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p. 4 of 13 BACK | NEXT I. Introduction II. ADB's Governance Policy III. Implementation of ADB's Governance Policy A. ADB's Governance Activities B. Assessing the Impact on the Four Elements of Good Governance C. Addressing Governance Issues-ADB's Instruments D. Developing ADB's Capacity to Address Governance Issues IV. Lessons Learned V. Medium-Term Governance Agenda and Action Plan 2000-2004 VI. Conclusions and Recommendations

Promoting Good Governance: ADB's Medium-Term Agenda and Action Plan (2000) : III. Implementation of ADB's Governance Policy

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A. ADB's Governance Activities

14. Since governance covers a complex range of issues that are best integrated into sectoral work or overall country strategy, responsibility for specific governance activities has been delegated to individual ADB work units (Figure). The Strategy and Policy Department (previously the Strategy and Policy Office) is the focal point for review and implementation of the governance policy.

15. ADB has been active across a wide spectrum of governance activities (Appendix 1). An analysis of this large amount of work identifies a need to link governance interventions to more focused and coherent governance strategies for each borrowing DMC. ADB also needs to determine the areas in which it should develop its own competencies and what can be left to other agencies or to consultants. A coordinated and consistent approach to improving governance needs to be developed by all aid agencies engaged in such work in each DMC before governance can become a driving force for improved government performance and for a more balanced allocation of resources to programs in which the poor are able to enjoy a rightful priority.

16. The centerpiece of ADB's programming process in the DMCs is the country operational strategy (COS). Out of the COS flows the annual country assistance plan (CAP)¹. Initially, after adoption of the governance policy, there was little discussion of governance issues in the COS. As a result, prospective loans and technical assistance (TA) paid insufficient attention to governance considerations. This is now changing. Governance review papers are being prepared for each DMC, so that the COS can address pressing governance issues (including corruption) that are impairing the effectiveness of development assistance. Since 1998, six such papers have been produced². The one for Thailand is on ADB's governance web site³, and was used to develop a separate governance strategy paper for the country.

17. The following discussion of ADB's governance activities since 1995 is organized by key governance themes. Appendix 1 provides details of a select number of governance projects in each of these areas. Table 1 highlights some of ADB's performance during this period.

1. Core Government Functions and Public Sector Management

18. Country size is a limiting factor in ADB's capacity to address issues pertinent to all levels of government. Consequently, assistance has been mostly directed at smaller DMCs. ADB has processed six program loans for the Pacific DMCs and is developing two more to address governance issues that affect all government levels. Most of the programs were preceded by serious fiscal crises in the DMCs concerned. Therefore, the loans have major macroeconomic and governance objectives. They aim to (i) reduce public sector expenditures, (ii) privatize nonperforming state-owned enterprises (SOEs), and (iii) introduce performance orientation into public sector management. The programs were generally successful in meeting the first two objectives. Performance improvement has proved more intractable, possibly because there has been too great an emphasis on improving budgeting and not enough on improving the overall management of the agencies concerned. However, the groundwork for performance improvement has been laid, and it is now being more effectively addressed.

19. In I999, ADB approved its first loan targeted exclusively at governance reform⁴. The loan to Mongolia supports the pilot phase of a 10-year, Government-initiated public sector reform program, under which reforms will be implemented across three parts of the public sector (central budget, local governments, and SOEs) and will address budgetary processes and administrative aspects. The loan recognizes realistic timelines for the introduction of improved processes in public expenditure management and public administration.

a. Public Expenditure Management

20. Many of the programs in the Pacific and the governance loan to Mongolia target public expenditure management as a critical dimension of public sector reform. Reducing expenditure and making government departments more cost conscious and output oriented are key drivers of change. Improvements to public expenditure management have also begun for Papua New Guinea and Sri Lanka. In part, the programs recognize the need for economists and accountants, using information technology, to produce forecasts to set a framework for budgets, to generate agreed estimates, and then to relate budgets to specified performance. In these projects, attention is also being paid to enhancing staff capacity to manage the systems.

b. Public Administration Reforms

21. Improving medium-term budget frameworks and public expenditure management requires changes in procedures and systems. In contrast, public administration reforms are more difficult to introduce because they can entail

1. making the civil service more merit-based and providing adequate legal protection to ensure they are independent, and thus less amenable to undue political influence and patronage;
2. making the civil service more performance oriented, which may not fit in with the culture of tolerance and sociability
3. ensuring that civil service pay is competitive with the market (often this requires significant downsizing, which can be difficult politically and may involve serious front-end payments to retrenched civil servants);
4. changing the machinery of government to make its operations more efficient (this usually requires reducing the number of ministries and departments, and therefore ministers); and
5. redefining the functions of ministries within a narrower range of core functions, which threatens existing spheres of influence

22. Reforms of this nature are necessary preconditions for corruption to be reduced. They are also required to remove civil service inefficiencies, so that money appropriated for service delivery produces more and higher quality outputs. In this way, programs targeting poverty can produce better results.

23. There have been few opportunities for broad-based public administration reform in the region so far. Most of ADB's work in this field has been in the Pacific. There, the public sector reform program loans have involved general downsizing and, in some cases, a small reduction in the number of departments. However, downsizing has not yet been accompanied by a review of civil service pay. Hence, the civil service has difficulty retaining key professionals (e.g., lawyers, accountants, and information technology specialists) and competent officers if they are underpaid, and an effective public sector cannot afford to be deprived of its most talented people. In Mongolia, the Governance Reform Program does not envisage any further downsizing of the public sector; there, the reforms are directed at focusing the government on core functions, and putting in place a system of personnel management that rewards with proper incentives and discourages corruption through performance contracting and output-based systems. In Nepal, the government, with ADB support, has carried out a civil service census that will become the foundation for a computerized personnel information system that will be routinely updated and eventually linked to the payroll.

c. Legal System Reform

24. Law and policy reform is central to predictability, one of the four essential constituents of ADB's approach to governance. Legal and regulatory frameworks also ensure (i) participation (e.g., laws imposing notice periods before passage of secondary legislation or executive orders that affect communities); (ii) transparency (e.g., laws that require disclosure of information); and (iii) accountability (e.g., laws granting citizens the right to challenge administrative action before an ombudsman or the courts). ADB's law and policy reform activities have focused on four broad areas.

25. Developing Legal Information Systems. Creation of legal information systems that are readily accessible to citizens is an important pillar of the rule of law. Knowledge of the law is important to empower citizens and create a stable environment for economic transactions. Yet access to legal information faces major impediments in many DMCs. Laws are not necessarily compiled in one centralized place, and may not be published or readily available to the public. ADB has initiated work to compile and publish laws in the People's Republic of China (PRC) and Tajikistan.

26. ADB has also launched Project DIAL (Development of the Internet for Asian Law, an Internet subscription-based service for legislators and public officials in DMCs), and LAW-DEV, an Internet forum that provides a link for communication of ideas and information among more than 600 participants in 40 countries. Project DIAL, LAW-DEV, and Bulletin on Law and Policy Reform⁶, provide important sources of information about DMC law reform activities and TA for law and policy reform.

27. Creating the Capacity to Implement and Administer Laws. Drafting of laws has long been a feature of ADB operations. However, passage of laws, though significant, is only one step in the process of law reform. Weak administration and enforcement of laws is common and threatens to undermine the legitimacy of many DMC⁷ public institutions. One important reason for this is the poor state of legal education and training. Midcareer training of government officials, judges, and lawyers has, therefore, been emphasized in ADB's law and policy reform activities. To strengthen capacity for law administration, ADB has supported training needs assessments in several DMCs. As a result, ADB is helping (i) retrain government legal officers in Viet Nam; (ii) establish an institute to provide continuing legal education for government lawyers, judges, prosecutors, and other legal professionals in Mongolia; and (iii) establish a law school and training in court administration and continuing education for judges in the Maldives⁸.

28. Legal Reform for Private Sector Development. Economic law reform, particularly development of business laws necessary for the functioning of a market economy, is another feature of ADB's law and policy reform activities. For example, ADB has helped Mongolia develop its legal framework and the Kyrgyz Republic develop a legal and regulatory framework for corporate governance⁹.

29. Laws relating to credit, security, and insolvency are essential for a well-functioning market economy. ADB has been active in developing insolvency laws and procedures to deal with state enterprise reorganization and liquidation in the PRC, introducing a collateral security registration system in Viet Nam, and establishing a new regulatory framework for secured transactions in Indonesia¹⁰. ADB has also played a significant role in developing legal and regulatory frameworks for capital markets in a number of DMCs.

30. Systemic Legal and Judicial Reform. Protection of property and contract rights requires appropriate laws on the statute book, and more importantly, a set of institutions that can enforce such laws. Creating a functioning efficient legal and judicial system is perhaps the biggest challenge facing the DMCs. ADB is responsive to the need for systemic reform. For example, TA to Pakistan supported a thorough diagnosis of the legal and judicial sector, and under a further TA¹² many of the recommendations from this diagnosis study will be pilot-tested as a prelude to a possible loan in 2001.

d. Enhancing Service Delivery

31. Most ADB projects aim to improve the availability and quality of public services. Concentrating only on investment in infrastructure is not sufficient; a focus on improving service delivery is crucial for getting the most out of budget appropriations and providing more and better services. It is also central to improving the prospects of the poor. Quality of public services, in turn, depends on institutional capacity and the incentive structure of the agency concerned. To address capacity, almost all ADB projects include a significant capacity-building component, usually provided through TA. The effectiveness of TAs was reviewed in 1997¹³. It led to (i) the introduction of the cluster TA; (ii) improved policies, guidelines, and procedures; and (iii) improved design focusing on agency weaknesses that need to be addressed to improve service delivery. However, a key need, which has not received sufficient attention in ADB operations, is to transform the orientation of public services from inward-looking to customer-orientated to allow customers a greater say in the coverage and quality of services delivered. Where there is competition, as in the private sector, consumers can express their preferences by exercising choice. In the absence of competition, consumers need to have a forum to voice their opinions about the services provided which, in turn, requires government to provide such forums for opinions to be expressed and grievances to be dealt with.

e. Public Accountability

32. Public Accountability Institutions. In cooperation with the World Bank, ADB undertakes country financial accountability assessments. Seven such assessments have been undertaken in 2000¹⁴. These analyze the degree to which a DMC's practices differ from internationally accepted standards, and the steps needed to rectify the divergences. In addition, ad hoc reviews are conducted in the context of individual projects. Other methods to improve audit standards are also being pilot tested. For example, in Indonesia international audit firms are required to submit reports through branches in Organization for Economic Cooperation and Development (OECD) countries to ensure that proper standards are followed.

33. Anticorruption. ADB has strengthened its procurement procedures by including anticorruption and transparency measures. A new anticorruption unit was established in ADB's OGA. The unit has experienced, externally recruited investigators. Staff guidelines were developed to review internal control procedures of executing agencies under ADB-financed projects. Officers now conduct a detailed examination of the internal controls and financial management rules of executing agencies as a formal component of loan approval. Inadequacies must be remedied as part of all loan programs. A rigorous review of compliance with covenants and assumptions is undertaken annually, and loans are suspended if audit reports are overdue by more than 12 months.

34. As of 15 September 2000, 96 cases had been investigated. Of these, 64 have been closed and 13 firms are now ineligible for ADB work for 2-7 years. In addition, 30 individuals are ineligible from two to an indefinite number of years. The number of firms and individuals who have been sanctioned is shown in ADB's web site, and their names are listed on ADB's "Sanctions" bulletin board.

35. ADB is also increasing support to the DMCs in their fight against corruption. A case in point is Indonesia. In May 1999, ADB adopted an anticorruption action plan for Indonesia. The plan was discussed at a workshop where key Government ministers and senior officials expressed support for its implementation. Since then, TA to establish an independent anticorruption commission was approved¹⁵. A participatory process for developing TA proposals to support the Government's anticorruption efforts is under way. Work to strengthen the Attorney-General's Office in prosecuting white-collar crime was also initiated.

36. Money laundering-a symptom of corruption-poses risks to the stability of the region's economies, particularly the small, vulnerable Pacific DMCs. ADB, therefore, maintains a close liaison with the Asia/Pacific Group on Money Laundering, which works closely with the Financial Action Task Force (FATF) and promotes the FATF 40 recommendations. In 1999, ADB hosted the second annual meeting of the Asia/Pacific Group on Money Laundering. In advising Vanuatu on amendments to its Offshore Finance Center Act¹⁶, ADB sought to strike a balance between the country's needs to attract genuine investment and to avoid becoming a haven for money laundering. ADB also seeks to inhibit money laundering through its programs of financial sector reforms. For example, one of the requirements of the Financial Governance Reform Program loan to Indonesia¹⁷ is enactment of legislation to prevent money laundering. The preparation of similar legislation was covenanted under the Financial Sector Program loan to Samoa¹⁸.

2. Improving Governance at Subnational Levels of Government

37. Moving decision making as close as possible to affected citizens increases the likelihood of more efficient and responsive government. Physical proximity also makes it easier for citizens to hold local officials accountable for performance. However, making such changes happen is often difficult because they impinge on power relationships within a government. Nevertheless, in the Philippines, ADB has contributed to this process. Reforms supported in the Philippines devolve administrative and financial management from central to provincial and municipal governments. In parallel, other interventions help strengthen the capacity of local governments in planning, financial management, and implementation of development activities and projects.

38. In Indonesia a number of activities toward decentralization have proceeded²⁰. These will devolve administrative and fiscal authority from central to district governments; build capacity at the district government level, particularly emphasizing efforts on poverty reduction; and give autonomy and responsibility to local schools and health services through village and district communities, to better meet local needs. These interventions have been designed to also provide incentives for local decision makers to direct their efforts toward poverty reductions to the extent possible.

39. ADB has also provided support for strengthening financial management, legal structures, and service delivery at subnational levels to improve fiscal management, achieve a more cost effective and sustainable service delivery, and drive change in urban local governments in a number of DMCs. These efforts have had a strong capacity-building component, as exchange of information with and learning from peers have proven to be potent means for effective reforms at subnational levels.

3. Public-Private Interface

40. Good public governance is important to encourage the development of the private sector, and has a vital role in improving governance in the private sector. The Asian crisis highlighted the need for DMC governments to address the weaknesses in the legal and regulatory frameworks within which the financial sector and private corporations function. In this crucial area, ADB has undertaken a number of activities.

a. Financial Governance

41. In the aftermath of the Asian crisis in 1997, corporate governance and financial sector reforms became central to the debate among policymakers and aid agencies. Weak enforcement of the principles of corporate governance was identified as a major contributing factor to the crisis. ADB assistance to the countries worst hit by the crisis-Indonesia, Republic of Korea, and Thailand-has had a focus on financial and corporate governance. In Indonesia, such assistance aims to improve resource allocation in the financial and public sectors (through adoption of good practice in financial governance); increase disclosure and transparency of financial information; and strengthen legal and regulatory frameworks of the financial sector. In the Republic of Korea, ADB emphasizes restructuring of financial institutions, strengthening of regulation and supervision, and introduction of measures to liberalize and further develop the capital market. In Thailand, the focus is on fundamental reforms for transparency and accountability in the financial sector. Under TAs in insolvency and secured transactions law reform, ADB has highlighted the importance of efficient and well-functioning legal frameworks for insolvency and secured transactions for the financial system²¹. ADB has also pioneered an integrated approach to insolvency and secured transactions law reform, which is now being applied in Nepal. Continuation of the financial and corporate governance reforms is critical to sustain the ongoing economic recovery in the crisis-affected DMCs.

b. Corporate Governance

42. ADB views corporate governance more broadly than just the internal governance of private corporations. As a development institution, ADB is also concerned with the broader regulatory framework (as it pertains to the private sector and SOEs), the policy framework to ensure competition and contestability, and the responsibility of firms as good corporate citizens (including implications for pursuing sound environmental policies).

43. A number of loans and TAs have been provided to improve corporate governance in ADB member countries. Recipient DMCs include India, Indonesia, Kyrgyz Republic, and Thailand. Much of this work is focusing on improving corporate governance of SOEs and involves adjustments to the legal framework and strengthening of insolvency procedures.

44. In its private sector operations, ADB places paramount emphasis on good corporate governance and has had some recent successes in efforts to improve corporate governance practices in the region. For example, the fund manager of the THAI SME Fund (involving a $25 million equity investment by ADB) has agreed to require each investee company to comply with the best corporate governance practices. Also, the Global Trust Bank in India has accepted most of the principles of corporate governance enunciated by ADB and is one of the few banks in Asia to announce its written and transparent corporate governance code. ADB is discussing a similar approach with other banks in India.

45. In addition to its operational work, ADB has been actively supporting Asia-Pacific Economic Cooperation (APEC) initiatives on corporate governance. ADB was part of the core group for the 1998 Initiative on Corporate Governance that examined the leading issues in Asian corporate governance. In addition to country studies on the PRC, Indonesia, Republic of Korea, and Philippines, ADB took the lead in preparing the report to the APEC finance ministers at their May 1999 meeting outlining key issues and providing a practical guide for strengthening governance in the region. ADB has also been collaborating with OECD, and joined with it and the World Bank in organizing the Asian Corporate Governance Roundtable in Hong Kong, China in May 2000.

c. Regulatory Frameworks

46. ADB has an established track record in helping DMCs improve regulatory frameworks, particularly in energy, banking and capital markets, and bankruptcy and liquidation. For example, ADB-financed capital market program loans to Bangladesh, India, Pakistan, and Philippines have promoted legal reforms to strengthen the oversight and enforcement capabilities of securities and stock exchange regulators²².

47. ADB has also been active in improving regulatory systems affecting the natural environment. Civil society, and particularly the poor, are often the victims of weak environmental management. ADB has tried to address their concerns. As a result, critical environmental legislation has been passed in one case, the urban poor have determined the improvements required in urban services and environmental quality in another, and industries have introduced clean technologies in a third. A less successful aspect of these initiatives was the attempt to get the DMCs to adopt environmental accounting practices.

4. Civil Society

48. There is often a close relationship between strengthening of civil society and good governance. Strengthening of civil society is a key to creating the momentum for reform where support for improved governance may be weak. ADB, especially in the Pacific, has been pilot testing mechanisms to provide civil society with a voice in the political process, at the national and subsidiary levels of government. Such mechanisms are promising, but more work needs to be done to develop and sustain civil society forums and other mechanisms in the interests of good governance. One such example has been the Cook Islands Public Sector Reform Program, in which two forums were established for civil society's involvement. One was the National Development Committee, an advisory body and think tank for the Government. The committee's principal duty is to comment publicly on the budget. The other is the Public Expenditure Review Committee, which investigates issues of abuse and other matters referred to it by citizens.

49. ADB recognizes the importance of NGOs as a key component of civil society. While ADB's financing instruments do not yet include direct assistance to NGOs, ADB cooperates with them in several other ways, e.g., as consultants to design or supervise ADB projects. Bilateral aid agencies usually have better instruments than does ADB to work with NGOs. In the future, ADB will focus more on working cooperatively with bilateral aid agencies to strengthen civil society and the part that NGOs play in civil society, both directly and as a conduit to other institutions that influence public opinion.

50. ADB's 1998 paper, Cooperation between the Asian Development Bank and Nongovernment Organizations²³, recommended expanded cooperation with NGOs in project activities, in programming and country-level work, and in policy cooperation. The main objective is to integrate NGO experience, knowledge, and expertise into ADB operations, such that these more effectively address ADB's development agenda. At the same time, the role of NGOs as increasingly significant participants in development processes will be recognized. To enhance ADB's cooperation with NGOs, a high-level committee and a Task Force on ADB's Institutional Arrangements for Cooperation with NGOs have been established. The latter has suggested the establishment of an NGO center and a network within ADB.

51. In 1996 a pilot fund was established using TA²⁴ to encourage participatory processes in ADB projects and programs. Under this initiative, 15 operational activities received support involving 11 DMCs, 11 subsectors, and different phases of ADB's operations. ADB staff identified stakeholders, built alliances within the DMCs, and designed workshops and other participatory events, thus contributing to greater participation and ownership by DMCs in the small number of projects involved. A second phase of the TA began in January 2000. Under this phase, ADB is assessing participation needs on a case-by-case basis, committing significant funds where appropriate. For example, $6.8 million has been allocated to mainstream local participation in irrigation design in Bangladesh²⁵ and $4.0 million to support participation in urban development in Rajasthan, India²⁶. To support the latter, ADB is undertaking a TA²⁷ to develop a model for participation in projects. An important aspect of participatory processes is the need to inform beneficiaries of their rights under various legal and regulatory frameworks (e.g., water user associations) supported under ADB projects and how to avail themselves of these rights. The ongoing work under a regional TA²⁸ will assist ADB in mainstreaming lessons learned in legal literacy into its project designs.

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