems to control corruption, resisting corruption in state enterprises, and eliminating improper ministerial interference are key objectives for effective implementation of PS 2002. Attention needs to be paid to creating an enabling environment for public sector performance. ROM, with its emphasis on clarity or organizational purpose, and on standards and measures of performance, should contribute positively.

71. Recommendations:

• Continue pay reform, raising the wages of the lowest ranks above a living wage to a motivating wage, and define a sustainable pay policy for the Public Service in a market economy

• Retain firm control of overall staffing numbers and continue reduction of functions to create space for continued pay reform within overall wage bill constraints

• Implement PS2002 which gives priority to establishing the foundation for results-oriented management (ROM)

• Explore new approaches to primary education, for example, converting ad hoc informal payments to teachers into formal community-monitored cost-sharing arrangements.

(d) DEREGULATION.

72. The Ugandan government deserves a great deal of credit for the far-reaching economic reforms which have been carried out over the past decade. Through sound macro-economic management, liberalization, and deregulation, the government has opened up the economy and enabled consistently strong economic growth. These reforms have concurrently reduced many of the monopoly powers and/or bureaucratic discretion which foster corrupt practices. The mission also notes that the government is committed to continuing the process of economic reform and deregulation. The environment for new

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investment is now more favorable in Uganda than in many other African countries, but the government still maintains an overly cumbersome regulatory structure which adversely affects private sector activity and creates opportunities for bureaucratic corruption of the “rent-seeking” variety. A study carried out in 1996 at the request of the Uganda Investment Authority (UIA) by the Foreign Investment Advisory Service of the World Bank/IFC, supported by USAID, has documented the extent of controls and regulations facing the potential investor in obtaining access to land and utilities, building permits, site development, work permits, business licenses, import permits, and so on.20 This study covers registration with the Registrar of Companies, obtaining municipal trading licenses, business permits, and expatriate work permits, and approvals from sector agencies where the extent of delays and levels of transparency vary from agency to agency. The report attaches over 100 pages of forms to be filled out by a new investor, plus additional forms for investors in certain sectors such as mining, fishing, hotels, tourism, and finance. There are few examples of purely outdated or unnecessary licensing and regulatory requirements; more typically the problems encountered are cumbersome procedures, unnecessary steps, lack of coordination and duplication of effort. Taken individually most of these requirements are not serious obstacles; taken together they comprise an unnecessarily long, difficult, and expensive path for new investors, and expose the potential investor to pressures to make “facilitation payments” at each step.21 Streamlining these procedures as part of the ongoing deregulation effort would greatly improve the investment climate and reduce substantially the opportunities for petty and middle level corruption of the rent-seeking variety.

73. The overall view of the business sector in Uganda is that the direct cost of corruption (that is, having to pay bribes to circumvent or maneuver through the regulatory framework) is not as serious a constraint on business activity as the cost of poor services and poor infrastructure (with electricity and telecommunications cited as the most serious deficiencies). A survey of businesses in Uganda carried out in 1998 by the Private Sector Foundation showed that the major constraints to investment are perceived to be i) high utility prices and poor utility services, ii) high taxes and poor tax administration, iii) corruption—cited in 26 percent to 53 percent of cases, and iv) the regulatory framework.

74. One area of the regulatory system which is generally regarded as inefficient and costly, and where widespread corruption is alleged, is the Customs Department of the Uganda Revenue Authority (URA). This brings a high cost to the economy in the form of expensive delays in import and export trade, unfair competition for those importers and

20 Uganda: Administrative Barriers to Investment: The Red Tape Analysis, September 1996, Foreign Investment

Advisory Service, The World Bank, Washington, D.C. In the four countries in which this type of study has been carried out - Ghana, Namibia, Tanzania and Uganda - establishing a new business can take as long as 36 months in Tanzania, 24 months in Ghana and Uganda, and 12 months in Namibia. The USAID-PRESTO (Private Enterprise Support, Training and Organizational Development) Project has produced a study entitled Doing Business in Uganda: A Practical Guide, which provides information on obtaining investment and trading licenses, utility services, work permits, registering for tax purposes, etc.

21 The mission was told of one case where the bribes associated with all the steps in gaining approval for a new, multi-million dollar private investment added about 10 percent to the cost of the project. this was considered to be representative of the current situation.

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producers who pay duties, and lost revenues for the Treasury. Uganda’s ability to compete in international markets is already constrained by its landlocked position. This disadvantage is made worse by problems of inefficiency and corruption in Mombasa, over which Uganda has little control. However, these uncontrollable problems are compounded by the costs and delays imposed by Ugandan customs.22 Corruption enters the picture when businessmen seek ways to shorten delays and avoid duties. In an effort to control fraud in customs declarations the government has for many years employed a pre-shipment inspection service for imports, and is now in the process of contracting with a second PSI firms, but the results of this additional check on import declarations have been less than fully effective.

75. Progress is being made in further rationalization of the legal and regulatory framework affecting the private sector. Recently a comprehensive review and draft revisions of all commercial laws has been funded under the IDA-funded Capacity Building Project. This work has been reviewed by government but not yet submitted to the Parliament for passage. Also, a Commercial Branch of the High Court has now been set up. The scarcity of industrial land in the Kampala area, which has been a serious constraint to new investment for many years, is being addressed through the development of a new 1000 hector industrial estate near Kampala.

76. The Uganda Investment Authority (UIA) licenses all foreign investments and until recently evaluated the requests of companies for investment incentives under the Investment Code. The agency also assists investors in dealing with other government agencies. With liberalization the rationale for UIA licensing is not obvious. Also, Uganda has now (1997) eliminated tax holidays and has made performance-based incentives such as accelerated depreciation available to all investors, so prior evaluation and approval for tax incentives is no longer required. The UIA has in the past been too much public sector dominated and was ineffective in generating investor interest in Uganda. Also, it faced resistance from other agencies of government to its role as a “one stop shop” for obtaining all necessary permits for a new investor. With a new Board and new management there is the hope that the UIA will play a more effective and dynamic role in facilitating private investment.

77. Recommendations:

• Continue to simplify the regulatory regime by, inter alia, implementing the recommendations of the FIAS study

• Proceed with the adoption of the new framework of commercial laws

• Privatize or contract out the functions of the UIA.

22 Typical delivery time for surface cargo from Europe is 8 to 10 weeks, of which 4 to 6 weeks elapse after goods

arrive in Mombasa. Typical transit times from arrival in Mombasa to the Ugandan border are 2 to 4 weeks, and delays at the border are usually 2 days even though goods are not normally cleared there. Customs clearance in Kampala can take 5 to 10 days.

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(e) PRIVATIZATION.

78. The process of privatization of Uganda’s large public enterprise sector began with the passage of the Public Enterprise Reform and Divestiture Statute No. 9 of October 1993. The World Bank has been supporting the reform and divestiture program since its inception under the Enterprise Development Project (EDP). The program got off to a slow start, with few privatizations prior to 1995. In January 1995 the organizational structure was changed with the appointment of a Minister of State for Privatization in the Ministry of Finance who chairs the Divestiture and Reform Implementation Committee (DRIC), the decision-making body created by the statute. At the same time the government also created a Parastatal Monitoring Unit to oversee reform of the “strategic” public enterprises, primarily the public utilities, and a Privatization Unit (PU) to manage divestitures. The pace of privatization then picked up during 1995 and 1996; by mid-1997 the government had divested or closed 72 out of the 123 enterprises slated for privatization. Subsequent targets were established for privatization of 95 enterprises by mid-1998 and full conclusion of the privatization program by mid-1999. However, the number of completed divestitures has declined notably over the past 12 months.

79. While the privatization process has resulted in a number of successful divestitures, the process has become seriously flawed. A number of privatization efforts have been unsuccessful for a variety of reasons—there have been widespread accusations of non-transparency, insider dealing, and corruption in the process. In some cases (for example, Nile Hotel, Sheraton Hotel) the winning bidder has failed to follow through with the purchase. In other cases the buyer, instead of operating the enterprise as a going concern, has sold the assets and failed to assume responsibility for the liabilities. Enterprises have not always been awarded to the highest bidder. In many cases when enterprises have been sold on a deferred payment basis the purchaser has subsequently refused or been unable to pay the outstanding balance and bank guarantees have not always been called. As of mid-1998 some one-third of total sales value was outstanding in deferred payments and two-thirds of that amount was in arrears, with 80 percent of the arrears judged by the PU to be “difficult to collect.” The decision process is widely felt to be overly politicized, with ambiguity over the role of the DRIC which has frequently become involved in technical aspects of evaluations and has overridden the PU’s technical recommendations. Revised guidelines for the role of DRIC were issued in 1997 but these have not always been followed. The World Bank has been concerned with the use of funds in the divestiture account, which have apparently been spent on rehabilitation of enterprises which are not in the divestiture pipeline or loaned to private companies.

80. There has been widespread public and Parliamentary support for the principle of privatization but much concern recently over the non-transparency of the process—both the sales and the use of sale proceeds. A poll conducted at a Parliamentary workshop in April 1998 showed overwhelming support among Parliamentarians for privatization, with the main objective of privatization seen by MPs to be eradication of corruption and abuse of public office. Further, the poll showed strong support from MPs, ranging between 58 percent and 85 percent endorsement, for the privatization, or the opening up

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to private entry, of the telecommunications, power, water supply, and rail and air transport sectors. But concern over issues of process led recently to a Parliamentary mandate to suspend further privatizations, except those already at the point of sale, while a Parliamentary Select Committee carried out an investigation. The World Bank has also informed the government that the processing of any follow-on projects to EDP will depend on actions to improve the privatization process. The challenge facing Uganda today is that a number of complex, large-scale privatizations, and the opening of key utility sectors to private investment, are still to be carried out. Flaws in the process have led to an erosion of public and political support for privatization and a decline in investor interest due to non-transparency and conflict-of-interest in many past sales. Much greater probity and transparency are essential if the privatization process is to be successfully concluded and if investor interest in Uganda, which is vital for sustaining the growth performance of recent years, is to be maintained.

81. Recommendations:

• Secure strong and unequivocal support across government, including, in particular, the Ministers responsible for the utility sectors, for the policy of reform and divestiture of public enterprises

• Hold the Minister for Privatization accountable for transparent implementation of the reform and divestiture process

• Ensure that DRIC acts strictly in accordance with the Divestiture Guidelines

• Give the Ministry of Finance the necessary mandate and capacity to monitor the performance of all parastatals

• Strengthen and expand the dialogue with the private sector on the process, benefits and results of privatization

• Base award decisions on price alone unless there are clear, objective reasons stipulated and publicized in advance, for introducing other considerations. Publicize all award decisions

• Expand the use of merchant banks, investment advisers and lawyers—foreign and domestic—to assist with all major privatization transactions

• Exercise bank guarantees and/or recover and resell properties in the event of non-payment of deferred payments

• Ensure that the use of Divestiture Account proceeds is in accordance with the recently revised guidelines; audit the Divestiture Account biannually.

(f) FINANCIAL SECTOR REGULATION.

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82. The financial sector in Uganda has seen a significant expansion in the number of commercial banks in recent years—from 13 in 1993 to 20 in 1996. For many years, commercial banking was dominated by the government-owned Uganda Commercial Bank (UCB), which traditionally held over 50 percent of deposits in the system. Government has also held shares in other banks (Barclays, Stanbic, Bank of Baroda) but has sold, or is selling, these shares. The UCB was partially privatized in 1997 with the sale of a 49 percent share for US$10 million to Westmont Land, Ltd. of Malaysia. (It is widely believed that certain powerful Ugandan interests have paid for all or part of the Westmont participation in UCB via a secret exchange of shares in violation of BoU’s guidelines regarding disclosure of ownership of financial institutions. While this is denied by the principal parties, the BoU and the Parliamentary Select Committee on Privatization are currently investigating the sale of UCB). Most of the recent expansion in bank numbers has been accounted for by the opening of smaller, locally-owned banks. With these recent changes, the share of UCB in total deposits has fallen to about 25 percent. The non-bank financial intermediaries (NBFIs) sector is small and underdeveloped, especially as regards term lending, mortgage finance, leasing, and credit for micro- and small-scale enterprises.

83. While banking laws have been updated with the passage of the Bank of Uganda Statute and the Financial Institutions Act in 1993, weaknesses still exist with respect to the BoU’s degree of independence, the prudential and reporting requirements (minimum capital, cash reserve, and liquidity ratios) for banks and NBFIs, especially locally-controlled institutions, the powers of the BoU in cases of bank illiquidity or insolvency, and the regulatory framework for NBFIs. The BoU is working with the Law Reform Commission on amendments to these laws designed to address weaknesses; meanwhile a freeze was imposed in 1996 on the issuance of new banking licenses, which has been extended to end-1999.

84. A more serious weakness than the legal framework has been the growing number of banks in financial difficulty and the failure of the BoU to exercise, until very recently, adequate prudential supervision and regulation of banks under the existing statutes.23 A recently completed program of outside audits of suspected weak banks has shown a clear pattern of violation of regulations regarding insider lending, maintenance of core capital and provisioning for non-performing loans, as well as excessive concentration of lending, mis-reporting to the BoU, and failure of certain banks’ auditors to report or properly qualify certain information. Inadequate supervision and regulation of the financial sector in a period of expansion in numbers and volume of activity can have serious negative consequences for the economy. In such an environment, there is the risk of collusion between government agencies and private commercial banks, as well as the risk of loss of public funds when government deposits are placed in failing private banks. While lax supervision by the BoU in recent years is not prima facie evidence of corruption, it has permitted mismanagement in banks and the spread of corrupt practices within the system.

23 For example, at the end of 1994 over 50 percent of UCB's outstanding loans were non-performing.

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85. Fortunately, the BoU has recently made some management changes, strengthened the Bank Supervision Department, conducted audits of suspected weak or mismanaged banks, and taken action to close or temporarily suspend operations of certain banks while placing others on strict performance plans intended to return them to full compliance with prudential regulations. There is also a commitment to maintain the necessary frequency of on-site and off-site audits of all commercial banks in the future.

86. Another example of a strong government response to a problem which indirectly addresses problems of corruption was the decision to establish, in 1994, the Non-Performing Assets Recovery Trust (NPART) to deal with the extensive portfolio of over 2,000 non-performing loans held by the UCB (USh 63 billion). This was a key step in the preparation of UCB for privatization. Many of these loans, made at a time when UCB was wholly government-owned, were to powerful individuals in government or the political sphere. NPART became operational in 1996. The organization was staffed with competent professionals employed on consultant contracts and paid a market wage, and was headed by persons who had had experience with similar efforts in other African countries. NPART was given authority to reschedule debts where the borrower showed a willingness to pay, or to seize and sell property when the borrower was unable or unwilling to repay. A special tribunal was established at the High Court to deal exclusively with appeals against NPART actions. NPART has maintained a strict policy of equal treatment for all debtors, and has received the necessary political backing to sustain this policy. To date almost USh 27 billion has been recovered, in either cash or property, with another USh 8 billion being repaid under rescheduling arrangements. Such action by government not only reduces the cost to the budget (and to the people) of the financial losses of a mismanaged public institution such as UCB, but can send a powerful signal that government will not in future countenance corruption in access to loans from any public institution.

87. Recommendations:

• Complete and adopt revisions to financial acts

• Continue to strengthen the Bank Supervision Department of the BoU, maintain program of on-site and off-site audits agreed with World Bank and IMF.

(g) THE LEGAL FRAMEWORK, LAW ENFORCEMENT, AND JUDICIAL REFORM.

88. Annex 5 describes the framework of the legal and judicial system in Uganda, the laws and regulations relevant to anti-corruption, and the agencies of government involved in investigating and prosecuting corruption cases. Uganda has a comprehensive legal and regulatory framework which is generally adequate to combat corruption. However, the institutions themselves are weak, under-funded, and lack human and material resources. These weaknesses—when combined with problems of inadequate compensation and

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accountability in the Public Service discussed earlier—encourage circumvention of rules and hamper the anti-corruption effort.24

89. The 1998 National Integrity Survey documents the perception in the general population of widespread corruption in the justice system, particularly at the level of the Magistrates, and in the police. There are also persistent reports of corruption at the level of the High Court, which may be related more to the support staff serving in the court registries than to the justices themselves. The support staff are members of the civil service; therefore it is not surprising that this group reflects the same problems facing other agencies of government; poorly qualified staff, low pay levels, inadequate training and lack of equipment and facilities, and it is common knowledge that they can be bribed by interested parties to displace files or tamper with evidence.

90. With regard to the institutions most directly involved in the anti-corruption effort (Ministry for Ethics and Integrity, Anti-corruption Unit, IGG, DPP, CID), most of the same constraints apply. The DPP, with an establishment of about 80 professional positions, has a staff of only 25 State Attorneys. As a result, the DPP is forced to rely on the police to conduct prosecutions. (However, the DPP plans to train 300 lay prosecutors to replace the police in prosecutions.) The IGG, whose staff is employed on civil service terms, is undermanned (only 38 professionals against an establishment of 63 in the three primary departments) and unable to compete for qualified staff (starting pay for a lawyer with the IGG is USh 190,000/month vs. USh 600,000/month in the Ministry of Justice) yet confronted with an overwhelming number of potential targets for investigation. For example, the IGG lacks capacity to investigate the more than 2,500 declarations of assets filed annually under the Leadership Code. Further, it is alleged by many that the staff of the IGG are themselves susceptible to bribery. The National Fraud Squad in the CID is not well-trained or funded (pay at entry is only equivalent to US$150 per month) and is not well-equipped to deal with "white collar" crime. All of these institutions are particularly handicapped in their ability to monitor district level activities which are becoming increasingly important as decentralization of government functions continues (the IGG reports that the number of complaints received by his office has increased seven-fold since the initiation of decentralization). All of the core anti-corruption agencies have reviewed their strengths and weaknesses. Meeting the full needs of these agencies, however, will require more resources than the government currently has at its disposal. Finally, there is acknowledged overlapping and duplication of functions in these institutions which should be rectified in the government's framework for implementing its anti-corruption strategy.

91. One area of current regulations which should be tightened is the Leadership Code. The Code forbids influence-peddling and the acceptance of gifts and favors from those being regulated, private use of public information, misappropriation of public funds, use of influence, or nepotism, and the award of government contracts to companies in which

24 The government’s own diagnosis of the weaknesses in the legal/judicial system, and areas for reform actions, are

set out in Section 7.3 of The Policy Document on Strategy to Fight Corruption.

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leaders hold an interest without the prior approval of the Leadership Code Committee. The Code also requires that all "leaders," defined as politicians, members of Parliament, Ministers, Permanent Secretaries, heads of government departments and public corporations, members of boards and commissions, must provide an annual declaration of assets to the IGG. These declarations are not made public and the IGG, as mentioned above, lacks the capacity to verify the accuracy of declarations. Also, these declarations do not extend to immediate family members. A leadership Code Amendment Bill has been drafted which expands the number of leaders/officers covered by the Code, addresses conflict-of-interest, provides for public access to declarations, and for the forfeiture of unexplainable wealth.

92. Several of the legal and administrative measures introduced in recent years have been designed to strengthen the government's hand in fighting corruption. In 1995 the government implemented a substantial increase in the remuneration of judicial officers - judges, magistrates, and staff of the DPP. This measure has contributed to an enhance-ment of the stature of the judiciary and improved its capacity to attract and retain qualified lawyers and judges. (The Judicial Service Commission has proposed that judicial support staff also be transferred from the Civil Service to the Judicial Service, which would permit significantly higher compensation.) The 1995 Constitution provided for increased authority and independence for the IGG and shifted its reporting responsibility from the Office of the President to the Parliament. However, while the IGG submits his annual reports directly to Parliament he does not relate formally to any specific Parliamentary committee through which follow-up could be coordinated. In response to widely expressed concerns over the inadequacy of the laws on evidence and criminal procedure which hampered investigation, prosecution and conviction in corruption cases, the government recently appointed a committee to examine the issues and recommend corrective action. Based on the committee's report, the relevant provisions of the Prevention of Corruption Act, the Penal Code, The Trial on Indictments Act and the Magistrates Courts Act were amended with effect from March/April 1998. Government has established a separate branch of the High Court which is intended to speed up the handling of commercial law cases. Government is also planning to set up special courts to expedite hearing of corruption cases. A precedent for these special courts was set by the successful example of the special court established for adjudicating NPART cases.

93. At the request of Government, a comprehensive review of Uganda's criminal justice system was carried out by the UK Department for International Development (DfID) in 1997 which identifies the strengths and weaknesses of the agencies in the system, the causes of delays at the various stages, reviews ongoing donor support programs designed to strengthen systems and institutions, and presents an action plan to address the constraints faced by each agency, along with an estimate of the costs of implementing the action plan.25 While addressing the financial and human resources constraints faced by institutions involved in the administration of justice will be costly

25 Review of Uganda's Criminal Justice System, Crown Agents, December 1997.

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and time-consuming, resources must be devoted to this effort. However, these needs should be carefully prioritized before resource allocation decisions are made.

94. Recommendations:

• Clarify the roles and responsibilities of the various anti-corruption agencies

• Strengthen IGG, DPP, and Ministry of Ethics (as suggested in August 1998 National Integrity Action Plan)

• Expand the conflict-of-interest provision of the Leadership Code, and consider extending the declaration of assets provision to immediate family members and making declarations public

• Seek the necessary financial support to begin implementing the action program recommended in the DfID study on the criminal justice system

• Implement the recommendation of the Judicial Service Commission to transfer support staff in the judicial system from the Civil Service to the Judicial Service.

(h) FINANCING OF POLITICAL PROCESSES.

95. Interviewees have characterized Ugandan political culture in terms of patronage arrangements in which political loyalty is traded for material reward—the electorate demands public and/or private goods in return for their votes. While Ugandan law forbids the use of bribes or gifts to influence voting behavior, and, in the context of the Parliamentary elections, forbade private meetings between candidates and voters, these laws could not be fully enforced. Voters’ demands escalate the already high cost of campaigning. To meet these financial needs, candidates report having to borrow and accept donations from banks and private companies. The percentage of elected officials in debt as a result of campaign expenditures is worrisome, and raises a concern over the possible capture of politicians by business interests or the use of public office to recoup election costs through corrupt means. In addition, incumbent politicians and government personnel who support them are reported to have employed public resources in their campaigns. Under Ugandan law, incumbents are allowed to use the facilities and resources that attach to their offices, but other, unlawful diversions were reported to have been carried out. Policing such diversions is difficult and would require strong political will to sanction powerful figures who already occupy key positions in the government.

96. The elimination of campaign financing abuses is difficult in every country, the more so in a poor country like Uganda where the electorate has limited information and limited recourse to the government through official channels, and is therefore more likely to judge candidates on the basis of rewards offered "up front" or promised through informal channels, than on the basis of promised development projects provided through the budget. However, various steps can be taken to: limit the length of campaigns, provide public funding to all candidates, provide free or publicly funded access to the

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media for all candidates, educate voters in their rights, compel candidates to disclose all sources and uses of campaign funds, strengthen the Electoral Commission's capacity to monitor election spending and sanction abuses, and to provide for better delivery of public services through government so that voters do not have to depend on individual candidates for public goods and services furnished on an "informal" basis.

97. Campaign-related corruption is not the only issue in political financing. Given the unique relationship between the NRM and government, the amount of public resources consumed by the movement could be problematic. This calls for internal checks and balances, and careful monitoring. Government has taken steps to keep government structures distinct from movement structures; the 1998 Movement Statute was enacted to de-link the movement’s functions from government’s, and is evidence of government’s commitment to this objective. A further risk has arisen from the movement’s decision to set up its own business enterprise. When such an enterprise is created, it should not be given privileged access to government compared to the rest of the private sector.

VI. INCREASING PUBLIC AWARENESS/INVOLVING STAKEHOLDERS

98. INCREASING AWARENESS. Uganda has made notable progress in democratization, and in organizing competitive elections, restoring human rights and the rule of law, and dispelling the atmosphere of fear that previously prevented free expression of opinion. The Law Society and the Ugandan chapter of the International Federation of Women Lawyers (FIDA) are gaining in strength. A Human Rights Commission was set up in May 1997 and it has become an active advocate for individuals reporting cases of governmental abuse of authority. An independent and relatively free press has been established and the elected Parliament has become a forum for open debate.

99. Within this liberalized environment a number of efforts are ongoing to increase public awareness of and response to corruption in government. The public can play a vital role in combating corruption by reporting corrupt officials, refusing to pay bribes, and by increasing pressure on leaders to implement anti-corruption policies. Government’s willingness to enter into such partnerships is a positive indication of its commitment to fight corruption. The Minister for Ethics and Integrity in the Office of the President plans to launch a comprehensive campaign of public education, including educating the youth, to re-establish and strengthen ethical and moral values and to enlist public support in the fight against corruption.

100. Government should also be commended for the open manner in which surveys of public opinion about corruption have been carried out and then discussed in workshops involving government officials, civil society, the media, and others. In 1995, the IGG—with support from The Economic Development Institute of the World Bank (EDI), UNDP, and others—began conducting integrity-building activities in Uganda, including a series of Integrity Workshops for parliamentarians, judges and magistrates, cabinet ministers, civil society representatives, and journalists. These workshops are designed to inform participants of the prevalence and costs of corruption and the responsibilities of all parties to fight it. They are also intended to build capacity to implement reforms in

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government and civil society. One important workshop outcome was a recommendation to increase the independence of the IGG by placing it under the Parliament rather than the Office of the President. The workshops have benefited from Integrity and Service Delivery Surveys conducted from time to time to assess the views and raise awareness of the population regarding: i) the availability, timeliness, coverage, and quality of public services, and the effectiveness of complaint procedures; and ii) the incidence of petty corruption in service areas. These surveys also provide a base against which to measure the effectiveness of anti-corruption initiatives.

101. The most recent Integrity Survey, conducted in all of Uganda's 45 districts in early 1998, covered a sample of 18,412 households in 200 communities, supplemented by interviews with 1,595 Public Service workers and 348 focus-group discussions. Already, the survey findings have been discussed in a national workshop and two district level workshops. Some key findings are:

• 40 percent of the sample reported having to pay bribes to obtain public services. The payment of bribes is most prevalent in the Police (63 percent) and the Judiciary (50 percent), followed by the Health Services (28 percent). Service users who pay bribes report receiving worse services than those who do not

• 70 percent of households believe that there is "very much" corruption in the Public Service, and 57 percent think that it has gotten worse over time

• 77 percent of households perceive that paying bribes is “bad”

• Ten years after its establishment, only 32 percent of households have heard about the IGG; only half of those who have heard about it know what it does.

The mission’s meetings with NGOs and the media supported the picture of systemic petty corruption reflected in the Integrity Survey findings.

102. Since decentralization of government brings the risk of greater corruption at the local level, the government intends to conduct workshops on the 1998 Integrity Survey in all 45 districts to raise awareness and devise action plans to combat corruption. While this district focus offers the virtue of addressing service delivery at levels of government closer to the client, it must be recognized that district and municipal efforts are directed primarily at petty corruption—perhaps more effectively than efforts at the center—but they offer few opportunities to address grand corruption.

103. THE PRESS. In a free society, the role of the media in demanding accountability in government through investigative reporting is pivotal. In Uganda, the press has exercised its new freedoms to pursue numerous corruption cases. To its credit, The New Vision—a government-owned paper—has often published corruption stories. However, there are limits to the capacity of the press to investigate these cases. In theory, journalists have the right—under Article 41 of the Constitution—of access to information; however, such rights are difficult to enforce. Enabling legislation is needed to implement this

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Constitutional provision. A draft law has been prepared, but has not yet been passed. Although journalists have reported police harassment, financial harassment, utility cuts, arrests, and excessive bail terms, the present government has been supportive of a free press—in stark contract to past Ugandan regimes, which banned or shut down newspapers, and imprisoned or killed journalists. (The Monitor was banned from receiving government advertisements at a key stage in its development, but growth of private advertising and an emphasis at The Monitor on financial independence has meant that such bans are no longer as serious a threat as they once were).

104. EDI has organized seminars for training newspaper reporters in investigative journalism. However, educating and informing the public through the press is difficult in a country such as Uganda with less than one newspaper for every 100 persons and with many different languages. Radio, thus, may be an even more important medium for reaching the masses, especially in rural areas. While in many developing countries governments have for a long time monopolized radio broadcasting, the liberal attitude of government in Uganda toward the establishment of private radio stations is a positive sign for democratization and exposing corruption.

105. OTHER CIVIL SOCIETY INSTITUTIONS. There are many NGOs in Uganda concerned with governance, but few focus on anti-corruption per se. A chapter of TI has been established, but it is still in the formative stages. One interesting initiative is the delivery of anti-corruption messages through performances of a play by an organization called the "Nderi Troupe." The National Organization for Civic Education and Monitoring (NOCEM) wishes to employ the network of volunteers assembled for election monitoring to train local government officials in responsible fiscal management and citizens in monitoring local government activities.

106. Recommendations:

• Continue open Parliamentary discussions on the IGG's annual reports

• Continue—and publish widely—the results of District-level Integrity Workshops based on 1998 National Integrity Survey

• Maintain a program of Service-Delivery and Integrity Surveys in coming years

• Continue training to strengthen the quality of investigative journalism for print and broadcast media

• Continue training for parliamentarians to strengthen their ability to exercise their oversight role.

VII. DONOR AND WORLD BANK ASSISTANCE

107. Donors are supporting many governance and anti-corruption initiatives in Uganda. For example, they have supported the Constituent Assembly elections in 1994, the Presidential and Parliamentary elections in 1996, and local council elections in 1997 and

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1998, and have provided assistance to the Electoral Commission. The UNDP has supported the preparation of a National Programme and Action Plan on Democratic Governance. A number of donors, including DfID and UNDP, are supporting the Public Service Reform Program, and DfID is also supporting the URA, especially the customs, the AG, police and judiciary. DANIDA has provided budgetary support for the IGG, funding for computerization of the judiciary and the establishment of a commercial court, and has provided consulting assistance to the Anti-corruption Unit to help prepare a framework for implementation of the government's anti-corruption strategy. USAID and Austrian Aid are funding the Nderi Troupe. A number of bilateral donors are planning to support NOCEM. GTZ and USAID are supporting the Ugandan chapter of TI. The Human Rights Commission is receiving support from Austria, Australia, the UK, UNDP, UNHCR, and the Konrad Adenauer Foundation. The EC is supporting the Uganda Invest-ment Authority. Switzerland is funding the ITC study of government procurement and the UK has funded consultants who are evaluating the military procurement system.

108. The World Bank is supporting ongoing programs in Uganda which indirectly contribute to the government’s anti-corruption efforts. One important area is reforms of economic policy and management. The Bank believes that opportunities for corruption can be reduced through a continuation of reforms to further liberalize the economy, eliminate excessive regulation, promote competitive market conditions, and create greater transparency. The World Bank has been supporting such reforms under the ongoing structural adjustment program; recently with the Third Structural Adjustment Credit (SAC III) for US$125 million approved in June 1997. This credit supports further liberalization of the trade regime, reduction of constraints to private sector development, reform of public enterprises, budgetary reforms, and strengthening of financial services. Bilateral donors are providing support in complementary areas. Progress to date under the credit has been broadly satisfactory. Macro-economic performance has been strong, and most of the policy actions related to the second tranche have been completed. However, progress in the reform of budgetary processes has not been as fast as originally anticipated, due primarily to administrative capacity constraints.

109. The World Bank is also supporting public enterprise reform and privatization through the EDP. The Bank is supporting development of the private sector directly through the Private Sector Competitiveness Project. Under the Financial Sector Adjustment Credit (1993-97) the Bank supported the preparation of the 1993 banking acts, the establishment of NPART, development of the capital market and the Insurance Act. The Bank has also been supporting the improvement of financial management through the installation of a computer program to record and monitor financial transactions between the URA, the Ministry of Finance, the BoU, and the AG under the Economic and Financial Management Project (EFMP). This effort has experienced delays, due to technical and personnel capacity problems, and some internal resistance. The World Bank has supported strengthening the banking supervisory capacity of the BoU, and this support will be continued under a planned financial sector technical assistance project.

110. These economic policy and management reforms must be accompanied by actions to improve governance and build institutional capacity. Ongoing IDA-funded projects

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(EFMP, Institutional Capacity Building Project) provide assistance for civil service reform, decentralization, legal and judicial reform, the Auditor General, Ministry of Finance, and the Department of Statistics. Support for legal and judicial reform includes the capacity building needs of the legal sector, including departments under the Ministry of Justice and Constitutional Development (MJCD), the Judiciary, the Law Reform Commission, the Law Development Center, the DPP and the Law Faculty of Makerere University. IDA has also provided funds to the MJCD to hire the consultants who carried out the review of the criminal justice system referred to earlier, to undertake a study on the needs of the legal sector as a whole. This study should serve as a basis for possible donor support of the institutions directly responsible for combating corruption. Other follow-on capacity- and institution-building projects are planned which will be designed not to duplicate efforts of other donors. Depending on discussions within the framework of the Country Assistance Strategy (CAS), future Bank support could be financed by instruments such as: Institutional Development Funds (IDF), Learning and Innovation Loan (LIL), or Adaptable Program Lending (APL).

111. On the issue of corruption in general and corruption linked to the financing of political processes, the Bank is conducting research into the locus, nature, causes and effects of corruption which can be shared with the Ugandan Government to help orient government activities more effectively towards exposing and combating corruption over the long term. Such research could be incorporated into future national integrity surveys, service delivery surveys and budget-tracking exercises. In addition, research into, for example, the value of revenue foregone through the avoidance of license fees and taxes by the informal sector could help inform government policy on regulation and taxation.

112. EDI can support government's anti-corruption efforts to increase public awareness and strengthen the role of civil society in fighting corruption in several ways. These include associating Ugandan officials with examples of international good practice by inviting them to EDI's global and regional workshops or specialized workshops in Uganda using international experts as resource persons. For example, Ugandan representatives participated in the "Curbing Corruption" workshop held in Benin in January 1998. EDI can support the participation of Ugandan media representatives at future regional workshops in "Advanced Investigative Journalism" and "Investigative Broadcast Journalism." EDI will also continue its Integrity Workshops at the district level, seminars in investigative journalism for both print and radio/television journalists, and would be prepared to support future National Integrity Surveys.

113. The Bank and other donors could also provide direct support to the government's anti-corruption efforts, in the form of assistance to the Anti-corruption Unit under the Minister of Ethics and Integrity, or for other key agencies, such as the IGG. The Bank would prepare any additional support of this nature in the context of the CAS to ensure that there is full coordination and integration with other IDA-funded activities in public sector reform and capacity building, private sector development, etc., and with activities of other donors. However, in addition to all of the capacity and institution building efforts mentioned above, one of the most important actions which the donor community can take to assist the government in fighting corruption is to monitor closely the use of the funds which they provide and to impose sanctions for any misuse of funds.

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VIII. CONCLUSIONS

114. The mission concludes that Uganda has since 1986 accomplished a great deal in the areas of improved economic management, respect for human rights and the rule of law, and in fighting corruption. However, the country is still experiencing significant corruption which imposes a burden on economic growth and poverty reduction. The mission's conclusions reflect the insights and perceptions gained through careful review of reports and discussions with Ugandan and foreign interlocutors. It cannot say definitively, however, whether corruption is increasing or decreasing (the 1998 National Integrity Survey records the population’s view that petty corruption is increasing) or whether there is more exposure of corrupt practices due to increased openness of society and the press. Nor can it judge whether corruption is more extensive in Uganda than in other countries. It is instructive, however, to note that Uganda's ranking in TI’s recent global survey of corruption places it among the most corrupt on the list. One can question the objectivity of such a survey, which is based on the opinions of businessmen from Uganda and around the world, but these are perceptions of a wide sample of local and international investors and their perceptions matter. Until greater efforts are made to address corruption, Uganda faces several risks: corruption may grow and spread as the view becomes widespread that "everyone is doing it and not getting caught;" donor and investor confidence in the country's economic future may erode, as may the Ugandan people’s confidence in the effectiveness of government.

115. Low-level, petty or bureaucratic corruption affecting the delivery of public services (health, education, justice, police) is widespread, as indicated by the National Integrity Survey. It arises out of the erosion over many years of the real value of civil service compensation accompanied by the breakdown of discipline and accountability in the Public Service. Another way to characterize this situation is to say that there are many instances where—at the interface between the civil service and the public—society functions according to informal rather than formal rules. The people of Uganda are frustrated with the petty corruption which touches their daily lives. Despite greater democracy, human rights, and transparency, the mass of civil society is intimidated by government officials, and lacks institutions and avenues for redress against abuses of government office. The problem for government is that, with petty corruption so widespread, many intervention points exist. Government has made significant progress in rationalizing the Public Service and improving remuneration, especially at the higher levels and for certain functions (for example, the judiciary) but until all public servants are assured an adequate, competitive wage, the incentive to violate the formal rules of procedure and adhere to informal—often corrupt—modes of behavior will remain. And to sanction petty corruption would be difficult if grand corruption is permitted to persist.

116. While high level, or "grand," corruption, does not appear as serious a problem in Uganda as in other developing countries, it clearly exists and will spread if unchecked. Grand corruption—based on "greed" rather than "need"—has been be attributed by many interlocutors to the conflicts-of-interest inherent in a society with a small, closely interrelated middle and upper class elite, which controls politics, government, the military, and the business sector. In this situation, strong internal checks and balances

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within government are required. Laws, regulations, and rules of procedure that provide such internal checks and balances exist, but they have been too often ignored or circumvented, and the institutions intended to prevent, expose, investigate, and sanction corruption are weak and lacking in capacity to follow up all reported cases. Senior officials in the various organs of government responsible for combating corruption report that there has been some overlap and lack of coordination in anti-corruption efforts, a situation which will hopefully improve with the creation of the new Ministry for Ethics and Integrity.

117. Uganda has strengths upon which the government can build in its fight against corruption—institutions with a clear mandate to address corruption, in spite of the need for strengthening, such as the IGG; a democratic, open, and activist Parliament; a government committed to human rights and the rule of law; and the ongoing decentralization which has the potential to bring greater control over resources and accountability to the grassroots, provided the training needs and development of financial management systems and skills at the local level are met.

118. The mission believes that the Ugandan government should intensify its efforts to combat corruption at all levels through a continuation of ongoing programs and with additional steps as set out in this report. This is a long-term challenge requiring changes in attitude as well as in behavior. Systems can be tightened and incentives and disincentives put in place but what is also needed—the mission believes—is a stronger signal from top leadership that corruption of public officials will no longer be tolerated and will be punished. If government addresses the current corruption problems in a focused and sustained manner, it can succeed in returning the country to the low corruption status it once enjoyed.

119. Finally, with respect to the possible use of an Anti-corruption Undertaking (AU) in future IDA-funded procurement, the mission believes that certain steps must be taken by the Ugandan government before application of an AU is feasible. Specifically, substantial progress in the reform of Government's procurement system is needed, as documented in Section V above and in Annex 3. Government has received and reviewed the ITC report on procurement reform—with which the World Bank is in agreement—and should, as quickly as possible, begin to incorporate its recommendations into government’s procurement regulations.

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Annex 1: The Extent of Corruption in Uganda

1. One of the mission’s objectives was to determine where weaknesses in the government's legal framework, regulations, institutions, management systems, policies and procedures facilitate corrupt practices. Numerous sources confirm the existence of a high level of corruption in Uganda, threatening the credibility and effectiveness of government, vis-à-vis the Ugandan population, the donor community, and potential investors. One source of evidence is the National Integrity Survey, which indicates that petty corruption is rampant and, in the opinion of the majority of the population, growing. The very agencies that should be in the forefront of the anti-corruption struggle—the police and the judiciary—are perceived to be the most corrupt public institutions with which the general public has contact.

2. Another reference source is TI’s annual Corruption Perception Index (CPI). This index reflects the views of a large sample of businessmen, whose firms operate in many countries, regarding the amount of corruption encountered in tendering, obtaining business licenses, clearing goods through customs, receiving payments from government, and so on. While the index is presented as a numerical score, with surveyed countries ranked from 1 (least corrupt) to 85 (most corrupt), the rankings are based on subjective judgments. Nevertheless, the rankings represent the average of perceptions of a country in the minds of the international business community. And perceptions do matter when a country, such as Uganda, wishes to attract direct foreign investment. Therefore, it should be of concern to the government to note that Uganda, included in the survey for the first time, ranks 73rd in the list of 85 countries, or in the bottom 15 percent. In terms of African comparators, which could be thought of as competitors for foreign investment, Uganda ranks on a par with Kenya, below Côte d'Ivoire, Senegal, Ghana, Zambia, Malawi, and Zimbabwe, and well below Mauritius, South Africa, Namibia and Botswana.

3. The press is a significant source of information regarding corruption in Uganda. In recent years, the press has experienced greater freedom, with increased emphasis on investigative journalism and exposing alleged corruption. To illustrate, below is a list of articles from the Ugandan press reporting on alleged large-scale corruption, which were published during the three-week period when the mission was in Uganda. It should be noted that many of these reports refer to cases of corruption which have been initially alleged and/or uncovered by government agencies—for example, Parliament, IGG, CID, Attorney General—and where follow-up investigations are on going. The purpose of documenting these press reports is not to convey the impression of government’s non-responsiveness to the problem of corruption, but rather to emphasize the magnitude of the challenge which government faces.

⇒ A Ugandan Army (UPDF) contract with a foreign supplier (Belarus) for four reconditioned helicopters was terminated after two un-reconditioned helicopters— different from those inspected by UPDF representatives—were supplied. This is being investigated by the UPDF and Attorney General. It is alleged that a reasonable price would have been US$5 million instead of the US$12 million reportedly paid.

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⇒ Questions are raised in Parliament regarding alleged mishandling of a contract for Mubende-Fort Portal road construction.

⇒ The Board of Directors of the Uganda Electricity Board dismisses the Managing Director and 11 other officials following an investigation by the IGG and CID, and an external audit, which reveals misprocurement totaling over US$15 million.

⇒ Members of Parliament request to see the report of an inquiry into alleged diversion of US$68 million in public funds allocated to rehabilitation of Luweero Triangle area.

⇒ Parliament votes to establish a Select Committee to probe allegations of theft and diversion of funds in the Ministry of Agriculture from projects in livestock (US$3 million for water catchment dams reportedly paid for but never constructed) and seeds (US$2 million). The motion passes unanimously.

⇒ Allegations appear in the press that the process of evaluating tenders for a second Pre-shipment Inspection (PSI) firm is being interfered with on behalf of one of the bidders. government’s procurement agent—SWIPCO—publishes an advertisement acknowledging that improper disclosure of confidential information has taken place, which could lead to canceling the tender, but for which they are not responsible.

⇒ The basis on which SWIPCO was selected in 1996 as the government’s procurement adviser/agent, and the terms of the SWIPCO contract, are alleged to be improper by the IGG and the Chairman of the Public Accounts Committee of the Parliament.

⇒ The company constructing a headquarters building for National Social Security Fund alleges that they were required to pay a bribe of US$1 million to obtain the contract. The IGG demands that the company be barred from future government contracts. The NSSF Managing Director is sent on leave but may be reinstated.

⇒ The contractor (SIETCO) originally awarded the bid for the Owens Falls Hydro-electric Dam Extension Project and subsequently removed for non-performance claims that 30 percent of the USh 84 billion contract price had to be paid in bribes to officials of the Uganda Electricity Board.

⇒ The IGG queries the award of a US$10 million contract for manufacture of new vehicle license plates.

⇒ A query is raised in Parliament regarding the conditions under which a contract has been entered into by the National Water and Sewerage Company (NWSC) and the firm of H.P. Gauff for management of operations and maintenance for NWSC.

⇒ Teachers complain that they have to sign two receipts for salary payments; their assumption is that someone else is drawing the second salary illegally. The Ministry of Education will investigate the payment of teachers’ salaries.

⇒ The Uganda Coffee Development Authority denies charges of corruption.

⇒ Stories continue in the press regarding the collapse of negotiations for sale of the Sheraton (Apolo) hotel, and the allegation by the winning bidder that bribes of US$6 million were solicited in addition to the agreed US$19 million purchase price.

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Annex 2: The Uganda Government's Strategy to Fight Corruption

1. THE GOVERNMENT'S PRINCIPAL STRATEGIC DOCUMENT. In 1997, the Office of the Vice President circulated a draft Policy Document on Strategy to Fight Corruption. The paper begins by reviewing Uganda’s recent history, to illustrate how different periods of governance affected political culture, values and norms, and how social turmoil and economic mismanagement for much of the post-Independence period weakened institutions and created a culture of survival and abuse of office. It comments that Uganda has experienced virtually every kind of corrupt practice, and evolved a culture which views ill-gotten wealth as a sign of being “smart.”

2. A description of the framework to fight corruption follows, centered on the 1995 Constitution which contains special provisions creating anti-corruption agencies and guaranteeing their autonomy: the roles of President and the Parliament, the Judiciary, the People, the Inspectorate of Government (IGG), established in 1988, the Auditor-General (AG), the Director of Public Prosecutions (DPP), the Criminal Investigation Department of the Police (CID), and the Human Rights Commission. The report then describes the laws on corruption: the 1970 Prevention of Corruption Act, the Penal Code as amended in 1987, and the Local Government Act of 1997, which, inter alia, provides for the removal of a District Council Chairperson for corruption.

3. The paper describes the government's economic and institutional reforms which have contributed to reducing corruption. These include privatization, civil service reform, decentralization, and improved remuneration of judicial officers, political leaders and top civil servants.

4. CONSTRAINTS TO FIGHTING CORRUPTION. Constraints hampering the fight against corruption are next addressed. Both the AG and the IGG suffer from shortage of staff, loss of/inability to recruit qualified staff due to poor remuneration, and general budget inadequacy. Neither has been given the resources to establish a presence in the districts. Similar constraints face the CID and DPP. The Judiciary, on the other hand, is seen to be fairly well established and remunerated, yet suffers from corruption, undermining its moral authority.

5. The next section describes the role of the Office of the Vice President (OVP), which the President has mandated to oversee the fight against corruption, and to coordinate the work of the existing anti-corruption agencies. An Anti-corruption Unit was set up in the OVP in March 1996, and its mandate was approved by Cabinet in February 1997.26 In particular it is charged with ensuring enforcement of

26 More recently, in July 1998, anti-corruption responsibilities were shifted to a new Minister for Ethics and Integrity in the Office of the President, and the Anti-corruption Unit was redesignated the Department of Ethics and Integrity under this new minister. The objectives of the new Ministry for Ethics and Integrity are to: develop a government

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recommendations of the AG and IGG. The report then describes the main achievements of the OVP: improved coordination, workshops, special investigations into corruption cases, intervening in government procurement decisions, receiving complaints from the public, capacity building and international activities. However, the report notes that the OVP has also suffered from a lack of resources.

6. THE GOVERNMENT'S STRATEGY. Next the strategy for fighting corruption is laid out. The OVP has adopted a sectoral approach—a "National Sectoral Anti-corruption Program"—with the following principal features:

• Creation of Directorate of Anti-corruption in the OVP, over the Anti-corruption Unit

• Establishment of Regional and District Offices for the AG and IGG and other measures to improve their capacity, including improved remuneration

• Introducing codes of conduct for public officials, conflict-of-interest regulations, financial disclosure rules, new financial accounting systems, anti-corruption clauses in government contracts, background investigations prior to appointment

• Legal reform, including enforcing the Leadership Code, and strengthening the legal framework against corruption, establishment of special corruption courts, addressing areas not covered, such as: extending the definition of corruption, confiscation of gains from corruption, regulating gifts to public officials and commissions on contracts, whistle blower protection, laws on computer misuse, surveillance laws, evidentiary rules, enforcement of PAC recommendations, broadening the mandate of the AG, establishing an independent advisory body on international contracts, personal liability for tender board officials, and blacklisting

• In recognition of the international dimensions of corruption, Uganda will cooperate with other countries in the investigation of cases, and will share information on anti-corruption experiences with other governments and international bodies

• Donor assistance will be sought for the Anti-corruption Sector

7. Finally, the paper outlines how an anti-corruption culture will be developed, based on ethical values, through an intensive public awareness campaign to promote honesty, transparency, accountability and professional codes of conduct. Government will launch a National Integrity Movement, building coalitions with civil society and the private sector, and with NGOs like TI, and introducing educational programs for youth.

policy on ethics and integrity and oversee its observance in all governmental institutions; propose new or revised laws against corruption; promote capacity-building in anti-corruption agencies; undertake an intensive campaign to inculcate ethical values and integrity in the population; and cooperate with international agencies and other governments in implementing Uganda's anti-corruption campaign.

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8. RECENT ORGANIZATIONAL CHANGES WITHIN GOVERNMENT. Since this paper was issued, the organization of the government's anti-corruption effort has changed with the creation in July 1998 of a new position of Minister for Ethics and Integrity in the Office of the President, and the transfer of the Anti-corruption Unit from the OVP to the new ministry. Government is also revising the strategy document and preparing, with the assistance of a consultant financed by DANIDA, an implementation framework for the anti-corruption strategy. However, the revised strategy and framework were not available for review by the World Bank anti-corruption mission.

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Annex 3: Public Procurement

1. Government procurement in Uganda is managed by six procurement entities, as follows:

• Central Tender Board (CTB) established in 1965 under the Public Finance Act responsible for approving central government procurement

• Central Purchasing Corporation responsible for central government supplies

• Forty-five District Tender Boards responsible for district procurement

• Six Urban Tender Boards in Kampala, Masaka, Jinja, Tororo, Mbale, and Gulu

• Military Tender Board, and

• The Police Tender Board.

2. Since the NRM came to power in 1986, five studies of the government procurement system have been carried out by international consultants. The first by International Development Business Consultants of New York in 1988 was financed by IDA and, as a result, The Central Purchasing Corporation (CPC) was established. In 1989, UK Crown Agents were retained for three years to advise the CTB and CPC on strengthening operations, including preparation of regulations and guidelines. Their assignment was completed in 1992 and the regulations and guidelines in use by these agencies were prepared under this consultancy. A third study in 1994 by the UNCTAD International Trade Center (ITC) covered government procurement and the logistics of import operations. This study made recommendations for improving the operations of CTB and CPC. The fourth study—still ongoing—is being carried out by Tony Lavender Associates of UK, under DfID financing. The consultants have been studying the financial and procurement systems of the Uganda Peoples Defense Forces (UPDF) with the objective of recommending to GOU how to obtain best value for funds allocated to UPDF. The consultants have completed the main part of the study and a report was issued on August 12, 1998. In the fifth study, the government—with Swiss financing—has again retained the ITC to review the current procurement systems and propose reforms to promote economy, efficiency, and transparency. The ITC issued a draft report on August 22, 1998, which is being reviewed by a government task force.

3. The ITC has identified the following weaknesses in the current procurement systems: inadequate organizational arrangements and procurement skills; and lack of accountability, economies of scale, and modern information systems. The report makes recommendations to remedy these weaknesses, which include:

• revise current Tender Board regulations to emphasize economy/efficiency

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• increase accountability and establish clear definition of the roles of different government organs fighting corruption

• establish a national policy and regulatory body to oversee the procurement function

• adopt a code of conduct for all officials involved with procurement

• build sufficient skills and professionalism in procurement through training

• promote bulk purchases

• establish management information systems.

4. The Lavender Associates report identifies organizational and procedural weaknesses in military procurement and recommends the following actions: pre-determine evaluation criteria for all bids; minimize ad-hoc and emergency procurement by introducing annual strategic procurement plans; establish clear audit trails for classified and unclassified procurement; establish a classified military tender Board with formal terms of reference and procedures which would be required to handle all classified procurement; and carry out an investment appraisal for all purchases above USh1 million.

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Annex 4: Anti-Bribery Mechanisms in International Contracting

1. BLACKLISTING AND WHITELISTING. There is growing interest in the use of specific anti-bribery mechanisms in government procurement processes. One mechanism is “blacklisting”—maintaining a list of companies that are known to have bribed or engaged in other corrupt practices, and banning them from bidding in future contracts.27 To be effective, blacklisting requires uniformity across government agencies, with decisions to blacklist taken on clear, objective criteria to ensure fair treatment and to minimize the risks of legal action by the blacklisted company. This can be achieved by specifying and publishing the criteria for blacklisting in the government’s procurement regulations. Tender documents may also include specific anti-corruption clauses, which make clear to bidders that the contract may be canceled if a bribe has been offered or paid to a public official, either directly or though an agent.28

2. Another alternative is “whitelisting”—screening of firms prior to bidding to ensure that they have policies which exclude bribery to win contracts and internal procedures to ensure compliance. Whitelisting may be a condition of all government contracting as in many US state and federal agencies. Issues in implementing whitelisting are determining the standard to be applied, and verifying whether companies have compliance programs. This is relatively easy in the US where all large corporations have company codes which forbid bribery and associated compliance programs.29 In Europe, only about half of the major corporations have codes, and outside Europe and North America, such codes are virtually unknown. Mandating a code and compliance program as a condition of international bidding thus risks limiting bidders regionally, or fostering the creation of token codes and bogus compliance programs.

3. THE NO BRIBERY PLEDGE (NBP). Between these two mechanisms is project- or contract-specific whitelisting. This could be adopted for a specific project—ideally in infrastructure, with internationally bidding. A proposed mechanism which has been proposed but is yet untried is the No Bribery Pledge (NBP), which requires the CEO of a bidding company to submit, along with the bid, an undertaking stating that company staff and agents will not bribe—either in obtaining or executing a contract—consistent with laws of the tendering country on bribing of public officials. A firm which omits such a pledge will not have its bid considered. The tender is accompanied by a declaration by the head of government that public officials caught accepting or demanding a bribe will be disciplined.

27 The Uganda draft Policy Document on Government Strategy to Fight Corruption proposes “blacklisting of

corrupt companies from contracting with government.” 28 The OECD (DAC) recommends incorporating an anti-bribery clause in aid-financed contracts, and most bilateral

donors now include such a clause in their contract documents, as does the World Bank. 29 CEOs of US companies tendering overseas risk heavy fines and jail sentences if found to have bribed a foreign

public official to obtain a contract. The sentencing guidelines of the Foreign Corrupt Practices Act 1977 provide for more lenient treatment of companies which have in place codes and compliance programs.

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4. The rationale behind an NBP is to create a non-bribing, level playing field among bidders by instilling confidence that competitors will not offer bribes, and thus bids will be considered on technical merit and price alone. This solves the “collective action” problem of bidders—a desire on the part of all bidders to avoid having to bribe, but a reluctance to do so unilaterally for fear that a competitor will bribe and win the contract.

5. THE ANTI-CORRUPTION UNDERTAKING (AU). Another version of contract-specific whitelisting is the Anti-corruption Undertaking which is now incorporated in the World Bank procurement guidelines. An AU is similar to the NBP. The bid document must contain an undertaking by the bidder that it will observe the laws of the country with regard to bribery in contract tendering and execution. The undertaking is included in the bid form itself to reduce the risk of having to disqualify a bidder on the grounds that the required commitment has been accidentally omitted. The World Bank guidelines set three conditions for an AU. First, there should be adequate laws against bribery (this is not an issue in Uganda). Second, the government must commit to apply the AU in other comparable international tendering. Third, the government must have a satisfactory anti-corruption program. This has been interpreted to mean: (i) political commitment to control corruption; (ii) a broad program to address corruption; and (iii) sound public procurement rules and procedures.

6. Three issues need to be confronted when considering use of an NBP or AU. The first is the “sign and bribe” risk. A “defensive” briber—a company which prefers not to bribe but does due to fears that competitors will—may find comfort in an NBP or AU, and compete under what they believe is a bribe-free environment. If an “aggressive briber”—a company which uses bribes in its marketing strategy, perhaps to compensate for an inferior product—is attracted to bid, these mechanisms will not deter bribery, but will reduce the cost of bribing to the corrupt firm, making it easier for it to bribe and win the contract. Such an outcome is not uniformly bad—less bribes will be paid in aggregate, but the corollary is that risks of lower quality performance will increase, especially if the bribe payer is a firm using bribes to compensate for an inferior product.

7. The second issue is facilitation payments. Facilitation payments are bribes used to speed up official processes, rather than distort them. Vernacular terms are “speed” money” or "grease". The US Foreign Corrupt Practices Act and the new OECD Convention against Bribery in International Business Transactions criminalize only bribes to gain an unfair business advantage, not bribes to spur an official to carry out his duties.30 National laws, on the other hand, generally do not make such a distinction—both types of bribes are illegal. Basing the NBP or AU wording on national law means that bidders are binding themselves to execute a contract without recourse to facilitation payments. While in many countries it is possible to obtain work permits, have a

30 The OECD Convention, now being ratified by the 29 member states and 5 additional non-member states, requires

each member state to modify its domestic legislation to place bribery of foreign officials on the same footing as bribery of national officials. Most OECD member states do not have laws which make foreign bribery a criminal offense, thus allowing firms to offset the cost of bribes against tax. This is changing and the Convention expects to be effective by late 1998.

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telephone installed, clear equipment through customs, or obtain government payments for work done without a bribe, the likelihood is that it will take much longer. Since the cost of a bribe to accelerate a bureaucratic process in most countries is modest, firms would rather make facilitation payments—directly or though an agent—rather than wait for the slow wheels of bureaucracy to turn. If bidders anticipate they will have to make facilitation payments to complete a contract on time, they may shun tenders which include an NBP or an AU. Thus countries with systemic petty corruption and comprehensive bribery laws are not suitable candidates for a NBP or an AU.31

8. The third issue is government credibility. If companies believe that the government’s commitment to fighting corruption is strong, they should be willing to tender under NBP/AU conditions. But if bidders believe that unabated middle and grand corruption is taking place under the eyes of the political leadership, the credibility of the NBP/AU will be weak. As the latest Transparency International (TI) Corruption Perception Index (CPI) illustrates, international firms are skeptical of governments’ commitment to fight against corruption in many developing countries.

9. THE INTEGRITY PACT. A variant of whitelisting at the project or agency level is the Integrity Pact (IP) developed by TI. The IP is based on an NBP, but builds in institutional mechanisms to increase chances of success. Dialogue with civil society and the business community is recommended prior to the pre-qualification process, and civil society is given a role in monitoring the bidding process and contract execution. Stress is placed on establishing a credible channel for complaints by bidders who believe a competitor has bribed to gain an unfair advantage, or by third parties who have evidence of bribes.

10. The Bank’s AU recognizes the importance of institutional strengthening. As a prior condition for an AU in Bank-financed international procurement, it reviews government’s procurement rules and practices, and recommends needed improvements.

11. Whichever variant is used, the process must be credible. One precondition is that a transparent government procurement process be in place, in which participants have confidence. In such circumstances, an AU/NBP can reinforce the procurement process by signaling the importance government attaches to controlling corruption and enhancing bidding outcome. Conversely, if prior conditions are not satisfied, special mechanisms will not add value and may lead to higher contract prices, either due to reduced competition or firms adding extra margin to their price to cover the delays resulting from bureaucratic obstruction. The weaknesses in Uganda’s government procurement make it inadvisable to adopt a project-specific AU until the recommended improvements in procurement guidelines and procedures under review are adopted and implemented.

31 The wording of the NBP restricts itself to a commitment not to bribe during contract award but not during

execution. This indirectly signals that facilitation payments are condoned, undermining national law. It is one thing for OECD countries to exempt petty corruption, another for governments seeking tenders to signal that national laws will not be applied.

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Annex 5: The Legal Framework, Law Enforcement, and the Judicial System

1. Uganda's 1995 Constitution establishes a number of institutions entrusted with investigating and prosecuting corrupt practices. Specific articles of the Constitution relevant to anti-corruption are:

• the Leadership Code of Conduct (Articles 233-236)

• the Inspectorate of Government (Articles 223-232)

• the Director of Public Prosecutions (Articles 120)

• the Auditor General (Articles 163-164)

2. The most significant laws specifying corrupt offenses, the applicable penalties, and the institutions empowered to investigate, prosecute, and punish offenders are:

• The Penal Code Act of 1964, as amended (1998)

• the Prevention of Corruption Act of 1970, as amended (1998)

• the Leadership Code of 1992

• the Inspector General of Government Statute of 1988

• the Public Finance Act of 1962

• the Magistrates Court Act, as amended (1998)

• the Trial on Indictment Act, as amended (1998)

• the Police Act of 1964

• the Local Government Act of 1997, which provides for removal from office of the Chairperson of a District Council on grounds of corruption and abuse of office.

3. The Ministries, Departments, and Agencies involved in law enforcement include:

• The Anti-corruption Unit, originally established in the Office of the Vice President to coordinate investigations and prosecutions of corruption, and to provide policy guidance, has been transferred to the newly created Ministry of Ethics and Integrity in the Office of the President. Recently, this unit has completed proposed amendments of the Leadership Code relating to conflict-of-interest and declaration of assets.

• The Leadership Code Committee is charged with investigating and sanctioning violations of the Leadership Code.

• The Inspector General of Government (IGG) established in 1998, is empowered to investigate, arrest, and prosecute corruption cases, take preventive measures, and

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advise Government on steps to prevent future abuses; the IGG reports to the Parliament.

• the Director of Public Prosecutions (DPP) holds concurrent jurisdiction with the IGG and prosecutes cases investigated by the police.

• the Police, in particular the CID, which has a 150-person National Fraud Squad.

• the independent Judiciary, which is governed by the Judicial Services Commission and includes the Magistrate Courts (Grades 1, 2, and Chief Magistrates), the High Court, including a special branch established in 1998 to deal with commercial law cases, the Court of Appeal, and the Supreme Court.

• Local Council Courts, established under the Local Government Act, exercise judicial powers at the local council level; however, they fall under the Ministry of Local Government and are not part of the Judiciary.

• the Uganda Prison Service (UPS) is responsible for the detention of suspects or convicted offenders.