ac paper (full text)1

8/7/2019 AC paper (full text)1

1/76


2/76

2

yardstick competition should emerge within the bureaucracy, if enough groups, ingovernment and outside of it, overcome their collective action hurdles to produce acounter wave of changes. Progress in reforms is urgent: corruption is seriously hurting the economy and

continues to ravage the social fabric. This paper addresses this tension between aconstraining governance environment and the reforms that have to be put in place inorder for anti-corruption to make a good deal of progress. Windows of opportunity for changes occasionally open up to significant breakthroughs, but only up to a point. Itis important to acknowledge that the institutional weaknesses of the state, theconcentration of vested interests, and the extent of what the institutional economicsliterature describes as state capture, will work as powerful brakes on anti-corruptioninitiatives, eroding their effectiveness and sustainability. Anti-corruption policiesthus should be crafted around realistic litmus tests that recognize the qualifyingfactors in such environments.What this paper does is to assess anti-corruption policies from 2001 to present, drawout anti-corruption themes and distill lessons for targeting transparency andaccountability reforms more effectively. The World Banks governance indicators areused as a heuristic tool to (1) examine the different circumstances underlying thepersistence of problems in fighting corruption and (2) provide a touchstone for reformstrategies that are keyed both to the specific contours of the difficulty and to themeans of overcoming it. The end product is a set of policy options, with stress onhow to target reform efforts, how to carry them out in stepwise fashion, and how tosustain them in a governance context susceptible to wrongdoing. II. SOFT STATE, VULNERABLE GOVERNANCE The late Swedish economist Gunnar Myrdal, a Nobel laureate, coined the term softstate to refer to developing countries that lack a disciplined and capable bureaucraticculture, a cogent societal fabric, and a strong political will to overcome suchweakness. As Myrdal put it, a soft state has deficiencies in legislation and inparticular law observance and enforcement, a widespread disobedience by publicofficials on various levels to rules and directives handed down to them, and often their collusion with powerful persons and groups of persons whose conduct they regulate(Myrdal, 1970). The Philippines easily classifies as a soft state under this definition.Not surprisingly, the aspects of a soft state extend over those of a poorly or fairly

governed state. That means there is something fundamentally wrong with the waysocial institutions, set of roles, rules, decision-making procedures, and programs thatserve to define social practices and guide the interactions of those participating inthese practices, are established and operated.

As Douglass North, another Nobel-prize winning economist, makes plain, institutions,whether formal or informal, are the means through which authority is exercised in themanagement of resources of the state. They make up, in other words, the enablingenvironment. The observable aspects of this environment that are important enoughto consider, according to Kaufmann (2003), are: (1) the process by which those inauthority are selected and replaced ( voice and external accountability and political

stability ); (2) the capacity of government to formulate and implement policies(government effectiveness and regulatory quality ) and (3) the respect of citizens and


3/76

3

the state for institutions that governinteraction among them ( rule of law and control of corruption ). On these counts of governance, the

Philippines received vulnerablemarks suggesting that the countryis at risk of being ineffectuallymanaged in a context where seriouschallenges remain. In 2005, thePhilippines got a 47.8 percentilerating on voice and accountability,17.5 on political stability, 55.5 ingovernment effectiveness, 52.0 inregulatory quality, 38.6 on the ruleof law and 37.4 in control of corruption. (See Figure 1) Thepercentile rank indicates thepercentage of countries worldwide(the survey covers about 209countries) that rate below theselected country. On the face of it, the countrysscore suggests a tolerable level of governments ability of government to produce andimplement good policies anddeliver public goods, a livableregulatory structure and traderegime, perceptions of relativelyfunctioning democratic institutions(including a free media), a slightimprovement in corruption control(although it remains low), andslight improvement (though lessthan satisfactory) observance of the

rule of law. The lustrous touches,however, are dimmed by politicalinstability, with the World Bank

suggesting that the score placed the Philippines in a state of governance crisis. 2

Box 1 Defining Governance Indicators As used by Kaufmann and Kraay (2005), voice and accountability measures governments preparednessto be externally accountable through citizen feedbacand democratic institutions, and an independent mediawhich serves an important role in monitoring those inauthority and holding them accountable for their actions. Political stability measures perceptions of thelikelihood that the government in power will bedestabilized or overthrown by possiblyunconstitutional and/or violent means. This has adirect effect on the continuity of policies and theability of citizens to peacefully select and replacethose in power. While regulatory quality looks at thepolicies themselves, i.e., at the incidence of market-unfriendly policies as well as perceptions of theburdens imposed by excessive regulation, government effectiveness focuses on inputs required for thegovernment to be able to produce and implementsound policies and deliver public goods. These inputsinclude the quality of the bureaucracy, the competenceof civil servants, the independence of the civil servicefrom political pressures, and the credibility of thegovernments commitment to policies. Rule of law measures the confidence and success of a society indeveloping an environment in which fair andpredictable rules form the basis for economic andsocial interactions. Rule of law means the existenceof checks and balances, regular and predictableregime succession, formally independent judiciary,among others. It measures the effectivenepredictability of the judiciary, the enforceability of contracts, and even the perceptions of the incidence o

k

ss and

f crime. Theory suggests that systems governed by theformal rule of law are likely to perform better thanthose in which rules may be arbitrarily changed(North, 1990). Obviously, the presence of corruptionis a manifestation of a lack of respect of both thecorrupter and the corrupted for the rules, whichgovern their interactions. Control of corruption measures the effectiveness of restraints on theexercise of public power for public gain. Abuse of public office could range from petty bribe tak grand corruption at the highest le

ing tovel.

Looking at historical trends, it is apparent from the figures that despite improvementsfrom 2004 to 2005, the overall quality of Philippine governance has declined from its1998 level (Figure 1). The score lends itself to pessimistic reading. Political stabilityand the rule of law showed the largest decline in the countrys score. Destabilizationhas become a serious concern due to threats of terrorism and spells of military

2 Kaufmann and Kraay (2005) grouped countries into a three broad categories: exemplary above 90th/between75th to 90th; vulnerable between 50th and 75th/between 25th to 50th, governance crisis - between 10th to25th/bottom 10th.


4/76

4

adventurism such as the 2003 Oakwood mutiny. The soldiers who became widelyknown as the Magdalo group claimed that they went to Oakwood to air their grievances about graft and corruption in the military. 3 Allegations of fraud in the 2004presidential elections, and the challenges to the legitimacy of the government of President Gloria Macapagal-Arroyo that they spawned, also continue to make

political stability elusive and hamper the ability of the central government to gainconsensus on important social and economic undertakings.

e 1. World Bank Governance Indicators Countryapshot for the Philippines, 1996 - 2005

01020304050607080

1996 1998 2000 2002 2003 2004 2005Year

Percentile Ranking

Voice and Accountability Political Stability/No ViolenceGovernment Effectiveness Regulatory QualityRule of Law Control of Corruption

Figur Sn

Figure 1. World Bank Governance Indicators CountrySnapshot for the Philippines, 1996- 2005

Source: Kaufmann, D., A. Kraay, and M. Mastruzzi 2006: Governance Matters V: Governance Indicators for 1996-2005.

The countrys capacity to enforce contracts has been put to question due to thenullification of the contract with the Philippine International Air TerminalCorporation, the private firm that constructed NAIA Terminal 3 4. Although thenullification was based on alleged corruption and overcharging, the private sector andthe international community view this as injurious to an investment-friendly businessclimate. The 2005 turnaround is good news but note that the higher governmenteffectiveness and regulatory quality ranking in 2005 only recovered their 2002 level.Despite the presence of a reform-oriented Supreme Court, the quality of Philippinecourts is still perceived to be less satisfactory. Political, extrajudicial killings of

3 On 27 July 2003, 323 junior officers and enlisted men, mostly from the elite units of the Armed Forces of thePhilippines (AFP) took over the Oakwood Premier Apartments in Makati City. The soldiers who calledthemselves the new Filipino heroes and became widely known as the Magdalo group claimed that they went toOakwood to air their grievances about graft and corruption in the military, the sale of arms and ammunition to theenemies of the state, the bombings in Davao City which were allegedly ordered by the then Chief of IntelligenceService of the AFP BGen. Victor Corpus in order to obtain more military assistance from the United States, andmicromanagement in the AFP by the then Department of National Defense Secretary Angelo Reyes. Theincident was brief, lasting less than a day. It ended without bloodshed, nor damage to property (Oakwood FactFinding Commission, 2003:1). Political analysts have suggested that the incident indicated restiveness in themilitary, especially among elite junior officers.4 The Philippine government nullified the contract with the Philippine International Air Terminal Corporation, theprivate firm that constructed NAIA Terminal 3, due to alleged corruption and overcharging. PIATCO has apending complaint in the International Court of Arbitration in Singapore. Fraport AG Germany, which is a partowner of PIATCO, has sued the Philippine government at the World Bank International Center for the Settlementof Investment Disputes (TAG, 2006).


5/76

5

media people, church workers and political activists (which has caught the attentionof international bodies) have undermined the governments capacity to quell crimeand violence. Voice and accountability slightly declined but fortunately has not gonedown to the level of political stability and control of corruption. In this light, it is nothard to imagine why government effectiveness, regulatory quality, voice and external

accountability were considered average only.

Source: Kaufmann, D., A. Kraay, and M. Mastruzzi 2006: Governance Matters V: Governance Indicators for 1996-2005.

Figure 2. Governance Indicators of the PhilippinesCompared with East Asia Average, 2005

0 10 20 30 40 50 60 70

Voice and Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Percentile Rank (Philippines) Regional Average

While collective action is still difficult to achieve, Filipinos enjoy a fair degree of political freedom. The Supreme Court has consistently held back challenges to thisfreedom: its most recent rulings put restraint on executive power on a wide range of issues, including detention without arrest warrants and prohibitions of rallies anddemonstrations 5. The Supreme Court SC rulings are ex-post, corrective butsignificant; abuse of executive power is an ex-ante sign that democratic institutionsare being put to a severe test. Without the Supreme Court decision, already weak institutions would have been eroded further. Elections, despite flawed and obsoletemeans, are regularly held and there are various forms of popular participation. Even

then, periodic elections have not developed a strong sense of accountability amongpoliticians. The clientelist nature of political parties has created incentives tomaintain voters literacy at a low level and held back reforms in campaign financing

5 On September 21, 2005, amidst plans for nationwide demonstrations to mark the 1973 proclamation of MartialLaw by President Marcos, President Arroyo issued CPR (Calibrated Pre-emptive Response), a directive orderingdispersal of unlawful mass action. On September 28, 2005, President Arroyo issued Executive Order 464 barringpublic officials from appearing in congressional investigations without the Presidents written consent. In its April2006 decision, the Supreme Court nullified the CPR policy on grounds that maximum tolerance will be the rule indealing with rallies and demonstrations, and not pre-emptive response. The Supreme Court declared twoprovisions of EO 464 unconstitutional (it upheld the right of Congress to summon officials from executivedepartment) but upheld executive privilege on matters of internal deliberations of the Cabinet, informersidentities, state secrets and matters of national security. (TAG, 2006).


6/76


7/76

7

Not Much Change in Perception of Corruption over Time Although the Philippines exerted efforts to boost investor and citizen confidence bydeclaring anti-corruption as a priority agenda, the foreign business and international

community has not changed its general perception of corruption incidence. To besure, business faces risks from corrupt practices. In 2005, the TransparencyInternationals corruption perception incidence (CPI) stands at 2.5, a few notcheslower than its 2.9 score in 2001 when President Arroyo assumed power after PresidentEstrada was deposed due to allegations of corruption (Figure 3). While it was tooearly then to expect significant improvements from anti-corruption reformsintroduced in the early 2000s, a positive shift was anticipated. But the Philippinescore stagnated across the years.

1.04

1.96

2.77 2.693.05

3.303.60

2.80 2.90 2.60 2.50 2.60 2.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1980

-85

1988

-92

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Transparency International

Figure 3. Corruption Perception Index, various years

It would be recalled that in the period 1997 - 1999, there was already a growingsatisfaction on the decreasing level of corruption in the country, which was ascribedby analysts to policy and regulatory reforms towards greater economic freedom thatare known to impede the occurrence of bribery and corruption. In 2000, CPI droppedto 2.8. The rising governance deficit as revealed by reduced investor confidence,

which in turn was due to the pervasive and deep-rooted corruption present in bothpublic and private sectors brought about the decline in value. Corruption had reachedeven the judiciary and media (World Bank Report, 2001). But from 2001 until 2005, the Philippines has been stuck with lower CPIs: 2.6 in 2002and 2004 and 2.5 in 2003 and 2005. Despite the vigorous efforts of anti-corruptionbodies, the Philippines failed to convince its stakeholders that things are now better.This is due to unresolved high profile cases such as the President DiosdadoMacapagal Boulevard case 8, the Armed Forces Retirement and Separation Benefits

8 Members of the Board of the Philippine Estates Authority (PEA), together with PEA officers, COA auditors, anda private contractor are accused of having approved and implemented the construction of the President DiosdadoMacapagal Boulevard through simplified bidding despite lack of funds, and the final bill of quantities without therequired presidential approval, resulting in overpriced payments (TAG, 2006).


8/76

8

System pension fund case 9, the Public Estates Authority-Amari scam 10, the tax creditscam 11, the Department of Public Works and Highways vehicle repair scam 12,irregularities in the Commission on Elections contract on automated countingmachines 13, cases against Defense Department comptroller Major General CarlosGarcia 14, and recently, the fertilizer scam 15. More so, the enforcement pattern of anti-

corruption policies appears to be erratic, as rule of law itself sits uneasily within thePhilippine patron-client culture. A similar trend in the results on public perception regarding the level of corruption isalso reflected in the Social Weather Stations Business Survey on Corruption. Findings from the first to the sixth enterprise surveys (2000-2006) showed that ratingsof government agencies continually declined in terms of corruption. This means thatthere is a very high and non-diminishing degree of perceived corruption in the publicsector, although not in all the agencies identified. In 2006, agencies net sincerity infighting corruption was relatively lower than in 2005. Half of the agencies shown inFigure 4 suggest poorer scores. Net sincerity went from positive to negative for threeagencies: Department of Justice (+13 to 20), Office of the President (+10 to 15),and the Presidential Commission on Good Government (+5 to 13). Other agenciesreceived same 16 scores while others improved 17, yet, still negative in value.

9 The Armed Forces Retirement and Separation Benefits System was established to create a separate fund to ensure

payment of retirement and separation benefits for members of the armed forces (in lieu of relying on the yearlyappropriations of the AFP). To generate investment revenues, RSBS engaged in the aggressive pursuit of highyields i.e., yields higher than those of risk-free Philippine treasury bonds and bills and made investments in realestate which resulted in massive losses when the Asian crisis struck (Oakwood Fact Finding Commission, 2003).High officials of RSBS were accused of having made sham investments. Cases filed involve charges for malversation through falsification of public documents. The use of falsified Deed of Sale as basis of payment for capital gains and documentary taxes relative to the sale of the subject lots allowed short-changed the government.10 It is alleged that Public Estates Authority officials during the Ramos administration entered into a joint venturewith Amari Coastal Bay Corporation in a reclamation project that was duly disadvantageous to the Philippinegovernment.11 The accused in these cases were charged of having approved Tax Credit Certificates on the basis of spuriousdocuments. Apart from this case, there are 200 more tax credit scam cases pending in the Sandiganbayan (TAG,2006).12 This case involves falsification of vouchers, checks and other documents (covering 4,400 transactions) to payDPWH vehicle repairs which reportedly never took place (TAG, 2006).13 A few months before the 2004 elections, the Supreme Court upheld a petition challenging the Commission onElections (Comelecs) award of the contract for the purchase of counting machines and equipment to a privateconsortium (Mega Pacific) that allegedly did not participate in the public bidding. The Court castigated Comelecfor grave abuse of discretion and nullified the contract for purchase of machines supposedly to be used in the 2004elections. The South Korean vendor rejected the request to buy back the counting machines.14 DND Finance Comptroller Major General Carlos Garcia and his family were charged with amassing andaccumulating ill-gotten wealth of PhP303,272,005.99 in the form of commissions, gifts, kickbacks and other pecuniary benefits in connection with government contracts since 1990 (TAG, 2006).15 This case involves malversation through unwarranted allocation of funds to questionable agriculturalinstitutions/foundations. PhP728 million allocated to congressional districts were allegedly disbursed, through theformer Undersecretary for Operations of the Department of Agriculture, to finance the campaign of theadministration in the 2004 national elections (TAG, 2006). The former DA official has been arrested in the UnitedStates on visa violation matters ( Sun Star Bacolod, July 15, 2006).16 For 2005 and 2006, DPWH and DBM obtained similar scores, -66 and +5, respectively.17 Agencies with better ratings compared to their 2005 net sincerity scores are PNP (-42 to 36), AFP (-38 to 19),BIR (-59 to 58), BOC (-75 to 74), LTO (-45 to 38), and DENR (-44 to 39).


9/76

9

There had also been a declining solicitation for bribes, at least for some transactions.Bribery to win private contracts is less common in the private sector (10% briberycomponent) than in the public sector (15-20% bribery component). Among thefindings of the six surveys undertaken by the SWS, the most pro-active componentmay just be the enthusiasm displayed by the managers in fighting corruption. Thisfigure showed a very positive reaction to the fight against corruption based on an

increasing willingness, expressed in the increasing percentage of net income thatmanagers are willing to give for such an undertaking, from a median of 2% in the2001 survey to 5% in the year 2006. Common conclusions from among the six surveys can be summarized to: (1) severepunishment for corruption must be imposed, (2) material rewards must be given tocorruption-fighters, (3) a percentage of net income for the business sector can berecovered, (4) government can save on contracts by 15-20% while for business, 10%[constant for all the six surveys], (5) 2 out of 3 firms are willing to join an Anti-Corruption Program Fund, and (6) the private sector must also clean up its ranks [thatcorruption is mostly learned from the workplace and that corrupt executives are

seldom punished]. A Constrained Environment for Good Governance Existing institutions and governance quality (context as used here) have a profoundimpact on reform efforts. They shape the way the interests of actors are aggregatedand shaped (Moe, 1990). Context also determines the degree of complementaritybetween new and existing institutions, which ascertains how likely effective andsustainable the institutions will be (World Bank, 2002; Ostrom, 2004). The literature suggests that struggles over institutional redesign involve conflictamong powerful institutional actors. Each actor will assess his or her degree of


10/76

10

support or resistance to any changes in institutional rules based on how his or her power and resource accumulation strategy are enhanced or diminished by thesechanges (Hammand and Knott, 1999). In Philippine political economy, the factions, which are in conflict, have their origins

in the political and economic power of the economic elite. The power center is acentralized bureaucracy that orchestrates the execution of policy and allocation of spoils. Such concentration of power at the top blends with the decentralized power of families and clans, within the context of a neo-patrimonial political system (Azfar,et al., 2000). The flow of power is from regional elites to central state authorities(Franco, 2000). The main political formations Laban ng Makabayang MasangPilipino , Nationalist People's Coalition, Laban, and Lakas are unstable politicalcoalitions, implying no genuine party loyalty exists. The national electoral system,which is nominally competitive (incumbency does not assure re-election---Franco(2000)), is a curious set of first-past-the-post contests, and mainly yields the president,senators and local-council ( sanggunian ) representatives who are elected at large, aswell as Congress members elected from geographic constituencies (along with a smallnumber elected from party lists). The need to share the spoils of political victory oftenincites a scramble by politicians across parties to join the winning presidentialcandidates party (Azfar, et al., 2000). Because the president has discretion over disbursement and big-ticket governmentcontracts, licensing authority, and fiscal management powers---a pattern appropriatedfrom the American presidential system---politicians have to ally themselves with thechief executive to ensure funding for key projects and a major share in the patronageresources of the government. In turn, in the absence of effective political parties, thepresident has to count on local elites for electoral support and mobilization. As aresult, local elites can leverage local power effectively during elections and, in-between, ask for major concessions, through the Congress, from the centralgovernment (Rocamora, 1995). The leverage that the chief executive has on localpoliticians is matched by the leverage that local politicians have in their ability tocollect votes from their local bases of power (Igaya, 1999). This local-central symmetry is perpetuated when Congress members routinely engagein party switching to bolster the ranks of the ruling party in successive elections, apractice which in turn stiffens the lack of any real programmatic or ideologicalseparation among Philippine political parties (Franco, 2000). One result of this system

is that the Philippine legislature by and large does not mediate differing interests; itspolicies, laws and resource priorities are seen widely as directly favoring powerfulconstituencies (Gonzalez and Mendoza, 2002). Also, minorities have little voice(other than as local majorities), especially in national politics (Azfar, et al., 2000). Assuggested by De Dios and Ferrer (2001) as well as Mendoza (2001), these politicalcontests for control of resources are quite intense since the state disposes over asignificant amount of resources and exercises discretion over a wide sphere. To recap: patron-client relations are consolidated upward and find their expression inpolitical factions contending periodically for direct control of government. Theprimary aim of elite struggles is to control the states machinery and resources and to

skew their deployment to favor specific interests. Powerful incentives then work toretain power indefinitely in order to protect such interests (De Dios and Esfahani,


11/76

11

2001). More often than not, politicians themselves design and modify institutions tostay in power. The proposed shift to parliamentary system---although it has intrinsicmerits---is widely seen as an attempt to bypass direct presidential elections and ensurepermanent executive capture because of the no election and holdover rider in theinitiatives to change the constitution. 18 Voting arrangements, constitutional rules,

financing of campaigns and political parties, and other institutions are maintained or revised to keep incumbents in office. Horrendous policies and institutions can be bestunderstood from the perspective of entrenching the incumbents (Djankov, et al.,2002).

Conversely, turnovers---whether electoral contests or more fundamental challenges tolegitimacy, such as attempted coups---may be viewed as opportunities to attain or retain this power. 19 The larger the prizes (a function of the scope of the governmentsinfluence over resource allocation), the greater the likelihood of dissipation of resources through rent-seeking. Various interpretations of Philippine politicaleconomy commonly suggest the likelihood of the capture of the state and itsinstrumentalities by vested interests based on political clans (De Dios and Esfahani,2001).

Filipino politicians invest their time and money to maintain a strong grip over thestate institutions in order to strengthen their influence over state policies. Publicagencies serve as conduits for capture of both policies and public resources. Statecapture implies that corruption is not always merely a sideshow; instead, the verypolitical and economic forces associated with capture play a pivotal role in shapingpolicies and political economy outcomes (Kaufmann and Kraay, 2005) in the processblurring the separation between public duties and private interests. Disregard of thisconflict of interest rule leads to the perversion of the rules of the game, to the benefitof a few, rather than for society as a whole. The Philippine situation may be more than a case of entrenching the incumbents or aclan-based struggle for political power, however. As De Dios and Esfahani (2001)suggest, the Philippines vulnerability may have been sealed by its choice of governance structure, and its concomitant aversion to large gambles, exemplified bythe Asian miracle. The Philippines neighbors had a normally functioning authoritarian set-up, with noregime turnover, which permitted a freedom of action that created the

opportunities for large gambles (like investment in strategic industries or discrimination in favor of or against certain groups). But therein also lies a paradox.

18 In her 2005 State of the Nation Address, President Gloria Macapagal-Arroyo reiterated what she had alreadysaid in previous pronouncements about how the political system has degenerated to become a hindrance toprogress and how it has strained it to its final limits premises for her calling on Congress to initiate moves toamend the Constitution and effect a change to the parliamentary form of government. Members of the oppositionallege that the Charter Change mainly seeks to strengthen President Arroyos power. Under the proposed shift toparliamentary system, the President can seek the post of prime minister after her term expires ( The Philippine Star ,September 29, 2006:14).19Coups are sometimes plotted to further political interests. From the Marcos the administration, a total of eightattempts were chronicled from February 1986 (under the Marcos regime) to December 1989 (during the Aquinoperiod) --- most of which were plotted by Reform the Armed Forced Movement (RAM) military men and Marcosloyalists. Incumbent President Arroyo also experienced military adventurism as manifested by the May 1Rebellion, the Black October plot and the Oakwood Mutiny. Noticeable in all coup attempts was theinvolvement of politicians (Fernandez, 2006: 42-45).


12/76

12

At the time of their rapid growth, Asian countries (notably Malaysia, Indonesia,Thailand) conformed least to the ideal of good governance. Corruption and highlevels of arbitrariness did not deter high levels of investments. On the other hand, thePhilippines, in a reversal of this paradox (exception validated the rule), limped along along history of formal democratic institutions associated with mediocre economic and

social performance.


13/76

13

Box 2 Corruption: A parallel view

Corruption, as a systemic problem, does not exist in a vacuum. It is reinforced and preserved

by two cycles involving human interaction. Each one feeds into the other, in the process adding to theweakness of existing institutions.On the supply side, corruption begins in the context of frail institutions (see Figure 5). This

suggests that the vulnerability of already established systems of control greatly affect the demeanor of individuals and groups. Weak institutions allow informal, tradition-bound norms, such as patronageand clientelism, to dominate bureaucratic practice. They also provide a fertile environment for abuse of power, and the rise of monopolistic structures. Both formal and informal conventions lead to poor policy and law enforcement. Laws can be effortlessly circumvented when oversight bodies can beeasily co-opted.

Political patronage and usurpation induce high-reward, low-risk rent-seeking activities,regulatory capture and the trading of policies (as if they were part of a business deal). Suchstructural distortions impair the efficient and effective functioning of government operations,resulting in low productivity, wastage of scarce resources, and poor delivery of basic services. They in

turn represent a further assault on already weak institutions, and the cycle starts anew at this point.On the other hand, the demand side explains this institutional Achilles heel from aconsumers standpoint. Weak institutions, to repeat, have a severe impact on productivity, use of resource inputs and effective delivery of services. These manifest themselves as bottlenecks in currentprocesses, restricted access to facilities and resources, and other forms of constrictions andinefficiencies. Quick fixes are a favorite recourse in easing restraints in government activities asdiverse as contracting, licensing, public works and textbook supply. That allows suppliers of quick fixservices (patrons and fixers) to provide a means to those who badly need to acquire goods and servicesfrom government---for a fee, of course. Resort to patronage, bribery and employment of fixers maketheir way into the menu of options available to customers.

Acceptance of these methodologies coupled with weak deterring tools encourages anenvironment where incentives for change are few (since transaction costs are perceived to be greater when following the legitimate course), investment in reforms is low (why bother when everyone else is

doing it---the collective action hurdle) and public apathy is pervasive (corruption is treated as a normalphenomenon). Social and political institutions, in the publics view, hardly represent the voice andinterest of the people. That puts a further handicap in the functioning of government, ensuring thepermanence of a low-level equilibrium trap occasioned by weak institutions.

Figure 5. The tie that binds


14/76

14

There was an episode of authoritarianism under Marcos (1972-1986), whichexperimented in its early years with setting up industrial conglomerates akin to thoseof Korea. But the experiment failed as cronyism reared its ugly head and dominatedthe political landscape. The People Power Revolution in 1986 (dubbed EDSA I)produced a reversal. The framers of the 1987 constitution shunned further costly

experiments with dictatorship and instituted clear rules for turnover and succession, aswell as controls on discretionary behavior (De Dios and Esfahani, 2001). At thesame time, it gave the executive strong authority within democratic limits, to avoidthe risks of a policy gridlock with the legislature. The result, according to De Dios and Esfahani, is a halfway house---a regime that hasneither consolidated power under strong central control (but with political interestsstill tightly aligned) nor indefinite tenure, and hence, could neither experiment withhuge risks freely, nor secure long-term policy stability. Its saving grace was that itsrisk aversion to wagers spared the country from too much damage arising from theAsian financial crisis in 1997-1998. In contrast to its high-performing neighbors, itavoided large mistakes made in the form of sectoral overinvestment or social andeconomic discrimination, (which) laid the basis for social conflicts. It is thePhilippines bad luck (or good fortune, depending on how one views it) that it hasavoided both centralization and indefinite tenure. But these institutional choices thatcould forestall an unstable situation for the Philippines may also prevent it fromdeveloping rapidly. The price of a halfway house is a halfway performance, with nomore possibility of spectacular growth. Again, from De Dios and Esfahani: No changes in governance in the Philippines haveoccurred that suggest it will henceforth be able to grow at rates shown in the past byhigh-performing East Asian countries. Investment costs are likely to remain as high(and therefore investment just as low), owing to corruption rents and inter- andintraregime uncertainty. Owing to a constrained regime where interests are closelyaligned (relative to a well-run authoritarian government), the system is likely toextract more corruption rents and generate greater policy instability among investors.Owing to term limits which promote regular turnover which in turn threaten policycontinuity, policy instability and investment costs are also likely to be greater. Yet, for all its weaknesses, the Philippines is far from being a failed state. After all, amediocre score is still a conditional passing mark. To slip into a critical rating,institutions have to collapse dramatically something unlikely to happen in the

Philippines. But that score precisely puts the country in a middling status, unableeither to soar up or go under. Nonetheless, the country has little choice but to pushreforms a little harder than usual to break out of this crippling environment. To donothing is to let already weak institutions waste away or degrade to a state of inertness. What is to be done then, particularly in the anti-corruption arena? Given a vulnerableinstitutional and policy environment, anti-corruption programs have to be carefullyselected and tested to see if they will survive and eventually outstrip these limits.This process combines judgments about both how suitable the particular interventionis (which suggests targeting) and how important such anti-corruption initiative is

compared to any other (potential for welfare gains) (Huther and Shah, 1998). Butbeyond any particular initiatives is the need to orchestrate anti-corruption efforts in


15/76

15

a harmonious way, and link them decisively with other institutional strengtheningdrives. Individual attempts can remain isolated and stuck in a low level trap if theyare not brought to a common action that involves other initiatives. Such a viewimplies a powerful case for a big push as a way of breaking out of this trap andgetting a virtuous cycle going. If the fight against corruption and for strong

institutions can be started on a sufficiently coordinated scale, it will be self-sustaining. What gives glimmers of hope is that the World Banks governance scorecard does notdescribe an unambiguous and unchanging situation. Following Kaufmann and Kraay(2005), it is potentially informative of a countrys position over time. As a heuristicdevice to underscore the pattern of governance existing in the Philippines and gaugethe nature of governance issues confronting the country, it is neither an absolute nor afinal classification of the country on these given dimensions of governance. In fact, itmight be more important to know in which direction (overall trend over time) thecountry is moving rather than its position at any given time. As Huther and Shah(1998) explain, countries can zigzag, progressing on one dimension of governance,falling behind on the other or moving ahead on both fronts simultaneously. Nomatter how hard, the real challenge is how to achieve breakthroughs and continuousimprovement. III. ASSESSING ANTI-CORRUPTION POLICIES: MOSTLY WEAK

LINKS AND A FEW BRIGHT SPOTS The Philippine experience in combating corruption to date has produced largelymixed results. To be sure, the clientelist nature of the political system has conditionedthe responses of the political actors to corruption, and, thus, set the equilibrium levelof corruption. But to a significant degree, this lack of enduring success in governancehas been occasioned by choices made by the country about institutional structures,which in turn, set in motion path-dependent growth patterns and shape incentives for haphazard changes. These institutional choices, old and new, represent a bindingconstraint on further progress in anti-corruption reform. From time to time, windows of opportunity open up and clear the way for better institutional options. For instance, the downfall of President Estrada in EDSA II oncharges of corruption opened a rare policy window to put anti-corruption on top of thenational agenda. The three (3) elements (i.e. problem, policy, and political streams)

identified by Kingdon (1999)20

that are indispensable to moving a vital issue (in thiscase, anti-corruption) onto formal government agenda were all present after GloriaMacapagal-Arroyo took over as president in 2001. The problem stream was ripe: amajority of Filipinos believed that corruption was a priority problem. 21 The politicalstream was perfect: President Arroyo vowed during her inauguration to promote goodgovernance based on a sound moral foundation, a philosophy of transparency, and anethic of effective implementation. The policy stream was fairly developed: at thattime, a comprehensive set of policy solutions to reduce corruption in the country had

20 The problem stream refers to the perceptions of problems as public problems requiring government action. Thepolitical stream is composed of such factors such as swings of national mood, administrative or legislativeturnover, and interest group pressure campaigns. The policy stream consists of experts and analysts examiningproblems and proposing solutions to them (Kingdon, 1999).21 Edsa II is about political corruption. People are outraged by political corruption rather than administrativecorruption because they dont know that giving bribes and dealing with fixers contributes to corruption.


16/76

16

been formulated and proposed by local think tanks like the Development Academy of the Philippines 22 and international organizations like the World Bank and the AsianDevelopment Bank. 23

To a certain extent, the three branches of government (i.e. the executive, legislative,

and judicial branches) took advantage of this unique policy window to introducemajor anti-corruption reforms. Business groups and non-governmental organizations,not to mention the media (the exposs made by the Philippine Center for InvestigativeJournalism 24 are worth mentioning here) also hurdled problems of collective actionnot only to put pressure on the government to curb corruption but also to implementon their own projects that complemented the anti-corruption efforts of thegovernment. It was a rare historic conjuncture for all governance stakeholders. The Executive branch (led by President Arroyo) did attempt to put anti-corruptionback on center stage. The Arroyo administration has adopted both administrative andlegislative initiatives to reduce corruption. President Arroyo revived the PresidentialAnti-Graft Commission to pursue the investigation of allegations of corruption againsther appointees. Under a collaborative arrangement with anti-corruption agencies, theadministration conducted lifestyle checks on government officials with the rank of director and above, which led to the filing of administrative and criminal cases againstsuspected officials. The government increased the number ofprosecutors in the Office of the Ombudsman which improvedthe OMBs conviction rate. A new procurement law nowtightens procedures in government purchasing. Likewise, anew government accounting system has strengthened publicfinancial accountability. New tax administration measuresin the Bureau of Internal Revenue hope to minimize

opportunities for corruption and abuse (NEDA, 2004). TheExecutive Department also has directed national line agencies to prepare their Integrity Development Action Plans (IDAP), a collection of 22 agency-level measureson corruption prevention, deterrence and education. Of these series of actions, a relatively good number, seen on their own terms, provedequal to the task. But generally, they were rendered powerless by poor institutionalchoices, unskillful and ineffective interaction, and lack of inter-agency harmony.

22 In its 1999 study on how to combat corruption, the World Bank recommended nine critical areas for thePhilippine government to address: (1) reducing opportunities for corruption through policy reforms andregulations, (2) reforming campaign finance, (3) increasing public oversight, (4) reforming budget processes, (5)improving meritocracy in civil service, (6) targeting selected departments and agencies, (7) enhancing sanctionsagainst corruption, (8) developing partnerships with the private sector, and (9) supporting judicial reform. Inresponse, the Development Academy of the Philippines, upon instruction of the Office of the President, formulateda National Anti-Corruption Plan which adopted a three-pronged approach to fight corruption: prosecution,prevention, and promotion of intolerance on corruption. The plan includes a Ten-point Jumpstart Anti-CorruptionProgram for immediate execution, which became the basis of many the initiatives undertaken by the Philippinegovernment.23 The Asian Development Bank and the Organization for Economic Cooperation and Development (OECD)jointly developed an Anti-Corruption Action Plan for Asia and the Pacific, which the Philippines subsequentlyendorsed in November 2001 as a viable framework with which to design and implement a national anti-corruptionprogram.24 The PCIJ expos on former President Estrada paved the way for the filing of impeachment charges against himin 2000. Since the 1990s, the PCIJ has conducted and published damning investigative reports on the misuse of pork-barrel of congressmen, textbook procurement scam, election fraud, and lifestyle checks.


17/76

17

Notwithstanding its achievements, the governmentrecognizes the need to strengthen its efforts and build atrack record of success. Among the issues it needs toaddress are: (a) weak enforcement of anti-corruptionlaws; (b) coordination among anti-corruption agencies;(c) low social awareness and high tolerance forcorruption; (d) institutionalizing government-civilsociety-business collaboration; and, (e) enhancingintegrity and accountability in government-businesstransactions. Toward these ends, the government has outlined threeareas of reform in the Medium Term Philippine Development Plan2004-2010. These reforms focus on : (1) enforcement of anti-corruption laws and other mechanisms to make corruption a high-risk, low-rewardactivity; (2) preventive measures to minimize opportunities for graft and corruptionand ensure that systems are corruption resistant; and (3) promotion of zero tolerancefor corruption through education, value-formation and advocacy (NEDA, 2004).

The next sections discuss in detail the mixed, and often checkered, anti-corruptionrecord of the country in the last five years. State Capture: When Economic and Political Forces are Closely Aligned The Marcos regime left a legacy of tightly knit relationships between centralgovernment and big business . Political and economic exchanges were and, still areoften based more on informal and personal relationships than on market transactions.Further stimulated by a presidential system that concentrates decision-making power in the hands of a rather small political elite, the close tie-up between big business andgovernment can be seen as one of the chief causes of corruption in the Philippines.Rules have not been able to adequately sort out the coupling of private and publicinterests. State capture is evinced by these interlocking links, subverting institutionsand raising prospects that they are endogenous to the variety and strength of control of vested interests. When economic and political forces are closely aligned, the veryactors which must adopt and implement policies to curb corruption may face weak, or even negative incentives to do so---all the more so when institutional rules of thegame affect resource accumulation strategies (Fritzen, 2006). The anti-money laundering law illustrates the difficulty facing reformers in counteringthe ties that bind. Legislation, as a formal channel of interest intermediation andalignment, provides circuitry for state capture. A breakthrough in the end---Congresspassed an acceptable law---came only because of outside pressure. Money-laundering, which by definition is a high-stakes operation involving thecollusion of factions of the elite, the banking sector, and international brokers, aswell as the acquiescence of legislature (through the lack of sanctions), stands at theheart of attempts to break intra-elite alignment. In 2000, the Philippines was includedin a list of 15 countries described as non-cooperative in worldwide efforts to counter money laundering because of its Bank Secrecy Law and the absence of bank reportingsystems. In response to this blacklisting by the Organization for Economic

Cooperation and Development (OECD) Financial Action Task Force (FATF), thePhilippine Congress passed Republic Act No. 9160 otherwise known as the Anti-


18/76

18

Money Laundering Act of 2001 (AML 1) to define and criminalize the act of moneylaundering, provide penalties for the crime, and establish the Anti-Money LaunderingCouncil (AMLC) to enforce the regulation. AML 1 however did not serve as apersuasive justification for systemic change in the anti-money laundering effort.Because of the high threshold for scrutinizing suspect money (PhP4 million), and the

need for court order to enforce it, in effect it preserved the alignment of privateinterests, with legislators facing a lame incentive to rock the boat. Elected representatives are susceptible to powerful elite forces out to bend the state totheir will because they have no social coalitions behind their position (Igaya, 1999). The institutional weakness of the Philippine Congress is in a way a reflection of theweakness of Philippine political parties, to which legislators belong. Political partiesin the Philippines are not based on class or ideological differences---they carry nodevelopment paradigm. Hence, Congress is a point of political access for purchasingmajor influence over government policy. Arguably, major legislators are the focus of demands to align Congressional preferences with the interests of firms and individualsseeking (or maintaining) influence over public policy.

Unsurprisingly, the FATF maintained the Philippines in its list, since the law did notpass the benchmark requirements. Hence, the Philippine government was forced topass a remedial measure. The turnaround came in March 2003, when, under pressurefrom the international community, Congress amended the Anti-Money LaunderingLaw to (1) provide authority to the AMLC to scrutinize bank accounts without a courtorder and (2) reduce the threshold amount to PhP0.5 Million. Without theseimportant amendments, which brought AML 2 at par with international standards, theFATF had threatened to impose countermeasures against the Philippines. The changeof heart came about as the number of independent agents that became involved inanti-money laundering policy-making and procedure-setting increased, diminishingthe degree of power concentration among colluding factions in government andbusiness. Without a countervailing pressure from domestic and international anti-money laundering coalitions, AML 2 would not have passed muster. This one brightspot suggests that when incoherent interests transcend their own collective actionhurdles, and build up into a compelling force that is brought to bear on state power, itis possible to override state capture. As of March 2003, the AMLC had frozen PhP954 million in four hundred fifty (450)accounts (World Bank et. al, 2003). AMLC has filed 68 cases in 2005 and 21

additional cases in 2006. AMLC achieved its first landmark (conviction) in June 2006(AMLC, 2006). The new law at least induced spillovers---the Supreme Court has taken steps tostrengthen its own rules on asset forfeiture in money laundering to guide courts incases related to the freezing of assets and forfeiture. This was seen as a part of theoverall goal of intensifying measures against money laundering. The high court haslikewise conducted training on new rules and relevant topics to improve the capabilityof judges and prosecutors in their treatment of money laundering cases. Aninteragency task force led by the Ombudsman is also working towards prosecution of corruption with money laundering.


19/76

19

State capture also suggests purchase of laws and policies to get both the legalframework and the policymaking process out of shape---in a systematic striving for concentrated rents (World Bank, 2000a). Captor firms seek to shop for privileges a lacarte directly from the state---such as individualized protection of their initiallyweaker property rights (World Bank, 2000b). Again, Congress is an easy target in

this regard. A possibly captured legislation is the new sin tax on cigarettes andalcoholic beverage. The Sin Tax Law (Republic Act No. 9334)), which increased thetax rates on cigarettes and alcoholic beverage, became effective January 1, 2005. Firstof all, this tax bill had been contemplated as early as the 12 th Congress as an urgentmeasure to address the countrys mounting fiscal deficit but was not passed until after the 2004 elections. Although politicians have weak inducements to pass a taxmeasure on an election year---the possible costs to their re-election would outweighany social benefits to their constituents---the reason for the ho-hum attitude had to domore with the strong tobacco lobby. Indeed, after sensing strong resistance fromlawmakers sympathetic to low-priced cigarette and alcohol makers, as former FinanceUndersecretary Milwida Guevarra put it, the executive department itself watereddown the provisions of the bill so that it would pull through in Congress (Journal of Congress, 2004). After a long haggling among the executive department, the cigarette firms and thelawmakers, the new sin tax law still contains the distortionary provision of theNational Internal Revenue Code which gives undue advantage to low-priced cigarettemanufacturers such as Fortune Tobacco. 25 The National Internal Revenue Code (of 1996) fixed the tax rate for existing brands. By not reclassifying old brands (theyretained the low levies enforced since 1994), the government lost millions of pesos inrevenues. In the final version, the tax rate increase for low-priced cigarettes is muchlower than the tax rate to be imposed on other brands. Such innocuous rider isunlikely to attract much public or press attention, but is of major benefit to a particular donor. Accordingly, the new brands that will be manufactured after its passage will bepriced as dictated by the manufacturer and this price will become the initial base of taxes. The Bureau of Internal Revenue is supposed to conduct a survey in order to getthe correct retail price so that it can determine the correct taxes that will be imposedon the new brands. But BIR failed to do so. There was a strong lobby not only from new brand manufacturers, but also from notedeconomists, to level the playing field and enable government to raise more taxes. 26 The Arroyo administration promised to rectify the distortion but later retracted its

position. Actually, Congress sidestepped a proposal to index the sin tax rate to

25 The company is owned by tycoon Lucio Tan who also owns the Philippine Airlines and the Philippine NationalBank. He is a known big contributor to many electoral campaigns. As PCIJ puts it, In this country, it is the fieldof contributors that is limited. The money comes mostly from Filipino-Chinese businesspeople; the bigger playersare the likes of Lucio Tan and Eduardo Cojuangco, whose hearts, minds, and pocket the candidates have tocompete for. In exchange, candidates promise them the moon, the stars, and even a piece of the economy (PCIJ,2004:1)26 Former Finance Secretary Jose Isidro Camacho had earlier pointed out that because the National InternalRevenue Code did not allow for a reclassification of tobacco and alcohol products introduced in the market beforeOctober 1996, the government had lost PhP40 billion from 1999 to 2002; and that from Fortune Tobacco alone, thegovernment had lost some PhP28 billion due to the non-reclassification of their old brands. He further said thataccording to the Department of Finance, the reclassification of all brands based on the prevailing price of cigarettescould generate the government PhP27.7 billion compared to only PhP6.8 billion that can be generated by a 20percent increase under House Bill No. 3174 (Journal of Congress, 2004). The final version version passed byCongress was estimated to yield PhP15 billion but enforcement of the law yielded only PhP2.96 Billion by the endof 2005, 80 percent less than the target.


20/76

20

inflation, with Standard and Poor suggesting that the entire legislative exercise wasnot encouraging because of what its passage demonstrates -- that vested interesthas a huge influence in the passage of reform measures (Journal of Congress, 2004).In the main, with few exceptions like the anti-money laundering law, state capture hasencoded advantages in both old and new rules and institutions for narrow vested

interests. The state remains appropriated by the alliance among political and economicelites in many fronts. Institutional Barriers to Casting a Wide Net over Corrupt Acts If it were to cast a wide net, the anti-corruption campaign ought to have substantialeconomies of scale and scope---appropriate bundling of various ex-ante (integritybuilding) and ex-post (prosecution) elements, and benefit spillovers. Seen in this light,how should anti-corruption services be assigned to executing agencies? That indicates at least two types of agencies or institutional arrangements to support awide-ranging process. The first is one that can, on its own, radiate power anddeploy an array of tools for enforcing sanctions against corruption. Its approach couldbe described as combative, or wielding a big stick with raised eyebrows, the centralidea behind which is deterrence, often making it regrettable for government officialsnot to comply with the regulations. The second type is one that can coordinate theanti-corruption campaign across different instrumentalities, ensuring that each unit or office has access to instruments most appropriate to its own initiatives. Consider the first type of institution first. Three factors are central to a well-designedinstitution: independence of approach, adequate resourcing, and sound methodology.If agency autonomy were the most important factor, obviously the Office of theOmbudsman would fit the description. It is formally, statutorily independent from allgovernment agencies. 27 The 1987 Constitution ensures not only its independence, butits existence (Congress cannot abolish it). There are a number of issues hounding theexercise of its autonomy, but consider the two other factors first. For quite a long time the OMB has been faced with scarce resources, rendering itspower to impose sanctions ineffective. As a rule, the public has not been pleased withgovernments efforts to weed out corruption due to the slow progress in theprosecution of high profile corruption cases. It is estimated that, on the average,

corruption cases in the Philippines are tried for a period of six-and-a-half years. Thecountrys historical low conviction record contributes to the perception that corruptionis a low-risk activity, thereby weakening deterrence. This weakness is being attributedto the inadequate capacity and resources of OMB (and the countrys anti-graft court---the Sandiganbayan--- as well) to investigate and prosecute corruption cases. As thePolitical and Economic Risk Consultancy, Ltd. (PERC) observed, the countrys anti-corruption forces are ill-equipped and lacking financial resources to do their jobsefficiently (PERC Survey Issue No. 667). 28 In 2002, only 32 prosecutors from the

27 At one point, it even argued that the Supreme Court should leave it alone, in the Comelec case, as the SupremeCourt instructions compromised its independence. But obviously it could not be above the law itself, since theSupreme Court is the supreme arbiter of the land.28 The Office of the Ombudsman pales in comparison with the Hong Kong Independent Commission AgainstCorruption (ICAC) in terms of personnel, budget and compensation. ICAC has 1,326 personnel for a bureaucracyof 174,175 officials and employees and for a population of 6.8 million, while the OMB has 1,141 personnel for a


21/76

21

OMB were handling a backlog of around 2,000 cases swamping the Sandiganbayan .Here, it must be said that prosecution has high costs, and will not remain a crediblethreat to offenders if enforcers are unlikely to see court proceedings through due tobudget limitations.

To break away from this languor, the Arroyo government strengthened an under-resourced, poorly-equipped OMB by infusing it with a new leadership and supportingthat leadership with a larger budget. The appointment of Simeon Marcelo in October 2002 as the third Ombudsman reinvigorated the national campaign against corruption.Having played a significant role (as private prosecutor) in the impeachment trial of President Estrada, Marcelos appointment as Ombudsman delivered a powerful,although subtle, message: corrupt officials remaining in government would also beprosecuted without let-up. With the cooperation of Congress, the government steadilyincreased the budget of the OMB. From an annual budget of around Php480 million,OMBs budget rose to PhP532 million in 2003, PhP520 million in 2004, and PhP638million in 2005. 29 The larger budget allowed Marcelo to hire additional field investigators andprosecutors. USAID-supported capacity building programs on trial advocacy, forensicaccounting, financial and fraud audits, and field surveillance and investigationcomplemented the increase in operations personnel. The significant improvement inthe quantity as well as the quality of field investigators and prosecutors resulted in atangible bottom line for the Office of the Ombudsman: its conviction ratedramatically improved from a low of 13 percent in 2002 to a decent 33 percent in2005. However, unofficial estimate as of mid-2006 places the conviction rate at 12percent. If this doesnt improve at yearend, it only indicates how fleeting reforms canbe in a weak environment. Is the increased budget allocation sufficient to support the use of an adequatemethodology? The Ombudsman raised the certainty of punishment by implementinga double-docketing system of both criminal and administrative cases. This means thata criminal indictment may be filed in court upon the finding of probable cause (thecriminal part), and in case where substantial evidence is found, the guilty respondentwill be either suspended or dismissed immediately (the administrative part). Thedecisions of the OMB are immediately executory even pending appeal. Despite the budget infusion, personnel augmentation, and shifts in handling cases, the

investigative and prosecutorial powers of the OMB are still severely limited. First, itcannot access bank documents at the fact-finding stage. Second, the law does not

bureaucracy of approximately 1,500,000 officials and employees and for a population of more or less 82 million.Considering the ratio of the number of personnel tasked to secure evidence with the total number of officials andemployees, ICAC has eight hundred thirty seven (837) field investigators, while OMB has thirty-seven (37)investigators. (Subsequently, 51 investigators were hired in 2004.) This would show that for a bureaucracy of 174,175, ICAC has a ratio of 1:208 as against the OMB ratio of 1:17,241 covering a bureaucracy of 1,500,000.With regard to budget allocation, ICAC has a total budget of $90million or PhP4.94 billion, while the OMB hadPhP480 million. It also follows that, with respect to compensation, ICAC officials and employees belong to thehighest paid government officials in Hong Kong. On the part of the OMB, while the Philippine Congress hasalready passed laws granting substantial increases in allowances to members of the judiciary and prosecutors of theDepartment of Justice, the last Congress failed to enact one for the OMB prosecutors and investigators (Office of the Ombudsman, 2005).29 Close to PhP1 billion budget was allocated to OMB for 2006 which would enable the agency to hire moreinvestigators and prosecutors. Unfortunately, the proposed 2006 budget was not passed by Congress.


22/76

22

adequately protect whistleblowers and potential witnesses to corruption cases. Third,the appearance of private lawyers to augment the prosecutors of the OMB is notallowed. 30 Fourth---and perhaps this is the crux of the matter---the performance of theOmbudsman is closely linked with the efficiency of the Sandiganbayan .

Efficiency improvements on the part of the OMB can be easily offset by the slowdisposition of cases in the Sandiganbayan . Reforms in the Sandiganbayan areunderway such as reducing docket congestion to improve case flow management.Nevertheless, such program will not substantially reduce the courts backlog unless itscapacity is improved by creating more divisions, which will require legislation. TheOMB has been batting for the creation of more divisions in the Sandiganbayan .Marcelo said that the five-division Sandiganbayan should have at least 10 moredivisions to adequately handle the corruption cases filed by the OMB. Its workloadstands at about 1,718 cases by the end of 2004, with each justice handling more than400 cases. The existing divisions, in many instances, handle only two hearings for each case every two months. 31 Arguably, even without adequate resource infusion, the OMB has enough capacity toget tough when needed to produce the right climate. If it pursues a few high profilecases (Comelec computerization, fertilizer scam) with vigor, using more combativemeasures, where the use of large penalties is a given, then it could send the rightsignals to corruptors. But this raises the issue of how well it is exercising its statutoryindependence. To be sure, both the executive and legislative branches still exert someinfluence because they provide funding and over time can somehow influence thefunctions and therefore the power of the OMB. This can lead to a lock-in of poor enforcement, especially if the cases have overflows that affect either of the twobranches. At this time, the OMB seems to be risk-averse, in spite of prodding fromthe Supreme Court to resolve the high-profile cases. It faces risks with asymmetricreturns. It is rare that the OMB will be admonished for concentrating on low profilecases, but will often face censure from vested interests if an adverse outcome isrealized on the cases attracting much attention and publicity. That makes the second institutional arrangement worth looking into. To break theinstitutional barriers the OMB is facing, a consolidation of anti-corruption forces,particularly coming from other statutorily autonomous agencies, is a worthy recourse.These agencies, notably the Commission on Audit, the Civil Service Commission,plus OMB itself, would be better placed than others---provided they have the

collective will, capability and incentive to fight corruption---in ensuring wider coordination and presenting a bigger, common front against corruptors. This of course does not absolve the OMB of its responsibility to take on the high profile

30 In 2005, the Office of the Ombudsman has initiated its Operation Big Fish with the aim to indict andsuccessfully prosecute fifty (50) of the most prominent and high impact cases identified at the Sandiganbayan i.e.,the President Diosdado Macapagal Boulevard case, the RSBS pension fund case, the PEA-Amari scam, the taxcredit scam cases, DPWH vehicle repair scam case, PCGG cases, and the Maj. Gen. Carlos F. Garcia case. In thesecases, high-ranking government officials are represented by top-caliber private lawyers. To offset this perceiveddisadvantage, the OMB has initiated a project to tap competent private lawyers, with the help of the CoalitionAgainst Corruption, who will assist its prosecutors in handling these cases.31 The study conducted by the OMB of the 30 high profile cases pending in the Sandiganbayan recorded anaverage of three to four months interval between scheduled hearings in every case, making continuous trialdifficult. The sheer volume of cases being handled by the Sandiganbaya n makes it impossible to promptly disposeof cases. Senator Mar Roxas has filed Senate Bill No. 1970 which seeks to increase the number of divisions of theSandiganbayan from its present five divisions to 44 to enhance its capacity to resolve corruption cases.


23/76

23

cases---no one else could do it---but a united front makes for a stronger countervailingforce, and a better shield to resist the power of vested interests to influence outcomes. In fact, the nucleus of such an alliance already exists. Knowing fully well theinvestigative strengths of each of these constitutional bodies, the Civil Service

Commission initiated an effort to forge stronger cooperation with these oversightinstitutions. Through the Solana Covenant 32, the heads of CSC, COA and OMBsealed a compact to embrace concrete and doable initiatives against corruption. Thethree agencies agreed to join efforts to investigate, prosecute and monitor high-profileand even lower-level corruption cases, and to undergo and share best practices of self-cleansing. (The OMB and CSC both subjected themselves to an IntegrityDevelopment Review 33 before institutionalizing the program in national governmentagencies.) To start with, the CSC and the Ombudsman signed a memorandum of agreement onjurisdiction over administrative cases, to declog the OMB and also to avoid forumshopping. Both parties agreed that the CSC shall take cognizance of all administrativecases concerning first level employees. At times when more than one respondent isinvolved belonging in the second and third level, jurisdiction over the highest- rankedrespondent shall determine which agency has jurisdiction, in this case, the OMB. 34 This is now operational. Declogging has the advantage of relieving the Ombudsmanof the pressure of handling cases that may be numerous, but whose impact is quitelow. These cases should be left to the lower courts and not addressed by a centralbody. Contrast that with a small number of high profile cases to be addressed byOMB, whose consequences for deterrence would be great. In a way, declogging hasleft plenty of elbow room for OMB to focus on the high profile cases. It is unlikely tojustify further OMB indifference on settling these cases conclusively andconvincingly. More importantly, the OMB and CSC are also in the process of linking their databaseson the SALN of government officials and employees, and enhancing their proceduresto enhance compliance and monitoring. The complementation of these three agenciescontributed not only to reinforcing each others capabilities but to the successful filingand conviction of corruption and lifestyle check cases. COA, for its part, has not beenas active as the other two, perhaps because of the ex-post nature of its auditing work.

32 The Solana idea came from CSC Chair Karina David. Solana was an attempt of the three constitutional bodies toembark on a joint effort. The SOLANA Covenant I was signed in March 2004. The Solana II Covenant, signed inJuly 2005, lays down continuing activities, and new initiatives against corruption in the government.33 Integrity Development Review entails a systematic diagnosis of an agencys vulnerability to corruption and thecorruption resistance mechanisms in place to forestall wrongdoings. IDR was developed by DAP with fundingfrom USAID. The Department of Education is the first line agency that underwent integrity review. The CSCinitially employed the IDR, but having seen it tedious, they developed their own customized pre-vulnerabilityassessment/ diagnostic tool to make the measure more user- friendly and less- time consuming. A computer program developed by the CSC supports this mechanism.34 More so, the OMB shall take responsibility of handling complaints involving second and third level officials andemployees involving: (a) direct, indirect, and qualified bribery, (b) fraud and illegal exactions, (c) malversation or illegal use of public funds or property where the amount involved is more than one hundred thousand pesos (PhP100,000.00), (d) conflict of interest or divestment, (e) homicide and murder, (f) corrupt practices, (g) unexplainedwealth, (h) violation of procurement rules and regulations, (i) violation of Anti- Money laundering Act of 2001,and (j) plunder. However, second and third level officials and employees (non- presidential appointees) withcharges do not concern any of the aforementioned violations, the CSC shall have jurisdiction. But as an exemption,when charges are pressed against CSC and OMB officials and employees, the mother agency shall take cognizanceof the cases. To maintain the clear delineation of jurisdiction, a certificate of forum shopping shall be required for all administrative complaints filed in both agencies (CSC, 2005: 17).


24/76

24

But two of its recent moves, although isolated, are worth mentioning. In order to fast-track cases on erring personnel, COA issued guidelines on the immediate liquidationof cash advances. COA further tightened rules by issuing a policy on irregular,unnecessary, excessive, extravagant and unconscionable expenditures (COA, 2004).

A cursory counterfactual assessment of the alliance would suggest that even withoutit, the above actions would have taken place, say through bilateral measures or individual moves. What remains untapped within the alliance is how theconstitutional guarantees of independence that each agency enjoys can translate intocollective power that it can utilize to further the cause of anti-corruption, and resistpressures from entrenched interests to undermine major initiatives. For surely thealliance can be a countervailing force that can ensure that the high level bureaucracycannot consistently ignore the anti-corruption initiatives without a heavy price. Thestrong commitment of these three constitutional bodies to address the problem of unliquidated cash advances is a clear example of how collective will can take place.The issuance of COA Memorandum No. 2004- 14, complemented by CSC ResolutionNO. 04-0676 (Policy Guidelines to Govern the Liquidation of Cash Advances and thePenalty to be Imposed for Failure of an Accountable Officer to Liquidate within aPrescribed Period) and an OMB Memorandum to immediately act on cases filed,resulted in a visible improvement in cash advance settlement (CSC, 2005: 22-24).With COA rendering endorsements, CSC issuing letters to respondents and filingcases against non-compliant individuals, and the OMB prosecuting violators, atripartite synergy will be a strong deterrent to purposively negligent and irresponsiblegovernment officials and employees. Apart from the Solana alliance, offices that are close to national leaders can also carryclout, because they control access to those leaders, which can be as valuable ascontrolling resources. They can tie up and overcome collective action as well. A goodexample is the Lifestyle Check, initiated at the level of the executive offices. Throughthe efforts of the Office of the President-Transparency Group, Department of Financeand members of the Inter-Agency Anti-Graft Coordinating Council (IAAGCC) 35, amemorandum of understanding was signed in 2003 creating the Lifestyle Check Coalition (LCC) which includes 14 government agencies and non-governmentorganizations. In the agreement, the OMB, the CSC, the COA and the PresidentialAnti-Graft Commission, plus the heads of agencies as primary disciplining authority,would cooperate in handling the administrative aspect of the lifestyle check process,specifically in providing information, determining the administrative culpability, if

any, of the accused officials, and in imposing the appropriate sanctions. The OMBhandles the criminal aspect of the lifestyle process, specifically in filing appropriatecases in court and prosecuting officials who failed the lifestyle check. The coalitionaims to pools the expertise, resources, and manpower of its members in spotting leads,obtaining information and prosecuting public officials whose manner of living doesnot correspond to the income they receive. The coalition began in earnest an

35 The IAAGCC is composed of anti-graft bodies such as the Office of the Ombudsman, PAGC, Commission onAudit, Civil Service Commission, Department of Justice, and the National Bureau of Investigation. The LifestyleCheck Coalition, involving other line agencies, non-government organizations and civil society groups such asCatholic Bishops Conference of the Philippines-National Secretariat for Social Action, Transparency andAccountability Network, Citizen National Network Against Poverty and Corruption, United Peoples AgainstCrime, Citizens Battle Against Corruption, Philippine Government Employees Association, National Associationof Corruption Prevention Units, and the National Youth Commission, was organized.


25/76

25

aggressive scrutiny of off-workplace conduct of government officials in order togather evidence of dishonest gain. The product of one is a reactant in the next. Along some kind of a chain reaction,lifestyle checks groups blossomed in other sectors, including six key agencies i.e. the

Department of Finance, Department of Agrarian reform, Department of Health,Department of Public Works and Highways, Department of Environment and NaturalResources, and Department of Education. The Office of the President also conductedits own the lifestyle check on the officials and personnel of the two corruption-pronerevenue collection agencies, the BIR and the BOC, while the OMB was asked toconcentrate on all other government officials holding positions above salary grade 25.As of 2005, two high-ranking officials of the DPWH, six from BIR and six from BOChave been suspended, removed from government service, sanctioned by the OMB, or charged before the Sandiganbayan for failing the governments lifestyle check. 36 Coordinated moves within a sector on a smaller scale could also spell the differencebetween success and failure. The initiative of the Department of Finance and theBureau of Internal Revenue to join hands in running after tax cheats and delinquentscan be said to be an important breaching of a barrier in an enemy's defense, althougharguably tax evasion is not an act of corruption (if no bribery is involved). ThePhilippine government has been losing big revenues due to tax evasion. The NationalTax Research Center reported that from 1998 to 2001, income-tax evasion ratesamong corporations was 38 percent; among professionals, 69 percent; and amongwage and salaried workers, seven percent. The average income-tax evasion rate acrossall sectors is 35 percent. Based on NTRC figures, government lost an average of PhP127 billion a year in uncollected taxes, about PhP85.4 billion of which were fromevasion of income taxes. In early 2005, the DOF Secretary Cesar Purisima and BIR Commissioner GuillermoParayno set a high-profile chase of tax evaders. The Run After Tax EvadersProgram (RATE) seeks to investigate criminal violations of the National InternalRevenue Code of 1997 and prosecute criminal cases that will generate the maximumdeterrent effect, enhance voluntary compliance, and promote public confidence in thetax system. RATE is a no holds barred effort, which at the outset targeted prominentindividuals and corporations to send the message that the government is serious inreducing tax leakages.

In March 2005, among the high profile individuals and companies charged with taxevasion included a member of the Cabinet, a military general, three celebrities, atalent manager, a basketball player, a fitness trainer, a plastic surgeon, and a pre-needcompany. Outside this program, the BIR continued to pursue a PhP25-billion taxevasion case against tycoon Lucio Tan and 69 others before a Marikina City trial

36 Based on OMB reports, the following officials have been dismissed; one Undersecretary and Regional Director from DPWH; one Deputy Commissioner and 5 other officials of the BOC; one Assistant Commissioner, oneRegional Director, one Assistant regional Director and three other officers of the BIR. The Ombudsman has alsofiled cases against: (a) retired Major General Carlos F. Garcia for plunder, perjury and forfeiture of unexplainedwealth; (b) Lt. Col. George A. Rabusa, Maj. Gen. Garcias former aide, for perjury and for forfeiture of unexplained wealth; and (c) former AFP Chief of Staff, Gen. Lisandro C. Abadia for forfeiture of unexplainedwealth and perjury (Office the Ombudsman, 2005).


26/76

26

court. 37 Then BIR Commissioner Parayno attributed the Bureaus record PhP63billion collection in April 2005 to the success of RATE. Even after the resignation of Secretary Purisima and Commissioner Parayno, the BIR continued the RATE program. As of February 2006, the RATE team has filed 47 (44

from 2005 and three in early 2006) criminal charges against certain companies andprominent individuals with the Department of Justice. 38 Very few of these cases have prospered so far; however, with BIR losing a number due to reversals 39 by the DOJ. Watchdogs observed that the RATE program lostluster under the new BIR Commissioner when he announced in July 2005 that theBureau is open to compromise agreements with taxpayers with pending cases. 40 A billamending the National Internal Revenue Code (House Bill No. 4774) has been filed inCongress to give BIR the sole power to administer tax evasion cases instead of referring it to the DOJ. BIRs referral to the DOJ of tax cases for determination of probable cause has become another bureaucratic layer that has considerably sloweddown the resolution of tax cases. According to the theory of optimal deterrence, expected penalties should be setequal to the social costs of the crime, where expected penalties are the amount of thepenalty multiplied by the probability of being detected and penalized. If thegovernment were unwilling to impose high penalties on persons or firms beingprosecuted (which lowers the probability of being penalized), government initiatives(like RATE) would lack credibility, and would induce public pessimism over theentire effort (Dee, 2006). DOJ reversals and slow prosecution of cases illustrate the serious difficulties thatRATE encounters, especially if it stepped on the toes of highly placed officials.Giving DOF quasi-judicial functions to administer the cases might give it more boost,but it would not solve the problem of being too close to the levers of power.Additionally, RATE, despite its laudable objectives to plug tax leakages, is hampered

37 The BIR filed the first case of tax evasion on September 7, 1993 for nonpayment of correct income tax, VATand ad valorem tax for the year 1992. Two similar charges for tax evasion for the years 1990 and 1991 weresubsequently filed. The cases were eventually raised to the Regional Trial Court, the Court of Appeals and twiceto the Supreme Court. Finally, the Department of Justice on December 1, 1998 filed the nine criminalinformations before the Marikina Metropolitan Trial Court. Recently, the Marikina Metropolitan Trial Court,citing lack of evidence, dismissed charges that Tan, his Fortune Tobacco Corp. (FTC) and its executives evadedpaying PhP25 billion by not paying the correct amount of taxes on cigarettes from 1990 to 1993 ( The Philippine Star , October 7, 2006).38 Of these cases, two (2) are pending before the Court of Tax Appeals, four (4) are cases pending before the DOJ(in favor of BIR), four (4) are pending before DOJ (in favor of respondents), 17 are for resolution, and 20 are stillpending investigation (BIR, 2006).39 The DOJ dropped the RATE against former Agriculture Secretary Arthur Yap and his father. The DOJ claimsthere was insufficient evidence against the Yaps, nullifying the BIR complaint against their company DHY Realty.The BIR alleged that the firm bought a 3.2 hectare property for PhP20.6 million and revised the contract amountthree times down to PhP1 million in order to avoid taxes (Philippine Business Magazine Vol. 12 No. 7). Yapresigned from office due to the allegations but was later reappointed as Head of the Presidential Management Staff.The case against singer Regine Velasquez was also reversed.40 Another RATE case involved Rep. Ignacio Arroyo, one of the countrys richest congressmen. A former member of the RATE team said Arroyos tax case arose from supposedly unreported income and unpaid tax fromhis sugar business in Negros. The RATE team was able to trace the discrepancy in the tax payments from theQuedan certificates, procured from the Sugar Regulatory Administration, that Arroyos business issues. Theformer RATE team member said evidence against Arroyo had been gathered and set to be drafted as a legaldocument. But the case had not been filed at the justice department by the time the so-called Hyatt 10, who includeParayno and Purisima, resigned from their posts (Rimando, 2006).


27/76

27

by another weakness: strictly speaking, it is not an anti-corruption instrument. Thereason for this is that it does not go after BIR agents who might have been inconnivance with tax evaders, which resulted in the tax misdeclarations in the firstplace, or have been conveniently negligent in scrutinizing tax returns. It isinconceivable that tax evasion would have flourished if no offering had taken place in

order to gain an illicit tax advantage. A counterpart program, the Run After the Smugglers Program (RATS), was initiatedby the Bureau of Customs in May 2005. RATS focuses on the monitoring of shippedcritical commodities 41, specific ports 42 and areas prone to smuggling operations 43.Aside from being established as an anti- smuggling program, it likewise serves as ananti- corruption program 44 and a mechanism to intensify prosecution of Tariff andCustoms Code of the Philippines (TCCP) violations. Since its creation, RATS wasable to file 16 cases involving 91 persons in DOJ (BOC, 2006). Three of these caseshave been resolved by DOJ in favor of BOC while majority are pendinginvestigations and the rest are submitted for resolution.Save for a few smugglers and customs officers apprehended, there was not muchprogress on this end. Based on current statistics, BOC reported that it lackedresources to implement the program. With recent government infusion of PhP1billion for anti-corruption, RATS is expected to be put on high gear provided theadditional enhancement measures 45 on the program. Reducing Opportunities, Increasing the Risk in the Philippine Bureaucracy For decades now, the Philippine public sector has been typified as poorly managed,where corruption and irregularities have became part of the norm. Bribery, extortion,pilferage, and falsification of records are just some of the illicit practices perceived tobe rampant in the government sector. Rose-Ackerman (1997) says that whenever apublic official has discretionary power over distribution to the private sector of abenefit or cost, incentives for bribery are created. The corruption depends upon themagnitude of the benefits and costs under the control of public officials.

In an attempt to clean the bureaucracy, the Philippine government has carried outseveral reforms to knock down discretion and make e

ac paper (full text)1

Documents