Independent Evaluation

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Mongolia: Governance Reform Program (First Phase)

Compared with other transition economies in Asia, Mongolia managed its transition well until the mid-1990s when budget pressures began to emerge partly due to the large size of the Mongolian public sector. Mongolia's financial difficulties were exacerbated by weak budget management and revenue administration, with limited political will and bureaucratic commitment to maintaining overall fiscal discipline.

The Government subsequently formulated a comprehensive program of public sector governance reforms to be implemented over 10 years (1999-2009), and sought ADB's support through the Governance Reform Program (GRP) to implement the initial phase of reforms over 1999-2002. The Government drafted the Public Sector Management and Finance Law (PSMFL), also with ADB support, to provide the overall legal framework to strengthen governance within the public sector. The complexity of reforms influenced both the design of the GRP and its focus on the implementation of a pilot reform program for selected central bodies and provinces.

Summary of Findings

The GRP was intended to help improve financial management in the public sector by introducing institutional mechanisms to improve financial planning, transparency, and accountability based on the New Zealand model of reform. The GRP also provided much needed budget support to the Government, although the report and recommendation of the President to the Board of Directors of ADB did not provide an explicit justification for the size of the Program loan ($25 million).

The evaluation found limited progress on several key aspects of the reform process (e.g., strategic planning, output-based budgeting, implementing a medium-term expenditure framework). Nevertheless, the GRP realized other significant achievements. It

• supported the preparation of Mongolia's draft PSMFL. The law was extensively debated by parliamentarians and senior public servants before it went into effect in January 2003;



• closed all off-budget bank accounts to improve budgetary constraints on public sector agencies. Government deposits were transferred into a single treasury account, and all transactions are now conducted at the Treasury;



• developed a system for monitoring and reporting the contingent liabilities of the Government;



• developed the technical capacity to connect local and central government administration to a centralized financial management information network;



• implemented a new debt management system;



• improved financial reporting and strengthened independent auditing; and



• developed guidelines and templates to guide general managers of public sector agencies entering into performance agreements with their reporting authorities.

The evaluation rated the GRP partly successful. It was assessed as relevant as it responded to an urgent need of the Government, although the design was overly ambitious and complex and did not adequately identify the risks and assumptions underpinning governance reform. The GRP was less effective in that while some significant achievements had been realized, progress in several key areas was limited, and local government agencies were left behind by the reform process. The GRP was less efficient as the program's effects were limited as compared to its costs. Insufficient technical assistance resources were provided to fast track the adoption of reforms in 17 central agencies and to achieve the desired capacity development outcomes in local government. The GRP was less likely to be sustainable due to a poorly sequenced implementation strategy and the growing demand for the PSMFL to be significantly amended or withdrawn. The performance of both ADB and the Government was mixed.

Lessons Identified

• New Zealand's model of public financial management reforms is not necessarily suitable for other countries, as its successful implementation demands a number of prerequisites. Unfortunately for the GRP, most of the preconditions were not in place in Mongolia at the time of the Program loan's approval, and were not achieved during the course of the loan.



• The evaluation offers a number of lessons regarding Mongolia's legal framework for reform, the need to design and sequence reforms properly, and the importance of taking a long term approach to development.

Recommendation

With the impending closure of its second GRP loan to Mongolia, ADB should take this opportunity to review its comparative strength and strategic approach to governance reform in Mongolia.