This report evaluates the performance of the Corporate Governance and Enterprise Reform Program (CGERP), a policy-based loan the Asian Development Bank (ADB) provided to the Government of the Kyrgyz Republic to improve the performance of joint-stock companies (JSCs) and the four major monopoly state-owned enterprises. The CGERP was rated as partly successful by the evaluation.
To address the identified constraints, the CGERP had six components:
- promoting enterprise efficiency through improved corporate governance;
- imposing financial discipline on enterprises through the phasing out of budgetary support and better debt recovery;
- promoting domestic and international competition to strengthen the environment for foreign direct investment;
- strengthening the legal framework and judicial capacity for insolvency to facilitate the liquidation of nonviable enterprises;
- promoting transparency in financial accounting and reporting; and
- mitigating the transition and social adjustment costs of enterprise restructuring.
Summary of findings
- In terms of relevance, the CGERP was consistent with the Government's overall reform agenda. On the other hand, it did not have a strong fit with ADB's country strategy in force at the time of approval. Reforms in the enterprise sector and in corporate governance were very much needed. However, the potential negative impact of important contextual factors was not sufficiently taken into account in the design, particularly that of poor governance in the public and financial sectors. Also, the assumption that a proportion of JSCs could be the main basis for growth of the enterprise sector has yet to be demonstrated-in fact, many have proven to be nonviable in an economy based on market principles.
- While many of the outputs were produced (and progress continued to be made at the time of evaluation), many obstacles remained for achieving the CGERP's purpose. Clearly, reforms in the areas covered take longer to realize than was envisaged.
- The level of policy dialogue during implementation was inadequate, particularly in light of frequent changes in government and key personnel during the program period. High-level engagement and oversight were mostly absent. Tangible benefits are yet to be substantially realized, so value for money was assessed as low. Efficiency in the use of counterpart funds was also assessed as low as these were not used to fund the costs of adjustment.
Lessons identified
- A substantial majority of legacy JSCs appear to be nonviable in an economy based on market principles. Improvements to corporate governance in such enterprises are unlikely to contribute to resolving their plight. Bankruptcy and a disposal of the assets is probably the only solution.
- Notwithstanding the apparent need for bankruptcy, there is considerable (and often understandable) opposition in the Government and bureaucracy to liquidation as a solution to enterprise failure. Overcoming this opposition is likely to be critical to making further progress. In other words, bankruptcy must become a politically feasible solution.
- It is important to ensure a sufficient set of conditions (to the extent possible) for achieving intended results in order to have a greater chance of producing positive outcomes. This was not the case in the CGERP.
- Reforms need to put a greater-or at least concurrent-emphasis on providing incentives for good corporate behavior rather than solely attempting to prevent and penalize poor behavior. They also need to minimize opportunities for discretionary decision making by civil servants as this also provides the opportunity for corruption and rent seeking.
- More attention needs to be placed on the political economy dimensions of reform ex-ante along with much closer monitoring of the likely consequences of shifts in political power and direction during program implementation and after. A change of government and movement of the champions of reform to less influential positions need to trigger a comprehensive review of a policy-based loan. Supervision of such loans and the associated technical assistance needs to be more constant, more focused on purpose achievement, and more cognizant of political economy dimensions.
- The recognition of the need to build a policy capability within the Government concurrent with the CGERP was laudable. This should be a part of every policy-based loan where such capacity does not exist or is weak. However, care needs to be taken to ensure that capacity is built in those departments with influence over the policy agenda.