Governance and Anticorruption in Project Design...x Governance and Anticorruption in Project Design:...

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Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.orgISBN: 978-971-561-872-4Publication Stock No. TIM090586

Governance and Anticorruption in Project Design

Inclusive economic growth, environmentally sustainable growth, and regional integration are the Asian Development Bank’s (ADB) strategic priorities. Governance is a key issue and a driver of change that cuts across these strategic priorities. To successfully employ these strategic priorities, ADB staff need to understand the particular governance and anticorruption issues and risks related to each strategic priority. They must also be able to incorporate measures into ADB projects that promote good governance and prevent corruption. This Governance Guide seeks to equip project counsel with the knowledge to assist project teams in integrating governance and anticorruption measures into ADB projects and across ADB’s core priorities.

About the Asian Development Bank

ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.



Office of the General Counsel Guide Asian Development Bank

© 2010 Asian Development Bank

All rights reserved. Published 2010. Printed in the Philippines.

ISBN 978-971-561-872-4Publication Stock No. TIM090586

Cataloging-In-Publication Data

Asian Development Bank.Kala Mulqueeny. Governance and Anticorruption in Project Design: Office of the General Counsel Guide, Asian Development Bank.Mandaluyong City, Philippines: Asian Development Bank, 2010.1. Governance. 2. Anticorruption. I. Asian Development Bank.

The views expressed in this book are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent.

ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use.

Use of the term “country” does not imply any judgment by the author or ADB as to the legal or other status of any territorial entity.

ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB.

Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, PhilippinesTel +63 2 632 4444Fax +63 2 636 2444www.adb.org

For orders, contactDepartment of External RelationsFax +63 2 636 [email protected]

Contents

Foreword vAcknowledgments viAbbreviations viiExecutive Summary ixPurpose of the Governance Guide ixHow to Use this Governance Guide ixADB Policies and Strategies xMultilateral Initiatives on Governance and Anticorruption xiTools Available to Project Counsel xiiProject-Specific Risks xivProject-Specific Governance and Anticorruption Measures xv

Introduction 1

The Governance and Anticorruption Agenda in Context 3Meanings of Governance and Corruption 5Governance and Corruption Risks 7Structure of the Guide 9

Chapter 1: ADB’s Governance and Anticorruption 11Policies, Strategies, and Procedures

Overview 11ADB Policies and Strategies 14

Chapter 2: International Law 43 and Multilateral Initiatives on Governance and Anticorruption

Overview 43International Law 43Multilateral Harmonization Initiatives 48Multilateral Development Bank Policies and Procedures 51International Organizations 64Regional Initiatives 68

iv Governance and Anticorruption in Project Design: Office of the General Counsel Guide

Chapter 3: Governance 73 and Anticorruption Tools

Overview 73Governance Tools 74Anticorruption Tools 81Tools on Procurement 84

Chapter 4: Governance and Anticorruption 87 Measures in ADB Interventions

Overview 87Risk Analysis and Institutional Assessments 87Indicators of Corruption Risks in Projects 92Governance and Anticorruption Project Design Measures 95

Chapter 5: Public Sector Covenants 125

Overview 125Governance Policy 125Anticorruption Policy 126Governance as “Sound Management” Design Features 128Project Design Features: Supervision and Monitoring 131

Chapter 6: Specific Cases of Governance 145and Anticorruption

General 145Corporate Governance 145Governance and the Regulation of Public Utilities—Water and Energy 153Social Sectors—Health and Education 168Decentralization 173Disasters and Emergencies 180Anti-Money Laundering 184Environmental and Natural Resource Governance 188Climate Change Governance 197

References 201Appendix 1 225Appendix 2 241

Foreword

Governance is a key issue and a driver of change that cuts across the Asian Development Bank’s (ADB) three strategic priorities of inclusive economic growth, environmentally sustainable growth, and regional integration. ADB staff need to understand governance and anticorruption issues to successfully employ these strategic priorities and incorporate measures promoting good governance and corruption prevention in ADB projects. Moreover, the mandate of the Office of the General Counsel (OGC) to assist operational departments with promoting project-specific governance measures stems from Article 14 (xi) of the ADB Charter. This requires ADB to ensure that the proceeds of any grant, loan, guarantee, or investment are used solely for the purposes for which ADB provided the finance.

This publication—Governance and Anticorruption in Project Design: Office of the General Counsel Guide (the Governance Guide)—evolved from ADB’s response to the 2004 Asian tsunami disaster. As part of that response, OGC developed and coordinated an approach to assist ADB staff working on ADB’s tsunami assistance projects to promote good governance and anticorruption in ADB’s tsunami response projects in India, Indonesia, the Maldives, and Sri Lanka. Innovative and interested project teams in South Asia and Southeast Asia were receptive to and encouraged these governance themes in the four post-tsunami projects. Later in 2005, a similar approach to governance and anticorruption was taken in the Pakistan Earthquake Emergency Assistance Project. OGC has since worked with operations departments to develop governance and anticorruption design features for other projects, where project leaders consider such measures appropriate.

The Governance Guide seeks to collect this operational knowledge and provide ADB staff, principally counsel from OGC, with guidance on ways to help project teams and developing member countries formulate corruption-prevention measures and sound governance features in a project’s design, particularly for non-core governance sectors.

Jeremy H. HovlandGeneral CounselOffice of the General Counsel

Acknowledgments

Several departments and individuals contributed and supported the preparation of this Governance Guide. Sandra Nicoll (Regional and Sustainable Development Department [RSDD]), Clare Wee (Office of Anticorruption and Integrity [OAI]), and Hamid Sharif (Central Operations Services Office [COSO]) provided support, encouragement, and helpful comments. Raza Ahmad and Surya Shrestha of RSDD; Nigel Savidge, Genevieve Abel, H. Lorraine Wang, and Patrice Sam of OAI; and Robert Rothery and Joel Syquia of COSO also gave helpful comments.

Sekhar Bonu (South Asia Department) developed operational guidelines for governance, in conjunction with OGC, in the 2005 Bangladesh Second Urban Primary Health Care Project. Those guidelines were subsequently adopted in other projects in South Asia and formed the basis for some of the work included here. Sekhar Bonu, Laurence Pochard (Special Office in Timor-Leste), Debra Kertzman (Central and West Asia Department), and Harsha Fernando (Sri Lanka Resident Mission) gave comments, sharing important operational perspectives.

Said Zaidansyah (OGC) contributed to Chapter 1 and added important information on governance in decentralization. Rita O’Sullivan (OGC) gave valuable inputs on anti-money laundering. Irum Ahsan (OGC), Leslie Lahm (INRM), and Ramit Nagpal (OGC) also gave valuable help on earlier drafts.

Ma. Priscila P. del Rosario, Muriel Ordoñez, Anthony H. Victoria, Portia Andres, Edith Creus, Vicente M. Angeles, Aldwin Thadeus S. Sutarez, and Rodel Bautista of the Department of External Relations gave extraordinary assistance. Kathleen Marie R. Leycano, Remedios Paningbatan, Laarni Zapanta, and Mark Alain V. Villocero provided helpful administrative support.

Eveline Fischer, as deputy general counsel and head of OGC’s Law and Policy Reform program, guided and encouraged this work. Kala Mulqueeny, senior counsel, OGC, is the lead author for this work. A team compromised of Angelique Badelles, legal specialist (consultant); Sherielysse Bonifacio, legal research associate (consultant); and January A. Sanchez, then-legal specialist (consultant), supported research and production.

Abbreviations

ACT – anticorruption and transparency expert task force

ADB – Asian Development Bank

ADF – Asian Development Fund

AfDB – African Development Bank

AML – anti-money laundering

APEC – Asia–Pacific Economic Cooperation

CAPE – country assistance program evaluation

CGA – country governance assessment

COSO – Central Operations Services Office

CPA – country performance assessment

CPIA – country policy and institutional assessment

CPS – country partnership strategy

CSO – civil society organization

DMC – developing member country

EA – executing agency

EBRD – European Bank for Reconstruction and Development

GACAP II – Second Governance and Anticorruption Action Plan

IA – implementing agency

IDB – Inter-American Development Bank

IFC – International Finance Corporation

IFI – international financial institution

KRA – key result area

LTSF – long-term strategic framework (2001–2015)

MDB – multilateral development bank

MIGA – Multilateral Investment Guarantee Agency

MTS II – medium-term strategy II (2006)

NGO – nongovernment organization

viii Governance and Anticorruption in Project Design: Office of the General Counsel Guide

OAI – Office of Anticorruption and Integrity

ODI – Overseas Development Institute

OECD – Organisation for Economic Co-operation and Development

OGC – Office of the General Counsel

OM – operations manual

PAI – project administration instructions

PBA – performance-based allocation

PMO – project management office

PPMS – Project Performance Management System

PPRA – project procurement related audit

RSGP – Public Management, Governance and Participation Division, Regional and Sustainable Development Department

RRP – report and recommendation of the President

TA – technical assistance

UN – United Nations

UNCAC – United Nations Convention against Corruption

UNDP – United Nations Development Programme

WBG – World Bank Group

Executive Summary

A. Purpose of the Governance Guide

All Asian Development Bank (ADB) staff have a duty to consider and address governance and anticorruption in all ADB-financed activities. This duty originates from the Agreement Establishing the Asian Development Bank (Charter)1 and has been elaborated upon in other ADB policies and procedures.

The Charter requires that the proceeds of any loan made, guaranteed, or participated in by ADB be used only for the purposes for which it was granted.2

This requirement extends to grants, technical assistance, and the newer, more innovative modes of financing that ADB has begun to undertake. Designing projects that incorporate sound governance features and measures to prevent corruption supports this Charter requirement. It also contributes to ensuring development effectiveness within ADB’s developing member countries (DMCs).

This Governance Guide was prepared to assist ADB staff, including counsel from the Office of the General Counsel (OGC), working in project teams on public sector projects or programs (project counsel) formulate projects that incorporate governance and anticorruption measures. In doing so, they should be aware that this Guide focuses on identifying and managing project-specific governance and anticorruption risks by incorporating project specific measures. ADB also conducts governance work such as diagnostic risk assessments performed at the country and sector level, which may assist identify and design project specific measures. These are also mentioned in this Guide.

B. How to Use this Governance Guide

This Guide can be read from cover to cover as a general introduction to governance and anticorruption. However, it has been prepared as a general reference and operational guide for ADB staff, particularly project counsel, working upon ADB projects and seeking to identify and manage project-specific governance and anticorruption risks. Each chapter is a

1 ADB. 1966. Agreement Establishing the Asian Development Bank.2 Ibid., Article 14 (xi).

x Governance and Anticorruption in Project Design: Office of the General Counsel Guide

fairly self-contained module that can be referred to separately as needed. It contains chapter summaries for quick ready reference and highlights key points in boxes. Important material in the text is highlighted in blue.

C. ADB Policies and Strategies

Under the mandate afforded by its Charter, ADB has formulated policies and strategies to promote governance and combat corruption. The governance policy (1995) is the foundation policy. ADB considers governance to be “the manner in which power is exercised in the management of a country’s economic and social resources for development.”3

The governance policy identifies four elements of good governance: accountability, transparency, participation, and predictability. It emphasizes that a legal environment conducive to development is essential for all DMCs and that overarching legal frameworks are needed to achieve these elements.

The second key governance-related policy is ADB’s anticorruption policy (1998), which identifies accountability, transparency, participation and predictability. ADB’s approach on anticorruption issues has three core objectives: (i) supporting competitive markets and efficient, effective, accountable, and transparent public administration as part of ADB’s work on good governance and capacity building; (ii) supporting promising anticorruption efforts and improving ADB’s dialogue with DMCs on governance issues, including corruption; and (iii) ensuring that its projects and staff adhere to the highest ethical standards.

The third key policy relating to governance is ADB’s private sector development strategy (2000), which highlights governance as one of the four areas of operational focus for promoting private sector development and pro-poor growth.

ADB’s poverty reduction strategy (1999) identifies good governance as a key pillar. In 2004, ADB adopted the enhanced poverty reduction strategy (2004) which stresses the importance of legal reform, and encourages ADB to assist DMCs to function with transparency and accountability, uphold basic rights, provide public safety, and promote the rule of law.

3 ADB. 1995. Governance: Sound Development and Management. p. 3.

Executive Summary xi

Under the long-term strategic framework 2008–2020 (Strategy 2020) ADB’s vision continues to be “an Asia and Pacific region free of poverty.”4

Strategy 2020 reaffirms ADB’s support for good governance and capacity building by (i) further mainstreaming four elements of good governance into its operations and activities; (ii) linking its anticorruption efforts to broader support for governance; and (iii) effectively increasing private sector investments by improving governance, curtailing official corruption, and helping to make public institutions and organizations more capable.

In 2006, ADB developed the second governance and anticorruption action plan (GACAP II). GACAP II seeks to prioritize ADB’s work in governance and anticorruption by focusing on the sectors and subsectors where ADB is active. Thus, the three thematic priorities under GACAP II are public financial management, procurement, and combating corruption.

The rules and outcomes governing the procurement of goods and works (the revised procurement guidelines [April 2010]), and engagement of consultants (the guidelines on the use of consultants by ADB and its borrowers [April 2010]), also have a significant impact on governance and corruption. In March 2010, both of these guidelines had been modified based on changes to the anticorruption policy to reflect cross-debarment among multilateral development banks.

D. Multilateral Initiatives on Governance and Anticorruption

In addition to ADB’s internal policies and procedures, project counsel should be aware of the international and multilateral initiatives relating to good governance and anticorruption, including international conventions, the policies of other multilateral development banks (MDBs), the work of the Organisation for Economic Co-operation and Development (OECD), and regional initiatives for Asia and the Pacific. These are relevant in formulating the need for project-specific anticorruption and governance measures.

Many international agreements and soft law instruments refer to or have an impact upon governance and anticorruption in different sectors in which ADB works, including the United Nations Convention Against Corruption (UNCAC) and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention).

4 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020. Manila, p. i.

xii Governance and Anticorruption in Project Design: Office of the General Counsel Guide

Moreover, other MDBs also have their own governance and anticorruption policies and initiatives and have recognized the importance of, and actively participated in, harmonizing their policies and initiatives.

International organizations such as the United Nations Development Programme (UNDP) have initiatives to promote democratic governance and prevent corruption.

Two regional initiatives are currently in force in Asia and Pacific. One is the ADB/OECD Anti-Corruption Action Plan for Asia and the Pacific (Action Plan), launched in 1999. The other regional initiative is the Asia–Pacific Economic Cooperation’s (APEC) Anti-Corruption and Transparency Expert Task Force, formed in 2005 to steer APEC’s anticorruption activities.

E. Tools Available to Project Counsel

To formulate project-specific governance measures, a project team needs to understand the governance context within the country and the particular sector governance issues. Several tools are available to assist.

1. Governance Tools

ADB Governance Risk Assessments and Risk Management Plans (RAMPs). GACAP II currently requires ADB staff to conduct governance risk assessments of countries and sectors as an input to each country partnership strategy. After risks are assessed, risk management strategies which are an important part of a country risk assessment can be identified.

ADB Country Governance Assessments (CGA). CGAs were carried out before the implementation of GACAP II and RAMPs have now replaced CGAs. Hence, CGAs may contain useful information, but must be used with caution given they have been replaced.

ADB Country Partnership Strategies (CPSs) and ADB Country Assistance Program Evaluations (CAPEs). CPSs are prepared substantially by operations departments, and CAPEs are prepared by the Independent Evaluation Department. They each usually provide shorter descriptions of the country governance context.

Executive Summary xiii

World Bank Country Policy and Institutional Assessment (CPIA). This tool is designed to describe the quality of policies, institutions and governance in a country and is used for determining the allocation of concessional grant resources to an eligible country.

ADB’s Performance-Based Allocation (PBA) Policy. This system resembles the CPIA. It forms an important basis for determining the Asian Development Fund (ADF) resource allocations for an ADF eligible country.

World Bank Governance Indicators. These measure the quality of governance of more than 200 countries and rank those countries on an index based upon six dimensions of governance.

Other Governance Assessments. Various other assessments that provide both quantitative and qualitative data on governance are also available.

2. Anticorruption Tools

ADB’s Risk Assessment Sourcebook. The sourcebook refers to several diagnostic tools, including the ADB/OECD Country Self-Assessment.

United Nations Anti-Corruption Toolkit. This toolkit is published by the United Nations Office on Drugs and Crime and contains a range of anticorruption strategy options.

ADB/OECD Anti-Corruption Initiative for Asia and the Pacific. The initiative has the results of the in-depth 2006 review on mutual legal assistance, extradition, and the recovery of proceeds of corruption.

Transparency International National Integrity System Reports. These reports detail and assess the anticorruption systems within a country.

Transparency International’s Toolkits. These are business tools, reports, actions, and information that can help prevent corruption on construction projects.

xiv Governance and Anticorruption in Project Design: Office of the General Counsel Guide

3. Tools on Procurement

ADB’s Sourcebook: Diagnostics to Assist Preparation of Governance Risk Assessments. This sourcebook refers to a range of diagnostic tools, including (i) Benchmarking and Assessment Methodology for Public Procurement Systems (OECD/Development Assistance Committee); (ii) the Country Procurement Assessment Report (World Bank); and (iii) the Procurement Capacity Assessment (ADB).

The OECD’s Checklist for Enhancing Integrity in Public Procurement. This toolkit contains 10 key recommendations on how to develop and implement a policy framework for enhancing integrity at each stage of the public procurement cycle.

ADB/OECD Anti-Corruption Initiative’s Fighting Bribery in Public Procurement in Asia and the Pacific. This initiative produced materials on fighting bribery and corruption in public procurement.

F. Project-Specific Risks

Project counsel must look out for risks and corruption indicators associated with different stages of the ADB project cycle and different levels of risk.

Project counsel can assist project teams to undertake a preliminary assessment of the institutions and organizations involved in a project. Two general tools for those involved in project formulation can be used.

• a risk map—producing a risk map helps project teams identify the potential risks throughout the project cycle and also identify mitigants for those risks; and

• a risk assessment checklist—working through the checklist helps project teams better understand the specific governance issues relating to an agency, entity, or organization.

Executive Summary xv

G. Project-Specific Governance and Anticorruption Measures

Specific cases of governance and anticorruption include:

• Corporate Governance• Governance and the Regulation of Public Utilities—Water and

Energy• Social Sectors—Health and Education• Decentralization• Disasters and Emergencies• Anti-Money Laundering (AML)• Environmental and Natural Resource Governance• Climate Change Governance

Project counsel can help project teams design project-specific governance and anticorruption measures that focus on transparency, participation, accountability, and predictability. These strategies and measures may

• incorporate features that instill good management, limit the opportunity for corruption and leakages, and create disincentives to engaging in corrupt practices;

• provide sufficient supervision and monitoring;• allow public and local stakeholders to access relevant project

information;• involve local stakeholders in project preparation and

implementation;• consider project accountability and grievance redress mechanisms

for the project; and• assess the legal environment of the country where the project is

located.

Introduction

Inclusive economic growth, environmentally sustainable growth, and regional integration are the Asian Development Bank’s (ADB) strategic priorities.5 Governance is a key issue and a driver of change that cuts across these strategic priorities. To successfully employ these strategic priorities, ADB staff need to understand the particular governance and anticorruption issues and risks related to each strategic priority. They must also be able to incorporate measures into ADB projects that promote good governance and prevent corruption. This Governance Guide seeks to equip project counsel with the knowledge to assist project teams in integrating governance and anticorruption measures into ADB projects and across ADB’s core priorities.

Governance is “the manner in which power is exercised in the management of a country’s economic and social resources for development.”6

Governance is now firmly recognized as an essential component of reducing poverty and creating sustainable development. A country’s government holds much of the power to manage development resources—as exercised by its executive, judicial, administrative, and legislative branches. Thus, the success of governance will often depend on the quality and capacity of each branch of government. However, “governance” is a wider concept than the operation of a country’s government. The concept covers the institutions that allow citizen participation in the task of governing, as well as in governing private sector entities. Good governance requires effective management. Corruption, which ADB’s anticorruption policy defines as the misuse of public or private office for personal gain,7 occurs where governance is weak and management is unsound.8

Unsound management, weak governance, and corruption can directly affect the impact of development programs and projects and reduce the overall effectiveness of development aid. ADB recognizes the potential for these risks to materialize in projects and has developed policies, strategies,

5 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020.

6 ADB. 1995. Governance: Sound Development Management. p. 3. This cited: Webster’s New Universal Unabridged Dictionary, London: Dorset & Baber, 1979.

7 ADB. 1998. Anticorruption Policy. paras. 1 and 17.8 Kaufmann, D. 2005. Myths and Realities of Governance and Corruption. In World Economic

Forum. Global Competitiveness Report 2005–2006.

2 Governance and Anticorruption in Project Design: Office of the General Counsel Guide

and procedures to tackle them on a systematic sector and programmatic basis. Increasingly, ADB is considering ways to address the risk that unsound management, weak governance, and corruption present to the success of specific projects.

ADB has provided financial assistance to many developing member countries (DMCs) for noteworthy core governance sector programs. Such programs have been designed to systematically help DMCs tackle core governance issues and support the institutions responsible for public administration and fiscal management, judicial reform, and anticorruption.9

Many projects that ADB supports in sectors that are not directly governance related have also been designed with specific measures to promote good governance and prevent corruption (for example, infrastructure, and disaster and emergency projects). Increasingly, specific measures to improve governance and combat corruption are being introduced into all sectors that ADB supports. It is important to continue with and expand up on these measures to ensure that the significant risks and negative impacts resulting from unsound management, weak governance, and corruption do not defeat the purposes of an ADB program or project.

The Office of the General Counsel (OGC) advises other ADB departments and can advise on the measures necessary to ensure that the proceeds of any ADB grant, loan, guarantee, or investment are used solely for the purposes for which ADB provided the finance.

This Guide seeks to provide ADB staff, principally counsels from the Office of the General Counsel (project counsel) who are working on sovereign transactions, with guidance on ways to help project teams and DMC governments formulate corruption-prevention measures and sound governance features in a project’s design. This guide has been specifically drafted to help project teams consider governance and anticorruption issues when designing projects for non-core governance sectors. However, if project teams are planning a more extensive program of core governance reforms, they may start with this guide but will need to undertake a deeper analysis than that presented herein.

9 Examples of ADB-funded programs are the (i) Bangladesh Good Governance Program, (ii) Nepal Governance Reform Program, (iii) Pakistan Access to Justice Program, (iv) Philippine Judicial Reform Program, and (v) Sri Lanka Fiscal Reform Program.

Introduction 3

A. The Governance and Anticorruption Agenda in Context

1. Governance

Governance as a theme and an agenda gained prominence within the development community during the 1990s.10 Since then, economists and development practitioners have examined the causal links between governance, on the one hand, and economic growth and development on the other. In recent times, the development community has reached a consensus that governance matters for, or is a vital factor in, achieving growth.11 However, the development community remains divided on the extent of the causal links between these concepts, the particular aspects of governance that are conducive to development, and the relative importance of governance vis-à-vis varying levels of development.12

Donors and other international organizations have also developed assessment tools and/or indicators for measuring these links.13 In particular, the World Bank developed the Worldwide Governance Indicators project,14

the Overseas Development Institute developed the world governance assessment,15 and the United Nations Development Programme (UNDP) developed the Governance Indicators Project.16 More recently, UNDP identified direct and indirect links between governance and ways to achieve the Millennium Development Goals (MDGs).17

10 Resnick, D., and R. Birner. 2006. Does Good Governance Contribute to Pro-poor Growth?: A Review of the Evidence from Cross Country Studies. DSDG Discussion Paper No. 30. See also Woods, N. 1999. Good Governance in International Organizations. Global Governance. Vol. 5, No. 1.

11 Bhatta, G. 2008. Governance Innovations in the Asia–Pacific Region: Trends, Cases, and Issues. pp. 23–46. Quoted in Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology to do Risk Assessments at the Program Level. See also Quibria, M.G. 2006. Does Governance Matter? Yes, No or Maybe: Some Evidence from Developing Asia.

12 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020. See also Kumar Roy, D. 2005. Governance, Competitiveness and Growth: The Challenges for Bangladesh. ADB Institute Discussion Paper No. 52; Rodrik, D. 2008. Thinking Governance. In North, D., D. Acemoglu, F. Fukuyama, and D. Rodrik, eds. Governance, Growth, and Development Decision-Making; and, Khan, M.H. 2007. Governance, Economic Growth and Development since the 1960s. DESA Working Paper No. 54.

13 Khan, M.H. 2007. Governance, Economic Growth and Development since the 1960s. DESA Working Paper No. 54.

14 Kaufmann, D., and A. Kraay. 2003. Governance and Growth: Causality which way?—Evidence for the World, in brief. See also the Worldwide Governance Indicators Project.

15 Hyden, G., K. Mease, M. Foresti, and V. Fritz. 2008. Governance Assessments for Local Stakeholders: What the World Governance Assessment Offers. Working Paper 287.

16 For more details, see www.undp.org/oslocentre/flagship/governance_indicators_project.html17 UNDP. 2007. Governance for the Millennium Development Goals: Core Issues and Good Practices.


Governance is directly linked to the MDGs because achieving the MDGs entails implementing reforms in policies and institutions, which in turn involves commitment to the principles of transparency, accountability, subsidiarity, and combating corruption.18 There is also an indirect link between governance and the MDGs. The decision to invest in and improve education and health—both MDGs—supports economic growth and is related to governance. Thus, MDGs may be achieved by investing in human capital, public sector management, and infrastructure.19

All multilateral development banks (MDBs) have similar restrictions in their respective articles of agreement that prohibit them from engaging in political activities in their member countries. As such, in 1991, the World Bank sought to establish the legal basis for engaging in governance activities, by distinguishing governance links to economic activities from governance directly associated with only political activities, or with the Bank engaging in political activities. The World Bank emphasized the important links between the economic considerations of governance and development.20

ADB first recognized these links in 1995 with the approval of its governance policy. Similarly, in 2000, ADB confirmed this view by undertaking a governance review that recognized that “the political and economic aspects of governance are often inseparable and the latter cannot be addressed in isolation.”21 Therefore, ADB also considers that undertaking programs to encourage good governance is consistent with ADB’s Charter.22

Most MDBs have also justified their governance programs on the basis that governance can contribute to economic growth.23 Hence, many MDBs have adopted governance policies and launched operational governance programs.24 Recent empirical findings provide further evidence of the link between the political and economic aspects of governance

18 Ibid., pp. 17–18.19 Ibid., p. 17.20 Shihata, I. 1991. The World Bank and ‘Governance’ Issues in its Borrowing Members. The World

Bank in a Changing World: Selected Essays and Lectures.21 ADB. 2000. Promoting Good Governance: ADB’s Medium-Term Agenda and Action Plan. para. 7.22 ADB. 1966. Agreement Establishing the Asian Development Bank.23 ADB. 1995. Governance: Sound Development Management. pp. 21–23. The European

Development Bank for Reconstruction and Development (EBRD) bases its governance agenda on different principles. Those principles are further discussed in Chapter 2 of this guide.

24 For examples of governance policies, see: (i) African Development Bank (www.afdb.org/en/topics-sectors/sectors/economic-financial-governance/), (ii) ADB (www.adb.org/Governance/default.asp), (iii) World Bank (www.worldbank.org/wbi/governance), and (iv) UNDP’s Democratic Governance Practice (www.undp.org/governance/about.htm).

Introduction 5

for development.25 In response to this empirical research, MDBs have become more willing to tackle issues that might have been perceived as too political for them in the past. For example, in 2006, the World Bank’s former senior vice president and general counsel issued an opinion that expanded the scope of considerations that are relevant to the World Bank’s decisions and activities. He concluded that apart from economic considerations, it is also within the World Bank’s mandate to recognize “human rights dimensions of its development policies and activities.”26

2. Corruption

Since the mid-1990s, together with the governance agenda, international organizations, including MDBs, have also sought to address corruption.27

Some claim that prior to this time corruption was tolerated on various bases, including that it was only a stage of development, that it provided a reasonable supplement to the low incomes of poor civil servants, and that it performed a valuable redistributive role.28 In any event, MDBs, in conjunction with their member countries, now actively seek to address corruption in projects and programs.

B. Meanings of Governance and Corruption

1. Governance and Good Governance

The term “governance” has been defined and applied variously. ADB prefers the straightforward definition contained in the Webster Dictionary: “the

25 Kaufmann, D., and A. Kraay. 2003. Governance and Growth: Causality which way?—Evidence for the World, in brief. See also World Bank. 2008. Governance Matters 2008: Worldwide Governance Indicators Project 1997–2007; and, Kaufman, D. 2004. Human Rights and Governance: The Empirical Challenge. Kaufmann wrote: “These findings, if corroborated through further research, have important implications for the donor aid community and emerging economies alike. In particular, it would point to the potential need to account for first generation human rights issues in enhancing effectiveness of development aid and its projects... Further, it would also point to the need to deepen the integration of the corruption and rule-of-law dimensions of governance in aid strategies so to enhance effectiveness related to socio-economic human rights and development.”

26 Danino, R. 2006. Legal Opinion on Human Rights and the Work of the World Bank.27 World Bank. 2007. Strengthening World Bank Group Engagement on Governance and

Anticorruption. See also African Development Bank. 2009. Overview: Good Economic and Financial Governance; EBRD. 2006. Anti-corruption Homepage; and, ADB. 2009. Anticorruption and Integrity.

28 Transparency International. 2005. Anti-Corruption Handbook.


manner in which power is exercised in the management of a country’s economic and social resources for development.”29 This was also the original definition adopted by the World Bank.30

ADB equates “good” governance with sound development management. Further, both the public and private sectors must contribute to good governance.31 ADB has established an analytical framework for good governance comprised of accountability, participation, predictability, and transparency. Within this analytical framework are specific action areas which relate to each element of the analytic framework through which parties may implement good governance. The elements and corresponding action areas are

• accountability—public sector management, public enterprise management and reform, public financial management, and civil service reform;

• participation—participation of beneficiaries and groups, the public–private interface, decentralization of public service delivery, and cooperation with nongovernment organizations;

• predictability—law and development (including the rule of law) and the legal framework for private sector development; and

• transparency—disclosure of information.

Different institutions adopt different formal definitions of governance. Like ADB’s approach, most institutions’ definitions cover the core elements of (i) an exercise of power (or authority); (ii) the manner, process, procedures, and institutions through which it is exercised; and (iii) the use of power (or authority) to allocate resources and grant or deny rights. However, the level of detail and overall purpose used in different definitions does vary. In Chapter 2, these different meanings of governance will be more closely considered. To highlight the differences, it will suffice for now to list a few of the definitions of governance used by different institutions:

29 Merriam Webster. 1979. Webster’s New Universal Unabridged Dictionary. Quoted in ADB. 1995. Governance: Sound Development Management. p. 3.

30 Kaufmann, D., and K. Aart. 2008. Governance Indicators: Where Are We, Where Should We Be Going? World Bank Research Observer 23(1). Spring. p. 4. This cited: World Bank. 1992. Governance and Development.

31 Merriam Webster (1979) as quoted in ADB. 1995. Governance: Sound Development Management. p. 3.

Introduction 7

• the Organisation for Economic Co-operation and Development (OECD) uses: “the exercise of political, economic and administrative authority necessary to manage a nation’s affairs”;32

• UNDP uses: “the exercise of economic, political, and adminis-trative authority to manage a country’s affairs at all levels and the means by which states promote social cohesion, integration, and ensure the well-being of their populations”;33 and

• the World Bank now uses: “the manner in which public officials and public institutions acquire and exercise the authority to provide public goods and services, including the delivery of basic services, infrastructure, and a sound investment climate.”34

2. Corruption

ADB has defined corruption as “the abuse of public or private office for personal gain.”35 More comprehensively, corruption includes public and private sector officials attempting to improperly and unlawfully enrich themselves and/or those close to them, or inducing others to do so by misusing their position.36

Chapter 2 more extensively reviews ADB’s corruption-related definitions including corrupt, fraudulent, collusive, and coercive practices; conflicts of interest; obstructive practices, and abuse.

C. Governance and Corruption Risks

Together with all other stakeholders involved in a project, the ADB project team has an interest in ensuring that necessary measures to achieve good governance and avoid or minimize corruption are incorporated into a project’s design. Several ADB policies also oblige project teams to incorporate strategies for good governance into a project. These are discussed further in Chapter 1.

32 OECD. 2007. Glossary of Statistical Terms: Governance. 33 UNDP. Undated. UNDP and Governance: Experiences and Lessons Learned. Lessons-Learned Series

No. 1. See also UNDP. 1997. Chapter 1: Good governance—and sustainable human development. In UNDP. Governance for Sustainable Human Development. A UNDP Policy Document.

34 The World Bank recently reviewed and changed its definition of governance. Its former definition was identical to ADB’s current definition. World Bank. 2007. Strengthening World Bank Group Engagement on Governance and Anticorruption. Annex E, p. 67.

35 ADB. 1998. Anticorruption Policy. paras. 1 and 17.36 Ibid.


Project counsel must become familiar with the common risks presented by corruption, poor management, and weak governance before they can help project teams address project-specific risks. Several examples of situations where common governance and corruption-related risks arise are given in Box 1.1 below.

Box 1.1: Common Governance and Corruption-Related Risks

• A stakeholder tries to influence the location of an infrastructure project such as a highway or rural road to position it near their own land to increase the value of their property.

• Politicians or officials recommend unqualified persons for a position and insist on using certain subcontractors or suppliers during the selection processes for contractors.

• Project office staff are included in a procurement evaluation committee, improperly influencing the procurement of goods and creating the risk that contract awards will be predetermined or delayed.

• Employees or contractors of a project office or project management unit may inflate the number of attendees at workshops to claim additional reimbursement or per diem on account of those attending the workshop.

• “Ghost employees” are listed on the payroll of a ministry or state-owned enterprise by inserting the names of imaginary or dead persons, or former staff.

• Construction contractors use inferior cement, and other construction materials, compared to the materials required under the contract and the technical engineer accepts a bribe to remain silent and certify the quality of the materials.

• Project office staff are appointed because they are friends or relatives of, or owed favors by, the person or committee making the appointment.

• An executing agency appoints a trained and qualified accountant with 2 years’ post-qualification experience and no experience with ADB’s financial procedures to be the sole accountant in a project management office responsible for the project accounts of three ADB loans totaling $700 million.

Introduction 9

A good way to become familiar with these and other similar risks is to review the Governance Risk Mapping Table in Appendix 1 and the relevant questions in the Governance Risk Assessment Checklist in Appendix 2 of this Guide. These documents are extensive and not intended to be used from start to end for every project. However, they cover a large range of issues that will help project counsel reveal the governance gaps and risks of most projects. The project team could also complete a risk mapping table or a governance risk assessment checklist to assess the corruption risks in any particular project under processing.

D. Structure of the Guide

The Governance Guide is structured as follows:

• Chapter 1 provides an overview of ADB’s internal policy and strategy documents relating to good governance and anticorruption.

• Chapter 2 provides an overview of international and multilateral initiatives relating to good governance and anticorruption, including international conventions, other MDB policies, the OECD’s work, and regional initiatives in Asia and the Pacific.

• Chapter 3 sets out the tools that project counsel may access in formulating project-specific good governance and anticorruption measures.

• Chapter 4 sets out some governance and corruption risks indicators in projects, the questions relevant to project counsel in undertaking an institutional assessment of institutions or organizations and their governance and corruption risks, and project-specific governance and integrity strategies that project counsel may adopt after identifying the risks and conducting the assessment.

• Chapter 5 sets out sample covenants for many issues discussed in Chapter 4.

• Chapter 6 provides an overview of the issues arising in special governance cases and projects: corporate governance, governance and the regulation of public utilities, health and education projects, decentralization, disaster and emergency projects, anti-money laundering, and environmental, natural resource, and climate change projects.

CHAPTER 1

ADB’s Governance and Anticorruption Policies, Strategies, and Procedures

A. Overview

The Asian Development Bank (ADB) has formulated policies and strategies aimed at promoting governance and combating corruption. The governance policy (1995)37 and the anticorruption policy (1998),38 form the core of ADB’s policy approach to governance and anticorruption. They derive principal authority from the Agreement Establishing the Asian Development Bank (Charter) under which ADB must:

take the necessary measures to ensure that the proceeds of any loan made, guaranteed, or participated in by the Bank are used only for the purposes for which the loan was granted... Article 14 (xi).39

The governance policy and the anticorruption policy each recognize the importance of the principles of accountability, transparency, participation, and predictability to development, and so reinforce the other.

The private sector development strategy (2000) also supports governance by promoting corporate governance in private and public sector entities and encouraging the development of national legal frameworks for private sector development.40

37 ADB. 1995. Governance: Sound Development Management. 38 ADB. 1998. ADB’s Anticorruption Policy. 39 ADB. 1966. Agreement Establishing the Asian Development Bank. 40 ADB. 2000. Private Sector Development Strategy.


ADB emphasizes the important role of governance in the poverty reduction strategy (1999),41 enhanced poverty reduction strategy (2004),42

and the long-term strategic framework (2008–2020).43 The medium-term strategy II (2006–2008) (MTS II)44 and ADB’s review of its governance and anticorruption policies in 2005 led the ADB Board of Directors to call for increased attention to governance in ADB operations. ADB then launched the second governance and capacity action plan (GACAP II) in 2006.45 GACAP II focuses on public financial management, procurement, and anticorruption as core areas given ADB’s need to be selective in its interventions and focus on areas where it has the resources to most add value. It takes an approach to governance that emphasizes these core areas rather than political economy and the rule of law in governance issues.

The Office of the General Counsel (OGC) plays a unique role in ADB’s governance and anticorruption activities. OGC is mandated to help ADB staff uphold the integrity of the Charter and comply with ADB’s policies and procedures. To address the specific risks of weak governance and corruption in any particular project under processing, a project counsel will have to work with

• the project leader and team (including any governance specialist); • other departments in ADB (especially the Public Management,

Governance and Participation Division of the Regional and Sustainable Development Department and the Office of the Auditor General, Integrity Division [OAI]).

41 ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy.42 ADB. 2004. Enhancing the Fight Against Poverty in Asia and the Pacific.43 ADB. 2008. Strategy 2020: the Long-Term Strategic Framework of the Asian Development Bank

(2008–2020); ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific: The Long-Term Strategic Framework of the Asian Development Bank (2001–2015).

44 ADB. 2006. Medium-Term Strategy 2006–2008.45 ADB. 2006. Second Governance and Anticorruption Action Plan.

Key Point for Project Counsel. Project counsel should know that the Charter and ADB’s policies give OGC the jurisdiction and mandate to work with other ADB departments to address the risks of weak governance and corruption in ADB-financed projects.

ADB’s Governance and Anticorruption Policies, Strategies, and Procedures 13

1Key messages in Chapter 1

Project counsel should know that

• they must work with other ADB departments to address the risks of weak governance and corruption in ADB-financed projects;

• a project should be designed to raise governance quality;• a project should reflect accountability, transparency, participation,

and predictability;• they must adopt the harmonized definitions of corrupt, fraudulent,

coercive, and collusive practices under the anticorruption policy, the procurement guidelines, and consultancy services guidelines;

• ADB’s investments must be limited to companies that can demonstrate the capacity to establish and maintain sound corporate governance structures and practices;

• ADB’s strategic framework for poverty reduction provides an overarching foundation for including good governance measures in projects;

• there are still weaknesses in the implementation of the governance policy;

• they must explain to the project leaders the project-specific recommendations identified in the Governance and Anticorruption Action Plan II (GACAP II);

• strengthening projects and project design by including governance and anticorruption components is one of the four key result areas under GACAP II;

• GACAP II’s priority areas are public financial management, procurement, and anticorruption;

• improving and mainstreaming governance in the public and private sectors is integral to ADB’s new long-term strategic agenda;

• capacity development is important for development effectiveness and ADB has a framework and action plan operationalizing it in projects; and

• a project must comply with the integrity principles and guidelines, procurement guidelines, and consultants’ guidelines.


B. ADB Policies and Strategies

1. Governance Policy (1995)

Since 1995, ADB has recognized the important role good governance plays in helping a government develop and institute effective development policies and effectively use development assistance. ADB’s governance policy identifies four elements of good governance: accountability, transparency, participation, and predictability. These elements are key for designing and implementing programs and projects for developing member countries (DMCs).

The governance policy also emphasizes that DMCs need a legal environment conducive to development. This conducive legal environment can be achieved by establishing overarching legal frameworks as they are relevant to promoting predictability, and contribute to accountability, participation, and transparency. For this reason, the governance policy focuses on legal reform activities that seek to improve sector policy frameworks and provide legal training in the public and private sectors. ADB acknowledges that promoting private sector development requires an especially strong legal foundation.

There are three important sections of the governance policy: (i) the discussion of Article 36 of the Charter,46 (ii) the analytical framework for good governance, and (iii) the specific action areas for implementing good governance.

• Article 36 Discussion. ADB’s analytic framework is comprised of four elements: accountability, transparency, participation, and predictability. The governance policy separately addresses and summarizes the then-general counsel’s opinion on the ability of ADB to engage in governance in a way that would not contravene Article 36 of the Charter.

• Good Governance Analytic Framework. The governance policy distinguished the World Bank’s basic approach to governance from ADB’s. The World Bank had identified key dimensions of governance as “(i) public sector management, (ii) accountability, (iii) legal framework for development, and (iv) transparency

46 Article 36 of the Charter prohibits ADB from interfering in the political activities of member states.


1and information.”47 The governance policy observed that ADB is also concerned directly with the manner in which the public sector is managed in DMCs, and with the legal framework for development. However, in formulating an analytical framework for addressing governance issues, rather than following the World Bank approach, ADB distinguished the four elements of good governance (accountability, transparency, participation, and predictability) from the specific areas of action (e.g., public sector management) in which they could be promoted or their existence enhanced.

This distinction is important because it shows how ADB deliberately avoided collapsing the analytic framework for good governance into the specific actions for implementing it. Project counsel con-sidering reviews of the governance policy should keep this in mind.

• Specific Action Areas for Good Governance. The governance policy emphasizes that the four elements of good governance are distinct48 but also interlinked.49 The four elements cover different specific areas of action, and different stakeholders as follows:

47 ADB. 1995. Governance: Sound Development Management. para. 15.48 Ibid., paras. 18–32.49 Ibid., para. 33.

ADB is helping people obtain legal documents after the tsunami in Jaffna, Sri Lanka.


� accountability—public sector management, public enterprise management and reform, public financial management, and civil service reform;

� participation—participation of beneficiaries and groups, the public–private interface, decentralization of public service delivery, and cooperation with nongovernment organizations;

� predictability—law and development, including rule of law, and the legal framework for private sector development; and

� transparency—disclosure of information.

ADB’s governance policy was originally contained in section 54 of ADB’s Operations Manual (OM), issued on 13 January 1997.50 Section 54 has been superseded by OM C4/BP: Governance, issued on 15 December 2003 and updated on 27 October 2008.51

2. Anticorruption Policy (1998)

ADB’s work on building the governance skills and capacity of its DMCs includes developing strategies to prevent and reduce corruption. Avoiding, or at least reducing, corruption decreases the financial and social toll that systemic corruption exacts on Asian governments and economies. Work

50 ADB. 1997. Operations Manual. OM 54: Governance.51 ADB. 2008. Operations Manual. OM C4/BP: Governance.

Key Points for Project Counsel. Project counsel should know that under the governance policy

• ADB must integrate governance dimensions into its operations, including specific projects and programs;

• ADB has four distinct but interlinked governance elements: accountability, participation, transparency, and predictability;

• ADB-supported projects and programs should be designed to raise governance quality in the relevant sectors; and

• project teams should not directly transpose governance and anticorruption measures from one DMC (or group of DMCs) to another in new projects, regardless of how successful they have been; project teams must take into account specific DMC and sector characteristics.


1toward reducing corruption also satisfies the Charter’s requirement that measures be taken to ensure that ADB finance is used only for the purposes for which it is granted.

The anticorruption policy has three core objectives:

• supporting competitive markets and efficient, effective, account-able, and transparent public administration as part of ADB’s broader work on good governance and building capacity;

• supporting promising anticorruption efforts on a case-by-case basis and improving the quality of ADB’s dialogue with DMCs on a range of governance issues, including corruption; and

• ensuring that ADB projects and staff adhere to the highest ethical standards.

Ensuring high ethical standards requires robust internal measures and enhances the integrity of ADB’s operations. The anticorruption policy proposes maintaining the integrity of ADB’s lending and technical assistance (TA) operations as well as improving the quality of project oversight.52

Like the governance policy, the anticorruption policy identifies four elements that are crucial to preventing corruption:53

• accountability—government officials must be accountable for their positions and use of funds;

• transparency—formal monitoring agents, auditors, and the general public need accurate information to tell if corrupt practices have occurred;

• predictability—individuals, the general public, and the private sector must be able to assume that similar actions and transactions will be treated in the same or a similar way by public officials and under the law; and

• participation—the general public, civil society groups, the media, and the private sector need to be included in decision making that affects them. Public support and the capacity of civil society groups, the media, and the private sector are necessary over the long term to combat corruption and malfeasance because they can potentially act as watchdogs.54

52 ADB. 1998. Anticorruption Policy. para. 53.53 Ibid., para. 13. This cited ADB. 1995. Governance: Sound Development Management.54 Ibid., para. 13. This cited ADB. 1995. Governance: Sound Development Management.


In November 2004, the ADB Board of Directors approved clarifications to the anticorruption policy that55

• introduced new definitions for fraud and corruption,• recommended that ADB’s anticorruption procedures be amended

to give ADB more latitude to impose sanctions where it determines that an entity that is eligible to participate in an ADB activity has not maintained the highest ethical standards,56 and

• amended relevant sections of ADB’s procurement guidelines57 and guidelines on the use of consultants by ADB and its borrowers.58

These clarifications are set out in section C5/BP of the OM.59 In September 2006, ADB and the other main multilateral development banks (MDBs) agreed upon standardized definitions for corrupt, fraudulent, collusive, and coercive practices.60 ADB incorporated these definitions into the procurement guidelines and guidelines on the use of consultants by ADB and its borrowers.

In March 2010, ADB’s Board approved modifications to the Procurement Guidelines and the Guidelines on the Use of Consultants to allow ADB to enter into an agreement for the mutual enforcement of debarment actions (also referred to as cross-debarment) by and between ADB, African Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, and the World Bank Group. This agreement will allow ADB to bar any firm or individual found by any of these institutions to have, directly or indirectly, engaged in corrupt, fraudulent, collusive, coercive or other prohibited practices, or failed to have observed the highest ethical standards.61 Prior to these revisions, ADB had no basis under its eligibility rules, as reflected in ADB’s procurement and consulting services guidelines,62

to take such action.

55 ADB. 2004. Anticorruption Policy: Proposed Clarifications and Related Changes to Consulting and Procurement Guidelines.

56 These provisions were previously contained in: ADB. 2003. Operations Manual. OM 55: Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of Terrorism. This was superseded by: ADB. 2008. Operations Manual. OM C5/BP: Anticorruption.

57 ADB. 2007. Procurement Guidelines.58 ADB. 2007. Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers. 59 ADB. 2006. Operations Manual. OM C5/BP: Anticorruption.60 See page 49 of this Guide for these definitions.61 ADB. 2010. Anticorruption Policy: Harmonization of Debarments.62 Procurement Guidelines (February 2007), clauses 1.8(d) and 1.14(d); and Guidelines on the Use of

Consultants (February 2007), clauses 1.13(e) and 1.23(d).


1The revisions (i) modified clauses 1.8(d) of the Procurement Guidelines and

1.13(e) of the Guidelines on the Use of Consultants to include a reference to ADB’s Anticorruption Policy and Integrity Principles and Guidelines to exclude the possibility that a sanctioned or cross-debarred firm or individual could benefit financially or otherwise from an ADB-financed or ADB-administered project; and (ii) modified clauses 1.14(d) of the Procurement Guidelines (2007) and 1.23(d) of the Guidelines on the Use of Consultants (2007) to remove the restriction that the corrupt or fraudulent practices shall have occurred only “in competing for, or in executing, an ADB-financed contract” and thus allow ADB to cross-debar and enforce sanctions imposed by the Participating Institutions in the cross debarment agreement.63 These changes are reflected in the Procurement Guidelines (2010) and the Guidelines on the Use of Consultants (2010).

3. Private Sector Development Strategy (2000)

ADB’s private sector development strategy (2000)64 is founded upon three strategic pillars: (i) creating enabling conditions for private sector investment, (ii) generating business opportunities, and (iii) catalyzing private sector investments.65

63 ADB. 2010. Anticorruption Policy: Harmonization of Debarments.64 ADB. 2000. Private Sector Development Strategy. 65 Ibid.

Key Points for Project Counsel. Project counsel should know that under the anticorruption policy:

• a project team should identify where potential corruption and leakage may occur in a project and incorporate measures to address it during the project processing stage,

• they have an obligation to report allegations of corruption to the Office of Anticorruption and Integrity (OAI) irrespective of whether they have received any evidence substantiating the allegation,

• they are expressly forbidden from undertaking any preliminary investigatory inquiries into a corruption allegation, and

• the possibility of cross debarment based on sanctions imposed by other multilateral development banks now exists.


The private sector development strategy also identifies public and private sector governance as a key area of operational focus under which ADB can promote private sector development and pro-poor growth.66 The strategy regards governance as being comprised of

• public sector governance,• commercialization and privatization of public enterprises, and• corporate governance.

The strategy envisages a large role for law and policy reform under these three focus areas of governance as set out below.67

a. Public Sector Governance

To advance private sector development, ADB needs to promote public sector governance. The private sector development strategy indicates several ways this could be done, which are:

• strengthening the rule of law through legal and judicial reforms;• establishing and maintaining effective and equitable taxation

systems;• formulating sound and transparent regulation of industry;• strengthening public administration;• fighting corruption;• removing impediments to investment and reducing transaction

costs; and• establishing efficient and competitive markets that are supported

by appropriate fiscal, monetary, and trade policies.68

The strategy also proposes that ADB develop public sector governance by providing its DMCs with TA to educate and modernize their bureaucracies. Likewise, ADB can provide TA to support DMCs’ efforts to build their agencies’ capacity to regulate and supervise their respective private sectors.69

66 The other three focus areas are (i) financial intermediation, (ii) public–private partnerships, and (iii) regional and subregional cooperation. See: ADB. 2000. Private Sector Development Strategy. pp. 16–17.

67 Ibid.68 Ibid.69 Ibid.


1b. Commercialization

Many DMCs are inclined to privatize their public sector utilities and services, but are often confronted with severe constraints in meeting the challenges of privatization.70 The private sector development strategy recognizes that ADB can help with commercialization by

• providing technical advice, particularly in defining sound privatization strategies;

• establishing and implementing effective privatization programs;• designing and operating sound post-privatization regulatory

frameworks; and• undertaking individual transactions transparently and professionally.71

c. Corporate Governance

The private sector development strategy recognizes that the 1997 Asian financial crisis elevated the importance of the quality of corporate governance in the private sector. ADB’s role is to promote corporate governance by providing TA to

• help DMCs review their commercial laws and regulations;• establish credible accounting and auditing standards, and

corporate disclosure rules that require corporate entities to make timely and accurate disclosure;

• establish sound environmental, labor, and social standards;• establish corporate regulations that protect minority shareholder

rights;• establish effective bankruptcy and foreclosure regimes; and• help train corporate directors on their duties and responsibilities and

on how they can effectively balance the interests of shareholders and other stakeholders such as employees, customers, suppliers, investors, and communities.72

70 ADB. 2000. Private Sector Development Strategy.71 Ibid., p. 19.72 Ibid., p. 20.


The private sector development strategy also envisages that ADB can provide ongoing support to reform policy and build the capacity of institutions that will strengthen DMCs’ financial systems. Specifically, the strategy suggests that ADB focus on helping governments enhance regulation and supervision, develop sound banking systems, deepen and broaden securities markets, and create bond markets.73

The private sector development strategy makes enhancing public–private partnerships another priority. ADB is to

• help establish effective regulatory frameworks for private sector participation in infrastructure,

• build the capacity of relevant regulatory agencies,• strengthen the capacity of public utilities to deal with the private

sector as an offtaker or supplier, and• train and develop the skills of public officials who are responsible

for implementing infrastructure development activities.74

73 Ibid., p. 21.74 Ibid., p. 26.

ADB’s private sector development strategy entails strengthening the financial systems of developing member countries to enhance regulation and supervision, develop sound banking systems, deepen and broaden securities markets, and create bond markets.


1

4. Poverty Reduction Strategy (1999) and Enhanced Poverty Reduction Strategy (2004)

In 1999, poverty reduction became ADB’s overarching goal with the adoption of the poverty reduction strategy (1999), which identifies good governance as key to reducing poverty.79 The poverty reduction strategy also recognizes that good governance contributes to participatory pro-poor policies and sound economic management.80

75 Ibid., p. 19. 76 Ibid., pp. 19–20.77 Ibid., p. 20.78 Ibid., p. 20.79 The other two pillars are (i) pro-poor, sustainable economic growth; and (ii) social development.

ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. p. 6.80 Ibid., p. 12.

Key Points for Project Counsel. Project counsel should know that the private sector development strategy requires ADB to

• ensure transparency in its DMCs’ privatization-related activities, including (i) implementing privatization transactions, (ii) establishing an appropriate tariff policy, (iii) protecting workers’ legitimate interests in ownership changes, and (iv) establishing financial market regulations;75

• help establish social safety nets to address the social costs of labor retrenchment involved in many privatization efforts;76

• consider providing direct financial assistance to privatization projects supported by ADB and/or MDBs;

• limit its investments in private sector operations to companies that have the capacity to establish and maintain sound corporate governance structures and practices;77 and

• invest proactively by (i) diagnosing the quality of corporate governance in proposed company investments, (ii) benchmarking the standard of corporate governance against best practice, and (iii) developing a time-bound action plan to remove deficiencies and enhance quality.78


Weak governance hurts the poor disproportionately compared to other social groups. Public sector inefficiency, corruption, and waste do not leave enough resources to support the level of public services and antipoverty programs that are needed.81 Thus, the poverty reduction strategy indicated that ADB would promote good governance through the way it processed and implemented its projects, as well as through specific governance-related initiatives.82

ADB undertook a comprehensive review of the poverty reduction strategy, and in 2004, presented the review’s results. The review sought feedback on ADB’s experience with implementing the poverty reduction strategy. It also examined the strategy’s continuing relevance to Asia and the Pacific. Based on the review, the ADB Board approved the enhanced poverty reduction strategy (the enhanced strategy).83

The enhanced strategy refines ADB’s strategic direction. On the issue of good governance, it encourages ADB to assist its DMC governments to function with transparency and accountability, uphold basic rights, provide public safety, and promote the rule of law. It also stresses the importance of legal reform.84 85

These strategies are contained in the OM.8586

81 Ibid., p. 13.82 Ibid., p. 23.83 ADB. 2004. Enhancing the Fight against Poverty in Asia and the Pacific.84 Ibid., p. 32.85 ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. p. 23. 86 ADB. 2004. Operations Manual. OM C1/BP: Poverty Reduction.

Key Points for Project Counsel. Project counsel should know that the poverty reduction strategy and enhanced strategy

• (together with the Charter) provide an overarching foundation for including good governance measures in projects, and

• indicate that ADB will promote good governance through its projects as well as through specific governance-related initiatives.86


15. Long-Term Strategic Framework (2001–2015) and Promoting

Good Governance: ADB’s Medium-Term Agenda and Action Plan (2000)

Project counsel should know that the long-term strategic framework (2001–2015)87 (LTSF) and medium-term agenda and action plan (2000)88

have now been superseded by the long-term strategic framework 2008–2020 (Strategy 2020),89 but should be aware of their historical significance to the development of ADB’s governance agenda.

Adopted in March 2001, the LTSF identified promoting good governance as one of its core strategies, along with sustainable economic growth and inclusive social development. It observed that poor governance constrains as well as retards and distorts the development process. Poor governance also has a disproportionate impact on the poorer and weaker sectors of society.90

Implementing the first LTSF’s good governance agenda involved developing a medium-term action plan for the period 2000–2004 (the medium-term agenda and action plan). The medium-term agenda and action plan was based on an assessment of ADB’s governance operations since the governance policy was adopted in 1995.91

Drawing on the lessons learned from implementing projects with governance objectives, the medium-term agenda and action plan sought to include programs within DMCs, and regional initiatives among them, that would focus on governance issues common to the region or to groups of DMCs.92 The medium-term agenda and action plan recommended six major governance activities:

• enhancing the quality of governance in DMCs,• elevating good governance to the top level of the development

agenda in Asia and the Pacific,• fighting corruption by establishing a zero-tolerance of corruption

and promoting the spread of good financial and other internal control systems,

87 ADB. 2001. Moving the Poverty Reduction Agenda Forward In Asia and the Pacific: the Long-Term Strategic Framework of the Asian Development Bank (2001–2015).

88 ADB. 2000. Promoting Good Governance: ADB’s Medium-Term Agenda and Action Plan.89 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank

2008–2020. p. i. 90 ADB. 2001. Moving the Poverty Reduction Agenda Forward In Asia and the Pacific: the Long-Term

Strategic Framework of the Asian Development Bank (2001–2015). p. 20. 91 ADB. 2000. Promoting Good Governance: ADB’s Medium-Term Agenda and Action Plan.92 Ibid., Appendix 3.


• coordinating the governance work of MDBs and other development agencies,

• strengthening ADB’s governance capacity, and• monitoring implementation of the medium-term agenda and

action plan.93

6. Medium-Term Strategy II (2006)

The MTS II (2006) has now been superseded, but is summarized here to show its contribution to the evolution of ADB’s approach to governance. It sought to enhance ADB’s relevance to achieving its mission of poverty reduction in Asia and the Pacific by establishing strategic priorities that respond to the key regional development challenges in reducing poverty.94

The MTS II recognized that weak governance and high levels of corruption occur in many DMCs.95 Strengthening governance and reducing corruption are essential to poverty reduction and enhancing ADB’s development impact.96

The strategy identified improving governance and preventing corruption as one of its five strategic priorities.97

The MTS II also highlighted the importance of ADB being selective about and maintaining its focus on key priorities. It proposed that ADB’s governance interventions give priority to

• public financial management, including procurement and public expenditure management; and

• the legal and regulatory framework and capacity development in sectors and subsectors where ADB is active.98

The MTS II also supported ADB’s theme of harmonizing policies with other MDBs and aligning MDB policies with those of DMCs (harmonization and alignment). It suggested that ADB work closely with other MDBs to develop a uniform framework for preventing and combating fraud and corruption.

93 Ibid., para. 88.94 ADB. 2006. Medium-Term Strategy 2006–2008. para. 3.95 Ibid., para. 13. 96 Ibid., para. 45.97 Ibid., para. 3.98 Ibid., para. 47.


1

7. Review of the Implementation of Governance and Anticorruption Policies (2006)

In February 2006, ADB completed a review of the governance and anticorruption policies (the Review). The Review candidly discussed ADB’s experience with implementing the governance and anticorruption policies and the areas in which ADB needed to significantly improve its implementation of these policies.99 The Review indicated that ADB

• has been successful in raising the profile of governance in the region,100

• has achieved some success in dealing with fraud and corruption in procurement,101 and

• has achieved some success in increasing awareness of the anticorruption policy.102

However, the Review found there were various weaknesses associated with ADB’s implementation of the governance policy, which included the following:

99 ADB. 2006. Review of the Implementation of ADB’s Governance and Anticorruption Policies: Findings and Recommendations.

100 Ibid., para. 124(iii).101 Ibid., para. 138.102 Ibid.

Key Points for Project Counsel. Project counsel should know that

• the MTS II has been superseded,• the MTS II provided further internal strategic support to ADB’s

policy directive to incorporate governance measures into projects, and

• encouraged by MTS II, international processes of harmonization and alignment will cause ADB’s governance and anticorruption approach to be influenced by the approaches of other MDBs.


• ADB had not paid enough attention to adopting a multidimensional approach to governance that would allow for local participation and take into account the local circumstances;103

• institutional development and infrastructure investments had not been effectively integrated into sector lending and development projects;104

• ADB had made poor progress in assessing the impact of corruption on DMCs’ ability to meet their development goals;105

• many project documents did not contain explicit arrangements for implementation, supervision, and oversight of project activities;106

• the terms of reference for contracting local expertise did not often specify how to prevent corruption;107 and

• the risk of corruption is particularly high when projects are implemented through stand-alone mechanisms such as project management units that report to specially created steering committees that operate outside official structures.108

The Review also found that ADB’s mechanisms for checking corruption are significantly deficient, moreover that:

• financial due diligence is not adequately reported in about 20% of reports and recommendations of the President (RRPs);109

• the project administrative instructions (PAIs) do not give clear guidance on how project review missions could provide valuable opportunities for looking into corruption issues;110

• project staff have insufficient time to thoroughly evaluate bid documents and bids for the award of contracts before giving a “no-objection clearance” to a DMC;111

103 ADB. 2006. Improving Governance and Fighting Corruption: Implementing the Governance and Anticorruption Policies of ADB. para. 65(i).

104 Ibid., para. 65(vii).105 Ibid., para. 66.106 Ibid., para. 46.107 Ibid., para. 46.108 Ibid., para. 47.109 Ibid., citing ADB. 2005. 2004 Financial Diligence Retrospective Report, prepared by ADB’s Public

Management, Governance and Participation Division. That report found that 17% of all RRPs evaluated and 20% of public sector RRPs failed to adequately address financial due diligence.

110 ADB. 2006. Review of the Implementation of ADB’s Governance and Anticorruption Policies: Findings and Recommendations. para. 84.

111 Ibid., para. 84.


1

• annual audited financial statements are prepared for all projects but yield very few allegations of corruption;112

• financial statements are often presented late, do not contain enough detail about disbursement flows, and are regarded as being of variable quality and excessively qualified;113

• procurement-related audits carried out in partnership with country audit institutions can increase ownership of audit findings and build local capacity; and

• the quality of an audit rests entirely on the integrity of a project’s internal monitoring arrangements.114

112 Ibid., para. 85. Over the last 6 years, the statements have led to an average of fewer than two investigations a year by the Auditor General Integrity Division (OAI).

113 Ibid., para. 86. ADB needs to ensure that statements are prepared to international standards and accept that greater use of private audit firms may be necessary.

114 Ibid.

ADB conducted three regional seminars on anticorruption in 2006 and 2007 to increase awareness and understanding of potential fraud and corruption in ADB-financed activities. This photo shows the seminar conducted in Indonesia in November 2007.


The Review concluded that ADB must focus its lending and nonlending activities in governance areas in which (i) DMCs’ demand is the greatest,115

(ii) DMCs have plans or commit to develop plans to improve their performance, and (iii) ADB has sufficient staff with appropriate skills and can provide the right external experts.116 It also concluded that ADB should renew its corporate commitment to its anticorruption agenda.117

115 Ibid., para. 147.116 Ibid.117 Ibid., para. 156.

Key Points for Project Counsel. To design specific project measures that avoid or minimize governance deficiencies that the Review identified had existed in previous ADB projects, project counsel should know that

• the Board of Directors had been concerned that the MTS II lacked strategic direction on governance issues and placed considerable importance on the Review’s findings on governance indicating the need for further action;

• project teams need to adopt a multidimensional approach to governance that allows for local participation and circumstances;

• the design of physical infrastructure, like roads and railways, needs to be integrated with sector policy and sector governance, including the development of relevant sector institutions, such as sector regulatory bodies;

• project documents including RRPs and financing agreements should contain explicit arrangements for implementing, supervising, and overseeing project activities;

• contracts for local expertise should specify anticorruption measures;• the process for conducting financial due diligence should be

adequately covered in RRPs; and• internal monitoring arrangements should clearly specify which

party will act as monitor, and how the monitoring will be carried out, documented, and reported.


18. Second Governance and Anticorruption Action Plan (2006)

(GACAP II)

GACAP II is designed to improve ADB’s implementation of the governance and anticorruption policies in ADB’s most active sectors and subsectors.118 It was developed at the request of the Board of Directors following discussions on the Review. It emphasizes the core themes of public financial management, procurement, and anticorruption.

GACAP II has four key result areas (KRAs). Each KRA relates to a set of outcomes that are desired over the medium to long term to improve implementation of the governance and anticorruption policies. Each outcome has a specific set of actions and sub-actions that must be done to achieve it.

The four KRAs are to119

• improve country strategies and programming, midterm reviews of country programming strategies, and annual country portfolio review missions by identifying and managing the risks of poor governance and institutions, and corruption;120

• strengthen projects and project design by including governance and anticorruption components within them;

• strengthen program and project administration, and portfolio management, by effectively managing program and project risks and performance reporting; and

• improve organizational structures, build human resource capacity, and provide access to expertise.

118 ADB. 2006. Second Governance and Anticorruption Action Plan. para. 4. 119 Ibid., para. 21. 120 Country strategies and programs (CSPs) were renamed in 2006 as country partnership strategies

(CPSs) following the proposals made by a working group that was tasked to review and propose improvements in refining CSP and business processes. ADB. 2006. Further Enhancing Country Strategy and Program and Business Processes.


Actions and sub-actions for each KRA focus on three areas:

• public financial management,• procurement, and• combating corruption.121

ADB continues to support GACAP II. In January 2007, the Board approved a TA designed to support its implementation.122 The TA focuses on

• the development of methodologies and tools for public financial management; and

• corruption risk assessments for country partnership strategies, including subnational assessments, where relevant, and sector governance, institutional, and corruption risk assessments.123

In May 2008, ADB issued the guidelines for implementing GACAP II (the Guidelines) to guide ADB staff.124 The Guidelines describe the processs for implementing GACAP II and the relevant requirements set out in the Country Partnership Strategy (CPS) Guidelines.125 These CPS Guidelines had required that before a CPS process, ADB conduct governance risk assessments and prepare risk management plans for national and subnational government systems and relevant sectors in which ADB is engaged (RAMPs) as part of the CPS process itself. However, in 2009, the CPS Working Group tasked with reviewing the relevance, effectiveness, and efficiency of the existing CPS process recommended that thematic reviews (like RAMPs) be delinked from the CPS preparation process.126 As a result, the preparation of RAMPs is now delinked from the main CPS preparation. Although RAMPs are required to be available in time to be included as an input to the CPS process, they need

121 ADB. 2006. Second Governance and Anticorruption Action Plan. para. 35. 122 ADB. 2006. Technical Assistance for the Governance and Capacity Development Initiative. 123 Ibid., para. 10.124 ADB. 2008. Guidelines for Implementing ADB’s Second Governance and Anticorruption Action

Plan.125 ADB. 2007 Country Partnership Strategy Guidelines. Manila.126 The rationale for delinking RAMPs from the CPS process is found in par. 13 and Appendix 3 of the

Country Partnership Strategy Working Group Report, Country Partnership Strategy: Responding to the New Aid Architecture (see also Streamlining Country Partnership Strategies, A Quick Guide, available www.adb.org/Documents/Guidelines/CPS-Quick-Guide.pdf)


1not be prepared as part of the CPS process itself.127 They are now considered to be a stand-alone product which is to be prepared at the best time for the DMC and other development partners to inform project preparation and policy dialogue.

Because GACAP II does not emphasize the political economy or rule of law aspects of governance, in order to consider and manage political economy, institutional, and rule of law-related risks and issues in particular projects it may be necessary to look beyond GACAP II’s recommendations. These additional issues include access to administrative justice and access to justice through the courts, as well as the link between good governance and the rule of law.

9. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020

On 5 May 2007, during ADB’s 40th annual meeting in Kyoto, Japan, ADB announced that it was undertaking a review of the then-current LTSF. ADB initiated an early review of its LTSF because of stated dynamic changes in

127 ADB. 2010. Country Partnership Strategy. Operations Manual. OM A2/OP. The OM requires the RAMPs as as input to the CPS process. It does not make the delinking process express.


• GACAP II’s second key result area (KRA) deals with strengthening governance and anticorruption. Therefore, it is the most relevant KRA for project counsel when advising project teams on dealing with project-specific governance issues.

• GACAP II’s project-specific recommendations and guidance on project design are set out in Table 1.1.

• GACAP II emphasizes public financial management, public procurement, and anticorruption rather than the political economy or rule of law aspects of governance.

• to determine and manage all of a project’s risks, it may be necessary to look beyond GACAP II’s recommendations and consider risks which may be managed by improving administrative justice, justice through counts, and the rule of law.


Table 1.1: GACAP II’s Project-Specific Recommendations for Improving Governance and Anticorruption Measures in Programs and Projects

Project Document Proposed ActionsProject Concept Notes • conductapreliminaryassessmentoffinancial

management, procurement, and corruption risks• confirmthatthetermsofreferencefor

conducting detailed risk assessments and preparing financial management, procurement, and corruption risk management plans have been developed

• confirmthattheskillssetandperson-monthsneeded to complete the work in accordance with the terms of reference and during the project preparation period have been determined

Program and Project Design

• includefindingsbasedonthegovernance,institutional, and corruption risk assessments conducted at the national, subnational, and sector levels for country programming

• checkthattheprojectadministrationrequirements are based upon the project’s risk assessments

Project Documentation • prepareacleardescriptionofrisksandriskmanagement and mitigation measures

Report and Recommendation of the President (RRP)

• reportontheoutcomesofthefinancialmanagement, procurement, and corruption risk assessment for the project and/or program

• discussthespecificmeasurestobetakeninproject design to mitigate risks

• summarizetheactionstobetakenbytheborrower and/or recipient to mitigate the risks during project implementation, and include in RRP and financing agreements as covenants

• reportonthefurthergovernanceandanticorruption measures that must be taken by ADB during the project’s implementation

• provideadescriptionofthehumanandfinancial resource requirements necessary for successful project administration

Source: ADB. 2006. Second Governance and Anticorruption Action Plan. Manila, pp. 5–8.


1the region.128 These stated changes include the unprecedented high rates of growth, global capital flows into Asia and the Pacific, the coexistence of high rates of savings and the need for high rates of investment in Asia and the Pacific, and significant adverse environmental implications associated with the high rates of growth.129

On 8 April 2008, Strategy 2020 was launched replacing the LTSF as ADB’s principal strategic document.130 Strategy 2020 reaffirms ADB’s support for good governance and the building of development capacities. ADB also commits to bring the four elements of good governance (accountability, participation, predictability, and transparency) deeper into the mainstream of its operations and activities.131

Under Strategy 2020, ADB intends to link its anticorruption efforts to broader support for governance and improvement in the quality and capacities of the public sector. Likewise, ADB plans to increase private sector investments by improving governance, curtailing official corruption, and helping make public institutions and organizations more capable.132

10. Integrity Principles and Guidelines (2010)

ADB and other MDBs met in Singapore in September 2006 and jointly endorsed a set of principles and guidelines for use by MDBs when conducting fraud and corruption investigations. ADB and the other MDBs also endorsed a set of policies, rules, regulations, and privileges and immunities applicable to fraudulent and corrupt practices.133

128 In June 2006, ADB convened an eminent persons group to provide ADB with insight on its appropriate future strategic role in the region. The group completed its report in March 2007. The report envisioned a dramatically transformed Asia by 2020. See: ADB. 2007. Toward a New Asian Development Bank in a New Asia Report of the Eminent Persons Group to the President of the Asian Development Bank.

129 ADB. 2007. Technical Assistance for the Review of ADB’s Long-Term Strategic Framework. 130 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank

(2008–2020).131 Ibid., para. 32.132 Ibid., para. 33.133 African Development Bank (AfDB), ADB, EBRD, European Investment Bank Group (EIBG),

International Monetary Fund (IMF), Inter-American Development Bank (IDB), and World Bank. 2006. International Financial Institutions Anti-Corruption Task Force.


In November 2006, ADB first adopted the integrity principles and guidelines, which set out general principles to guide investigations into fraudulent, corrupt, coercive, and collusive practices, and to define misconduct (including abuse and conflicts of interest).134 They also outline the rights and obligations of ADB (as an organization and in relation to its staff), procedural guidelines, and sanctions. OAI is the designated investigative unit in ADB for conducting investigations. Under the integrity principles and guidelines, OAI must use its best efforts to encourage and protect whistle-blowers and witnesses.

Likewise, OAI must protect the whistle-blowers’ and witnesses’ identities from unauthorized disclosure throughout and following an investigation.135 In 2009, ADB issued an administrative order136 providing operational procedures on whistle-blower and witness protection, including the protections afforded to whistle-blowers and witnesses. The order protects people reporting or providing information on a suspected integrity violation or misconduct.137

On 28 May 2010, ADB approved updates to the Guidelines, including references to (i) the administrative order on whistle-blower and witness protection; (ii) the cross-debarment agreement amongst MDBs; (iii) related harmonized sanctioning guidelines; and (iv) new internal procedures on debarment and appeals.

134 ADB. 2006. Integrity Principles and Guidelines.135 Ibid., p. 5.136 ADB. 2009. Administrative Order No. 2.10: Whistleblower and Witness Protection.137 Ibid.


• the integrity principles and guidelines establish guidelines for ADB’s investigation procedures, which must be followed in cases of fraud and corruption, and may need to be explained to DMCs, but are not directly related to project design;

• understanding how ADB deals with cases of fraud and corruption, will enable them to highlight the need for anticorruption and good governance features in project design; and

• they can obtain further information on the integrity principles and guidelines on ADB’s website at the frequently asked questions on anticorruption and integrity page.138


111. Capacity Development Medium-Term Framework

and Action Plan (2007)

ADB considers capacity development to be important for improving development effectiveness (Poverty Reduction Strategy) and a key driver of change (Strategy 2020). It is intimately connected with good governance. In 2005, capacity development became a thematic priority in ADB’s lending and TA operations. In 2007, a capacity development action plan was prepared to set out ADB’s approach to integrating capacity development in ADB operations and in DMCs’ partnership strategies.

ADB follows the OECD definition of capacity as “the ability of people, organizations and society as a whole to manage their affairs successfully.” ADB’s operational appoach to capacity development is outlined within ADB’s capacity framework which has the three dimensions listed below.138

• Institutional context. ADB considers the institutional context to include strategic planning and implementation, subnational and local governance, anticorruption systems, participation of civil society, and institutions for poverty reduction. Strengthening these institutional dimensions allows capacity development at sector, organization, and project levels.

• Organizational capacity. ADB considers an organization’s capacity to deliver its mandate and objectives to depend upon leadership, and its ability to mobilize and manage resources to plan, implement, monitor, learn, and manage change. Organizations are key vehicles for ADB’s capacity development interventions.

• Networking and partnerships. ADB recognizes that various government, private sector, and civil sociey organizations need to act in partnership to achieve development objectives and outcomes. The networking/partnership dimension frames this.

138 ADB. 2007. Integrating Capacity Development into Country Programs and Operations: Medium-Term Framework and Action Plan. Available at www.adb.org/Documents/Policies/Integrating -Capacity-Development/Integrating-Capacity-Development-2007.pdf


12. Procurement Guidelines (2010)

The procurement guidelines set out the policies governing the procurement of goods, works, and services (other than consultant services) for projects that are financed in whole or in part by an ADB loan, an ADB grant, or ADB administered funds, and also contain a detailed list of the effects of fraud and corruption on the procurement process.139 ADB reviews the borrower’s procurement procedures, documents, bid evaluations, award recommendations, and contracts to ensure that the procurement process is conducted in accordance with agreed procedures.140 The procurement process is guided by five general principles:141

• the goods, or works being procured must come from ADB’s DMCs;142

• economy and efficiency are needed to implement the project, including for the procurement process;

• all eligible bidders should be given the same information and the same equal opportunity in the procurement process;

• ADB has an interest in encouraging the development of domestic contracting and manufacturing industries in the country of the borrowing DMC; and

• it is important for the procurement process to be transparent.

If procurement is not carried out as agreed, the procurement guidelines require ADB to declare misprocurement.143 The procurement guidelines are not crystal clear on the consequences of misprocurement. Therefore, ADB has some discretion in choosing from among the following options, and it may cancel that portion of the financing allocated to the goods and works that have been misprocured,

139 ADB. 2010. Procurement Guidelines. para. 1.1. In March 2010, ADB’s Board of Directors approved amendments to the Procurement Guidelines that expand the basis for declaring a firm or individual ineligible, including by allowing harmonization of sanction or “debarment decisions amongst MDBs.” ADB. 2010. Anticorruption Policy: Harmonization of Debarments. As a result of these amendments, the earlier 2007 Procurement Guidelines was updated and reprinted in April 2010 to reflect these changes. See also pp. 18–19.

140 Ibid., para. 1.11.141 Ibid., para. 1.2. 142 Ibid., para. 2.11; and, Article 14(ix) of the Charter. There is an exception for procurements that are

(i) approved by a two-third majority of the Board of Directors; or (ii) for special funds resources, in which case payments are limited to goods or works produced in, or supplied by, the developed member countries that have contributed to such resources, and all DMCs.

143 Ibid., para. 1.12.


1• allow rebidding for the goods and works, or• exercise other remedies under the financing agreement (such as

suspension).144

For example, ADB declared misprocurement where an executing agency did not want to award a contract to a winning bidder despite its technical and financial qualifications. The executing agency alleged that the winning bidder had performed poorly in previous contracts.

The winning bidder claimed that the allegation was untrue and ADB obtained confirmation about the adequacy of the winning bidder’s prior performance. The winning bidder also agreed to replace allegedly faulty equipment that it had delivered to the executing agency on the basis that it was not admitting to any breach of contract or wrongdoing. Despite this, the executing agency insisted on rebidding for the contract. As a result, ADB declared misprocurement on the basis that the executing agency failed to award the contract to the winning bidder. ADB cancelled that portion of the financing allocated to the procurement.

144 Ibid.


ADB may also declare misprocurement after it awards a “no objection” if it finds that the “no objection” was issued on the basis of incomplete, inaccurate, or misleading information; or that the terms and conditions of the contract were substantially modified without its approval.145

13. Guidelines on the Use of Consultants by ADB and Its Borrowers (2010)

The guidelines on the use of consultants by ADB and its borrowers (consulting guidelines) define the policies and procedures for selecting, contracting with, and monitoring consultants who are engaged for loan, grant, and TA projects that are financed in whole or in part by ADB loans, grants, or administered funds.146 The consulting guidelines also contain a detailed list of the effects of fraud and corruption in respect of consultants.147

Those consultants that are engaged with loan or grant-financed funds are normally selected, engaged, and supervised by the borrower. In contrast, those consultants that are engaged with TA grant-financed funds are selected, engaged, and supervised by ADB.148 ADB is guided by several principles when engaging consultants:149

• high-quality services are needed,• economy and efficiency are needed,• all qualified consultants have an opportunity to compete in

providing services financed by ADB,• the development and use of national consultants from DMCs is

encouraged,• transparency in the selection process is needed, and• anticorruption and ethics measures need increasing focus.

145 Ibid.146 ADB. 2010. Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers.

para. 1.1.147 In March 2010, ADB’s Board of Directors had approved amendments to the Guidelines on the

Use of Consultants that expanded the basis for declaring a firm or individual ineligible, including by allowing harmonization of sanction or “debarment decisions amongst MDBs.” ADB. 2010. Anticorruption Policy: Harmonization of Debarments. As a result of these amendments, the earlier 2007 Guidelines on the Use of Consultants was updated and reprinted in April 2010 to reflect these changes. See also pp. 18–19.

148 Ibid., para. 1.3.149 Ibid.


1Like the procurement guidelines, the consulting guidelines indicate that if

recruitment is not carried out as agreed, ADB must declare misprocurement, resulting in three potential consequences:150

• any financing allocated to the misprocured consulting services is normally cancelled,

• the request for consultancy proposals may be reissued, or• other remedies under the relevant agreement (such as suspension)

may be exercised.151

ADB may also declare misprocurement of the selected consulting services after its issuance of a “no objection” notice if it concludes that the “no objection” was issued on the basis of incomplete, inaccurate or misleading information, or that the terms and conditions of the contract had been substantially modified without ADB’s approval.152

150 Ibid., para. 1.18.151 Ibid.152 Ibid.


Overall Review Guide 1Project counsel should know that

• they must work with other ADB departments to address the risks of weak governance and corruption in ADB-financed projects: the Charter, Article 14 (xi), page 11;

• a project should be designed to raise governance quality: see the discussion on the governance policy at pages 14–16;

• a project should reflect accountability, transparency, participation, and predictability: see the discussion on the governance and anticorruption policies at pages 14–19;

• they must adopt the harmonized definitions of corrupt, fraudulent, coercive, and collusive practices under the anticorruption policy, the procurement guidelines, and consultancy services guidelines: see the discussion regarding the anticorruption policy at pages 16–19;

• ADB’s investments must be limited to companies that can demonstrate the capacity to establish and maintain sound corporate governance structures and practices: see the discussion on the private sector development strategy at pages 19–23;

• ADB’s strategic framework for poverty reduction provides an overarching foundation for including good governance measures in projects: see the discussion regarding the enhanced poverty reduction strategy at pages 23–24;

• there are still weaknesses in the implementation of the governance policy: see the review of the implementation of governance and anticorruption policies at pages 27–30;

• they must explain to the project leaders the project-specific recommendations identified in the Governance and Anticoruuption Action Plan II (GACAP II): see the discussion regarding GACAP II at pages 31–34;

• strengthening projects and project design by including governance and anticorruption components is one of the four Key Results Areas under GACAP II: see the discussion regarding GACAP II at pages 31–34;

• improving and mainstreaming governance in the public and private sectors is integral to ADB’s new long-term strategic agenda: see Strategy 2020, discussed at pages 34–35;

• a project must comply with the integrity principles and guidelines, procurement guidelines, and consultants’ guidelines: see discussions at pages 35–40; and

• capacity development is important for development effectiveness and ADB has a framework and action plan operationalizing it in projects, see discussion at page 37.

CHAPTER 2

International Law and Multilateral Initiatives on Governance and Anticorruption

A. Overview

This chapter provides an overview of international law and multilateral initiatives relating to good governance and anticorruption. It discusses international conventions, regional initiatives for Asia and the Pacific, the policies of other multilateral development banks (MDBs), and the work of the Organisation for Economic Co-operation and Development (OECD).

This chapter is relevant to project counsel because it sets out the current status of international law and multilateral actions on governance and anticorruption. Project counsel may refer to these laws, initiatives, and actions on governance and anticorruption when explaining the need for project-specific anticorruption and governance measures to an ADB borrower, or recipient.

B. International Law

1. Introduction

Several international agreements and soft law instruments recognize the importance of good governance as a part of achieving their goals. For example, in Agenda 21, adopted at the 1992 United Nations (UN) Conference on Environment and Development in Rio de Janeiro, Brazil, world leaders recognized the need for improved governance in formulating an effective strategy for tackling the problems of poverty, development, and environment.153

153 UN Department of Economic and Social Development. 2004. Agenda 21. Chapter 3: Combating Poverty. para. 3.2.


Eight years later, at the Millennium Summit in September 2000, world leaders adopted the UN Millennium Declaration, which stressed the importance of good governance in eliminating poverty.154

At the 2002 World Summit on Sustainable Development (WSSD) in Johannesburg, South Africa, world leaders undertook to strengthen and improve governance at all levels for the effective implementation of Agenda 21, the Millennium Development Goals, and the Plan of Implementation of the Summit.155 The Plan of Implementation of the WSSD expressly recognized that good governance within each country and at the international level is essential for sustainable development.156

Two international agreements are explicitly directed toward preventing corruption. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-Bribery Convention), adopted on 21 November 1997, came first. It contributed to the impetus leading toward adoption of the UN Convention against Corruption (2003) (UNCAC).

154 UN. 2000. General Assembly Resolution 55/2: United Nations Millennium Declaration. para. 13. 155 UN Department of Economic and Social Development. 2004. Johannesburg Declaration on

Sustainable Development. 156 UN Department of Economic and Social Development. 2005. Plan of Implementation of the World

Summit on Sustainable Development.

Former US President Bill Clinton addresses the United Nations (UN) Security Council during the Millennium Summit 07 in September 2000, UN, New York.

International Law and Multilateral Initiatives on Governance and Anticorruption 45

2

2. OECD Anti-Bribery Convention (1997)

The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions157 (Anti-Bribery Convention) was established by OECD member countries and five nonmember countries: Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic. As of December 2009, 38 countries have become parties to the Anti-Bribery Convention. The OECD Working Group on Bribery oversees the implementation of the OECD Anti-Bribery Convention. It is comprised of representatives of each of the other 38 parties.158

Article 1 of the OECD Anti-Bribery Convention requires each party to

take such measures as may be necessary to establish that it is a criminal offence under its law for any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.159

Likewise, by signing the OECD Anti-Bribery Convention, parties agree to provide prompt international legal assistance for investigating and prosecuting foreign bribery.160 Finally, bribery of a foreign public official is “deemed to be included as an extraditable offence under the laws of the parties and the extradition treaties between them.”161

157 OECD. 1997. Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

158 The members of the Working Group on Bribery in International Business Transactions are Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, the Republic of Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. For more details on the Working Group see: www.oecd.org/infobycountry/0,3380,en_2649_34859_1_1_1_1_1,00.html

159 OECD. 1997. Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

160 Ibid., Article 9. 161 Ibid., Article 10.


The OECD Anti-Bribery Convention also has an important monitoring process. Through a peer review mechanism, a Working Group, established under the OECD Anti-Bribery Convention, evaluates each party’s implementation and enforcement of anti-bribery laws and each country takes an active role in evaluating other parties.162

Details of the parties’ implementation of the OECD Anti-Bribery Convention can be found in its annual report.163

162 Ibid., Article 12. 163 OECD. 2008. Annual Report 2007. 164 OECD. 1997. Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions. Article 10.

Ministerial meeting of the Organisation for Economic Co-operation and Development.

Key Point for Project Counsel. Project counsel should know that the OECD Anti-Bribery Convention:164

• exists and forms the foundation for many donor member countries approach to anticorruption and bribery;

• informs the OECD’s work in anticorruption and bribery, including the ADB/OECD Anti-Corruption Initiative; and

• provided initial impetus for the United Nations Convention Against Corruption (UNCAC).


2

3. The United Nations Convention Against Corruption (UNCAC) (2003)

The UN General Assembly adopted the UNCAC on 31 October 2003 in New York.165 Considered as the first truly global anticorruption convention,166

the UNCAC prioritizes the prevention, detection, and sanctioning of corruption. Under the UNCAC, parties commit to developing and implementing (or maintaining) effective, coordinated anticorruption policies.

The parties agree that their anticorruption policies need to promote the participation of society and reflect the principles of the rule of law, proper management of public affairs and public property, integrity, transparency, and accountability. Specifically, the parties commit to adopting the legislative and other measures necessary to make bribery of national public officials, foreign public officials, and officials of public international organizations criminal offences under national law.167

Parties need to cooperate in relation to anticorruption and bribery and are encouraged to do so.168 Among other things, parties must not allow expenses that constitute bribes to be tax deductible.169 The UNCAC also states that each party may adopt more strict or severe measures than those provided for under the UNCAC.170 Thus, the UNCAC may be seen as the minimum level of commitment for its parties.

Twenty-two DMCs have signed the UNCAC (Table 2.1). As of 30 April 2010, 16 of these 19 countries have ratified the UNCAC, indicating their commitment to implementing the convention within their territory. In addition, 10 more DMCs acceded or became parties to the UNCAC after it entered into force: Bangladesh, Cambodia, Fiji Islands, Georgia, Kazakhstan, the Maldives, Palau, Tajikistan, Turkmenistan, and Uzbekistan.171 All donor countries to ADB have signed the UNCAC.172

165 UN. 2003. General Assembly Resolution 58/4: United Nations Convention Against Corruption. 166 Transparency International. 2005. First global convention against corruption to come into force.167 UN. 2003. General Assembly Resolution 58/4: United Nations Convention Against Corruption.

Articles 15 and 16.168 Ibid., Article 46.169 Ibid., Article 12.170 Ibid., Article 65. para. 2.171 When a state accedes to a UN convention or treaty, it accepts the offer or the opportunity to

become a party to a treaty that has already been negotiated and signed by other states. Acceding to a convention or treaty has the same legal effect as ratifying the treat or convention. Accession usually occurs after the treaty has entered into force, see: http://untreaty.un.org/English/guide.asp#accession

172 Available: www.unodc.org/unodc/en/treaties/CAC/signatories.html


Table 2.1: DMC Signatory and Ratifying Countries to the United Nations Convention against Corruption

Afghanistan*Armenia*Azerbaijan*BhutanPeople’s Republic of China*IndiaIndonesia*Kyrgyz Republic*

Lao PDR*Malaysia*Mongolia*MyanmarNepalPakistan*

Papua New Guinea*Philippines*Republic of Korea*SingaporeSri Lanka*ThailandTimor-Leste*Viet Nam*

* DMC = developing member countries that have ratified the UNCAC, Lao PDR = Lao People’s Democratic Republic.

Source: Table formulated from the list of signatories and parties to the UNCAC as of 30 April 2010. Available: www.unodc.org/unodc/en/treaties/CAC/signatories.html

C. Multilateral Harmonization Initiatives

On 18 February 2006, leaders of seven international financial institutions (IFIs) gathered in Washington, DC and collectively recognized the importance of a unified and coordinated approach in combating corruption.173 The leaders agreed upon broad policies and practices to address the internal and external problems of corruption. They recognized the need to standardize their respective definitions of corruption, improve the consistency of their investigative rules and procedures, strengthen information sharing, and ensure that their respective compliance and enforcement actions were supported by each other’s institution.174

173 Parties from the following banks met: AfDB, ADB, EBRD, EIBG, IMF, IDB, and World Bank. The results of the meeting are contained in: ADB. 2006. Update on Cooperation among Multilateral Development Banks.

174 ADB. 2006. Update on Cooperation among Multilateral Development Banks.

Key Points for Project Counsel. Project counsel should

• know of the UNCAC’s existence; and• check whether a borrower, recipient, or beneficiary has ratified

the UNCAC and whether they have enacted legislation that adopts the principles of the UNCAC into national laws.


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As a result of the meeting, the participating MDBs and IFIs established the Joint IFI Anti-Corruption Task Force, which reports bimonthly on progress made to develop a uniform framework for preventing and combating fraud and corruption.

At their next meeting in Rome in July 2006, the IFI heads pushed for the harmonization of capacity development and developed a synthesis paper for the High Level Forum in Paris.175

The Joint IFI Anti-Corruption Task Force presented its report during the September 2006 meeting of the IFIs, during which the IFI heads adopted a uniform framework for preventing and combating fraud and corruption. In the framework, they recommended that a harmonized strategy to combat corruption should contain the following elements:176

• definitions of fraudulent and corrupt practices,• principles and guidelines for investigations,

175 Ibid.176 AfDB, ADB, EBRD, EIBG, IMF, IDB, and World Bank. 2006. International Financial Institutions Anti-

Corruption Task Force.

An ADB Anticorruption and Governance Action Plan Development Retreat in 2006.


• exchange of information,• integrity due diligence,• mutual recognition of enforcement actions, and• support for anticorruption efforts of member countries.

As a result of the Joint IFI Anticorruption Task Force’s recommendations, ADB adopted the following definitions:

• Corrupt practice is the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party.

• Fraudulent practice is any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.

• Coercive practice is impairing or harming, or threatening to impair or harm, directly or indirectly, any party or the property of the party to influence improperly the actions of a party.

• Collusive practice is an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party.177

The International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and the European Bank for Reconstruction and Development (EBRD) have reinterpreted these agreed definitions and have crafted their own interpretation in their Guidance Notes. This point is discussed below.

ADB has also defined the following terms for its use related to investi gations:

• Conflict of interest is any situation in which a party has interests that could improperly influence its performance of official duties or responsibilities, contractual obligations, or compliance with applicable laws and regulations.178

177 ADB. 2006. Anticorruption Policy: Harmonized Definitions of Corrupt and Fraudulent Practices.178 ADB. 2006. Integrity Principles and Guidelines. para 50.


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• Obstructive practice is deliberately destroying or falsifying, altering or concealing information or evidence material to a loan investigation.179

• Abuse means theft, waste, or improper use of ADB assets in ADB-financed or -supported activity, either committed intentionally or through reckless disregard.180

• Integrity violation is any act which violates ADB’s anticorruption policy and includes, abuse, coercion, collusion, conflict of interest, corruption, and fraud, as defined herein.181

D. Multilateral Development Bank Policies and Procedures

1. General

Because of the donor aid harmonization processes discussed above, ADB’s governance and anticorruption approach will be influenced by the approach taken by other IFIs. Thus, their approaches to governance and anticorruption are relevant to ADB.

2. World Bank Group

a. Governance

The World Bank Group (WBG) first adopted a definition of governance in 1992.182 It defined governance as “the manner in which power is exercised

179 Ibid.180 ADB. 2009. Administrive Order No. 2.10: Whistleblower and Witness Protection. 181 Ibid.182 World Bank. 1992. Governance and Development.

Key Points for Project Counsel. Project counsel should know that as a result of ADB harmonizing its definitions relating to corrupt and fraudulent practices with other IFIs and MDBs,

• ADB’s governance and anticorruption approach will be influenced by other IFIs and MDBs, and

• the approaches to governance and anticorruption taken by other IFIs and MDBs are relevant to ADB.


in the management of a country’s economic and social resources for development.”183 As outlined in the introduction, this is the same definition that ADB adopted in its governance policy in 1995.

Its original definition must be understood in the context of how the World Bank analyzed the concept of governance. The WBG distinguished between the political and economic dimensions of governance. In a 1991 paper,184 Ibrahim Shihata, then the World Bank’s general counsel, identified aspects of governance that were beyond the World Bank’s mandate.185

Mr. Shihata noted that the World Bank might, however, address governance to the extent that it was relevant to the success of a World Bank project or program.186 Thus, the aspects of governance that were considered consistent with the World Bank’s mandate included civil service reform, legal reform, accountability for public funds, and budget discipline.187 ADB followed similar reasoning when adopting its governance policy.

The World Bank has subsequently further considered the empirical links between the success of a project or program and governance and human rights, and these links were found to be greater than originally understood.188

In January 2006, then General Counsel, Roberto Danino, noted that the World Bank should consider human rights under its mandate as well—thus suggesting a considerable broadening to the originally understood concept—based upon empirical evidence.189

183 Kaufmann, D., and K. Aart. 2008. Governance Indicators: Where Are We, Where Should We Be Going? World Bank Research Observer. 23(1). Spring, p. 4. This article cited: World Bank. 1992. Governance and Development.

184 Shihata, I. 1991. The World Bank and “Governance” Issues in its Borrowing Members. In Shihata,I., ed. The World Bank in a Changing World: Selected Essays and Lectures. pp. 53–96.

185 Shihata, I. 1991. Determination of the Standard of Value of the Bank’s Capital—A Legal Analysis. In Shihata, I., ed. The World Bank in a Changing World: Selected Essays and Lectures. pp. 81–84. Mr. Shihata noted that: (i) the World Bank should not be influenced by the “political character” of the member; (ii) the World Bank should not interfere in the domestic or foreign partisan politics of any member; (iii) the World Bank, as coordinator of foreign assistance for a given country, should not act on behalf of donor countries in influencing the recipient country’s political orientation or behavior; (iv) the World Bank should not allow political factors or events to influence its decisions, unless they have direct and obvious economic effects relevant to its work; and (v) World Bank staff should not build their assessment on the possible reaction of any particular Bank member or members to their analysis.

186 Shihata, I., ed. The World Bank in a Changing World: Selected Essays and Lectures. p. 87.187 Ibid., pp. 88–92.188 Kaufmann, D. 2004. Human Rights and Governance: The Empirical Challenge. See also Kaufmann,

D. 2006. Human Rights, Governance and Development: An Empirical Perspective. Development Outreach.

189 Danino, R. 2006. Legal Opinion on Human Rights and the Work of the World Bank.


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The World Bank’s definition of governance has now been updated. In March 2007, the Boards of Directors of the five international institutions190

that make up the WBG approved a governance and anticorruption strategy (GAC) for the WBG.191 Under the strategy, governance is defined as

the manner in which public officials and public institutions acquire and exercise the authority to provide public goods and services, including the delivery of basic services, infrastructure, and a sound investment climate.192

190 The World Bank Group consists of five organizations: (i) the International Bank for Reconstruction and Development (IBRD), (ii) the International Development Association (IDA), (iii) the International Finance Corporation (IFC), (iv) the Multilateral Investment Guarantee Agency (MIGA), and (v) the International Centre for the Settlement of Investment Disputes (ICSID).

191 World Bank. 2007. Strengthening World Bank Group Engagement on Governance and Anticorruption. 192 Ibid., Annex E. p. 67.

The World Bank’s definition of governance would include the manner in which the authority to acquire and implement infrastructure projects is exercised. For example, the Pasig River Rehabilitation Commission has the authority to oversee all rehabilitation efforts for the Pasig River Program including transforming riverbank easements into public parks and constructing ferry stations for the Pasig River Ferry.


The WBG plans to increase its engagement in governance and anticorruption in its country work, group operations, and global partnerships.193

b. Anticorruption194

The World Bank adopted its first anticorruption strategy in September 1997.195

Under the strategy, the World Bank sought to help partner countries reduce corruption, bring anticorruption measures into the mainstream of World Bank work, prevent fraud and corruption in World Bank projects, and support international efforts to combat corruption.196

In 2000, the World Bank released the public sector governance strategy, which recognized that corruption was an outcome of a poorly functioning governance system.197 In the GAC, the World Bank affirmed that fighting corruption is important to achieving its mission to reduce poverty and therefore corruption-fighting efforts must be strengthened.

Within the WBG is the Integrity Vice Presidency (Department of Institutional Integrity [INT]).198 This department implements the WBG’s anticorruption strategies, and investigates allegations of corruption regarding the WBG operations and potential staff misconduct. It also reports to the WBG president on its activities. Additionally, each institution within the WBG has an evaluation officer who makes interim recommendations.

In 2006, the Guidelines On Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants were issued. The guidelines “set out the general principles, requirements and sanctions applicable to persons and entities which receive, are responsible for the deposit or transfer of, or take or influence decisions regarding the use of”

193 World Bank. 2007. Implementation Plan for Strengthening World Bank Group Engagement on Governance and Anticorruption.

194 Prior documents such as the anticorruption strategy just refer to the World Bank, instead of the World Bank Group.

195 World Bank. 1997. Helping Countries Combat Corruption: The Role of the World Bank. 196 Ibid., p. 3.197 World Bank. 2007. Strengthening World Bank Group Engagement on Governance and Anticorruption.

Annex A. p. 38. Cited in World Bank. 2000. Refor ming Public Institutions and Strengthening Governance: A World Bank Strategy.

198 See: http://go.worldbank.org/036LY1EJJ0


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the proceeds of financing from the International Bank for Reconstruction and Development (IBRD) or the International Development Association (IDA).199

In 2007, the WBG also approved the voluntary disclosure program. This program seeks to prevent and deter corruption from occurring in World Bank projects and contracts. The program provides incentives to firms, other entities, and individuals working under World Bank projects or contracts to end corrupt behavior and comply with World Bank rules and guidelines.200

Also in 2007, the World Bank established an independent review panel, the Volcker Panel, headed by former Federal Reserve Chairman Paul Volcker, to review INT’s work.201 In September 2007, the Volcker Panel recommended, among other things, that the WBG establish a small, external advisory oversight board to protect the independence and strengthen the accountability of INT.202 It also recommended the creation of an internal consulting unit within INT that could work collaboratively with operations units,203 and that all investigations into staff misconduct (not including investigations into significant fraud or corruption) be handled by units outside of INT.204 Moreover, it urged the WBG to work with other multilateral institutions in developing, defining, and following “best practices” in protecting institutional integrity and investigating corruption.205

In January 2008, the World Bank announced that it would fully implement the recommendations of the Volcker Panel.206 This included its intention to establish an independent advisory board,207 responsible for advising INT, the World Bank president, and World Bank Audit Committee; and reporting on the World Bank’s progress with implementing the Volcker Panel’s major

199 World Bank. 2006. Guidelines On Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants. para. 1.

200 The voluntary disclosure program is not open to bank staff or firms, entities, or individuals under active investigation by the World Bank. For more details on the voluntary disclosure program, see http://go.worldbank.org/3JOFMN95S0

201 The other members of the panel are Gustavo Gaviria; John Githongo; Ben W. Heineman, Jr.; Walter Van Gerven; and Sir John Vereker.

202 Volcker, P.; G. Gaviria; J. Githongo; B.W. Heineman, Jr.; W. Van Gerven; and J. Vereker. 2007. Independent Panel Review of the World Bank Group Department of Institutional Integrity. p. 15.

203 Ibid., p. 17.204 Ibid., p. 31.205 Ibid., p. 40.206 World Bank. 2008. Implementing the Recommendations of the Independent Panel Review of the

World Bank Group’s Department of Institutional Integrity (INT). 207 Ibid., p. 5.


recommendations relating to INT. The members of the advisory board were appointed in September 2008.208

As of July 2009, the World Bank has implemented all the recommendations of the Volcker Panel.209 The World Bank has established a Preventative Services Unit in INT to provide fraud and corruption risk assessment and mitigation advice, training, research, and support to client anticorruption functions.210

It also created a task force to develop protocol for transferring all internal investigation cases not involving significant fraud and corruption to the newly appointed Chief Ethics Officer.211 In connection with the recommendation to continuously liaise with other multilateral institutions as a means to measure

208 Those appointed were former Australian Treasurer Peter Costello, former US diplomat and scholar Chester Crocker, former Philippine Ombudsman Simeon Marcelo, and Swiss Jurist Mark Pieth. See: World Bank. 2009. Status of Recommendations from Volcker Independent Review of INT. Issue Briefs.

209 World Bank. 2009. Status of Recommendations from Volcker Independent Review of INT. Issue Briefs; Department of Institutional Integrity. 2009. Fiscal Year 2008 Annual Integrity Report: Protecting Development’s Potential.

210 World Bank. 2008. Implementing the Recommendations of the Independent Panel Review of the World Bank Group’s Department of Institutional Integrity (INT). p. 7.

211 Ibid., p. 27.

The World Bank accepted and implemented all recommendations of the Volcker Panel.


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INT’s performance, a new performance metric had been proposed in July 2008.212 The Chief Ethics Officer was appointed and cases were transferred to the Office of Ethics and Business Conduct.213

The GAC also applies to IFC and MIGA (the private sector arms of the WBG), which coordinate with INT in implementing GAC. In 2006, MIGA issued a set of procedures detailing how it would respond to allegations of corrupt, fraudulent, collusive, coercive, or obstructive practices; or the violation of the terms and conditions of the WBG’s voluntary disclosure program.214

Recall that Part C of this Chapter discussed the MDBs’ interpretations of the definitions of corrupt, fraudulent, coercive, collusive, and obstructive practices. In 2006, IFC and MIGA issued interpretative guidelines to “clarify” the meaning of these terms.215

216

212 See World Bank. 2009. Status of Recommendations from Volcker Independent Review of INT. Issue Briefs.

213 Ibid.214 MIGA. 2006. MIGA Sanctions Procedures.215 MIGA. 2006. Definitions and Interpretive Guidelines; IFC. 2006. Definitions and Interpretive

Guidelines. 216 In October 2009, the High Level Commission on Modernization of the World Bank Group

Governance issued its report, Repowering the World Bank for the 21st Century. The report stated the that WBG’s governance arrangements needed reconsideration. Most recommendations concern strengthening internal institutional weaknesses to meet the global challenges of the 21st century, rather than recommendations concerning governance of the World Bank’s member countries. Once recommendation is to strengthen management accountability to conduct a second internal evaluation of the Institutional Integrity Vice-Presidency (INT) within 2 years to ensure that the recommendations of the Volcker Panel have been fully and properly implemented and are producing the results intended by the Panel.


• the World Bank undertook a significant reorganization of its internal arrangements for investigating fraud and corruption with the recommendations consistent of the Volcker Panel,216

• this reorganization has served as a precedent for other MDBs,• IFC and MIGA have issued interpretative guidelines “clarifying”

the meaning of the harmonized definitions that the MDBs adopted in 2006 to the extent they apply them, and

• project counsel working or cofinancing with IFC or MIGA should pay close attention to these interpretations and any possible differences.


3. Inter-American Development Bank

a. Governance

The Inter-American Development Bank (IDB) first adopted a governance approach in 1996 by emphasizing the need for strong institutions in its Frame of Reference for Bank Action in Programs for Modernization of the State and Strengthening of Civil Society.217 Under this strategy, IDB works to modernize governments and strengthen civil society by focusing on nine general principles: (i) comprehensiveness, (ii) transparency, (iii) competition, (iv) social equity, (v) efficiency, (vi) effectiveness, (vii) participation, (viii) subsidiarity, and (ix) gender equity.

In 2003, IDB adopted a new strategy that focuses on the following areas of action: (i) democratic system; (ii) rule of law and justice reform; (iii) state, market, and society; and (iv) public management.218

b. Anticorruption

IDB adopted its current framework for addressing corruption internally and within its member countries in 2001.219 The framework has three elements:

• staff act with high integrity and IDB commits to this goal through its internal policies and procedures;

• operations are free of fraud and corruption and executed in a controlled environment; and

• programs that help strengthen good governance, enforce the rule of law and combat corruption in IDB’s developing member countries are supported.220

IDB’s Office of Institutional Integrity (OII) is responsible for investigating allegations of fraud and corruption occurring in activities financed by the IDB Group.221

217 IDB. 1996. Frame of Reference for Bank Action in Programs for Modernization of the State and Strengthening of Civil Society.

218 IDB. 2003. Modernization of the State: Strategy Document.219 IDB. 2001. Strengthening a Systemic Framework Against Corruption for the Inter-American

Development Bank.220 Ibid., para 1.9.221 IDB. 2008. Office of Institutional Integrity. Annual Report 2007.


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In 2008, an IDB team led by Dick Thornburgh released a report on the review of IDB’s anticorruption framework.222 The review recommended, among other things, moving OII’s reporting line under the Office of the President to a separate position as an Executive Advisory Office.223 Although the new arrangement preserves OII’s structure and functions and its direct reporting line to the President, the review expects the realignment to make OII more visible.

The Thornburgh review also dealt with the modification of the jurisdiction of the Sanctions Committee. It suggested that allegations of fraud and corruption in private sector contracts and those directly funded by IDB also be included within its jurisdiction.224 This modification seeks to address a disparity wherein allegations of fraud and corruption in these areas are considered to fall under the jurisdiction of the Oversight Committee on Fraud and Corruption (OCFC).225 The Thornburgh review also recommended OCFC to concentrate on policy direction, development, and oversight.226

4. African Development Bank

a. Governance

The African Development Bank (AfDB) adopted its good governance policy in 1999227 and first approved its implementing guidelines in 2001.228 The good governance policy recognizes that good governance plays an integral

222 Thornburgh, D., J.S. de Noriega, R.L. Gainer, and C.H. Walker. 2008. Report Concerning the Anti-Corruption Framework of The Inter-American Development Bank. 21 November.

223 Ibid., p. 73. 224 Ibid., p. 88. 225 Ibid., p. 89. OCFC was established in 2001 “to coordinate responses to all allegations of fraud and

corruption in connection with Bank activities or operations, to oversee any resulting investigations, and to assure appropriate dispositions” (Thornburgh et al 2008, 8).

226 Ibid., p. 67. 227 AfDB. 2000. African Development Bank Group Policy on Good Governance. 228 AfDB. 2001. Operational Guidelines for Bank Group Policy on Good Governance (2001).

Key Point for Project Counsel. Project counsel should know that IDB’s internal rearrangements following the Thornburgh Review bring IDB into line with the approach taken by the World Bank following the Volcker review.


part in sustainable development, poverty reduction, and ensuring ongoing development effectiveness.229

AfDB prepares country governance profiles that serve as diagnostic tools for identifying the strengths and weaknesses of governance systems in its developing members. It uses its investigations to help develop and implement its governance programs.

b. Anticorruption

AfDB identifies combating corruption as one of the five key elements for good governance under its good governance policy and its 2004 guidelines on preventing and combating fraud and corruption.230

AfDB adopted a four-point anticorruption strategy that focuses on preventing corruption, mainstreaming corruption issues in its activities, helping regional member countries that request assistance, and participating in multilateral anticorruption initiatives.231 To carry out this strategy, AfDB created an Integrity and Anti-Corruption Division (IACD) in November 2005. IACD is a part of AfDB’s Office of the Auditor General and investigates allegations of fraud, corruption, and misconduct. IACD’s mandate requires it to play a preventive role in pursuing AfDB’s anticorruption-related work. In such capacity, it conducts fraud and corruption awareness-raising activities and publicity as well as outreach and other training efforts.232 In line with its integrity and anticorruption work, AfDB formed an independent Advisory Committee on Corruption and Fraud comprised of senior management which is tasked to “advise the President on final investigation findings and recommendations on corruption and fraudulent practices reported by the Auditor General to the President.”233

In 2007, AfDB issued its whistle-blowing and complaints-handling policy. The policy seeks to (i) allow concerns relating to fraud, corruption, or any other misconduct to be raised; and (ii) ensure persons disclosing information that they will be protected from retaliation.234

229 For more details on AfDB’s work on governance, see www.afdb.org/en/topics-sectors/sectors/economic-financial-governance/

230 The policy is called Bank Group Policy on Good Governance, adopted in 1999.231 For more details on AfDB’s work on integrity and anticorruption, see www.afdb.org/en/about-us/

structure/auditor-generals-office-oagl/integrity-and-anti-corruption232 AfDB. 2008. Integrity and Anticorruption 2007-2008 Report. 233 Advisory Committee on Corruption and Fraud (ACCF).234 AfDB. 2007. Whistle Blowing and Complaints Handling Policy.


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The whistle-blowing and complaints-handling policy encourages AfDB staff and firms or individuals involved in AfDB projects to volunteer information on any fraud, corruption, or misconduct of which they have knowledge or in which they participated. People who voluntarily disclose such information will have reduced sanctions applied against them.235 The policy also protects whistle-blowers (including individuals, firms, or AfDB staff) from any direct or indirect discrimination, reprisal, harassment, or vengeance that is recommended, threatened, or taken by reason of the disclosure.236 Remedies are available to a whistle-blower if the provisions are not followed.237

5. European Bank for Reconstruction and Development

a. Governance

The European Bank for Reconstruction and Development (EBRD) is the only MDB with a charter that explicitly considers political concerns.238 The charter acknowledges that the process of achieving democracy, the rule of law, and economic growth are interlinked, each of which encompass broader concerns of public sector government and multistakeholder governance.239 Hence, EBRD does not have a separate overarching governance policy. Additional governance concerns at EBRD more specifically focus on corporate governance as EBRD’s significant focus is on private sector activity.

In 1997, EBRD issued its guiding principles for corporate governance and good business practices.240 Under the guidelines, EBRD recognizes that the core of corporate governance is understanding clearly, and being

235 Ibid., para. 8.1. 236 A whistle-blower is “any person or party who conveys or is proven to be about to convey a

concern, allegation or any information indicating that Fraud, Corruption or any other Misconduct is occurring or has occurred in the Bank or in a Bank Project; with knowledge or good faith belief that the concern, allegation or information is true.” AfDB. 2007. Whistle Blowing and Complaints Handling Policy. para 5.1.

237 The remedies include (i) reinstatement; (ii) back benefits and pay; (iii) compensatory damages; (iv) adjudication expenses; (v) transfer to another part of the bank; and (vi) intangible benefits, including public recognition of the vindication of the whistle-blower, and in appropriate circumstances public recognition of the contributions of the whistle-blower to the AfDB. See: AfDB. 2007. Whistle Blowing and Complaints Handling Policy. para 6.

238 EBRD. 1991. Basic Documents of the European Bank for Reconstruction and Development. Article 1.

239 EBRD. 1991. Political Aspects of the Mandate of the European Development Bank for Reconstruction and Development.

240 EBRD. 1997. Sound Business Standards and Corporate Practices: A Set of Guidelines.


satisfied with, the manner in which shareholders can oversee management’s performance and participate in important decisions.241

EBRD indicates that it promotes high corporate governance standards in the companies in which it has taken an equity stake through the appointment of nominee directors.242 These nominee directors must act in the best interests

241 The guidelines also note that sound principles of corporate governance include (i) setting out in legal form in the company charter the roles and responsibilities of management bodies and shareholders; (ii) the existence of a transparent shareholding structure with disclosure of the voting rules and of the beneficial ownership of major blocks of shares; (iii) respect for the right of minority shareholders to be protected against share dilution; (iv) procedures for the protection of the integrity of the shareholders’ registry; (v) systematic and open communication with shareholders through the provision of properly audited accounts, information about the progress of the company, and explanations of the major decisions taken by management in the form of an Annual Operational and Financial Review included in the Annual Report; (vi) providing shareholders with adequate information on matters to be decided by them; and (vii) clearly established and well- understood division of authority between the various governing bodies of the company. EBRD. 1997. Sound Business Standards and Corporate Practices: A Set of Guidelines. p. 3.

242 EBRD. 2007. Anti-corruption Report Update. p. 5.

Pres. Kuroda emphasized the importance of strong, well-governed institutions in leading the way toward more effective regional cooperation at the ADB 2010 Annual Meeting in Tashkent.


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of the company and provide advice and expertise on corporate governance matters.

b. Anticorruption

Beginning in 1999, EBRD conducted corruption assessments and surveys in countries undergoing transition.243 It has used the results of these assessments to engage with governments on how to address corruption issues. EBRD also supports the UNCAC and was part of the Joint IFI Anti-Corruption Task Force in 2006.

To govern its internal operations, EBRD adopted measures designed to avoid corrupt or fraudulent practices or involvement in money laundering or terrorist financing schemes. The Office of the Chief Compliance Officer (OCCO) is responsible for promoting good governance and for ensuring that the highest standards of integrity are applied throughout all of the activities of the EBRD.244

To facilitate the reporting and identification of corruption and other instances of misconduct, EBRD implemented a whistle-blowing protection scheme to protect whistle-blowers from “pressure, retaliation, or reprisal” including throughout any disciplinary and appeal process.245

EBRD also issued definitions and guidelines for private sector operations to clarify the meaning of the terms corrupt practices, fraudulent practices, coercive practices, and collusive practices in the context of EBRD’s activities in private sector projects.246

In 2006, EBRD first published its anticorruption report, summarizing its anticorruption efforts for 2005 and 2006, and anticorruption work and initiatives since 1991.247

243 Ibid., pp. 6–7.244 Ibid., p. 9.245 EBRD defines a whistle-blower as “any employee who, in good faith, promptly reports instances of

suspected misconduct to the Chief Compliance Officer.” EBRD. 2008. Whistleblower Protection at the EBRD.

246 EBRD. 2008. Fraud and Corruption—Definitions and Guidelines for Private Sector Operations. 247 See full details at www.ebrd.com/about/integrity/report.pdf for the 2006 report and www.ebrd

.com/about/integrity/report07.pdf for the 2007 report. See also www.ebrd.com/about/integrity/ index.htm


E. International Organizations

1. United Nations Development Programme

a. Governance

In January 1997, the United Nations Development Programme (UNDP) explicitly confirmed governance as a programming objective with the publication of its governance policy: Governance for Sustainable Human Development. UNDP defined governance as:

“the exercise of economic, political, and administrative authority to manage a country’s affairs at all levels and the means by which states promote social cohesion, integration, and ensure the well-being of their populations.”248

UNDP explains that this definition of governance covers how power is distributed and how public resources are managed. UNDP also indicates that governance embraces the organizations that shape governments and policies and “the mechanisms, processes, and institutions, through which citizens and groups articulate their interests, exercise their legal rights, meet their obligations, and resolve their differences.”249

In implementing governance, UNDP’s governance program focuses on

• governing institutions (legislatures, legal and judicial systems, and electoral and human rights bodies);

• public and private sector management (institutions that manage economic transactions and social resources);

248 UNDP. 1997. Governance for Sustainable Human Development. 249 Ibid.

Key Point for Project Counsel. EBRD’s definitions and guidelines contain clarifications to the meanings of the harmonized definitions that the multilateral development banks adopted in 2006 that are similar to those made by IFC and MIGA. Project counsel working and cofinancing with EBRD should pay close attention to these guidelines and any possible differences in any documentation they may lead to.


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• decentralization (distribution of the financial and administrative processes of decision making and management of public programs at central, regional, and local levels);

• civil society organizations (groups and individuals that are involved in the public policy-making process; groups and individuals that participate in the political, economic, and social affairs of the state); and

• governance in special circumstances (countries in transition; and countries experiencing severe political, economic, or social crises).250

UNDP also recognizes that democratic governance can play a vital role in achieving the Millennium Development Goals. Hence, UNDP prioritizes programs that promote democratic governance, and in 2007 UNDP allocated 41% of its overall expenditure to such programs.251 In 2007, UNDP expenditures in democratic governance amounted to $1.29 billion.252

250 UNDP. Undated. UNDP and Governance: Experiences and Lessons Learned. Lessons-Learned Series No. 1.

251 UNDP Democratic Governance Group. 2007. Annual Report 2007.252 Ibid.

Launch of the report, A Future within Reach: Reshaping Institutions in a Region of Disparities to Meet the Millennium Development Goals in Asia and the Pacific, 7 September 2005. The report is a tripartite initiative of UNESCAP, UNDP, and ADB.


UNDP’s core services to support national processes of democratic transitions focus on

• policy advice and technical support;• strengthening capacity of institutions and individuals;• advocacy, communications, and public information;• promoting and brokering dialogue; and• knowledge networking and sharing of good practices.253

b. Anticorruption

In 1998, UNDP issued a corporate policy on fighting corruption to improve governance.254 The policy highlighted the importance of addressing corruption as a development phenomenon and defined corruption as:

”the misuse of public power, office or authority for private benefit—through bribery, extortion, influence peddling, nepotism, fraud, speed money or embezzlement.”255

It observed that although corruption is often considered a sin of public servants and government, it also prevails in the private sector.

In 2004, UNDP published a practice note on anticorruption, which provided a framework of UNDP’s approaches and interventions on accountability, transparency and integrity, and anticorruption.256

2. Organisation for Economic Co-operation and Development

a. Governance

The OECD is an international organization comprised of 30 developed countries.257 The OECD’s mission is to help governments achieve sustainable

253 UNDP. 2005. About the Democratic Governance Practice.254 UNDP. 1998. Fighting Corruption to Improve Governance.255 Ibid., Part 1, p. 6.256 UNDP. 2004. Anti-corruption: Practice Note. para. 2.257 The OECD’s member countries are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark,

Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, the Republic of Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.


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economic growth and employment and improve standards of living in member countries while maintaining financial stability. The OECD defines governance as “the exercise of political, economic and administrative authority necessary to manage a nation’s affairs.”258

The OECD carries out its governance-related work through its Network on Governance (GOVNET). GOVNET is a network of development practitioners from bilateral and multilateral cooperation agencies and experts from partner countries that aims to

• improve the effectiveness of donor assistance in support of democratic governance; and

• give members a policy forum for exchanging experiences and lessons, identifying and disseminating good practice, and developing pro-poor policy and analytical tools.259

b. Anticorruption

The OECD Anti-Bribery Convention260 gives a good example of the OECD’s intensive work on anticorruption. It is the OECD’s position that of all of the different types of government activity, public procurement is the most vulnerable to corruption; this is more so than the operation of utilities, collection of taxation, or functioning of the judiciary. The OECD has produced three important knowledge products:

• A Methodology for Assessment of National Procurement Systems (Version 4). This publication sets out Benchmarking and Assessment Tools for Public Procurement Systems in developing countries.261

• Integrity in Public Procurement: Good Practice from A to Z.262 This publication provides a comparative overview of practices that are

258 OECD. 2007. Glossary of Statistical Terms: Governance.259 OECD. 2008. Inside the DAC: A Guide to the OECD Development Assistance Committee

2007–2008. p. 26. 260 OECD. 1997. Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions. 261 OECD. 2006. Methodology for Assessment of National Procurement Systems (Version 4).262 OECD. 2007. Integrity in Public Procurement: Good Practice from A to Z.


meant to enhance integrity, from needs assessment to contract management.

• A checklist for enhancing integrity in public procurement.263

The checklist sets out 10 key recommendations for developing an adequate policy framework for enhancing integrity in public procurement. It also discusses how to implement the policy framework at various stages in the public procurement cycle.

F. Regional Initiatives

1. ADB/OECD Anti-Corruption Action Plan for Asia and the Pacific

In 1999, ADB, the OECD, and a group of countries in Asia and the Pacific jointly launched the ADB/OECD Anti-Corruption Initiative for Asia–Pacific (the Initiative).264 The participants under the Initiative also developed the Anti-Corruption Plan for Asia and the Pacific (the action plan) within the framework of the Initiative.265

By 31 December 2009, 28 countries in Asia and the Pacific, 25 of which are ADB DMCs, committed to combat corruption by endorsing the action plan.266 The action plan adopts a holistic approach to combating corruption and has three pillars:

• developing effective and transparent systems for public service,• strengthening anti-bribery actions and promoting integrity in

business operations, and• supporting active public involvement.

263 OECD. 2008. Enhancing Integrity in Public Procurement: A Checklist.264 ADB and OECD. 2001. Anti-Corruption Action Plan for Asia and the Pacific. ADB/OECD

Anti-Corruption Initiative for Asia and the Pacific: Combating Corruption in the New Millennium. 265 Ibid.266 The 28 countries were: Australia; Bangladesh; Bhutan; Cambodia; the People’s Republic of China; the

Cook Islands; the Fiji Islands; Hong Kong, China; India; Indonesia; Japan; Kazakhstan; the Republic of Korea; the Kyrgyz Republic; Macau, China; Malaysia; Mongolia; Nepal; Pakistan; Palau; Papua New Guinea; the Philippines; Samoa; Singapore; Sri Lanka; Thailand; Vanuatu; and Viet Nam.


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The action plan’s two core principles for implementation are to

• establish a mechanism to promote and assess overall reform progress, and

• provide specific and practical assistance to participating governments on key reform issues.267

The action plan is implemented by a

• representative from a participating party who must have the authority, staff, and resources to oversee fulfillment of the action plan’s policy objectives for their government; and

• regional steering group composed of the participating parties’ representatives and national experts who review the participating parties’ progress. The group meets regularly.268

Since 2007, ADB and the OECD has been publishing an annual report describing achievements and challenges in the fight against corruption in Asia and the Pacific. It also describes regional good practices for anticorruption efforts and contains accounts of different countries’ various legal and institutional reforms that promote better governance.269 Project counsel looking for up to date information can refer to the annual report and the newsletter. 270

The Initiative celebrated its 10th anniversary in 2009. Under the Initiative, the parties have conducted in depth reviews of mutual legal assistance, extradition and recovering the proceeds of corruption;271 and bribery in public procurement; and have held regional symposiums on these initiatives.272

At its 12th meeting in Singapore in November 2008, the Steering Group decided to conduct an independent review of the Initiative to assess its

267 ADB and OECD. 2001. Anti-Corruption Action Plan for Asia and the Pacific. ADB/OECD Anti-Corruption Initiative for Asia and the Pacific: Combating Corruption in the New Millennium. p. 6.

268 Ibid., p. 7.269 The last report was published in 2008. ADB and OECD. ADB/OECD Anti-corruption Initiative 2008

Annual Report. 270 www.oecd.org/corruption/asiapacific271 ADB and OECD. 2007. Mutual Legal Assistance, Extradition and Recovery of Proceeds of Corruption

in Asia and the Pacific: Frameworks and Practices in 27 Asian and Pacific Jurisdictions: Thematic Review—Final Report.

272 ADB and OECD. 2008. Fighting Bribery in Public Procurement in Asia and the Pacific: Proceedings of the 7th Regional Seminar on Making International Anti-Corruption Standards Operational.


impact and to determine its future direction. The review’s final report was published in November 2009. It confirmed that members believe the Initiative is successfully helping members to reduce corruption mainly through a peer-learning process in an informal environment, however, it suggested several improvements.273 A working group is currently assisting the Steering Group consider how to implement the findings and recommendations and will report on these during 2010.274

2. Asia–Pacific Economic Cooperation’s Anti-Corruption and Transparency Experts Task Force

In 2003, leaders of the Asia–Pacific Economic Cooperation (APEC) placed fighting corruption on their agenda and decided to form a task force to steer APEC’s anticorruption activities.275

On 21 November 2004, APEC leaders endorsed the Santiago Commitment to Fight Corruption and Ensure Transparency during the 16th APEC ministerial meeting in Santiago, Chile. In the Santiago Commitment, APEC leaders affirmed the importance of good governance, and transparent legal regimes and systems in the fight against corruption.276

APEC leaders also recognized the important role of the UNCAC as the first legally binding global instrument specifically targeting corruption. For that reason, they decided to proceed to develop their plan within the UNCAC’s framework. They agreed to promote regional cooperation on extradition, mutual legal assistance, and the recovery and return of proceeds of corruption.277 In the course of the 16th APEC ministerial meeting, ministers from Chile, the Republic of Korea, and the United States presented the APEC Anti-Corruption and Transparency Course of Action,278 which led APEC leaders to agree to take all appropriate steps to ratify (or accede to) and implement the UNCAC. The ministers also agreed to develop effective actions to fight all forms of bribery, and take account of the OECD Anti-Bribery Convention and other relevant anticorruption conventions or initiatives.279

273 Garnett, H., and T. Kwok. Independent Review of the ADB/OECD Initiative—Final report.274 www.oecd.org/document/25/0,3343,en_34982156_34982431_44084761_1_1_1_1,00.html275 APEC. 2008. Anti-Corruption and Transparency Experts Task Force.276 APEC. 2004. Santiago Commitment to Fight Corruption and Ensure Transparency.277 APEC. 2004. APEC Course of Action on Fighting Corruption and Ensuring Transparency. 278 Ibid.279 APEC. 2004. APEC Course of Action on Fighting Corruption and Ensuring Transparency.


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In 2005, APEC established the anti-corruption and transparency expert task force (ACT). ACT is made up of law enforcement officials from APEC member economies.280 Its main activities include the implementation of the

• United Nations Convention Against Corruption,281

• Santiago Commitment to Fight Corruption and Ensure Transparency, and

• APEC Anticorruption and Transparency Course of Action.

In 2007, ACT endorsed the following:

• a code of conduct for business,282

• conduct principles for public officials,283

280 APEC member economies are: Australia; Brunei Darussalam; Canada; Chile; the People’s Republic of China; Hong Kong, China; Indonesia; Japan; the Republic of Korea; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; the Philippines; the Russian Federation; Singapore; Taipei,China; Thailand; the United States; and Viet Nam.

281 Transparency International. 2005. First global convention against corruption to come into force. In Focus, 16 September.

282 APEC. 2007. Code of Conduct for Business.283 APEC. 2007. Conduct Principles for Public Officials.

During the ADB/OECD Anti-Corruption Initiative’s 5th Steering Group Meeting in Manila on 5 July 2004.


• complementary anticorruption principles for the public and private sectors,284 and

• the 2007 Statement on Actions for Fighting Corruption through Improved International Legal Cooperation.

284 APEC. 2007. Complementary Anti-corruption Principles for the Public and Private Sectors.

Review Guide for Chapter 2


• Several international agreements and soft law instruments have been adopted that highlight the importance that states, including ADB DMCs, now formally give to good governance and anticorruption as a part of achieving their goals.

• International donors recognize that a unified and coordinated approach is needed to effectively influence and successfully combat corruption.

• Because of the donor aid harmonization processes, ADB’s governance and anticorruption approach will be influenced by the approach taken by other IFIs, so their approaches to governance and anticorruption are relevant to ADB.

CHAPTER 3

Governance and Anticorruption Tools

A. Overview

Project counsel seeking to formulate specific governance and anticorruption measures to be incorporated into a project should be familiar with the country and local governance context.

This chapter directs project counsel to additional corruption and governance tools that may be used to understand the local governance context. It contains information on three types of governance tools. These are

• governance risk assessments, and other sector, country, and global governance assessments and rankings;

• anticorruption toolkits and national integrity system reports; and• public procurement and governance tools.

Governance risk assessments and other sector, country, and global governance assessments and rankings are relevant to project counsel because they provide an overall perspective on a country. In Asian Development Fund (ADF) countries, they are also relevant to project counsel because governance is a factor affecting a country’s performance and its performance may determine the allocation of its ADF funds.

Anticorruption toolkits and national integrity system reports may help a project counsel assist a project team to formulate and develop anticorruption measures for projects. If ADB has already conducted a country-level risk assessment under the Second Governance and Anticorruption Action Plan (GACAP II),285 these toolkits and report are likely to have already been used as part of that process.

Public procurement and governance materials are also identified in this chapter. The public procurement of goods, services, and works is usually the largest component of expenditure in most loans and grants. It provides significant occasion for opportunists to exploit weak governance with corrupt and fraudulent practices and to siphon off large monetary amounts from

285 ADB. 2006. Second Governance and Anticorruption Action Plan (GACAP II). www.adb.org/Documents/Policies/Governance/GACAP-II.pdf


contracts for goods, works, or services. Other nonmonetary ways to exploit weak governance are also possible. Therefore, project teams should formulate measures within the project design process to ensure good governance and protect against corrupt practices.

B. Governance Tools

Available assessments include those set out below.

1. ADB Governance Risk Assessments

Since 2007, following ADB’s adoption of GACAP II, ADB staff must conduct governance risk assessments as an input to a country partnership strategy (CPS). Under GACAP II, country governance risk assessments must identify the risks relating to corruption, procurement, and public financial management within a country’s overall governance context and in the specific sectors in which ADB is operating in that country (e.g., transport, water, and sanitation). After risks are assessed, risk management plans must be prepared.

Governance and Anticorruption Tools 75

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Governance risk assessments and risk management plans (RAMPs) at country and sector levels are required to be available as an input to a CPS. Operations departments typically take the lead. However, the Public Management, Governance, and Participation Division (RSGP) of ADB’s Regional and Sustainable Development Department provides support, as does the Office of the General Counsel (OGC) in some cases. RSGP has prepared an ADB risk assessment sourcebook with diagnostics to assist in preparing governance risk assessments, which contain diagnostic tools, and to be referred to in preparing any governance risk assessment.286 As of December 2009, governance risk assessments have been prepared for Afghanistan, Armenia, Cambodia, the People’s Republic of China, India, the Lao People’s Democratic Republic, the Maldives, Mongolia, Pakistan, Samoa, and Sri Lanka, Tajikistan (energy and roads), the Philippines (roads and energy), and Viet Nam (education, energy, and transport), while reduced scale RAMPs have been completed for the Cook Islands, the Federated States of Micronesia, Kiribati, Palau, Timor-Leste, Tuvalu, and Vanuatu.287 The conduct of country- and sector-level RAMPs is a continuing process, so project counsel working on projects should check whether RAMPs have been prepared for the relevant country and sector when they are working on a project.

Under GACAP II, country risk assessments have replaced country governance assessments (CGAs), which were in place before 2007.288

286 ADB. 2008. Sourcebook: Diagnostics to Assist Preparation of Governance Risk Assessments. Draft. 287 ADB. 2009. Progress on the Second Governance and Anticorruption Action Plan (GACAP II). 288 ADB. 2007. Technical Assistance for Governance and Capacity Development Initiative.


• Governance risk assessments and risk management plans (RAMPs) are required as an input to the CPS preparation process,

• RSGP currently has a regional technical assistance (TA) project to support the preparation of governance risk assessments under GACAP II,288 and

• operations departments will soon be required to find their own resources to conduct such assessments to assist in the preparation of RAMPs.


2. ADB Country Governance Assessments (pre-GACAP II)

RAMPs have now replaced CGAs. CGAs were prepared before GACAP II began to require the preparation of country risk assessments. CGAs may not contain the level of systematic analysis that country risk assessments now require. However, if used with caution, existing CGAs may contain useful information about a country’s governance context—particularly in countries where RAMPs have not yet been conducted. ADB has conducted governance assessments of the countries listed in Table 3.1.289

As GACAP II no longer requires CGAs to be prepared, the practice is not expected to continue. Project counsel referring to existing CGAs for guidance should consider that these CGAs may provide helpful information but may be outdated.

3. ADB Country Partnership Strategies and Country Assistance Program Evaluations

Country partnership strategies (CPSs) and country assistance program evaluations (CAPEs) prepared by operations departments and the Independent Evaluation Department respectively, both include shorter descriptions of the governance situation in particular countries. In some countries, specific governance and anticorruption assessments have been conducted as part of the development of the CAPE for the country. As of July 2009, ADB has prepared CPSs for the countries listed in Table 3.2.

289 ADB. 2008. Country Governance Assessments.

Table 3.1: ADB Country Governance Assessments

•PapuaNewGuinea•VietNam•Philippines•Indonesia•KyrgyzRepublic•Mongolia•SriLanka

•Tajikistan•People’sRepublicofChina•Cambodia•Thailand•ThePacific•Cambodia–LaoPDR–Thailand–

Viet Nam

Lao = People’s Democratic Republic.

Source: Authors.


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Table 3.2: ADB Country Partneship StrategiesEast Asia

Central and West

Asia

Pacific South Asia

Southeast Asia

•People’sRepublic of China (2008–2010)

•Mongolia(2008–2010) (2009–2012)

•Afghanistan(2009–2013)

•Armenia*(2008–2010)

•Georgia** (2008–2009)

•KyrgyzRepublic* (2009–2011)

•Tajikistan(2010–2012)

•Uzbekistan (2006–2010)

•Pakistan (2009–2013)

•CookIslands(2008–2012) (2010–2012)*

• FijiIslands(2006–2008)

•Kiribati* (2009–2011)

•Maldives(2007–2011)

•MarshallIslands, Republicof*(2009–2011)

•Micronesia,Federated Statesof*(2007–2009)

•Palau (2009–2013)

•PapuaNewGuinea (2006–2010)

•Samoa (2008–2012)

•SolomonIslands (2009–2011)

•Timor-Leste*(2008–2010)

•Tonga* (2010–2012)

•Tuvalu (2010–2012)

•Vanuatu (2010–2014)

•Bangladesh(2006–2010)

•Bhutan (2006–2010)

• India (2009–2012) (2010)*

•Nepal (2010–2012)

•SriLanka(2009–2011) (2010–2012)*

•Cambodia(2009–2012)

• Indonesia*(2010–2012)

• LaoPeople‘sDemocratic Republic (2007–2011)

•Philippines*(2010–2012)

•Thailand*(2009–2011)

•VietNam*(2009–2011)

*Countryoperationbusinessplan,**Interimoperationalstrategy.

Source: Compiled by the authors.


ADB also prepared regional partnership strategies for the following regions:290

• Central Asia Regional Economic Cooperation,• Greater Mekong Subregion,• South Asia, and• the Pacific.

4. World Bank Country Policy and Institutional Assessment

The World Bank Country Policy and Institutional Assessment (CPIA) is a tool that uses 16 criteria to assess and describe the quality of policies and institutions in a country.291 The CPIA is an important tool that the World Bank has used to assess which countries are eligible to receive grant resources from the International Development Association. It groups the 16 criteria into four clusters:

• economic management,• structural policies,• policies for social inclusion and/or equity, and• public sector management and institutions.

The public sector management and institutions cluster is particularly relevant to assessing governance. It examines

• property rights and rule-based governance;• the quality of budgetary and financial management;• theefficiencyofrevenuemobilization;• the quality of public administration; and• transparency, accountability, and corruption in the public sector.

Other multilateral development banks (MDBs) have adopted elements of the CPIA for their own performance-based country-funding allocation systems. For example, ADB uses the CPIA questionnaire as part of its annual country performance assessments (CPA) and the African Development Bank has based its own assessments on the World Bank’s CPIA.

290 ADB. 2007. Country Partnership Strategy. 291 World Bank. 2008. Country Policy and Institutional Assessment.


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5. ADB’s Performance-Based Allocation System

ADB’s performance-based allocation (PBA) policy for the ADF countries resembles the World Bank’s CPIA system.292 ADB determines the amount of ADF resource allocations for an ADF eligible country based upon its CPA.

The PBA policy was adopted in 2001 and revised in December 2004.293 It requires that a country’s allocation of ADF resources be linked to its performance.294 Under the PBA policy, an annual CPA is conducted for ADF countries. ADB determines the ADF resource allocations based upon the CPA.

ADB harmonized its PBA policy with the CPIA of the World Bank’sInternational Development Association and the African Development Bank. From 2005, ADB conducted its annual CPAs using the World Bank’s CPIA questionnaire.295

292 ADB. 2008. Performance-Based Allocation. See also ADB. 2008. Operations Manual. OM A3/BP: Performance-Based Allocation of Asian Development Fund Resources.

293 ADB. 2004. Review of the Asian Development Bank’s Policy on the Performance-Based Allocation of Asian Development Fund Resources.

294 Ibid.295 Under the original policy adopted in 2001, governance is given 30% weight in measuring a

country’s performance. ADB. 2001. Policy on Performance-Based Allocation for Asian Development Fund Resources.

Key Point for Project Counsel. Project counsel should know that the governance-related criteria contained in the World Bank’s CPIA are very important because they form part of the basis for assessing a country’s overall performance. In turn, the World Bank uses a country’s performance as a basis to determine whether to allocate concessional grant resources to that particular country.


6. Worldwide Governance Indicators Series

The worldwide governance indicators series is an ongoing World Bank research project that measures the quality of governance in more than 200 countries and ranks them on an index based upon six dimensions of governance.296

These dimensions are

• voice and accountability,• political stability and absence of violence,• government effectiveness,• regulatory quality,• the rule of law, and• the control of corruption.

The data is obtained from public sector, private sector, and nongovernment organization respondents in more than 200 countries, including ADB’sDMCs. Respondents are asked how they perceive the country in terms of the six dimensions of governance. The worldwide governance indicators project commenced in 2002, and is updated annually. In June 2009, the eighth updatewasreleasedandcoverstheperiod1996–2008.297

296 World Bank. 2008. Governance Matters 2008: Worldwide Governance Indicators, 1996–2007. 297 World Bank. 2009. Governance Matters VIII: Aggregate and Individual Governance Indicators

1996–2008.


• the performance-based allocation (PBA) policy exists and applies to ADF eligible countries;

• an annual country performance assessment (CPA) is performed to determine a country’s ADF resource allocation based upon performance; and

• ADB places a great deal of weight on governance in drafting the overall CPA rating—50% of a country’s overall performance rating.


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7. Other Governance Assessments

Other assessments are available that provide both quantitative and qualitative data on governance.298 Most other assessments are country specific, although the approach of the United Kingdom Overseas Development Institute (ODI) toward governance is broader and includes several countries. Other important governance assessments include

• the ODI’s world governance assessment,299

• the United Nations Development Programme’s (UNDP) Governance Indicators Project,

• the Organisation for Economic Co-operation and Development’s (OECD) Metagora Project,

• the United States Agency for International Development’s democracy and governance assessment framework,

• the Netherlands’ strategic governance and corruption assess ment,• CGAs prepared by the Department for International Development

of the United Kingdom, and• other initiatives developed by research institutions.

C. Anticorruption Tools

1. ADB’s Risk Assessment Sourcebook

ADB’s Risk Assessment Sourcebook has references to a range of diagnostic tools on anticorruption, including the ADB/OECD Country Self Assessment and the World Bank’s Value Chain methodology.300 Project counsel seeking more information should refer to the Sourcebook.

298 Hyden, G., K. Mease, M. Foresti, and V. Fritz. 2008. Governance Assessments for LocalStakeholders: What the World Governance Assessment Offers. (This document provides a good summary of the different types of governance assessments.)

299 ODI. 2007. Governance Assessment: Overview of Governance Assessment Frameworks and Results from the 2006 World Governance Assessment. (This document provides a comparison of each of the governance assessments contained in this list.)

300 ADB. 2008. Sourcebook. Diagnostics to Assist Preparation of Governance Risk Assessments. Draft.


2. United Nations Anticorruption Toolkit

The United Nations Office on Drugs and Crime published the third edition of its anticorruption toolkit in 2004.301 The toolkit contains a range of options that countries may consider in developing their own anticorruption strategies.

3. ADB/OECD Anti-Corruption Initiative for Asia and the Pacific

In 2006, the ADB/OECD Anti-Corruption Initiative for Asia and the Pacific (the Initiative) identified the need to strengthen mutual legal assistance and extradition frameworks.302 The Initiative’s 27 members began an in-depth thematic review on mutual legal assistance, extradition, and the recovery of proceeds of corruption.303 The subsequent report (i) compiles the existing frameworks and practices in Asia and the Pacific; (ii) highlights the strengths and weaknesses of existing regulatory models, policies, and practices; (iii) lists the recom mended steps that policy makers may take to strengthen existing frameworks; and (iv) outlines policy options to implement these recommendations.

4. Transparency International National Integrity System Reports

Transparency International has integrity system reports available for the countries listed in Table 3.3.

The full texts for East Asia, Pakistan, South Asia, Southeast Asia, and the Pacific are available in Transparency International’s website,304 as well as for Central and West Asia.305

301 United Nations Office on Drugs and Crime. 2004. The Global Programme Against Corruption: An Anti-Corruption Toolkit.

302 ADB and OECD. 2007. Mutual Legal Assistance, Extradition and Recovery of Proceeds of Corruption in Asia and the Pacific: Frameworks and Practices in 27 Asian and Pacific Jurisdictions: Thematic Review-Final Report.

303 Except Bhutan, which became the Initiative’s 28th member in September 2007 after the review began.

304 www.transparency.org/policy_research/nis/nis_reports_by_country/asia_pacific305 www.transparency.org/policy_research/nis/nis_reports_by_country/europe_central_asia


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5. Transparency International’s Toolkits

Transparency International has developed a number of anticorruption measures specifically for the construction industry by working in close collaboration with construction participants worldwide. In particular, it has

Table 3.3: Transparency Internal Integrity System ReportsEast Asia*

Central and West Asia

Pacific South Asia

Southeast Asia*

•People’sRepublic of China (2006)

•HongKong,China (2006)

•RepublicofKorea (2006)

•Armenia(2003)

•Kazakhstan(2001)

•Mongolia(2001)

•Pakistan(2003)

•PacificRegionOverview Report (2004)

•CookIslands(2004)

•FijiIslands(2001)

•Kiribati(2004)

•RepublicofMarshall Islands (2004)

•FederatedStates of Micronesia (2004)

•Nauru(2004)

•Palau(2004)

•PapuaNewGuinea (2003)

•SolomonIslands (2004)

•Tonga(2004)

•Tuvalu(2004)

•SouthAsiaOverview Report (2005)

•Bangladesh(2003)

• India(2003)

•Nepal(2001)

•SriLanka(2003)

•Cambodia(2006)

•Philippines(2006)

•Singapore(2006)

•Thailand(2006)

•VietNam(2006)

*EastAsiaandSoutheastAsiaOverviewReport(2006).

Source: www.transparency.org/policy_research/nis/nis_reports_by_country


developed business tools, reports, actions, and information that can help prevent corruption on construction projects, including306

• a Project Anti-Corruption System,• an Anti-Corruption Training Manual,• an Anti-Corruption Reports and Tools, and• an Anti-Corruption Action Statement.

D. Tools on Procurement

1. ADB’s Risk Assessment Sourcebook

ADB’s Risk Assessment Sourcebook has references to a range of diagnostic tools on public procurement, including the OECD/DAC Benchmarking and Assessment Methodology for Public Procurement Systems and the World Bank’s Country Procurement Assessment Report.307 Project counsel seeking more information should refer to the Sourcebook.

2. OECD’s Checklist for Enhancing Integrity in Public Procurement

The OECD has developed a checklist for enhancing integrity in public procurement. It prepared the survey after it completed an international survey and consultation process in 2006. The checklist underscores the need for a systemic approach to promoting good governance in public procurement. This approach integrates effective policies and practices that have been applied to the different stages of the procurement cycle.

The checklist is divided into two parts. The first part covers developing an adequate policy framework for enhancing integrity in public procurement. It covers (i) transparency; (ii) good management; (iii) preventing misconduct, and compliance and monitoring; and (iv) accountability and control. It is the OECD’s aim that by using the checklist, governments will consider

306 Transparency International. 2007. Preventing Corruption on Construction Projects. 307 ADB. 2008. Sourcebook. Diagnostics to Assist Preparation of Governance Risk Assessments. Draft.


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• giving adequate transparency during procurement processes to promote fair and equitable treatment for potential suppliers;

• maximizing transparency in competitive tendering and takingprecautions to enhance integrity;

• ensuring that public funds used for procurement are applied to their intended purposes;

• ensuring that procurement officials meet high professional standards of knowledge, skills, and integrity;

• establishing mechanisms to prevent integrity risks in public procurement;

• encouraging close cooperation between government and the private sector to maintain high standards of integrity, particularly in contract management;

• providing specific mechanisms for monitoring public procurement, and detecting and sanctioning misconduct;

• establishing clear chains of responsibility, together with effective control mechanisms;

• handling complaints from potential suppliers in a fair and timely manner; and

• empoweringcivilsocietyorganizations,themedia,andthewiderpublictoscrutinizepublicprocurement.308

The second part of the checklist contains recommendations on implementing the policy framework during the

• pre-tendering process—the needs assessment, planning and budgeting, definition of requirements, and choice of procedures;

• tendering process—the invitation to tender, evaluation, and award; and

• post-tendering process—contract management, order, and payment.309

308 OECD. 2008. Enhancing Integrity in Public Procurement: A Checklist. 309 Ibid., p. 30.


3. OECD’s Integrity in Public Procurement: Good Practice from A to Z

The OECD’s checklist must be used in conjunction with another OECD tool—the Integrity in Public Procurement: Good Practice from A to Z published in 2007.310 This tool was a product of an international survey and symposium where procurement experts and practitioners, audit, anticorruption and competition specialists, representatives from the private sector, academia, civil society,donoragencies,and internationalorganizations identifiedandreviewed good practices for enhancing integrity from the needs assessment to contract management.

ThegoodpracticeswereidentifiedinOECDcountriesaswellasinBrazil,Chile, United Arab Emirates, India, Pakistan, Romania, Slovenia, and South Africa.

4. ADB/OECD Anti-Corruption Initiative for Asia and the Pacific’s Fighting Bribery in Public Procurement in Asia and the Pacific

As discussed in Part F of Chapter 2, the Initiative conducted a regional seminar on fighting bribery in public procurement in November 2007. The presentations, analyses, and discussions among experts and participants who attended the seminar are compiled in a publication released by the Initiative in 2008.311

310 OECD. 2007. Integrity in Public Procurement: Good Practice from A to Z. 311 ADB and OECD. 2008. Fighting Bribery in Public Procurement in Asia and the Pacific: Proceedings

of the 7th Regional Seminar on Making International Anti-Corruption Standards Operational.

Governance and Anticorruption Measures in ADB Interventions 87

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CHAPTER 4

Governance and Anticorruption Measures in ADB Interventions

A. Overview

Project counsel should work with project teams to address governance and corruption risks. There are a series of measures that they can adopt that emphasizethetransparency,participation,accountability,andpredictabilityrequired under the governance policy and the anticorruption policy.

This chapter describes measures to mitigate governance and anticorruption risks in the design and implementation of ADB projects. The approach taken in each intervention must be based on local conditions and circumstances. As much as possible, assistance should be coursed through existing institutions and support must be given to enhance the capacity of these institutions. New institutions should be supported only if there is strong local ownership and a strong rationale for doing so.

Section B of this chapter highlights examples of risks and indicators of corruption. Section C discusses risk analysis and risk mapping. It seeks to help project counsel understand how to identify and map governance risks associated with different levels of risk and different stages of the ADB project cycle. It also discusses governance and institutional assessments that could help project counsel and their project teams undertake a preliminary assessmentofinstitutionsandorganizationswithwhichtheywork.SectionDsets out specific practical options for project counsel to consider when helping project teams design and formulate projects.

B. Risk Analysis and Institutional Assessments

1. Risk Analysis

In conjunction with the project team, project counsel should identify, consider, and mitigate the common governance challenges and the avenues


DMC = developing member country.

Source: Adapted from Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology to do Risk Assessments at the Program Level. Manila: ADB, p. 25.

Figure 4.1: Domains of Risk

Risk fields

Risks beyondthe DMC

Risks beyond the sector or project

DMC Project Sector

Sector risks

Project-specificrisks to the program

for corruption, poor management, weak governance, and leakage that may be present in a project.

Before identifying and mapping specific project risks, project teams should conduct an analysis of general problems and constraints for the project.312 This analysis will be part of the sector and subsector analysis. It also forms the foundation for the project-based risk assessment.313 If country and/or sector risk assessments and management plans (RAMPs) have been conducted under the Second Governance and Anticorruption Action Plan (GACAP II), then country and/or sector risks related to public financial management, procurement, and anticorruption should have been identified. However, there may be residual, political, economic, and rule-of-law risks at these levels that need to be managed.

Project counsel must understand how and where risks may occur to identify them. Risks exist in or arise in four domains as described in Figure 4.1:314

• project governance risks—operational risks, structural risks such asthestructureoftheorganization,technicalrisks,orproceduralrisks;

• sector governance risks;• developing member country’s (DMC) governance risks; and• governance risks arising beyond or outside the DMC (i.e., caused

by other countries or regional or international forces).

312 Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology to do Risk Assessments at the Program Level.

313 Ibid., para. 58.314 Ibid., para. 70.


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The governance risk mapping table in Appendix 1 sets out the governance risks that are associated with each stage of the ADB project cycle, and provides an example and an appropriate mitigation response to that example. Even where risks are mitigated, some residual risk may remain.

Project counsel should get to know the potential risks and mitigating responses in the governance risk mapping table and look for the potential risks throughout the project cycle. Governance risks that are not fully mitigated should be set out in the risk factors section of a report and recommendation of the President (RRP).

2. Institutional Assessments

Institutional assessments (sometimes called capacity assessments, needs assessments, or governance assessments) are intended to review fundamental issues of gov ernance. An institutional assessment aims to facilitate understanding of the governance issues of an agency, entity, or organization in a particularproject.

A short checklist of questions is set out in Box 4.1 to help project counsel assist project teams conduct a basic institutional assessment of an agency, entity,ororganization.Byaskingthesequestionstheprojectteamwillidentifymany important governance issues. Specifically, the questions are designed to elicit more detailed information and understanding on various focus areas.

Most of the relevant questions should have been asked and answered before a project counsel becomes involved in a project. The information should be available from the existing project formulation material, or a specific capacity needs assessment or institutional assessment. However, if this work has not been done, project counsel should identify the governance work that a project team needs to undertake while formulating the project or implementing an aspect or component of it.

The answers to the questions and the information obtained should be analyzedtoidentify

• risk areas, including the probability that the risk will occur and the likely extent of negative impacts resulting from the risk;315

• ineffective controls and poor governance practices;

315 For more detailed guidance, see: ADB. 2010. Financial Management Assessment Guidelines. Forthcoming. These Guidelines also contain a financial management assessment questionnaire.


continued on next page

Box 4.1: Institutional Assessment Short Checklist

• Whatisthelegalorpolicyframeworkapplyingtotheorganizationor agency?

Considerthelaws,rules,andregulationsgoverningtheorganizationor agency; political, economic, sociocultural, and commercial influences(ifany)towhichtheorganizationoragencyisexposed;keyrelationshipsthattheorganizationoragencyhasvis-à-visotherorganizationsoragenciesandthekeystakeholders;andthepublicrelationspolicyorapproachadoptedbytheorganizationoragency.

• Whatisthemissionoftheorganizationoragency?

Look into the history, purpose, strategic plan, and powers of the organizationoragency.

• Whatisthestructureoftheorganizationoragency?Howdoesthestructurefulfillthemissionoftheorganizationoragency?

Examine the leadership and management structure, locations of branches (if any), reporting requirements, and cultural environment oftheorganizationoragency.

• Wheredoestheorganizationoragencygetitsfundingfrom?

Consider government financing, private sector financing, and potential conflicts of interest.

• process indicators, measurements, and benchmarks; and• areas where risk prevention or control procedures could enhance

operations, accountability, and transparency to improve project and/or sector performance.

A more extensive version of this checklist is set out in Appendix 2. That checklist is directed toward obtaining an overall understanding of the legal environment, governance structure, and diversified operations of a high-level organization, agency, or entity, aswell as specific governance, fraud, andcorruption issues.

Governance risks that are not fully mitigated should be set out in the risk factors section of a report and recommendation of the President.


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Box 4.1: continued

• What are the particular activities undertaken and services delivered bytheorganizationoragency?

Look at the planning, preparation of budgets, workflow management, and manuals and guidance implemented (if any).

• Howdoestheorganizationoragencyuseitsresources?

Consider the recruitment procedures and personnel movement, review of property and equipment owned or used by the organizationoragency, fundsbeingreceivedby theorganizationor agency; data and information access and management, and communications and other support services such as training.

• How does the organization or agency implement internal andfinancial controls?

Examine the preparation of accounts, conduct of internal and external audits as well as spot checks, cash handling, retention of records, history of fraud and corruption, and procurement policies andprocedures.*

• Arethereotherissuesorproblematicareasintheorganizationoragency?

Assess the problematic areas in the organization or agency andrecommend steps for improvement.

*ADB.2010.FinancialManagementAssessmentGuidelines. Forthcoming.TheseGuidelinesalso contain a financial management assessment questionnaire.

Source: Authors.


C. Indicators of Corruption Risks in Projects

The procurement of goods, works, and services usually presents the largest components of expenditure of ADB financing. The process of procurement is particularly vulnerable to corrupt practices and poor governance and it “is more prone to risks of malgovernance” than many other areas in which ADB operates.316

316 Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology to do Risk Assessments at the Program Level. para. 31.

Key Points for Project Counsel. Project counsel should know the following:

• any risk assessments and mitigation plans (RAMPs) conducted under the Governance and Anticorruption Action Plan II (GACAP II) at the country or sector level set the baseline for considering project-level risks for public financial management, procurement, and anticorruption;

• residual,institutional,politicaleconomy,andrule-of-law–relatedrisks may not be covered by a GACAP II RAMP assessment;

• the governance risk mapping table contains potential risks, together with their potential mitigants, which project counsel may use to predict possible risks throughout the project cycle; and

• the short institutional assessment checklist can be used during project due diligence to help identify governance risk control measures.


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317318319320

317 This occurs when “kickbacks” or commission amounts are negotiated, or ways are determined to work around project controls.

318 Review the country governance context. For example, the World Bank cancelled several loans in Cambodia in 2007, and hired an international procurement agent.

319 This is mitigated by other anticorruption measures such as lifestyle checks.320 OECD. 2006. Methodology for Assessment of National Procurement Systems. Version 4.

Key Points for Project Counsel. Project counsel should be alert to the possibility of corruption by considering the following examples and indicators of corruption:

Procurement of Goods and Works

• officials recommend or insist on engaging a particular agent or consultant without a proper selection process, or they insist on using certain local subcontractors or suppliers;

• the procurement process is subject to unexplained or unusual delays;317

• contract awards are highly priced;• sole source awards are unjustified or repeated;• unqualified contractors are repeatedly selected;• the borrower or executing agency (EA) attempts to reject the

lowest bidder on spurious grounds or on technicalities;318

• project officials live beyond their means;319

• a reputation or history of bid rigging exists in the DMC or in that type of project;320

• bid specifications are too narrow or too vague;• prequalification requirements are unreasonable;• the time allowed for the submission of bids is unreasonably

short;• bids are not properly advertised;• unqualified contractors, or contractors who are not the lowest

bidder but still meet the specifications, are selected;• the lowest bidder is selected and the contract award is

followed by a change order increasing the scope or price of the contract;



• the EA grants an unjustified extension on an existing contract instead of calling for new bids;

• the EA questionably disqualifies the winning bidder and calls for new bids for the contract;

• bid prices drop when a new bidder enters (especially in localities or provinces);

• apparent connections exist between the bidders (such as common ownerships or directorships), shared fax numbers, and common addresses on bidding documents;

• works are of poor quality and need frequent repairs, or a consultant’s work product is poor or never used;

• the project repeatedly fails tests or inspections;• tests are delayed by parties to the works or such parties insist

on choosing test sites for their works; and• complaints from users or beneficiaries accumulate.

Consulting Services

• consultants proposed by the EA are connected to the project, technical assistance (TA) project, or EA;

• consultant selection is based on factors other than merit;• consultants proposed are those with whom the donor is

comfortable working, instead of those who are most competent at handling a particular type of project; and

• preference is given to international consultants instead of a local expert who may have better capabilities.

Key Points... continued

Project counsel should inform the Office of Anticorruption and Integrity (OAI) if any of the indicators identified above are present in projects.


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D. Governance and Anticorruption Project Design Measures

1. Designing “Sound Management” Systems

Project teams are in a better position to consider project-specific governance and integrity strategies once risk mapping and/or an institutional assessment has been conducted. Measures that promote good governance, that are reflected in the design of the project and operate to prevent corruption at the outset, should be preferred to those that work to detect or punish corruption after the fact. Such measures instill systems for good project management, limit opportunities for corruption through internal financial controls, and generate disincentives for corruption. While many of these design measures are seemingly common sense, they are sometimes overlooked, so it is helpful tosetthemout.TheyaresummarizedinTable4.1andthedetailsarediscussedin the remainder of this section.

a. Project Director

The project director is one of the most critical factors for ensuring good project governance, limiting corruption, and securing the overall success of a project. Not only do project directors need technical competence and management ability, they must also be honest and have integrity. In more complex projects


Table 4.1: Governance and Anticorruption Design MeasuresMeasures Practical OptionsProject director and project staff

Select based on their capacity, experience, and expertise in managing similar projects, and their demonstrated integrity and commitment.

Financial management and accounting capacity

Consider project’s financial management arrangements, and the capacity, experience, and expertise of its accountants.a

Financial controls Require two signatures for checks and accounts and that audits of financial statements are conducted and submitted on time.b

Procurement Consider a project’s procurement arrangements, the specificity of the procurement plan, and the capacity, experience and expertise of its procurement officers, or in their absence, the appointment of a procurement agent.a

Implementation arrangements

Ensure that the arrangements, including internal monitoring and supervision by a ministry and the executive agency, are in accordance with a project performance monitoring and evaluation system, and external supervision and monitoring by an independent external consultant.

Dispute resolution Consider existence of independent (or at least quasi-independent) mechanisms of administrative or judicial justice to resolve complaints or disputes from beneficiaries.

a For more detailed guidance see ADB. 2010. Financial Management Assessment Guidelines. Forthcoming.

b See, e.g., Organisation for Economic Co-operation and Development. 2006. Methodology for Assessment of National Procurement Systems. Paris. Available: www.oecd.org/dataoecd/1.36/37130136.pdf

Source: Authors.

and TA projects, leadership and decision-making abilities are vital for project directors. Sometimes the timing of their appointment may be an issue.

In most cases, selecting a project director will not be an issue. However, sometimes ministries desire arrangements such as part-time project directors, co-appointments for ministry staff, and the like. These arrangements usually lead to project implementation problems. Moreover, project directors must not have conflicts of interest and while obvious, this issue arises not infrequently. If there are any doubts about the position of project director or any particular individual, project counsel should discuss with the project team, which may need to discuss the issue further with the government or within ADB.

If a new project director is to be appointed, at the minimum, ADB should try to ensure the relevant government and EA appoint a project director through a competitive and transparent process using agreed selection criteria.


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Project counsel are also encouraged to consider including a covenant in the financing agreement that the appointment of, or any changes to, the project director is subject to ADB’s approval or consent. Such a covenant will help protect against changes of a project director that may defeat sound management. Part D (1) of Chapter 5 provides more information on the appropriate covenant.

b. Project Staff

Even a good project director will be at a disadvantage if project staff have weak capacity. Project staff must be competent in their particular field and have no conflict of interest. In many cases, the project office may need additional training or support to get up to speed on certain issues. In particular, EAs frequently need training on ADB’s procurement and financial requirements. ADB’s consulting services and financial controllers departments, respectively, can provide this training.

Project counsel are strongly encouraged to include a covenant in the financing agreement that appointing new project staff or changing existing

Key Point for Project Counsel. Project counsel should know that having a good project director is critical to ensure good project governance, limit corruption, and ensure project success.

PROJECT DIRECTOR


project staff (particularly the project accountant or procurement officer) is subject to ADB’s approval or consent, or that their appointment or alteration is subject to other competency requirements. Such a covenant would help protect against changes of project staff that may defeat sound management. Part D (1) of Chapter 5 provides more information on the appropriate covenant.


• the effectiveness of project implementation and good gover nance depends in large part on the capacity and commitment of the project staff; and

• project design should include a covenant that reflects their importance.

c. Financial Management and Accounting Capacity

Good financial practice supports sound management and good gover nance.321 It is fundamental that the project management office (PMO), and any provincial or district PMOs, follow and maintain good accounting practices.

321 This Guide provides only an overview of the relevant issues. For further detailed guidance, see: ADB. 2010. Financial Management Assessment Guidelines. Forthcoming. This contains a useful financial risk assessment questionnaire.

PROJECT DIRECTOR


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In conjunction with the project team, project counsel should consider whether the number and capacity of accountants allocated to the respective PMO is sufficient to complete the required accounting and financial work in a timely manner and on an efficient basis. Thephysicalsizeorthefinancialcostof a project is not always the determinant of financial management needs. Some small, complex projects may require more staff because they also have many invoices of small amounts.

The project team will also need to consider the adequacy of financial managementandinternalcontrolssuchaswhoisauthorizedtowritechecksand how standard bookkeeping is done, and whether controls are manual or computerized.Project counsel may need to include covenants to achieve these purposes. Part E (3) of Chapter 5 provides more information on this issue.

Project counsel should discuss any concern that the number of financial staff is insufficient, or their competence is inadequate with, the project team. The project team should consider whether the project’s accounting capacity could be strengthened by providing (and ensuring funding for) additional accountants, accounting clerks, or alternatively, conducting financial management training for the existing staff. A covenant could be included to this effect. Part D (2) of Chapter 5 provides more information on this issue.322

d. Procurement

In Chapter 3, we saw that large supply contracts for goods, the procurement of civil works, and the selection of consultants present prime opportunities for

322 For further detailed guidance, see: ADB. 2010. Financial Management Assessment Guidelines. Forthcoming.

Key Points for Project Counsel. Project counsel should consider

• the adequacy and sufficiency of staff capacity,• the adequacy and quality of financial management and internal

controls, and• where necessary, Financial Management Assessment Guidelines322

of the Public Management, Governance and Participation Division of the Regional and Sustainable Development Department, which give detailed guidance.


corrupt practices. Strengthening the institutional and management aspects of the procurement of goods, works, and the selection of consultants can mitigate the risk of corruption. Part D (3) of Chapter 5 also contains the relevant covenants that can be used in loans to mitigate the risk of corruption.

Project counsel, in conjunction with the project team and the Central Operations Services Office (COSO), need to consider the nature and extent of procurement and consulting services required under a project. If procurement requirements are extensive and the EA’s capacity is weak, the project team has several options. The project team and government could agree to

• increase the number of procurement specialists or assisting clerks in the Project Management Office (PMO),

• engage more consultants to assist conducting the procurement,• engage a procurement agent to conduct the procurement, and/or• provide for additional procurement training under the project. In

some cases the project team could enlist COSO to conduct the training as it conducts routine procurement trainings.323

Project counsel should work with the project team and ADB’s consulting services and procurement department to ensure that the procurement plan contains clear requirements regarding thresholds and types of procurement. It should also contain clear requirements on the strengthening of the EA’s capacity.

A DMC may prefer to apply its national competitive bidding regime to a project. In that case, project counsel should consider whether COSO has assessed the DMC’s procurement laws and whether ADB has prepared clarifications on any potential inconsistencies between ADB’s procurement and consulting service requirements and the DMC’s procurement laws.324

323 See: http://coso.asiandevbank.org/modules/tinycontent4/index.php?id=6324 Those DMCs with national competitive bidding annexes are Bangladesh, Cambodia, Indonesia,

theKyrgyzRepublic,Nepal,SriLanka,Pakistan,thePeople’sRepublicofChina,thePhilippines,and Tajikistan.


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e. Supervision and Monitoring

Sound project management requires an effective system of monitoring, evaluation, and supervision. A ministry or EA needs to adequately supervise implementing agencies (IAs) and contractors in accordance with a project performance monitoring and evaluation system.

The Project Performance Management System (PPMS) collects data before the start of the project to establish baselines. It uses that baseline data to measure and evaluate a project’s performance. Under the PPMS,


• procurement requirements and whether the EA’s capacity needs to be supplemented;

• whether the DMCs’ procurement laws are adequate or need to be supplemented; and

• whether procurement risks identified in any country or sector governance risk assessment and risk management plan (RAMP) have been managed in the project.


periodic reporting of the project’s progress is necessary. Establishing an effective PPMS is not always straightforward and may need significant expertise. If there is insufficient capacity within the ministry or EA itself, consultants may need to be engaged to prepare the PPMS. The cost of these consultants would need to be included in the project’s budget.325

Regular and random supervision and monitoring should be performed by the EA. Independent external monitors may be required for some aspects of a project. Performance auditors are a form of independent external monitoring and they are discussed below.

If project management is conducted by district or provincial PMOs, monitoring and reporting procedures need to be in place to ensure the quality of the EA’s supervision and control over the district or provincial PMOs.

325 ADB. 2006. Operations Manual. OMJI/BP: Project Performance Management System.

Key Points for Project Counsel. Project counsel needs to ensure that the financing agreements

• contain requirements for monitoring, supervising, and establishing a PPMS; and

• provide for external supervision and monitoring by independent external consultants where monitoring by the EA is difficult.

Cambodia Water Filtration project: Monitoring by executing agencies is an integral part of project management.


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f. Financial Audits

The timely provision of audited accounts is fundamental for good governance. It allows ADB to ensure that its finances are used only for the purposes for which they were approved and with due attention to economy and efficiency.326

A project’s accounts must be prepared in accordance with accounting standards acceptable to ADB and independently audited. ADB prefers the application of international standards (e.g., International Financial Reporting Standards or International Standards on Auditing).327 However, ADB will accept national standards where it considers the standards are reasonably close to international standards.

The supreme audit institution of the DMC (i.e., its auditor general), or a private sector auditor, may undertake the audit. The project team should be satisfied that the auditor (either private or government) has the capacity to conduct an audit in accordance with standards that are acceptable to ADB.

If the project team considers that the DMC’s auditor general does not have the appropriate skills or cannot complete the audit within the time required, the project team could additionally require the DMC’s government to engage a private firm to conduct the audit. Alternatively, the project team could suggest that a joint audit be conducted and it could be used as an opportunity to provide on-the-job training to the DMC’s auditor general staff.

A supreme audit institution usually has constitutional guarantees of independence in carrying out its obligation to conduct audits. Hence, project counsel needs to be alert to the fact that a supreme audit institution is likely to be separate from and independent of the government’s obligation.

ADB requires all audited project accounts to be delivered within 6 months of the end of the fiscal year. There are two exceptions to this rule:

• where the EA has weak institutional capacity, in which case audited project accounts can be submitted 9 months after the end of the fiscal year in the early stages of project implementation and subsequently reduced to 6 months over the course of project implementation; and

326 This Guide provides an overview of the relevant issues. For further detailed guidance, see: ADB. 2010. Financial Management Assessment Guidelines. Forthcoming.

327 International Accounting Standards Board.


• iflogisticalconsiderationsthroughdecentralizationaresuchthatthey would impact the physical flow of information.328

However, these exceptions are rarely invoked and project counsel should not agree to deviations from the 6-month rule without discussing it first with their assistant general counsel (AGC) and/or the Controllers department.

If an EA claims that it cannot provide accounts within 6 months, project counsel, in conjunction with the project team, should seek an explanation from the EA. For example, in some ADB projects, the project has budgeted for private sector financial auditors to audit accounts provided to ADB within 6 months of the end of the fiscal year.

ADB’s requirement for DMCs to provide audited accounts within 6 months of the end of the fiscal year arises because of donor consensus ontheharmonizationoffinancialmanagementrequirementsundertheParisDeclaration.329 The World Bank also requires audited accounts to be provided within 6 months.330

Project counsel and the project team should also include a provision for special, spot, and random financial audits in the project design where they have particular concerns about an EA’s capacity to provide financial audits so as to identify problems prior to the audit.

g. Performance Audits

Performance audits are special and random performance checks or audits that are designed to ensure that funds will be used for their intended purpose. They consider both the financial and the physical aspects of a project. They are sometimes called value for money auditing.

328 ADB. 2008. Project Administration Instructions. PAI 5.09: Submission of Audited Project Accounts and Financial Statements. para. 17.

329 OECD website. The Paris Declaration on Aid Effectiveness and the Accra Agenda for Action. 330 World Bank. 2007. Operational Manual. OP 10.02: Financial Management.

Key Point for Project Counsel. Project counsel should be alert to the requirement that all audited project accounts must be delivered within 6 months of the end of the fiscal year within the two limited exceptions.


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Performance audits do not check financial expenditure in isolation. The audits examine the efficiency, economy, and effectiveness of undertakings or organizations:

• efficiency is about getting the most or best output from available resources,

• economy is about keeping the cost of a project low, and• effectiveness is about achieving the project’s stipulated aims or

objectives.

Through performance audits, answers may be provided to issues such as whether (i) the project activities have been performed in accordance with sound administrative principles and good management policies; (ii) the project meets the stipulated objectives; or (iii) the funds have been used for the purposes for which they were granted, e.g., checking whether a road was constructed to a particular quality or confirming that a bridge was actually constructed.

The requirement to conduct performance audits in a particular project is intended to enhance a project’s accountability. Performance audits may be conducted quarterly, semiannually, or annually, and they should be conducted by an independent and external auditor. Auditors will frequently be consulting firms, such as PricewaterhouseCoopers, but performance audits may also be conducted by nongovernment organizations (NGOs) or community-basedorganizations.

For examples of projects where performance audits have been invoked see: the Second Urban Primary Health Care Project in Bangladesh (2005);331

the Tsunami Affected Areas Rebuilding Project in Sri Lanka (2005);332 and the Nanjing Qinhuai River Environmental Improvement Project in the People’s Republic of China (2007).333

331 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Asian Development Fund Grant to the People’s Republic of Bangladesh for the Second Urban Primary Health Care Project.

332 ADB. 2005. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Grants to the Democratic Socialist Republic of Sri Lanka for the Tsunami-Affected Areas Rebuilding Project and the North East Community Restoration and Development Project II.

333 ADB. 2007. Project Agreement between the Asian Development Bank and the Jiangsu Provincial Government Nanjing Municipal Government for the Nanjing Qinhuai River Environmental Improvement Project.


h. Procurement Audits

OAIconductsprojectprocurement–relatedaudits(PPRAs).PPRAsareintendedtodetect fraudulent and corrupt practices relating to procuring goods and services. PPRAs are conducted to review a project’s procurement, financial management, contract implementation, and project management practices.334 In 2008, OAI initiated six PPRAs and completed four PPRAs jointly with the DMCs’ supreme audit institutions.335 Because OAI can only ever conduct PPRA’s for a sample of projects in any given year, project teams concerned about procurement risks

334 In 2008, OAI completed the PPRAs in Afghanistan, the Kyrgyz Republic, Mongolia, and Viet Nam.335 Wang, H.L., and A. Egloff. 2008. PPRA Debriefing and Experience Sharing with SAI.


• performance audits can be used to ensure the funds are used for their intended purpose;

• many supreme audit institutions do not have the capacity, and some private sector auditors do not have the skills, to conduct performance audits; and

• performance audits are sometimes a sensitive issue for DMC governments and project counsel needs to carefully explain the importance of performance auditing in ensuring project outcomes and building quality projects to them.


• suggest that the project team conduct spot procurement reviews to ensure that the EA complies with ADB’s procurement guidelines and consulting services guidelines;

• contact OAI to obtain sample checklists used for PPRAs in conducting reviews of fraud and corruption, procurement, internal controls, and EA capacity, which may be used by project teams to conduct similar PPRAs; and

• consider whether a covenant regarding the need for annual special procurement audits in projects, along the lines of OAI’s PPRAs should be included.


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in a project can adopt OAI’s checklist methodology and conduct their own procurement audits for their project. OAI is willing to provide these sample checklists.

i. Post Completion Audit

A special post completion audit to address governance, financial accountability, and transparency is required under ADB’s disaster and emergency assistance policy (2004).336 Such audits would usually be funded by the relevant DMC government because after the DMC has completed the project and the loan or grant account has been closed, another funding source for the audit would be required. ADB includes a covenant into financing agreements that indicates the government has this obligation.

2. Transparency

a. General

The governance policy explains that transparency means making information available to all stakeholders and the general public, and having clear government rules, regulations, and decisions.337 Project counsel should ensure that appropriate measures are incorporated into a project to allow stakeholders and the general public access to relevant project information and, where possible, to increase the clarity of government regulations and processes.

b. Media for Information Disclosure

There are various ways in which a project team can ensure that information is provided to the public and stakeholders to help the intended beneficiaries access a project’s programs and assistance:

• Internet. The EA for a project can establish an internet website that describes the project or can link their existing EA website to a description of the project. The website may record the names of people or communities

336 ADB. 2004. Disaster and Emergency Assistance Policy. 337 ADB. 1995. Governance: Sound Development Management. p.11.


who have received assistance, or are targeted to receive assistance under the project. The website should fully describe the project so that local communitiesandcivilsocietyorganizations(CSOs)canmonitorwhetherthe project assistance reaches its intended beneficiaries. Allowing such monitoring is in the interests of the EA, the borrower, ADB, and the beneficiaries.

• Newspapers. The EA for a project can publish information in local languages through the relevant government or private newspapers.

• Posters, leaflets, and display boards. The EA for a project can publish information concerning the project on posters, in leaflets, or on display boards hung in local offices. These more simple modes of “publishing” information are effective in more remote rural areas and other places where people do not have easy access to the internet or newspapers. Such modes allow the information to be published in a simple form and manner that can be readily accessible to the intended project beneficiaries.

• Radio. The EA for a project can publish information on local radio. Radio is a particularly effective way of reaching people in remote rural areas and other places where access to the internet or newspapers is not easy.

• Television. The EA for a project can increase a project’s transparency through the use of television. Television is the leading form of mass media in many jurisdictions. In ADB’s DMCs, television often reaches far more people


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than the internet. Pre-taped television such as videos, drama features, and advertisements may be shown to raise awareness of governance issues. Television was particularly effective in the Cambodia land project.338 It was also effective in the Sri Lanka Tsunami Governance Project.339

• Music. The EA for a project can increase a project’s transparency through the use of music. Like television, music reaches large numbers of people. In the Philippines, the Office of the Ombudsman conducted an anti corruption songwriting competition and produced a CD of the songwriting finalists that was widely distributed.340

• Street drama. Street drama shows are an increasingly popular way of informing members of a community about the needs of good governance and giving them an incentive to listen to what is said. The EA for a project can increase a project’s transparency in this way.

• Loudspeakers. The EA for a project can increase a project’s transparency through the use of loudspeakers affixed to cars. This form of communication is often used to communicate information to a local community. It is an appropriate way of quickly informing local communities that do not have access to other forms of communication.

338 ADB. 2005. Technical Assistance Completion Report on Implementation of Land Legislation in Cambodia.

339 See Loan NO. 2167/2168(SRI): Tsunami-Affected Areas. Rebuilding Project and the NorthEast Community Restoration and Development Project II, approved on 14 April 2005.

340 Flores, Helen. 2006. Gospel Rapper Tops for Anti-corruption Song Tilt. The Philippine Star.


c. Type of Information Disclosed

The information to be made public should, among other things:

• help ensure that the project funds are used properly and reach the intended beneficiaries;

• address the rights of the affected people and beneficiaries;• provide details of all relevant laws and regulations;• disclose information on procurement packages; and• provide details of the contract packages to be, or that have

been, procured with ADB’s assistance. For example, procurement information could outline procurement contract awards, including (i) information on the list of participating bidders; (ii) the winning bidder’s name; (iii) the bidding procedures adopted by the winning bidder; (iv) the amount awarded to the winning bidder; and (v) the goods and/or services purchased, as well as their intended and actual use.

d. Public Knowledge of the Law

A project can promote “legal literacy” and “legal empowerment” by facilitating publication of project-related information and promoting awareness of governance by the public and district officials. This leads to predictability and hence better governance. ADB has implemented two regional technical assistances that support this proposition.

The regional TA for Legal Literacy for Supporting Governance uncovered very promising results.341 It suggested that improving legal literacy through paralegalscouldreducepovertyandincreaseacitizen’scapacitytoparticipatein governance.342

The regional TA for Legal Empowerment for Woman and Disadvantaged Groups sought, among other things, to address the need to collect more data and evidentiary proof that illustrates the link between legal empowerment for women and disadvantaged groups and poverty reduction and good governance.343

341 ADB. 2005. Technical Assistance Completion Report on Legal Literacy for Supporting Governance. 342 ADB. 2001. Law and Policy Reform at the Asian Development Bank. p. 134, para. 31.343 ADB. 2005. Technical Assistance for Legal Empowerment for Woman and Disadvantaged Groups.

para. 7.


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ADB has done considerable work in legal empowerment and in its role in good governance and poverty reduction.


e. Identification Cards

In some projects, it may be relevant and appropriate to require that beneficiary identification cards be issued at the earliest possible stage. Identity cards may be project specific or may involve reissue of national identity cards as part of restoring an individual’s legal identity. In large-scale resettle ment projects, identity cards or some other identification system are often issued to prevent benefits from being conferred upon opportunistic persons who are not originally from the project area and who come to an area once land values have begun to escalate.

ADB has reissued identity cards in certain post-disaster emergency projects. Issuing identity cards may also be useful in projects where it is necessary to pinpoint the beneficiaries at the project’s outset. It also prevents or limits persons from obtaining multiple or fictitious identities in places where documentation for personal and business identities is not obtainable or has been lost or destroyed. A project team could consider and budget for a simplified procedure for obtaining new identity cards for individuals and businesses, using the latest technology (e.g., iris recognition).


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4. Participation

a. General

Participationreferstotheinvolvementofcitizensandotherstakeholdersinthe development process. The principle assumes that people are at the heart of development; they are not only the ultimate beneficiaries of development but also its agents.344

To ensure that all stakeholders are included, a stakeholder analysis should be undertaken. It may be extensive and conducted as part of the feasibility work for a project, or more limited, depending upon the nature of the project. It should consider and address laws that might discriminate against certainclassesorcastesbecausesuchlawsmaypreventcertaincitizensfromparticipating in governance. At the very least, it should also identify all of the relevant stakeholders and their needs, issues, and concerns through broad-ranging discussions and interviews with those affected by and interested in the project.

Therefore, during project processing the project counsel should help the project team determine whether a satisfactory stakeholder analysis has been conducted for a project of the relevant type. If it has not, project counsel may need to assist or recommend that a stakeholder analysis be conducted.

344 ADB. 2005. Governance: Sound Development Management. p. 9.


• a new identity system may facilitate governance and/or the legal identity of an individual but must be tied to measures to protect the privacy of individuals,

• an identity system should take into account the administrative and technical capacity of the EA, and

• identity cards will not be appropriate in all projects and should be discussed with the project leader and relevant assistant general counsel and/or director.


Project counsel can obtain further guidance on stakeholder analysis from ADB’s staff guide to consultation and participation.345

b. Local Stakeholders and Community Coordination Groups

Involvingcivilsocietyorganizations(CSOs),346 local communities, and other local stakeholders in project preparation and implementation is vital. Their involvement helps ensure that projects are appropriate and relevant. It can also facilitate good governance. Past experience suggests that when local stakeholders know more about a project, corruption is less likely.

CSO Involvement in Projects. CSOs can improve governance in projects in the following ways:

• ADB or an EA may consult with CSOs to obtain local knowledge of sources of corruption;

• CSOs can participate in local institutions and help to rebuild those institutions;

• ADB or an EA can enlist CSOs for project and performance monitoring; and

• CSOs and local representatives can be represented on the provincial or district project coordination committees that approve the selection of subprojects under sector loans.

CSO Governance. CSOs often act as whistle-blowers of corruption; many cases that ADB investigates result from CSO tip-offs. Although CSOs frequently guard against corruption in a project, when they are involved, project counsel should be aware of the rare potential for CSOs to collude with government officials. Project counsel can alleviate this problem by requiring CSOs to do the following:

345 ADB. 2006. Strengthening Participation for Development Results: A Staff Guide to Consultation and Participation.

346 CSOs is a broader term including nongovernment organizations (NGOs), labor unions, researchinstitutions, and foundations. ADB is moving toward use of this term instead of NGO as it is all encompassing. For further information, see ADB. 2009. Civil Society Organization. Sourcebook. A Staff Guide to Cooperation with Civil Society Organizations.


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• publish information about their activities and use of funds,• display this information on a website or at another public forum,• ensure that all CSOs engaged under ADB projects are subject to

an audit, and• ensure that CSOs tasked with project monitoring are independent

of those CSOs that are involved in service delivery.

ADB has published information on cooperating with NGOs and civil society on its website.347

c. Coordination among Development Partners

Coordination among development partners is verywell recognized as aprinciple.348 However, in practice it works better in some DMCs and some sectors than others. Good coordination among development partners simultaneously promotes good governance, limits corruption, ensures effective delivery of project assistance, avoids duplication, and obtains

347 See www.adb.org/NGOs/default.asp; ADB. 2008. In Brief: ADB and Civil Society; ADB. In Brief: Participatory Development.

348 Paris Declaration on Aid Effectiveness. 2005.

Key Points for Project Counsel. In conjunction with the project team, project counsel should consider

• ensuring a project has had an extensive consultative and participatory pro cess for local stakeholders, CSOs, and NGOs in project or sub-project selection, design, preparation, implementation, and monitoring;

• taking steps to ensure the good governance of any CSOs and NGOs involved in projects;

• ensuring community participation in the selection, prepara tion, implementation, and monitoring of projects and subprojects; and

• budgeting for the cost of community participation in super vising and monitoring subprojects in a project’s cost, where necessary.


synergies. For example, if coordination is not effective, two donors may provide finance for substantially the same project in overlapping areas, allowing opportunistic individuals to take advantage of the duplication.

Usually, at least the first stages of donor coordination occur before project counsel becomes involved in the processing of a project. However, project counsel should confirm that the project team is confident that ADB’s project is not duplicating the work of other projects. Moreover, coordination among development partners needs to continue during implementation,particularlyinprojectsthatarecomplicated,decentralized,or where more than one donor is working in a particular area.

Even during the review of project documents, project counsel should stress the importance of coordination.

5. Accountability

a. General

Accountability makes public officials answerable for government behavior, subject to sanctions; and more responsive to the entities from which they derive authority.349 In considering accountability mechanisms for the project,

349 ADB. 2005. Governance: Sound Development Management. p. 8.

Key Points for Project Counsel. Project counsel may suggest the following coordination activities to the project leader:

• donor or sector coordination meetings at the national, regional, and district levels, if these are not already occurring;

• regular (monthly or quarterly) meetings among all development partners to disclose activities that they support or intend to support;

• joint audits and project monitoring; and• requiring all partners to share information on needs assessments.


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projectcounselshouldrecognizethatitisusuallypreferabletostrengthenexisting and established institutions, rather than establish new mechanisms. Creating new mechanisms normally entails greater costs, and conflict with ADB’s approach of applying and strengthening country systems. New mechanisms are appropriate where the project team decides a policy, institutional, and regulatory reform program is appropriate.

Private individuals or public officials who either misappropriate funds from donors or take advantage of, and benefit from, vulnerable people must be sanctioned. Mechanisms to track and sanction such abuse of power need to be in place. The government should agree to quickly sanction private individuals, entities, or public officials who take or attempt to take advantage of project funds.

However, securing government agreement to take such action depends upon government leadership, as well as ensuring that the existing judicial and administrativemechanismsare inplace todetectandpenalize corruption.In many DMCs such mechanisms are in place and it requires a display of leadership from the government to take such action. In other cases, ADB may be able to assist by streamlining coordination among the judiciary and anti-bribery institutions, ministries, or departments that detect, apprehend, prosecute, and punish corruption offenders under law.

The extent to which additional project-based mechanisms may be required depends upon the preexisting system of administrative and judicial justice, and the nature and value of the project. Possibilities are described below.

b. Bribery and Anticorruption Institutions

The relevant government will often have an anti-bribery institution or commission. It will operate within the DMC’s governance and regulatory framework. While these anti-bribery institutions or commissions are likely to be established under the DMC’s constitution or a statute, and so be independent or quasi-independent, synergies or linkages may be possible between the DMC’s anti-bribery institutions and the anticorruption efforts of the project.


c. Complaint and Redress Mechanisms

A project ultimately seeks to serve its beneficiaries which are usually the people within a DMC. However, during implementation individuals, groups, and members of civil society may have complaints about the way in which the project is being implemented. Complaints will not all involve corruption or legal issues—many will involve administrative issues.

To deal with such complaints against the relevant ministry, EA, and/or the project, complaint mechanisms may need to be strengthened or established. Beyond establishing a system for receiving and resolving complaints, a complaint mechanism provides complainants with an opportunity to voice their individual complaints, problems, and conflicts to an appropriate body.

Complaints mechanisms may be administrative or judicial. They are not the same as a complaints referral system, whereby complaints are received and merely referred to the officer against whom the complaint was filed or to the relevant department. Complaint mechanisms involve at least some degree of quasi-independence from the particular department from which the complaint was received.

Largeanddecentralizedprojectswillneedcomplaintmechanismstobeavailable to all project affected people in what will sometimes be a very large

Key Point for Project Counsel. In conjunction with the project team, project counsel could consider how to facilitate these synergies or linkages.


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project area. Certain options are available to make a complaint mechanism accessible:

• intensive and wide reaching publicity about the mechanism throughout the entire project area, togetherwithdecentralizedcollection of complaints;

• a “mobile” complaint mechanism; or• decentralizedofficesofthecomplaintmechanism.

In conjunction with the project team, project counsel may need to allocate budgetary resources to assist the government to establish a complaint mechanism for the project or strengthen an existing mechanism.

Finally, project counsel should be aware that ADB’s Safeguard Policy Statement (2009)350 requires grievance mechanisms to be established for environment, resettlement, and indigenous peoples’ in projects, where those safeguards are applicable. In some cases, it may be appropriate to establish only one mechanism to deal with all project grievances, including safeguards. In other cases, it will be preferable to have several grievance mechanisms.

The different complaintmechanisms, their bases of authorization andoperative tools are set out in Table 4.2 and these are described further below.

350 ADB. 2009. Safeguard Policy Statement. Policy Paper.

Table 4.2: Complaint and Redress Mechanisms

Type Basis of Authority Operative ToolAdministrative • executive

• managerial• administrativeconsensus• quasi-independent

fact-finding and recommendation

Ombudsman • legal• constitutional• statutory

• quasi-independent fact-finding

• formatrecommendation

Community-Based Resolution

• traditional• consensus

• transparency• problemsolving• consensus

Office of Anticorruption and Integrity

• managerial/advisory • quasi-independent fact-finding

• formatrecommendation

Source: Authors.


Administrative Review. Complaint mechanisms can be established for projects in existing or newly created ministries delivering ADB assistance. Complaints under an administrative mechanism should improve the ability of individuals or communities with complaints to access justice. To provide quasi-independence, such complaint mechanisms need to be located outside the PMO and report to the secretary or minister of a ministry.351

Some DMCs have already established administrative complaint mechanisms under the ministry dealing with public administration, or under the line ministry. To deal with additional project-based complaints, such mechanisms may require strengthening and this could be done under a project.352

Whatever the type of complaint mechanism, a project could ensure that project beneficiaries and stakeholders are aware of this avenue of complaint submission and redress by

• requiring information and publication of such information in the project area, and/or

• supporting CSOs and/or NGOs to do so or to assist with complaints.

Many ADB projects have required administrative complaint mechanisms to be established.353

Ombudsman. A real or “classic” ombudsman’s office is established under a country’s constitution or by statute. “Ombudsman” is a term that has acquired many meanings. It has been used to describe internal grievance mechanisms for organizations, agencies, and ministries. These types ofpseudo ombudsman perform functions that are more akin to the complaint mechanism for administrative review described above.

351 See Grant 0002-INO(SF): Earthquake and Tsunami Emergency Support Project, approved on 29 April 2005.

352 Loan No. 2096-SRI(SF): Secondary Education Modernization Project II, approved on 7 December2004.

353 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Asian Development Fund Grant to the People’s Republic of Bangladesh for the Second Urban Primary Health Care Project; ADB. 2005. Report and Recommendation of the President to the Board of Directors on Proposed Grants to the Republic of Indonesia for the Earthquake and Tsunami Emergency Support Project and Contribution to the Multidonor Trust Fund.


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A real ombudsman is given statutory powers of investigation and decision making that an administrative complaint mechanism or “organizationalombudsman” would not have.

Establishing a real ombudsman would be a lengthy process. It would involve extensive discussion with the government and would require determining the ombudsman’s relevant statutory powers. It could only be considered in a DMC strongly committed to a reform program as part of an overall governance reform program.

However, it may be possible for a project or program to supplement the resourcesofanexistingclassic,organizational,oragencyombudsman’sofficewith a more limited approach. By doing so, the system of complaint and dispute resolution for a particular project could be improved. If the project is to provide such resources, the project design would need to incorporate a component or subcomponent on building the capacity of such institutions.

Multistakeholder Grievance Process. A multistakeholder process could also be used to resolve disputes that cannot be readily dealt with under the other complaint mechanisms described above. For example, a committee or a dispute resolution panel may comprise representatives of different stakeholders, as required. Such representatives could be drawn from CSOs, NGOs, the private sector, the government, and/or development partners.

Mediation. Some DMCs have adopted mediation systems under law as a mechanism for dispute resolution. Such systems operate on a problem- solvingbasis.However,theyarenotparticularlystrongonresolvingpublic– individual complaints, which usually allege an abuse of power by a public official. Mediation is more effective where private–private disputes areexpected in a project.

Community-Based Resolution. Existing community-based customary dispute resolution mechanisms may be strengthened to resolve disputes relating to property rights or other private matters.

ADB’s Office of Anticorruption and Integrity (OAI). As well as the national systems for grievances and conflicts discussed above, project counsel should know to refer all complaints and conflicts relating to corrupt or fraudulent practices to OAI. ADB has published information on referring matters to the OAI on its website (www.adb.org/Anticorruption/unit.asp).


d. Government Record-Keeping Systems

Government record keeping in ADB’s DMCs includes both sophisticated automated systems and traditional manual record-keeping systems of old dusty files that may not be stored according to any particular system.

Manual record-keeping systems are easier to manipulate and therefore provide more opportunity for corrupt practices and poor governance. Computer automation may limit the extent to which the system can be manipulated for false claims for assistance and increases the extent to which project affected people and beneficiaries can claim public accountability for administration of records. Improving such record-keeping systems can increase the reliability and predictability of access to such information.

However, automating record-keeping systems may be too extensive (and expensive) a project for the capacities of existing staff within a ministry. Replacing a manual system may not necessarily improve a government record-keeping system if personnel do not understand it and therefore decline to use it, if technical difficulties prevent its constant use, or if only a few personnel know how to use it, and are thus able to take opportunities to manipulate it.

In conjunction with the project team, project counsel, during project design, could consider ways to

• improve manual systems of record keeping and documentation delivery,

• establish an appropriate manual or computer automated management information system for the project office(s), and/or

• have computer automated manual systems of information storage.

6. Predictability

a. General

Predictability refers to (i) the existence of a system of laws, regulations, and policies that regulate society, and (ii) the fair and consistent application of the system of laws, regulations, and policies. The importance of predictability cannot be overstated since without it the orderly existence of citizens


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and institutions would be impossible.354 Furthermore, a consistent legal environment in a country is vital for development.

b. Legal System and Infrastructure

Quasi-judicial mechanisms only work effectively in the shadow of the formal legal system. The potential for project counsel to influence a project’s design in a way that impacts a country’s legal infrastructure and legal system more broadly is likely to be limited in any given project.

However, project counsel need to be aware that the success of any administrative accountability mechanisms, such as those referred to in Section 5 (Accountability), is likely to be influenced by the overall quality of a legal system and the extent that the rule of law exists and prevails.

c. Training Workshops for Judges, Magistrates, and Law Enforcement Officers

A project may result in the introduction of new legislation or regulations. In such circumstances, project counsel could consider working with the project team to build into the proj ect’s design, the ability to provide training to judges, magistrates, and law or administrative enforcement officers on the effect of the new legislation or regulations.

d. Administrative System and Infrastructure

The effectiveness of the preexisting system of public administration will enhance or detract from the effectiveness of any particular set of governance measures.

354 ADB. 2005. Governance: Sound Development Management. p.10.


Overall Review Guide for Chapter 4


• different risks are associated with each stage of the ADB project cycle, what these risks are, and how to mitigate them: see the Risk Analysis section on pages 87–89;

• thegovernancerisksandissuesofanagency,entity,ororganizationin a particular project may be identified and better understood by arranging an institutional assessment: see the Institutional Assessments section on pages 89–92;

• the general checklist of questions involved in a basic institutional assessment is a helpful tool: see the checklist on pages 90–91;

• public procurement creates many opportunities for corrupt practices and poor governance: see Indicators of Corruption Risks section on pages 92–94;

• they should have regard to the “warning bells” of corruption: see Indicators of Corruption Risks section on pages 93–94; and

• there are a number of project-specific governance and integrity strategies and measures that are designed to reduce the risk of corruption and poor governance in projects and project counsel can help project teams reduce such risks by knowing what these measures and strategies are: see the Governance and Anticorruption Project Design measures section on pages 95–123.

CHAPTER 5

Public Sector Covenants

A. Overview

Chapter 5 sets out sample covenants for many of the issues discussed in Chapter 4. As explained in other parts of this Guide, governance risk profiles of different projects will differ by country, sector, and project. Hence appropriate covenants will also differ on these bases. Thus, these covenants are only illustrative. Before including them in a memorandum of understanding or a financing agreement, project counsel should

• discuss the covenants and their rationale with the project leader,• be prepared to explain their rationale to the relevant government,

and• discuss the covenants with their assistant general counsel, where

necessary.

Many governments will only be able to comply with the governance and anticorruption covenants if they are integrated into a project design and given a specific budget allocation. Project counsel will need to discuss this with the project team and project leader.

B. Governance Policy

The Second Governance and Anticorruption Action Plan (GACAP II) recommends that reports and recommendations of the President (RRPs) list project-specific governance measures. Increasingly, RRPs include a table or appendix with these measures. The following are general covenants to incorporate more detailed measures in a table or matrix in the RRP, or some other document, by reference.


1. Standard Governance Statement

Section [•] Further to the [Borrower’s]355 commitment to good governance, the [Borrower] shall adopt the measures set forth in the Governance and Anticorruption Approach,356 andparagraphs[•]ofthisSchedule[•].

C. Anticorruption Policy

The following covenants on the anticorruption policy should be included in all financing agreements, although the covenant may need to be adjusted to suit the country and project.

1. Standard Covenant: General Contracts

Section [•] (a) The [Borrower] shall comply with [, and shall cause the [Project Executing Agency]357 to comply with,] ADB’s Anticorruption Policy (1998, as amended to date). The [Borrower] [and the Project Executing Agency]:

(i) acknowledge[s] ADB’s right to investigate, directly or through its agents, any alleged Corrupt Practices, Fraudulent Practices, Coercive Practices, or Collusive Practices relating to the Project; and

(ii) agree[s] to cooperate fully with any such investigation and to extend all necessary assistance, including providing access to all relevant books and records, as may be necessary for the satisfactory completion of any such investigation.

2. Definitions

The following definitions can be included in the definitions section of the relevant agreement if considered necessary:

355 Replace all references to Borrower with Recipient or Beneficiary if the transaction so requires.356 The reference to “Governance and Anticorruption Approach” allows project counsel to incorporate

by reference a project-specific action plan that prescribes measures to be taken in the specific project. The term “Governance and Anticorruption Approach” should be defined.

357 Insert the name of the executing agency (EA) and/or implementing agency (IA) and change all references as the project so requires.

Public Sector Covenants 127

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(i) Corrupt Practice means the offering, giving, receiving, or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party.

(ii) Fraudulent Practice means any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.

(iii) Coercive Practice means impairing or harming, or threatening to impair or harm, directly or indirectly, any party or the property of the party, to influence improperly the actions of a party.

(iv) Collusive Practice means an arrangement between two or more parties designed to achieve an improper purpose, including influencing improperly the actions of another party.358

3. Standard Covenant: ADB-Financed Contracts

Section [•] (b) Without limiting the generality of Section [•] (a), the[Borrower] shall:

(i) ensure that the Project Executing Agency conducts periodic monitoring inspections on all contractors’ activities related to fund withdrawals and settlements; and

(ii) ensure that [and shall cause the Project Executing Agency to ensure that] all contracts financed by ADB in connection with the Project include provisions specifying the right of ADB to audit and examine the records and accounts of [the Project Executing Agency and] all contractors, suppliers, consultants and other service providers as they relate to the Project.

358 ADB. 2006. Anticorruption Policy: Harmonized Definitions of Corrupt and Fraudulent Practices.


D. Governance as “Sound Management” Design Features359

1. Project Director and Staffing

The covenants in the following paragraphs should be considered for all financing agreements:

359 It is appropriate to refer to a “loan” or “grant” instead of a “financing agreement,” subject to the nature of the document.


• The covenants in the foregoing paragraphs should be modified if the obligations of the executing agency (EA) or implementing agency (IA) are not contained in the relevant financing agreement,359 but are principally contained in a schedule to the project agreement. In such case, the relevant financing agreement needs to contain such obligations as they relate to the borrower, and the project agreement needs to contain such obligations as they relate to the EA and/or IA, as appropriate.

• Many financing agreements now include a provision requiring any procurement bidding documents to contain references to or extracts from the relevant provisions of ADB’s anticorruption policy.AnexampleofsuchcovenantisreflectedinSection[•](b)above. The standard bidding documents already contain relevant provisions from ADB’s anticorruption policy. Thus covenant Section [•] (b)wouldbe legallynecessaryonlywherenationalcompetitive bidding is used or where there are no standard bidding documents for the particular procurement contract.

• All financing agreements should refer to such ADB rights under the anticorruption policy. This reference should be included to improve implementation and compliance. Establishing this contractual obligation in the financing agreements reminds ADB and the EA of this obligation. ADB staff will later check compliance before ADB’s procurement committee approves any particular procurement package.


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a. Covenant Establishing Project Office Requirements and Staff Retention Requirements

Section [•] The [Borrower] shall ensure that

(i) a project management office (PMO)360 is established within the [Project Executing Agency], which shall oversee day-to-day operations of the Project, including in particular procurement, planning, budgeting, accounting, monitoring and coordinating with district and local offices of the beneficiaries; and

(ii) the staff engaged in the PMO of the Project will be [engaged] [and retained] in the PMO, subject to their satisfactory performance.

b. Covenant Identifying Project Staffing Requirements and ADB’s Rights

Section [•] The [Borrower] shall also ensure that the PMO is managed and operated by a Project director with qualifications and expertise in [insert necessary expertise], and is supported by an adequate number of competent full-time personnel, including an administrator, a finance manager and accountant, an engineering and civil works professional, a procure ment officer, and a monitoring and evaluation officer. The [Borrower] shall [consult with]/[seek the approval of] ADB concerning any changes to staffing at the PMO.

c. Covenant Requiring Consideration of Vacancies to Maximize Good Governance and Minimize the Opportunities for Leakage

Section [•] The [Borrower] shall review the vacancy levels in various govern ment service posts and the staffing needs for the implementation of the Proj ect, including [describe the types of officers]. The [Borrower] shall take all steps necessary within its control to fill any vacant positions and ensure that such service posts are adequately staffed by competent and qualified personnel.

360 Project counsel may refer to “project management unit” or another term as requested by the project team.


2. Financial Management and Accounting Capacity

a. Covenant Requiring the Borrower to Appoint, Train, and Budget for Financial and Accounting Staff

Section [•] (a) The [Borrower] shall ensure that

(i) an adequate number of competent financial and accounting staff are appointed for the Project;

(ii) the Project director and all PMO financial and accounting staff: (A) have adequate experience and expertise in the applicable accounting standards; and (B) receive training on ADB’s Loan Disbursement Handbook, prior to the Effective Date; and

(iii) it allocates sufficient counterpart budget for staff training, if necessary, as determined in consultation with ADB.

Section [•] (b) The [Borrower] shall ensure that the [Project Executing Agency] [or other holder of a [second/third] generation imprest account for the Project] shall establish and maintain Project accounts and records of Project progress and expenditures to facilitate the identification of income and expenditures related to the Project.

3. Procurement

a. Covenant Appointing, Training, and Budgeting for Procurement Staff

Section [•] (a) The [Borrower] shall ensure that the Project director and all relevant PMO procurement staff have adequate experience and receive training on: (i) the Procurement Guidelines, (ii) the Consulting Guidelines, and (iii) [Borrower’s] procurement and consulting requirements prior to the Effective Date. The [Borrower] shall allocate sufficient counterpart budget for such training, if necessary, as determined in consultation with ADB.

b. Covenant Preventing Project Staff from Being Part of Borrower’s Procurement Evaluation Committees

Section [•] (a) The [Project director] and the PMO staff shall not be eligible to be members of any [Borrower] procurement committee evaluating bids for procurement contracts under the Project.


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E. Project Design Features: Supervision and Monitoring

1. Project Performance Monitoring Systems

Section [•] (a) No later than [insert date], the [Borrower] shall cause the [Project Executing Agency] to develop or update a Project Performance Monitoring System (PPMS) acceptable to ADB.

Section [•] (b) The [Borrower] shall cause the [Project Executing Agency] to develop the PPMS by: (i) conducting surveys to establish a baseline-data at the start of Project implementation; (ii) proposing the key indicators for evaluating the Project’s performance; and (iii) including baseline performance monitoring, systematic Project performance monitoring, and benefits monitoring and evaluation, in each case in consultation with and in a form acceptable to ADB.

Section [•] (c) To evaluate the Project benefits, the [Borrower] shall cause the [Project Executing Agency] to conduct surveys comparing the baseline and checking the performance indicators: (i) by the time of the Project midterm review; (ii) by the time of Project completion; and (iii) within 6 months of Project completion.

Key Points for Project Counsel

• The PPMS is a key governance measure and tool because it establishes the benchmarks and indicators from which to monitor and measure whether the project’s resources have been used for the purposes for which they were intended. The PPMS is not always understood in this way as a governance measure and may not be given sufficient importance.

• The project team may need to engage consultants to develop a sufficient and effective PPMS system if the capacity of the EA is weak. If so, a separate budget line-item may need to be allocated for PPMS consultants.

• Each PPMS is different. A PPMS is established for a project in accordance with its specific needs. Thus, the project team, the



2. Government Monitoring of Project

a. Covenant on Reporting

Section [•] The [Borrower] shall cause [the] [each respective] [Project Executing Agency] to submit [quarterly] monitoring reports to [ADB] [the National Committee and Provincial Committee] in relation to Project implementation.

Key Point for Project Counsel. ADB receives periodic reports from the developing member country (DMC) and project EA. However, to encourage government-based monitoring of the work of the project EA, a project team may also have the borrower or the EA send monitoring reports to various national or project based entities.

b. Covenant on Periodic and Random Compliance Monitoring

Section [•] The [Borrower] shall also cause each [Project Executing Agency] to conduct periodic and random compliance monitoring of the Project to determine if the Project funds have been used effectively and efficiently to implement the Project, achieve its objectives and outcomes, and satisfy its performance indicators.


EA or consultants must collect project-specific baseline data, develop indicators, and monitor and evaluate them separately for each project. Moreover, different components of a project require the collection of different sets of data.

• Qualitative indicators will need to be developed for components of a project that involve capacity building or the provision of services (e.g., financial or legal services). Qualitative indicators are often very difficult to develop because they seek to measure intangibles. For example, they may seek to measure the extent that training increased the knowledge of EA staff about ADB’s accounting procedures. Individual response surveys are one way of measuring this but are subjective and will vary among respondents.


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3. Standard Covenants on Financial Management and Audit

Standard covenants on financial audits are included in the loan/grant regulations and model documents.

a. Financial Management: Accounting and Auditing

Section [•] (a) The [Borrower] [shall cause the Project Executing Agency to] [and the Project Executing Agency] shall ensure that proper accounts and records shall be maintained and audited in time to adequately identify the use of Loan proceeds in accordance with this [Loan Agreement] [and the Project Agreement].

Section [•] (b) The Borrower shall ensure that within [3] months of the Effective Date, the [Borrower] shall cause the [Project Executing Agency] to

(i) establish internal accounting and financial control system in accordance with [national/international] accounting standards to ensure the (A) regular monitoring of expenditures and all financial transactions, and (B) safe custody of all assets financed under the Project, including all Project facilities;

(ii) establish an independent and autonomous internal audit department; and

(iii) adopt computerized financial and management information systems to ensure efficient, effective, and accountable financial and information management:

in each case in a form and manner acceptable to ADB.

Key Point for Project Counsel. Periodic and random compliance monitoring is also sometimes described as a “spot audit.” However, some DMCs and EAs object to the term “audit,” but may not object to the terms “check,” “review,” or “compliance monitoring.” The covenant can be drafted to achieve the same effect either way.


b. Engage Private Financial Auditors to Accelerate Timing of Submission of Accounts

Section [•] (a) The [Borrower] shall ensure that private sector auditors are engaged to conduct financial audits and, in accordance with Section [•],361

provide audited financial statements to ADB within 6 months from the audit date.

Section [•] (b) If there are discrepancies between such audited financial statements submitted to ADB and the audited accounts subsequently prepared by the Borrower’s auditor general, the Borrower shall notify ADB of such fact and shall consult and discuss the actions necessary to resolve or reconcile such discrepancy.362

361 This should refer to the section that establishes the obligation to provide audited accounts.362 ADB. 2009. Project Administration Instructions. PAI 5.09: Submission of Audited Project Accounts

and Financial Statements. para. 17.


• The model loan documents provide standard language requiring borrowers to provide audited accounts to ADB within 6 months. They also require the borrower’s auditors to be acceptable to ADB.

• At loan negotiations, borrowers often ask ADB to consider their respective auditor general an auditor “acceptable to ADB” for the purposes of the financing agreements. The request is made because in most DMCs, the DMC’s national auditor general has a constitutional obligation to audit the accounts of all government agencies and government-owned entities. ADB routinely accepts such a request from a borrower, subject to retaining its general discretion to request additional auditors if the government auditors ever become unacceptable to ADB. This request and ADB’s response is included in the loan negotiation minutes.

• A borrower’s audited accounts need to be provided to ADB within 6 months of the end of the fiscal year. As discussed in Chapter 4, ADB will only rarely consider exceptions to this general rule.362



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c. Covenant on Spot and Random Financial Checks and Audits363

Section [•] (a) The [Borrower] shall allow and assist ADB to conduct spot and random checks on

(i) the flow of funds through each imprest account [and each second-generation imprest account and each third-generation imprest account], and the use of such imprest accounts for the Project in accordance with this [Financing Agreement];

(ii) work in progress under the Project; and(iii) Project implementation.

4. Performance Audits and Value for Money Auditing

Section [•] (a) The [Borrower] shall engage, and shall cause [each] [Project Executing Agency] to engage [private sector performance auditors,] [civil society organizations (CSOs),] [or] [nongovernment organizations (NGOs)]364

to conduct semiannual performance audits during Project implementation.

363 ADB. 2009. Project Administration Instructions. PAI 5.09: Submission of Audited Project Accounts and Financial Statements.

364 The Borrower can be offered a choice of entity to conduct the performance audit or the financing agreement could specify the entity.

• If a DMC’s national auditor general cannot comply with the 6-month requirement and the case does not fall within one of the few exceptions to the general rule,363 ADB could propose that the borrower engage private sector auditors to provide ADB with audited accounts within 6 months. In such case, ADB would rely on the private sector auditors report, although the national auditor general would conduct and deliver its separate audit report in a longer time period (e.g., 9 months, or 12 months, or 15 months). The national auditor general’s audit report would become relevant to ADB if there was any discrepancy between public and private accounts that would need to be reviewed by ADB and reconciled in conjunction with the borrower.

• If a project EA supervises several IAs, ADB should require the project EA to conduct monitoring and periodic spot and random checks of the IAs’ activities.



Section [•] (b) The [Borrower] shall ensure that performance audits shall be conducted during subproject implementation as part of the overall Project audit.

OR

Section [•] (a) The [Borrower] shall ensure that the financial audits and performance audits under the annual Project audit are conducted by the auditors appointed in accordance with the [Borrower’s] [Audit Law].365

Section [•] (b) The [Borrower] shall ensure that performance audits will be conducted during subproject implementation as part of the overall Project audit.

365 A specific reference to the correct law should be made.


• The rationale for performance auditing is to ensure that ADB finance is used for its intended purpose. Performance audits may become desirable to a central DMC government that makes subloans to provinces or parastatals because they also provide assurance to the central government that the province/parastatal is using funds for their intended purpose.

• In DMCs like Mongolia, performance audits are required by law but are not yet thoroughly implemented and enforced. In such cases, project teams should consider the second example of Section[•](a).

• Performance auditors may come from financial auditing firms, certain NGOs, or a mandated government department.

• The borrower or project EA may be reluctant to endorse performance audits because they are not familiar with the concept or it is not yet standard in their jurisdiction. Project counsel together with the project team can explain the rationale for performance audits to the borrower.


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5. Completion Audits: Standard Post-Disaster Covenant

Section [•] Within 3 months of Project completion, the [Borrower] shall cause a special independent post-completion audit to be conducted in accordance with ADB’s Disaster and Emergency Assistance Policy (2004) to determine compliance with ADB’s governance, transparency, and financial accountability covenants and/or policies. The [Borrower] shall bear the expenses for such audit.


• Completion audits are required only for emergency loans and grants. However, a completion audit may also be appropriate in other situations to have a complete assessment on expenditure for the entire project.

• The borrower must agree to finance the completion audit and this agreement must be documented in the financing agreement. The reason is that the completion audit must be conducted after completion, which is after the loan account has been closed.

6. Transparency

Information Disclosure

a. Covenants Requiring Disclosure on the Project Website, in Newspa pers, and on Radio

Section [•] (a) The [Borrower] shall take steps to ensure that the [Project Executing Agency] ensures (i) two-way communication, transparency, and participation between and among itself and the Project beneficiaries; (ii) accountability; and (iii) zero tolerance for corruption.

Section [•] (b) The [Borrower] shall

(i) provide the public with information on the Project, its intended beneficiaries, and use of funds (A) on a Project website, (B) in


government newspapers, (C) in a readily accessible place in the Project area, (D) on public radio, and (E) on television; and

(ii) ensure that the information described in Section [•] (b) (i) is published in [insert description of local languages], and includes (A) audited financial statements; (B) the tracking of procurement contract awards, including the amount of the award; (C) basic information on the processes adopted; and (D) the list of goods or services purchased and their use.

OR

Section [•] (b) The Borrower shall

(i) publicly disclose information concerning how the funds are being used for the intended beneficiaries in accordance with applicable procedures; and

(ii) establish a Project website that contains audited financial statements and tracks procurement contract awards, by providing information on, among other things, the (A) list of participating bidders, (B) name of the winning bidder, (C) basic details on the bidding procedures adopted, (D) amount of the contract awarded, and (E) list of goods and/or services purchased and their intended and actual use.

The [Borrower] shall ensure that

(1.) National and provincial newspapers in [insert name of local languages] and English will carry such details on a regular basis at intervals of not more than 30 days; and

(2.) TV and radio broadcasts made in [insert description of local languages] at national and provincial levels, giving the same details.


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7. Identification

a. Covenant Requiring Borrowers to Issue Identity Cards

Section[•]The[Borrower]shall(a)issueorreissueidentitycardstoaffectedpeople and businesses, and (b) ensure that no person shall be allowed to obtain Project assistance without such identity card.

b. Covenant Regarding Replacement of Identity Cards

Section [•] (a) The [Borrower] shall conduct (i) awareness activities in local communities on the importance of national identity cards (NICs), and (ii) an intensive NIC issuance campaign in conjunction with the [insert name of the DMC’s Registration Authority] and [insert relevant local bodies, where appropriate].

Section [•] (b) The [Borrower] shall ensure that under the NIC issuance campaign:

(i) mobile NIC units go to affected areas and issue NICs;(ii) mobile NIC units have cameras and processing equipment,

and any other material necessary to issue NICs;(iii) [Insert description of appropriate local leaders] attest the

accuracy of the information provided by villagers;(iv) the staff of the mobile unit include at least 1 woman; and(v) female villagers have opportunities to obtain NICs.

c. Covenant Requiring Identification Required for Benefits

Section [•] The [Borrower] and the [Project Executing Agency] shall ensure that any cash assistance or housing assistance provided to beneficiaries under the Project is only provided when adequate identification is given by such beneficiaries to ensure that they are people affected by the Project.


8. Participation

a. Local Stakeholders and Community Coordination Groups

1. Covenant Including Stakeholders In Project Design

Section [•] The [Borrower] shall ensure, or shall cause [each] [Project Executing Agency] to ensure, that CSOs, NGOs, beneficiaries, and potentially affected persons are involved in selecting, designing, implementing, and monitoring the [Sub]Project.

b. Coordination Among Donors, International Organizations, Governments, Stakeholders, and Other Development Partners

1. Covenant to Establish a Donor Coordination Committee

Section [•] The [Borrower] shall cause the [Project Executing Agency] to establish [a] donor coordination committee[s] [at the central level] and [at the provincial level] and [at the local level] that include[s] representatives of all public and private donors, including NGOs, operating in the [insert the name of the sector] sector. The donor coordination committee will

(a) meet no less than once every 2 months to discuss measures on preventing the duplication of assistance in the [insert the name of the sector] sector; and

(b) ensure that donors coordinate their activities to ensure smooth and uniform implementation of the Project and other activities in the [insert description of sector] sector and prevent overlap.

Key Point for Project Counsel. This covenant will frequently be needed to facilitate donor coordination in the particular sector. Where the project is decentralized, donor coordination may also be required at the provincial and local levels to facilitate uniform implementation. Frequently, even where donors coordinate effectively at the central level, more coordination will be needed among donors at the provincial and local levels. The project EA should always lead such coordination committees to facilitate ownership.


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9. Accountability

a. Ensuring Administrative Accountability and Corruption Sanctioning

1. Guiding Statement

Section [•] (a) In furtherance of the [Borrower’s] commitment to good governance, the [Borrower] and ADB will adopt a policy of zero tolerance for corruption in relation to the assistance provided under the Project, including the adoption of measures set forth in the Governance and Anticorruption Approach,andparagraphs[•]ofthisSchedule[•].

Section [•] (b) The [Borrower] shall take measures to immediately sanction private individuals, entities, or public officials who actually, or attempt to, take advantage of donor funds or [insert relevant circumstances]. These measures must include initiating investigations through the [define or state the government body empowered to hear/conduct investigations into bribery and anticorruption, such as the “Anti-Bribery and Corruption Commission”].

Key Point for Project Counsel. This covenant is a broad general statement directed at raising awareness of the government and the EA, and linking their general commitment to more detailed measures.

b. Bribery and Anticorruption Institutions

1. Covenant Requiring Strengthening of Corruption Institution

Section [•] The [Borrower] shall strengthen [insert name and Act of establishment of anti-bribery and corruption commission or equivalent] to investigate, prosecute, and address potential corruption or irregularities related to the Project.

Key Point for Project Counsel. This covenant should be inserted only if ADB assistance forms part of a holistic program of support for governance, including support to the relevant anticorruption institution. If so, additional project-specific covenants are likely to be needed to support the entire program.


c. Complaint Investigation and Resolution Mechanisms

1. Internal Executing Agency Complaint Mechanisms

Section [•] (a) Within [insert appropriate time period, which is often 3 months] months from the Effective Date, the [Borrower] shall cause the [Project Executing Agency] to establish a complaint investigation and resolution mechanism within the [Project Executing Agency].

Section [•] (b) The complaint investigation and resolution mechanism will be responsible for

(i) reviewing and addressing complaints in relation to the Project from end-users, beneficiaries, and other stakeholders of the Project, howsoever arising;

(ii) establishing the threshold criteria and procedures for handling and addressing such complaints, subject to ADB’s approval; and

(iii) giving notice to the public of such mechanism’s existence, function, and powers, which may include publishing the mechanism’s procedures on the Project website, in newspapers, and by other effective means of dissemination.

Section [•] (c) The complaint investigation and resolution mechanism must be staffed by full-time professional staff of the [Project Executing Agency] who shall report directly to [the Minister and/or Secretary].

2. Decentralized Dispute Resolution

Section [•] The [Borrower] shall establish a decentralized provincial system of public grievance review and alternative dispute resolution in the Project area, staffed by independent persons.


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3. Legal Assistance

Section [•] The [Borrower] shall provide legal assistance for accessing legal entitlements, including access to documents or dispute resolution, to affected people to help them access their legal entitlement [define legal entitlements].

Section [•] The [Borrower] shall establish a decentralized mechanism for affected people to resolve private disputes and/or obtain review of grievances against public officials, such as:

(a) mediation boards;(b) an ombudsman, or extending the jurisdiction of the existing

ombudsman; and/or(c) strengthening the [Insert name of the relevant anti-bribery

and anticorruption body or commission].

Key Point for Project Counsel. These covenants should be included in financing agreements when the project design includes an adequately funded and adequately designed component on legal assistance.

CHAPTER 6

Specific Cases of Governance and Anticorruption

A. General

ADB supports projects in a range of sectors. The broad governance issues that apply to all of the sectors within which ADB works are com mon, but particular governance issues may be sector specific. The governance issues of commercial entities and public entities can also differ. This chapter covers ADB’s policy and/or approach to several important specific cases of governance and anticorruption. These include:

• Corporate Governance• Governance and the Regulation of Public Utilities—Water and

Energy• Social Sectors—Health and Education• Decentralization• Disasters and Emergencies• Anti-Money Laundering (AML)• Environmental and Natural Resource Governance• Climate Change Governance

B. Corporate Governance

1. What is Corporate Governance?

Corporate governance is the manner in which a corporation, company, or similar entity is managed, directed, and controlled. Understanding an entity’s corporate governance involves understanding the internal policies, rules, and processes that prescribe the way staff interact with each other and the outside world. These include its articles of association and bylaws and its internal office manual and staff rules.


It also involves understanding the laws, regulations, policies, and standards that set the external framework for an entity’s management, direction, and control. This process is also affected by the relationship that an entity’s principal stakeholders (including its shareholders, management, and directors) have with other stakeholders, such as employees and the members of the community in which it operates.

2. What Are the Issues and Risks Involved?

The key issue of corporate governance is the relationship between a principal and its agent—best known as the “principal–agent problem.” The problem involves answering how it is possible to get corporate directors and managers, as the agents of the entity, to act in the best interests of the corporation and its owners or shareholders, as the principals of the entity. Because the agents have more information regarding the day-to-day actions of the entity, they can use this information to their advantage at the expense of the company and its owners.

ADB’s Board of Governors meet at the 43rd Annual Meeting in Tashkent where Pres. Kuroda reported the strengthening of ADB’s anticorruption initiatives and the commencing of the review of ADB’s Accountability Mechanism and Public Communications Policy.

Specific Cases of Governance and Anticorruption 147

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a. Internal

The following are examples of poor corporate governance, or circumstances that will lead to poor corporate governance:

• the corporate strategic direction is not in the interests of the owners/shareholders;

• incumbent directors and senior management: � nominate weak candidates for future positions; � receive excessive remuneration; and � do not declare conflicts of interests or related-party transactions;

• internal control systems: � do not minimize excessive, unwarranted risk-taking; � for finance, accounting, and audit are insufficient or

inadequate to ensure good financial management; and � for management information do not provide adequate data

on operational performance.

One key example of the principal–agent problem arose recently in the wake of the 2008–2009 global financial crisis. Company directors continued to receive extremely high salary packages even where companies had performed very poorly. The payment of these large packages emphasized the broader corporate governance issue of whether paying extremely high remuneration actually results in attracting top-quality management and incentivizing them to perform in the company’s best interest, or principally benefits only the directors themselves. Another high profile example of poor corporate governance occurred during the 1997–1998 Asian financial crisis, where reckless lending in Thailand was exacerbated by the high concentration of ownership and control of several publicly listed companies by only a few related parties and the inadequate protection of minority shareholders’ interests.

Other corporate governance issues arise when family conglomerates hold shares and/or deal with other supposedly separate corporate entities that are run by the same directors and managers. They may also arise when directors, managers, or “related company” subsidiaries assume other positions that present conflicts of interest. For example, directors or officers may seize corporate opportunities properly belonging to the corporation, or may fail to divest themselves of shares in another corporation that is engaged in a competing venture, threatening shareholder trust in them.


Internal controls (e.g., an entity’s articles of association, by-laws, and shareholder agreement) must clearly establish the powers and responsibilities of corporate directors, senior executives, and officers. Internal controls and contractual arrangements become even more important when developing member countries (DMCs) lack sufficient external controls.

Internal controls encompass specific arrangements for Board procedures, including the establishment of Board committees to provide detailed working information for the entire Board and checks and balances on the work of senior executives, management, and the Board chair. Best international practice on corporate governance would commonly recommend the following Board committees or some combination thereof:

• a Strategic Operations Committee,• an Internal Controls and Risk Management Committee,• an Audit Committee,• a Corporate Governance Committee,• a Nominations Committee, and• a Remunerations Committee.

b. External

Fundamental internal corporate governance issues and risks such as those described in the preceding section, arise when the external legal and policy environment is weak or absent, particularly where (i) competition laws are absent and corporate monopolies can abuse market power, (ii) security or collateral is insufficient in financial transactions, and security laws are weak or nonexistent and (iii) corporate rehabilitation and insolvency laws are weak or nonexistent.

To avoid or at least minimize internal and external corporate governance risks, governments impose external controls. For example, the relevant national company law will usually prescribe a broad framework establishing the parameters of an entity’s powers and duties of directors, senior executives, and officers. External controls such as commercial law and national and international accounting standards will supplement corporate law. However, some DMCs do not always have external controls adequate to impose competition laws, security laws, and insolvency laws.


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3. What Do ADB Policies Say About Corporate Governance?

ADB recognizes that corporate governance is a vital component of public enterprise reform. To be effective, ADB interventions must address the internal governance of private corporations, the broader regulatory framework (as it pertains to the private sector and state-owned enterprises), the policy framework to ensure competition and contestability, and the responsibility of firms as good corporate citizens (including implications for pursuing sound environmental policies).366

ADB’s private sector development strategy recognizes that good corporate governance, or the lack thereof, plays a role in the larger poverty reduction agenda. The Asian crisis demonstrated how the systemic failure of corporate governance affected the region’s poor. Thus, the private sector development strategy underscores the need to address the root causes of poor corporate governance, including weak commercial law, poor accounting and auditing standards and systems, a failure to recognize conflicts of interest, and an unwillingness to recognize the rights of minority shareholders.367

4. How Does ADB Promote Good Corporate Governance?

ADB sets out the ways to promote good corporate governance under the private sector development strategy. More specifically, ADB seeks to promote good corporate governance by funding technical assistance (TA) projects that focus on (i) reviewing DMCs’ commercial laws and regulations; (ii) formulating credible accounting and auditing standards and corporate disclosure rules; (iii) establishing sound environmental, labor, and social standards; (iv) establishing corporate regulations that protect minority shareholder rights; (v) establishing effective bankruptcy and foreclosure regimes; and (vi) training corporate directors on their duties and responsibilities and on how they can effectively balance the interests of shareholders’ and other stakeholders.368

366 ADB. 2000. Promoting Good Governance: ADB’s Medium-Term Agenda and Action Plan. para. 41.

367 ADB. 2000. Private Sector Development Strategy. p. 20. 368 Ibid.


ADB also works closely with regulators, state-owned enterprises, and private businesses.369 In 2004, ADB partnered with Hermes Pensions Management Limited to draft a set of 10 principles promoting corporate governance for business enterprises.370 These core principles seek to (i) help enterprises in designing and implementing their own corporate governance guidelines by benchmarking their practices against the principles; (ii) assist domestic and institutional investors, fund managers, and ADB in implementing corporate governance in investment enterprises; and (iii) help governments design corporate governance regulations.371 The principles are:

• Principle 1: Performance Orientation—enhance all shareholders’ economic value by using resources efficiently.

• Principle 2: Nomination and Compensation Committees—infuse a company with quality leaders and set a compensation policy through independent committees.

• Principle 3: Disclosure—establish accounting and disclosures standards and systems that are timely and adequate.

• Principle 4: Audit Committee—establish an independent and competent committee and a suitable system of internal control and risk management.

• Principle 5: Code of Conduct—adopt a written code of business conduct and ensure that companies abide by the code as well as all applicable laws.

• Principle 6: Conflicts of Interest—ensure that directors act in the best interest of the company and that errant directors are sanctioned accordingly.

369 For more details on ADB’s loans, TA projects, and country-specific examples of good governance practices, see ADB. 2009. Corporate Regulatory Frameworks; and, Bestani. R. 2004. An Asian Perspective on Corporate Governance. Keynote speech.

370 ADB and Hermes Pensions Management Limited. 2004. Corporate Governance Principles for Business Enterprises. See also Boyle, C., and N. Page, eds. 2004. Global Corporate Governance Guide, 2004: Best Practice in the Boardroom.

371 ADB and Hermes Pensions Management Limited. 2004. Corporate Governance Principles for Business Enterprises.


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• Principle 7: Environmental and Social Commitment—recognize and effectively deal with concerns involving the interrelationship among corporate objectives, social development, and environmental protection.

• Principle 8: Conduct of the Board of Directors—ensure that directors are qualified, committed, trained, suitably compensated, informed, proactive, and diligent.

• Principle 9: Responsibilities of Investors—communicate with institutional investors, general partners, and fund managers, and ensure protection of shareholder rights.

• Principle 10: The Role of Directors in Turnaround Situations—avoid preferential treatment of creditors, or trade when the company is insolvent.

ADB also promotes good corporate governance by supporting financial sector development in its DMCs. ADB interventions in financial sector development are based on, and reinforce, how a strengthened private sector fits into the larger poverty reduction agenda. These interventions include loans and TA projects that among other things seek to (i) strengthen legal and regulatory frameworks for banking and small and medium-sized enterprises; and (ii) strengthen the basic foundations of the corporate and financial sector through improvements in governance, transparency, and accountability.372

372 For ADB’s interventions addressing financial sector governance, see ADB’s Financial Sector Toolkit. Available: www.adb.org/documents/others/OGC-Toolkits/Financial-Sector/


• the 10 Corporate Governance Principles in projects involving state-owned or other nonsovereign entities, and whether a particular project has addressed them; and

• the Indicative Checklist of Corporate Governance Issues and Risks in a particular project (Box 6.1).


Box 6.1: Indicative Checklist of Corporate Governance Issues and Risks in a Project

• Does the project design consider and reflect the 10 “Corporate Governance Principles for Business Enterprises”?

• What are the shareholders’ powers, and what are their responsibilities to each other? Are there adequate protections for minority investors?

• Are there prohibitions against non-arm’s-length transactions? What procurement rules apply to related companies and intercompany group sales and transfers?

• How are the powers and responsibilities, duties, and functions of the company’s directors and executive officers set out in its incorporation documents and articles of association? Are they clear and are all relevant items included?

• How does the company prescribe internal operational procedures? Does the company have an operations manual or an equivalent document that details the company’s organization, staff terms of reference, financial procedures, and procedures for day-to-day operations? Is it clear?

• What is the system of financial control? Is there a company accounting and auditing standard? Does it comply with internationally accepted accounting and auditing standards?

• What are the criteria for selecting directors and executive officers, and hiring management personnel? Are these criteria clear and transparent?

• What are the company’s rules on conflicts of interest for directors, management, and staff? Does the company clearly define when something is a conflict of interest, and publish guidelines on how to deal with conflicts of interest situations? Does the company have a code of ethics or code of professional responsibility?

• Who appoints the directors and hires and fires managers and employees? Does the company have clear and transparent criteria for establishing compensation, performance bonuses, and other benefits for officers and employees?

Source: Authors.


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C. Governance and the Regulation of Public Utilities—Water and Energy

1. What Governance Issues Concern Water and Energy Utilities?

Governance issues that arise in supplying water and energy to consumers must be considered at two broad, yet interrelated, levels: (i) governance of particular public or private water or electricity utility companies, and (ii) “regulatory governance.” They are described as follows:

• Water and energy utility governance. The types of governance issues that arise in relation to public or private water or electricity utility companies are principally corporate governance issues. The issues, risks, and strategies in connection with these utility companies are broadly the same as the corporate governance issues, risks, and strategies set out in Part B (above). However, financial, operational, and technical issues arise frequently in connection with water and energy utilities. For example, staff members employed by water and energy utilities in some DMCs have been known to illegally connect people to the water or electricity supply network for a bribe, meaning that those connections do not pay for their electricity or water. This clearly results in revenue losses for the utility.

• Regulatory governance of water and energy utility industries. Regulatory governance involves the wider framework of governance within which governments or public agencies regulate water or energy utilities.373 In part, it involves the processes, institutions, and relationships through which the various stakeholder interests are balanced and relationships are mediated.

In contrast to regulatory governance, “regulatory substance” refers to the subject matter of utility regulation, using mechanisms such as tariffs, licenses, and technical standards to provide utility

373 ADB. 2007. Regional Technical Assistance Report: Enhancing Effective Regulation of Water and Energy Infrastructure and Utility Services.


services.374 The link between regulatory governance and regulatory substance is that regulatory substance is the outcome of a process of good regulatory governance—regulatory substance is the end, while regulatory governance is the means to achieving that end.

Regulation of water or electricity utilities seeks to balance the interests of investors, consumers, and the public. Investors aim to achieve a reasonable rate of return on their capital investment and receive sufficient incentives for expansion and new investments. Consumers focus on receiving an adequate, safe, and affordable supply of utilities. The public interest serves the public at large. It is in the public interest to avoid irreversible damage to the environment, expand water supply or energy access to unconnected citizens (e.g., the poor), and ensure that taxpayer dollars are spent wisely.

374 ADB. 2007. Regional Technical Assistance on Enhancing Effective Regulation of Water and Energy Infrastructure and Utility Services.

Durable pipes are essential in water supply delivery. Nonrevenue water and leakages are some of the governance challenges water utilities face.


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In short, governments and/or utility regulatory agencies seek to provide a framework for the management of corporate governance of water and energy utilities through regulation. The process by which the regulation itself works is called “regulatory governance.” The endpoint of which is good regulatory substance. The endpoint of good corporate governance and the regulation of water and energy utilities is good water and sector outcomes.375


Water and energy utilities have traditionally been publicly owned monopolies. Beginning in the 1990s, public monopolies came to be viewed as inefficient and ineffective at providing these services because of underpricing and overpricing of tariffs (tariffs failed to reflect the costs of providing the service, leading to insufficient funds available for investments, but in many cases, citizens were required to pay high prices for substandard services); insufficient funds to invest in maintenance and expanding public access to the utility network; poor operating and financial performance; corruption and political interference; and large subsidies and government debt.

Historically, the relevant water or energy ministry has the overall responsibility for setting policy in the sector, operating and managing the utility, and regulating or governing its operations. Also in the 1990s, donor institutions came to view this blending of functions as presenting conflicts of interest and not conducive to efficient and effective governance of the water and energy sectors.

Consequently, reformers and policy advocates prescribed a standard model for reform. This model involved separating the three sector functions by mandating them to different authorities or entities to improve sector governance and often, although not always, introducing private sector participation into the operation and management of the utility. The three functions are:

• sector policy—the relevant water or energy ministry,• operation and management of the utility—a separate (private)

legal entity, and

375 Brown, A.C., J. Stern, and B. Tenenbaum with D. Gencer. 2006. Handbook for Evaluating Infrastructure Regulatory Systems.


• regulation of the utility—an independent public regulatory agency or commission.

The standard model appears different in the power sector compared to the water sector. In the power sector, the standard model involves separating the generation, transmission, distribution, and market segments of the industry; selling the generation and market segment parts that are amenable to competition to many private firms; establishing independent regulators; and allowing competition to operate in competitive markets. In the water sector, where regulatory reform through competition has been introduced, it has taken the form of inviting competitive tender for the opportunity to supply water services to certain areas, sometimes with an autonomous regulator, regulating those areas.

Although reformers instituted variations of this reform model, in many cases they did not result in improved efficiency, effectiveness, and good governance. More recently, reformers have realized that the effectiveness of any such reforms is context and country-dependent.376 The standard model may not be necessary, and it may not be sufficient or possible to achieve improvements in governance.

One reason for the patchwork success of reform programs is that they do not necessarily remove some of the chief governance risks involved in the utility sectors. Sometimes reform programs actually accentuate such risks.

A chief governance risk involved in all regulation is “capture.” Water and energy regulation is no exception. Capture is the exploitation of the regulatory mechanism by politicians, regulated entities, or select groups to the disadvantage of the public at large. Capture occurs in two ways: regulatory capture and political capture.

376 Kirkpatrick, C., and D. Parker. 2004. Infrastructure Regulation: Models for Developing Asia. ADB Institute Discussion Paper No. 6; Stern, J., and J. Cubbin. 2005. Regulatory Effectiveness: The Impact of Regulation and Regulatory Governance Arrangements on Electricity Industry Outcomes. World Bank Policy Research Working Paper 3536.


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• Regulatory capture occurs when particular interest groups or the regulated industry itself gains control of the regulatory process or achieves bias in their favor.377

• Political capture occurs when individual politicians, the government, or the ruling elite control the regulatory process and distort its objectives to pursue political ends or their own self-interest.378

Some staff of ministries and regulatory agencies in DMCs have also sometimes pointed to a third form of capture—”consultant capture” whereby consultants engaged by bilateral and multilateral agencies assert or impose Western precepts of regulation, that are not adequately sensitized or modified for local context.

A second significant governance risk involved in energy and water regulation in DMCs is that the numbers of staff within the ministry or regulatory agency are insufficient to perform the task, and/or the staff do not have the right technical skills to do the work.

Regulating energy and water utilities is complex and involves sophisticated economic and engineering calculations and decisions, including tariffs. There are often not enough people, or not enough people with the right skill set, to perform an adequate job of regulating the utility. This risk incidentally increases the risk of capture and increases the chance that more typical governance problems (such as conflicts of interest and corruption) will arise.

3. What Do ADB’s Policies Say About Governance for Water and Energy Supply?

ADB views providing access to infrastructure and utility services as key to DMCs reducing poverty and increasing economic growth. Poor infrastructure leads to increased energy consumption, which has detrimental environmental effects. The absence of well-planned infrastructure systems also discourages private investment.379 Thus, infrastructure and utility services reform and regulation is relevant to ADB because it is relevant to its DMCs.

377 Kirkpatrick, C., and D. Parker. 2004. Infrastructure Regulation: Models for Developing Asia. ADB Institute Discussion Paper No. 6.

378 Ibid.379 ADB. 2008. Strategy 2020: Long-Term Strategic Framework of the Asian Development Bank

2008–2020.


In Strategy 2020, ADB identified infrastructure development as one of its five core specializations because an infrastructure deficit constrains growth and access to social services in many DMCs. ADB’s investment in infrastructure projects includes constructing physical infrastructure and improving the delivery of infrastructure services by promoting institutional and policy reforms that enhance operation efficiency and sustainability.380

In 2007, ADB released a study on its infrastructure operations in Asia and the Pacific. It concluded that infrastructure and utility services are a priority for ADB interventions in DMCs.381 In relation to governance, the study found that improving the operating efficiency and quality of infrastructure and utility services was also an important objective in governance activities. Thus, ADB’s development plans for DMCs prioritize infrastructure and utility services, recognizing that inadequate infrastructure constrains growth, international competitiveness, and poverty reduction efforts.

The recurring theme throughout ADB’s policies is that the role of government should shift from owner and producer to facilitator and regulator of water and energy supply services. To this end, regulatory reforms must precede sector-specific mechanisms such as privatization, contracting out, and private–public partnerships.382 Government must ensure efficient markets level the playing field for all participants.383 Governments must strive to avoid or curtail corruption because that action encourages people to avoid good and bad regulations.384 Accountability, participation, predictability, and transparency form dimensions of good governance and must be given priority.385

ADB’s private sector development strategy recognizes that private sector development can affect poverty.386 However, ADB observes that private investment in infrastructure projects needs proper regulation to relieve pressure on public budgets and therefore enable governments to redirect more resources to social spending. Thus, it also recognizes the importance of governance and regulation in these sectors.

380 Ibid.381 Sharan, D., B.N. Lohani, M. Kawai, and R. Nag. 2007. ADB’s Infrastructure Operations: Responding

to Client Needs.382 ADB. 2004. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy.383 ADB. 1995. Governance: Sound Development Management. 384 ADB. 1998. Anticorruption Policy. 385 ADB. 1995. Governance: Sound Development Management.386 ADB. 2000. Private Sector Development Strategy.


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These policies are relevant to water and energy supply because such utilities rely on good infrastructure development and good governance. The relevant sector policies are described below.

a. Water Policy

ADB’s water policy recognizes that “the finite nature of water requires ADB to promote the governance of its conservation and management to the highest possible standards.”387 The policy recognizes that the elements of accountability, participation, predictability, and transparency are also important in water governance strategies.388 In relation to accountability, it considers that DMCs’ legal and regulatory systems must ensure that water service providers and resource managers are subject to legal accountability controls to different levels in different countries. Water allocation must consider high value uses, and social and environmental externalities.

Regarding participation, the policy recognizes the importance of ensuring public, private, community, and nongovernment organization (NGO) stakeholder participation in water planning. With respect to “predictability” in water governance, the policy explains that it depends upon fair and consistent application of laws, regulations, and policies to regulate water sector activities. To ensure effective transparency in water governance, governments and private providers must provide the general public with timely information about water policies and projects, and also provide clear information on government rules, regulations, and decisions on water. The water policy requires ADB to work toward establishing appropriate standards of predictability and transparency in water projects in accordance with its anticorruption policy,389 and to work with governments in changing their roles and adopting improved regulatory functions. Moreover the policy promotes building the capacity and knowledge of different water sector stakeholders.390

387 ADB. 2001. Water For All: The Water Policy of the Asian Development Bank. para. 55. 388 Ibid.389 Ibid.390 Ibid., paras. 56 and 57.


b. Energy Policy

ADB’s 2009 energy policy aims to help DMCs “provide reliable, adequate and affordable energy for inclusive growth in a socially, economically, and environmentally sustainable way.”391 The energy policy “emphasize[s] energy efficiency and renewable energy; access to energy for all; and energy sector reforms, capacity building, and governance.”392 Moreover, it specifically acknowledges the relevance of accountability, participation, predictability, and transparency to the energy sector.393 It requires ADB to emphasize energy sector reforms, building capacity, and governance to increase investment and efficient use of resources.394

Under the energy policy, ADB is also directed to encourage private sector participation (and public–private partnerships) as a means of enhancing energy sector efficiency through competition, and increasing the available resources for investment, but not as the end point for the reform process.395

ADB is to place greater emphasis on a country’s context and phasing the sequence of reforms. Moreover, ADB is directed to support the appropriate division of regulatory responsibilities among policy, regulatory, and operational roles within a particular national context, and across different levels of government. ADB is also to promote the regulation of natural monopolies and regulation to support competition in the energy sector, where appropriate within the country’s context.396 ADB seeks to promote greater transparency in procurement and improvements in corporate and financial management.397

391 ADB. 2009. Energy Policy. para. 14. The current energy policy reflects consistent themes in this sector. ADB’s energy policy (1995) advocated power sector reforms that promote competition, private sector participation, and independent and transparent power regulation. It also encourages reforms that integrate the planning of resources, manage the demand for power, minimize environmental impacts, and promote sustainability through energy efficiency and renewable energy. See ADB. 1995. The Bank’s Policy Initiatives for the Energy Sector. In 2000, ADB confirmed that then existing energy policy framework was sound and that it would continue to support energy sector investments and assist in their implementation, placing emphasis on supply- and demand-side efficiency improvements, environmental protection, and regional trade. ADB. 2000. Energy 2000: Review of the Energy Policy.

392 ADB. 2009. Energy Policy. para. 14. 393 Ibid., para. 46. 394 Ibid., para. 15(iv). 395 Ibid.396 Ibid., para. 46. 397 Ibid.


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In 2008, ADB endorsed the Extractive Industry Transparency Initiative (EITI) and became a supporting organization. By endorsing EITI, ADB encourages its DMCs to ensure that natural resource wealth translates into equitable economic growth, and that the process of creating the necessary transparency and accountability frameworks to facilitate this goal must respect the sovereignty of countries and existing contracts and laws.398

In relation to energy from the transport sector, ADB is also directed to support cleaner modes of transport, invest in modernizing public transport systems, and encourage transport and communication connectivity within and among DMCs.399

4. How Can ADB Promote Good Governance for Public Water and Energy Supply Services?

Good governance strategies for public water and energy supply services must achieve the right mix of regulating the market effectively and efficiently and promoting competition among service providers. This mix will depend upon the degree to which competition has been introduced into the relevant sector market (if any), and the model by which it has been introduced. Good regulatory substance flows from an appropriate framework for effective regulatory governance. The four general models for governing and/or regulating water and energy utilities and promoting a price and quality mix are described below:

• Government regulation—the water or energy ministry prepares policy and makes regulation. However, some argue that when government makes regulation and operates a state-owned utility, there is no “real” regulation of the utility service, rather what is involved is governance of the sector because ownership is in government hands.400

• Independent regulation—a separate legally, managerially, and fiscally autonomous public legal entity has the authority to make regulations.

398 ADB. 2008. Extractive Industries Transparency Initiative.399 ADB. 2009. Energy Policy.400 Brown, A.C., J. Stern, and B. Tenenbaum with D. Gencer. 2006. Handbook for Evaluating

Infrastructure Regulatory Systems. p. 19.


• Regulation by contract—a contract between the government or the utility provider and/or a private sector entity contains all key aspects of regulation.

• Hybrid regulation—elements of independent regulation and regulation by contract are combined, or independent regulation is introduced together with contracted technical experts or other alternative measures.

As described above (see Part C, sections 2 and 3), reformers have tried to separate the sector functions of policy, operations, and economic regulation. Thus, they have tried to encourage shifts from models of government regulation to models of independent regulation, regulation by contract, or hybrid regulation. Policy analysts and reformers have achieved some consensus on the core elements of effective regulatory governance for independent regulation.401 These are described below.402 However, reformers seeking to improve any model of regulation could usefully consider these core elements of effective regulatory governance to provide an effective regulatory framework in other arenas. They include

• Clear objectives and roles.403 The objective of regulation must be clear, whether it is set out in government regulation, a contract, or regulation made by an independent agency. A clear list of objectives facilitates accountability and enables monitoring of performance over time.

The roles of the regulatory department or independent agency, or the roles and responsibilities set out in a regulatory contract must be clear. Moreover, if an autonomous regulatory agency exists, its authorizing legislation must clearly distinguish between

401 Brown, A.C., J. Stern, and B. Tenenbaum with D. Gencer. 2006. Handbook for Evaluating Infrastructure Regulatory Systems; Kirkpatrick, C., and D. Parker. 2004. Infrastructure Regulation: Models for Developing Asia. ADB Institute Discussion Paper No. 6; Stern, J., and J. Cubbin. 2005. Regulatory Effectiveness: The Impact of Regulation and Regulatory Governance Arrangements on Electricity Industry Outcomes. World Bank Policy Research Working Paper 3536.

402 Note that many commentators include more elements of effective governance than these six. However, for the purposes of this Guide, consistent with the government policy and ADB’s prior work, these six elements will be treated as the key elements.

403 Clear objectives and roles could also be considered as part of the principle of autonomy or the principle of predictability, however, it is of sufficient importance to treat it distinctly.


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its mandate to regulate, and the policy responsibilities retained within the ministry. Overlapping responsibilities create confusion.

Similarly, in federal systems, or DMCs with multilevel government, the authority of the ministry or the regulator over these different levels must be clearly articulated. When roles are clearly described result with greater coherence and less room for confusion or incidental political interference.404

• Autonomy. Regulation should be conducted within a sphere of relative autonomy with at least sufficient independence from political interference to allow a regulator to perform its role in a manner that satisfies the regulatory objectives.405 Until recently, “independence” has been considered the holy grail of regulatory governance. However, regulatory reformers now realize the practical difficulties of achieving complete independence and that it may not be necessary or possible in some DMCs so long as a regulatory agency has a degree of autonomy and this autonomy allows it to operate with credibility.

To whatever extent regulation is developed, its designers must have sufficient autonomy and independence from political or private sector regulatory capture to establish a credible system of regulation. A regulatory system that clearly defines the powers and duties of a regulator, ensures its financial security, and allows its operational and managerial autonomy for staffing decisions will be in a better position to have an autonomous regulator.

• Participation. Participation in the regulatory process requires that all parties affected by regulation on a regulatory decision, including government, regulated industry, consumers, and unconnected citizens, have the opportunity to influence the regulation or decision before the regulator decides. Participation may take different forms such as formal consultations, formal or informal hearings, and surveys. Participation can improve the quality of regulatory decisions

404 National Economic Research Associates. 1998. Governance and Regulatory Regimes for Private Sector Infrastructure Development—Final Report.

405 Ibid.


and secure more widespread stakeholder support, particularly when the issues involve sensitive issues like tariff increases.406

• Accountability. Accountability requires the regulator, or those who made the regulatory contract, to answer questions and be subject to sanctions for performing its/their obligations and responsibilities with respect to its/their regulatory mandate and tasks. This makes the regulator answerable to government, investors, consumers, and citizens, and is potentially subject to sanctions for failing to properly perform.

• Predictability. Predictability means that laws, rules, policies, and any regulatory contract are applied fairly and consistently. Predictability is important in ensuring that risks can be rationally measured, transaction costs lowered, and arbitrariness minimized. Predictability assures regulated firms that the “rules of the game” will not unexpectedly change, either by changing the legal and regulatory framework or through major policy changes, but needs to be balanced against the regulatory need for flexibility to adapt to new circumstance.

• Transparency. Transparency refers to both the ability to access information surrounding that process and also refers to the clarity of information, laws, rules, regulation, and decisions. Transparency of regulatory decisions and the regulatory decision-making process is needed to ensure participation, accountability, and predictability. It achieves this result when regulated firms, government, and citizens know the bases for the regulators’ decisions or the bases upon which regulatory contracts have been made.

• Integrity. Integrity of the regulatory system is dependent upon whether the system is structurally sound and unimpaired as well as on the personal integrity of individuals that comprise that system. An individual’s personal integrity depends upon the extent that the individual adheres to principles of honesty and

406 Ibid.


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sincerity. Better employment conditions such as paying sufficient salaries to regulators to support themselves and their families at a reasonable level without any other source of income, bolsters integrity of the regulator. The enactment and strict enforcement of laws that prohibit bribery, conflict of interest and preferential treatment, undue disclosure of financial interest, and unlawful use of information are of utmost importance to promote integrity, deter corruption, and demonstrate a strong rule of law.407

• Capacity. Capacity refers to the ability of people, organizations, and society as a whole to manage their affairs successfully.Individuals and organizations need the capacity to implement regulation to achieve the other governance elements of an effective regulatory system.

407 The following resources are excellent supplements on governance in the electricity and water sector and should be consulted. They can be found on-line. ADB. 2009. Guidance Note on Electricity Sector Risk Assessment; ADB. 2009. Guidance Note on Urban Water Supply Sector Risk Assessment; World Bank. 2009. Deterring Corruption and Improving Governance in the Electricity Sector: A Sourcebook; Halpern, J., C. Kenny, E. Dickson, D. Ehrhardt, and C. Oliver. 2008. Deterring Corruption and Improving Governance in the Urban Water Supply and Sanitation Sector: A Sourcebook.

Key Points for Project Counsel. When working on an energy or water sector project and considering governance, project counsel may find it useful to

• work with the project team to ask and answer the questions listed in Box 6.2; and

• consult additional resources on governance and anticorruption in the energy and water sectors.407


Box 6.2: Indicative Checklist of Governance Issues for Energy and Water Projects

Clear Roles and Objectives• Is there primary legislation and does it clearly define the regulator’s

functions and duties?• If not, where are these functions and duties formally published?

Are they published in legal instruments, contractors’ documents and/or other documents?

• Does the legislation establish unambiguously which entity is responsible for what regulatory functions? If not, how do the various parties involved in regulation identify their responsibilities?

• Does the regulator have any responsibility for commercial activities?

Autonomy• What is the relationship between the regulatory body and the

government (e.g., a separate division of a ministry, a body independent of any ministries, a body independent of government)?

• What is the process for appointing and dismissing members of the regulatory body?

• How is the regulatory body financed? Who must approve the funding?

Participation• Does the regulator formally involve regulated firms, other industry

firms, consumers, and others in major decisions or the proposed approach for making major decisions? Are consultation responses made public in any form?

• Does the regulator comment publicly on points made in consultation responses, and how (if at all) these have affected the final decision?

• What other ways are industry participants (including firms and consumers) are involved in regulatory decision making and processes?

Accountability• Is there a formal mechanism for regulated firms (or other parties)

to challenge regulatory decisions? If so, how does it work? Has it been used?

• Is there also a legal right of redress from regulatory decisions?



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• Do firms or other parties comment (or even challenge) decisions through informal channels such as direct representations to ministers, or through the media?

• To whom does the regulatory body report and to whom is it accountable—government, parliament, or courts?

Transparency• Are major regulatory documents such as the concession agreement

or licenses made public?• Does the regulator publish major decisions or advice?• Does the regulator publish the reasoning behind major decisions

and orders? If not, why?• Are consumer bills and invoices in a readily understandable format?

Predictability• How easily can the regulatory functions and duties be changed and

what is involved?• How easily can key regulator documents (e.g., licenses,

authorizations, franchise contracts) be changed and what is involved?

• To what extent are regulatory principles formally defined?• Have the regulator’s decisions demonstrated a consistent approach?• To what extent are regulatory arrangements in the sector part of a

coherent approach?

Integrity• Do the individuals leading and managing the regulatory system

have reputations for honesty and sincerity?• Is the utility regulatory system regarded as corrupt or captured?

Capacity• Are the individuals leading and managing the regulatory system

known for being skilled managers and leaders?• What are the human and financial resources available for the

regulatory body and are they enough to gather information needed to conduct its mandate?

• Do the staff of the regulatory body have the right skill mix and competence for performing the regulatory body’s mandate?

Source: This has been modified from: National Economic Research Associates. 1998. Governance and Regulatory Regimes for Private Sector Infrastructure Development. Manila: ADB, Annex 1. Available: www.adb.org/Documents/Reports/Consultant/31610-REG/31610-REG-TACR.pdf

Box 6.2: continued


D. Social Sectors—Health and Education


The education and health sectors each have very different substantive objectives, all the more so in the context of different DMCs. The education sector broadly seeks to provide universal education to all school-age children to support an educated and skilled workforce. The health sector broadly seeks to provide universal and affordable health care to all members of the population, and promote, in particular, the health of vulnerable groups such as the poor, women, and indigenous peoples. The issue of providing the poorer segments of society with access to good quality and safe pharmaceuticals is also important, and is thus included as a vital part of a government’s health program. However, poor governance and corruption of both education and public health delivery systems can jeopardize the proper implementation of social programs.408

408 Campos, J.E. 2007. A Practical Approach to Combating Corruption: A Value Chain Methodology. Governance Brief Issue 16.

Universal education for all is one of the United Nations’ Millennium Development Goals.


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Because education and health sectors are social services, many of the governance issues that arise are similar. These issues may include

• setting clear priorities to ensure the most efficient use of resources;• mobilizing resources for public health/education; • building administrative or managerial capacity; • experimenting with innovative approaches to or new technologies

for health and/or education;• providing public goods such as research, health and education,

and regulation;• collaborating between the public and private health and education

sectors;409

• distributing fees, salaries, and scholarships to health professionals and/or teachers;

• making timely disbursement of funds to educational and/or medical institutions;

• making timely distribution of educational and/or medical equipment and materials;

• ensuring good financial management;• ensuring commitments or bonded time for training or trips within

country or overseas for health professionals or teachers;• establishing complaint mechanisms for beneficiaries; and• ensuring transparent flow of funds.

The overriding risk confronting both public health delivery systems and the education system is that poor governance and corruption present risks to proper implementation of social programs, defeating their overriding objectives.410

2. What Do ADB’s Education and Health Policies Say About Governance?

ADB’s education policy recognizes the important role education plays in introducing members of a society to the system of government and the concept of governance though the school curriculum.411 The education policy also emphasizes that children’s participation in classroom committees

409 ADB. 1999. Policy for the Health Sector. p. xi. 410 Campos, J.E. 2007. A Practical Approach to Combating Corruption: A Value Chain Methodology.

Governance Brief Issue 16. 411 ADB. 2003. Education Policy. Appendix 1, para. 5.


and school government forms a foundation for future participation in government.412 Promoting good governance requires facilitating access to information and knowledge because this is the basis of decision making and concerted action.413 Thus, ADB recognizes governance as one of the six subsidiary priorities that must be addressed to achieve the key priorities of poverty reduction, enhancement of the status of women, and economic growth as its key priorities.414

ADB’s policy in the health sector recognizes that improved health services have a positive impact on its objectives to promote economic growth, reduce poverty, improve the status of women, and support human development.415

Additionally, improvements in the health sector are intimately linked with those in the education sector. Healthy children learn better, and therefore benefit more from investments in education.416 Good health also increases workers’ productivity.

ADB’s health policy also stresses the importance of strengthening the monitoring and evaluation aspects of health investments through the project performance management system and improving the management capacity of health ministries so they can better provide services.417 Thus, the health policy implicitly embeds ADB’s priorities for the health sector within ADB’s broader framework for promoting good governance.

3. How Does ADB Promote Good Governance in Education and Health?

Promoting good governance in the health and education sectors will involve building the capacity of health and education ministries at all levels—central, provincial, city, municipality, and village. It also may involve supporting organizational restructuring or involving the private sector in the delivery of social services in some manner. Ensuring and strengthening community participation in the management of hospitals, health clinics, and/or schools

412 Ibid.413 Ibid.414 The other subsidiary priorities are: (i) increasing equity, access, and retention, especially for the poor,

women, and other marginalized groups; (ii) improving quality of education; (iii) mobilizing resources for sustainable education delivery, in particular facilitating the role of the private sector, while protecting access by the poor to affordable basic education;(iv) strengthening collaboration with partners and beneficiaries; and (v) emphasizing more experimentation with, and dissemination of innovative strategies and technologies. ADB. 2003. Our Framework: Policies and Strategies—Education. para 43.

415 ADB. 1999. Policy for the Health Sector. p. 57. 416 Ibid., p. 58. 417 Ibid., pp. 66 and 69.


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can improve accountability and transparency. However, careful assessment, evaluation, and implementation of reforms in the legal and policy frameworks must be undertaken to facilitate education sector reforms.

ADB has tailored specific design features to improve project management and promote good governance in several health and education projects. The mechanisms used in these projects can be used as precedents or examples. Examples include:

• introducing e-governance to the education system, including the design and piloting of an education management information system (EMIS) to improve school administration in institutions, districts, zones, and ministries;418

• modernizing the curriculum and strengthening a ministry of education's capacity to conduct monitoring and evaluation activities;

• establishing administrative grievance mechanisms for those within the school system;419

• introducing the Knowledge Society project in Sri Lanka, which supports the development of a central mechanism for policy dialogue among educators to improve coordination and partnerships among them and training providers;420

• integrating a step-by-step process for the executing agency and the project management unit to ensure good governance including performance auditing, a grievance mechanism, and financial controls in the Second Urban Primary Health Care Project in Bangladesh;421 and

• including a Governance and Accountability Action Plan (GAAP) that aims to ensure minimum enabling conditions for good governance in schools and education in the Education Sector Program in Nepal.422

418 ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Democratic Socialist Republic of Sri Lanka for the Secondary Education Modernization Project II.

419 Ibid.420 ADB. 2007. Report and Recommendation of the President to the Board of Directors on the

Proposed Loan and Asian Development Fund Grant to the Democratic Socialist Republic of Sri Lanka for the Education for Knowledge Society Project.

421 ADB. 2005. Report and Recommendation of the President to the Board of Directors on the Proposed Loan and Asian Development Fund Grant to the People’s Republic of Bangladesh for the Second Urban Primary Health Care Project.

422 ADB. 2009. Report and Recommendation of the President to the Board of Directors on the Proposed Asian Development Fund Grant and Loan for Subprogram III to the Government of Nepal for the Education Sector Program. Manila.


Key Points for Project Counsel. Project counsel working on an education or health sector project may find it useful to consider the following governance issues with the project team:

• to ask and answer the questions listed in Box 6.3; and • address the key generic issues listed above.

Box 6.3: Indicative Checklist of Governance Issues for Health and Education Sectors

• Are there clear sector priorities to ensure the most efficient use of resources?

• How are resources mobilized for the sector?• How is administrative and/or managerial capacity strengthened?• Are there innovative approaches to or new technologies for health

and/or education?• Is there a need to encourage collaboration between the public and

private health and/or education sectors?• What regulatory safeguards or guidelines have been established to

ensure that private sector profit motives do override the provision of social services?

• How are fees, salaries, and scholarships distributed to teachers and health professionals?

• What is done to ensure the timely disbursement of funds to educational and medical institutions?

• What is done to ensure timely distribution of educational or medical equipment and materials?

• What systems are in place to ensure good financial management and internal controls?

• Is there a commitment or bonded time requirement for overseas or in-country training or trips for health professionals or teachers?

• Is there an administrative complaint mechanism for intended beneficiaries of the health and education systems?

• What is done to ensure transparent flow of funds?

Source: Authors.


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E. Decentralization

1. What Is Decentralization?

Decentralization is a broad term that includes several other related terms that also describe forms of decentralization (i.e., devolution, deconcentration, and delegation).

Decentralization occurs when a higher tier of government (usually the central tier) transfers certain powers and responsibilities to deliver public services and goods to lower tiers (usually provincial and district levels). The degree of power and responsibility that is transferred may vary and results in three notable forms of decentralization: devolution, deconcentration, and delegation.

• Devolution is the most extensive form of decentralization. Devolution describes the process of a higher tier of government completely passing power and responsibility to the lowest tier. That lowest tier of government then becomes independently responsible for delivering a set of public goods or services and imposing the fees and taxes required to finance the delivery of such goods or services.

• Deconcentration occurs when the lower tier of government acts as agent for the higher tier in delivering goods and services. The lower tier may not have authority over the scope or quality of local services and how they are provided.

• Delegation involves the lower government tiers being responsible for delivering certain public services under the supervision of the higher tier.

Many of ADB’s DMCs have embarked on a process of decentralizing the functions of government. Decentralization is often pursued as policy reaction to the poor delivery of public goods and services under a system of centralized government. For example, the public demanded decentralization during the post-Suharto era in Indonesia, partially in response to overtly centralized control under Suharto.


Central governments may also use decentralization as a political strategy for responding to demands from subnational governments seeking separation of their subnational state or province from the entire country. Examples of this trigger for decentralization existed in the civil conflicts in Indonesia and Sri Lanka. In Indonesia, separatist demands made by the Province of Aceh resulted in the central government statutorily authorizing a level of provincial autonomy for Aceh. In Sri Lanka, the reason for the decentralization process that resulted in the 13th amendment to the constitution was partially a response by the central government to separatist demands by Tamils in the north and east.


Successfully pursuing decentralization strategies requires understanding the trade-off between benefits and risks. Arguments putting forth the benefits of decentralization suggest that it leads to

• Enhanced accountability. Decentralization of power brings service providers and politicians closer to the citizens that are the end users of public services, making it easier to empower citizens and enhance their voice. Any accountability framework must have these factors to operate effectively. In particular, it needs mechanisms that will provide citizens with the right to � receive relevant information and adequate explanation for

certain decisions, and � impose sanctions if such decisions are deemed inappropriate

or the information about them is considered inadequate.

• Increased transparency. Under decentralization, citizens typically have greater access to information (formally and informally) on activities and programs promoted and supported by their leaders. Dissemination of information should also be cheaper and accomplished more efficiently at a local level. By increasing the public’s access to information, citizens will have better prospects for objectively assessing whether authorities have improved public services and politicians have delivered on campaign promises.


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• Greater local participation. When power and resources are delegated to a level of government that is more familiar and more easily influenced, citizens have greater opportunities to participate in the delivery of services. Communities are likely to have greater opportunities to participate in and finance the delivery of certain services under the supervision of or in collaboration with the local government. For example, local government ordinances in Pakistan allow public–private partnership in the delivery of municipal services, which come under the control of subdistrict government.

Some of these supposed benefits of decentralization may not materialize when various risks crystallize. These decentralization risks include

• State capture at the local level. Lower levels of government are generally more susceptible to state capture (i.e., individuals, groups, or firms in the public or private sectors who seek to influence the formulation of rules and regulations to their advantage through illicit and nontransparent actions). State capture is more likely to be a risk in an area where highly concentrated interest groups dominate the market for political influence and political competition is weak.

The growing susceptibility of local governments to capture results from � weak institutions (such as the local judiciary and legislature)

that are normally expected to provide adequate checks and balances, and

� less-experienced media and civil society organizations being expected to represent the public interest in a local setting.

• Intergovernmental tensions. The decentralization process is usually driven by political decision. However, the bureaucracy tasked with implementing the transfer of powers and responsibilities may not be entirely enthusiastic about implementing the decentralization process.


The central government’s and the administration’s reluctance to transfer powers and responsibilities and to allocate financial and staff resources can detract from successful implementation of decentralization on the ground. The powers and responsibilities passed down to the lower tier of government are often not as exhaustive as those mandated under the relevant legislation. Central governments and bureaucracies may justify limiting the devolution of power to lower tier governments based upon capacity constraints at the lower levels.

• Capacity constraints. A government’s capacity to act stems from the experience and expertise of its members, together with its cumulative knowledge, financial and capital resources, and implementation systems. Among the different tiers of government, the local tier often has the least capacity to execute public policies. Thus, at the initial stage of decentralization, local governments may not be ready to assume their new powers and responsibilities or formulate policy.

• Matching policy issues with decision-making tiers. The particular policy issues for implementation must match the policy considerations of the government tier tasked with implementing them. For example, a local government may have the incentives to allow pollution from a particular industry where its effects are felt primarily in a neighboring district, while a provincial or central government will not have those same incentives and instead will have a broader geographic and substantive mandate to protect a wider public interest.

3. What Does ADB Policy Say About Decentralization?

ADB recognizes that the party best placed to determine whether a country should undertake decentralization is the country itself. ADB further recognizes that the country would make such decisions, taking into account the legal and political landscape, degree of economic growth, and government


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priorities.423 ADB prefers that end-users of loan proceeds bear the loan-related obligations.424 However, ADB allows governments to determine whether devolving functions to smaller administrative units is the best mechanism for achieving this. When a DMC chooses to decentralize, ADB will help by analyzing which characteristics of decentralization sustain the market and which enhance economic performance.425

4. How Does ADB Promote Effective Decentralization?

To promote effective decentralization, it is important for project counsel to understand its benefits and risks. Even where a project is not primarily concerned with achieving decentralization, if it is operating within an environment where decentralization is occurring, project counsel should encourage project teams to consider how to use the benefits of decentralization and how to mitigate against its associated risks, if possible.

Effective decentralization also requires certain other arrangements to be put in place, such as

• Clear roles and responsibilities between different tiers of government. Lack of clarity will sidetrack decentralization reform. In many DMCs, the basic legislation mandating decentralization may have been enacted and may provide clear guidance on the different powers and responsibilities of the different tiers of government. However, legislation requires implementing rules. Typically, such rules should be issued by the tier of government that is required to devolve its power and responsibility to a lower tier (i.e., the central

423 ADB. 1995. Governance: Sound Development Management. p. 37. 424 Ibid.425 Ibid.

Key Point for Project Counsel. In responding to decentralization risks, project counsel should seek to ensure that a project design incorporates measures such as those described in Box 6.4.


level of government). There are often delays in issuing such rules or regulations. Thus, this stage carries the greatest risk that the decentralization process will be sidetracked.

• A clear fiscal mechanism that provides each government tier with adequate finance. The local government must be able to adjust its budget to adequately respond to community

Box 6.4: Measures to Improve Governance in Decentralization Projects

• Enhance the accountability framework. If an accountability framework already exists within a country’s decentralization structure, project counsel should assist the project team to properly integrate it into the project design. If such mechanisms do not exist, project teams may seek to incorporate them into the project’s design.

• Enhance transparency. Allow citizen access to pertinent project-related information.

• Encourage local community participation. One concrete example of such mechanism would be a service delivery agency adopting a client charter. A client charter could outline the standard of service that the agency would deliver and the complaint mechanisms available to the citizen (as the end-user) if those standards of service are not met.

• Avoid state capture at the local level. When designing a project, understand and attempt to avoid the potential for “capture.” Enhancing the role and capacity of civil society could mitigate some of this risk.

• Resolve or reduce intergovernmental tensions. Strike a balance between the necessity to align project design with the decentralization framework and the need to consider practical reality. Supervisory roles may be needed within the higher tier of government until the lower tier is ready to assume more responsibility.

• Increase capacity to undertake activities. When preparing a project in a decentralized governance setting, include capacity building of the relevant level of government to undertake decentralized powers and responsibilities as one of the required activities.

• Match policy issues with decision-making tiers. Certain decisions are best made at particular tiers of government.

Source: Authors.


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preferences for the quantity and quality of public services. Effective fiscal mechanisms will ensure

� a clear allocation of revenue among the different government tiers,

� a certain degree of autonomy for the different government tiers to exercise their authority, and

� an efficient revenue administration system.

• A proper and adequate way of managing human resources. The decentralization process often requires the transfer of a significant number of staff from one tier of government to the other. Transferring staff among different government agencies or tiers can be disruptive. It is important that the lower tier of government is able to

� allocate staff to work in the different functional areas, � attract and retain qualified individuals, � have flexibility in managing financial resources for staffing,

and � hold staff accountable for their performance

These challenges are not insignificant.426

426 The following resources provide additional helpful material. Rohdewohld, R. 2006. Managing Decentralization: Interministerial Bodies, Policy Coordination, and the Role of Development Aid Agencies. Governance Brief Issue No. 15; Subbarao, D., and R. White. 2005. East Asia Decentralizes. In World Bank. East Asia Decentralizes: Making Local Government Work. See also: World Bank. 2009. Decentralization in South Asia.


• understand the discussed preliminary guidance on how to maximize project results within a decentralized governance setting discussed in this section, and

• work in conjunction with the project team to seek guidance from additional resources as needed.426


F. Disasters and Emergencies

1. How Does ADB Define a Disaster or Emergency?

ADB’s disaster and emergency policy defines a disaster as

a sudden, calamitous event that seriously disrupts the functioning of a community or society, causing widespread human, material, economic, or environmental losses that exceed the community’s or society’s ability to cope using its own resources.427

Natural disasters include events such as earthquakes; tidal waves; hurricanes; cyclones; volcanic eruptions; floods; droughts; epidemics; technological or industrial accidents, including explosions, oil spills, nuclear reactor failures, or chemical mishaps; and conflict situations, including regional conflicts, national or civil wars, or widespread community violence.

427 ADB. 2004. Disaster and Emergency Assistance Policy; ADB. 2004. Operations Manual. OM D7/ BP: Disaster and Emergency Assistance.

People make their way through flooded streets in Pasig City, Philippines, after tropical storm Ketsana dropped the heaviest rain recorded in more than 40 years.


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Post-conflict countries are those emerging from violent, protracted conflict. An emergency occurs following a disaster, “when unforeseen circumstances require immediate action, and local capacity is insufficient to address and manage traumatic events.”428 An emergency may result in deaths, injuries, displacement of people, disease, disability, food insecurity, damage or loss of infrastructure, weakened or destroyed public administration, and reduced public safety and security.

2. What Governance Issues and Risks Are Involved?

The four key elements of governance—transparency, accountability, participation, and predictability—are crucial during the rehabilitation and reconstruction that follows a natural or man-made disaster. They are particularly important because a DMC often receives considerable foreign financial and in-kind assistance after a disaster or other emergency.

The immediate response and the slower rehabilitation process always involve the DMC allocating financial and in-kind resources and large expenditures for rebuilding. Many of the DMCs in which ADB works already have stressed institutions with a weakened capacity for achieving outcomes. The influx of financial and in-kind resources adds further stress on these institutions. If the four key elements of governance are not present in the DMC, the additional financial and in-kind aid can be siphoned off by corrupt individuals, or misused through poor project management and poor governance. Ultimately, there is a risk that resources intended for rehabilitation and rebuilding may not be used for their planned purpose.

3. What Does ADB’s Emergency and Disaster Policy Say About Governance Issues?

Together with the governance policy, the disaster and emergency assistance policy provides the framework for ADB’s response when communities have been affected by a natural disaster or a conflict.429 The policy requires the elements of transparency, accountability, and participation to be applied in any emergency assistance project.

428 ADB. 2004. Disaster and Emergency Assistance Policy.429 Ibid.


This policy also emphasizes that post-disaster reconstruction initiatives should aim to strengthen and rebuild institutions and protect vulnerable persons. In particular, the disaster and emergency assistance policy specifically requires a project completion audit.430

Thus, the disaster and emergency assistance policy affirms the relevance of the governance policy for disasters, although it leaves staff the flexibility of determining how to achieve its purposes.

4. How Does ADB Promote Good Governance in Emergency and Disaster Situations?

ADB promotes good governance in disaster and emergency situations by designing measures to reduce the additional stress on DMC’s existing institutional service delivery mechanisms, and by increasing oversight of the institutions designed to respond to provide relief to beneficiaries and to reconstruct institutions, infrastructure and services.

Demands for rehabilitation and reconstruction in a DMC affected by a natural or man-made disaster will be urgent. However, one of the lessons learned from past disasters is that ADB’s response must be quick but well considered. A balance must be struck between processing ADB’s assistance quickly and spending enough time formulating and designing the project to ensure that the purposes of rehabilitation, reconstruction, and rebuilding are ultimately satisfied.

Projects that are rapidly designed risk having delays in implementation, especially when problems arise due to incomplete design. Such projects then need redesigning to facilitate implementation. Thus, an emergency or disaster response project that does not sufficiently focus on governance and anticorruption issues risks subsequent delays that may eliminate any advantage gained by an initial quick response.

There are several emergency response projects for which ADB has tailored design features to improve project management and promote good

430 Ibid., para. 108.


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governance.431 Good examples of such projects are the tsunami response projects for Indonesia, the Maldives, and Sri Lanka.432 Information on tsunami assistance, fund administration, and procurement was published on internet websites and in local newspapers to promote transparency. In Sri Lanka, the tsunami project ensured widespread participation from members of the project, civil society, and NGOs in selecting and approving subprojects for implementation thus ensuring a participatory process.433 More specifically, the measures set out in Chapter 5 of this Guide were originally designed for emergency projects, and should be considered in new emergency projects.

Further, the disaster and emergency assistance policy requires additional supervision and monitoring within disaster and emergency projects. To satisfy this requirement, the Sri Lanka tsunami project subjected personnel and community members to regular and random monitoring. The project was also subjected to special and random financial and performance audits.434 Each of the four tsunami projects incorporated grievance mechanisms for tsunami affected persons. The Pakistan Earthquake Emergency Project followed a design similar to the Sri Lanka project and included similar components, including a grievance mechanism.435

431 ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grant to Solomon Islands: Emergency Assistance Project; ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Grant and Loan to the Republic of the Maldives for the Tsunami Emergency Assistance Project; ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Cook Islands for the Cyclone Emergency Assistance Project.

432 ADB. 2007. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Grants to the Democratic Socialist Republic of Sri Lanka for the Tsunami-Affected Areas Rebuilding Project and the North East Community Restoration and Development Project II.

433 Ibid., Appendix 8, para. 10. 434 Ibid., Appendix 8, para. 6. 435 ADB. 2005. Report and Recommendation of the President to the Board of Directors on Proposed

Loan, Pakistan Earthquake Fund Grant, and Technical Assistance Grant Islamic Republic of Pakistan: Earthquake Emergency Assistance Project.


Key Points for Project Counsel. Project counsel working on disaster and emergency projects should

• consider the project specific features in Chapter 5 of this guide, which were originally designed specifically for disaster and emergency projects; and

• review prior disaster and emergency projects to obtain illustrative guidance on project specific design features.436

G. Anti-Money Laundering 436

1. What is Money Laundering?

Money laundering is action taken to process the proceeds of crime so as to disguise their illegal nature or origin.437 Criminals launder money for two reasons: (i) to separate the funds from the crimes that generated them, thereby seeking to avoid criminal prosecution; and (ii) to protect the funds from seizure and confiscation by law enforcement authorities. Criminals usually launder money in three stages, identified as

• placement—the criminal introduces the proceeds of the crime into the financial system;

• layering—the criminal uses a series of transactions that convert or transfer the funds to other locations and financial institutions, including offshore financial centers; and

436 The following projects are examples. ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grant to Solomon Islands: Emergency Assistance Project; ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Grant and Loan to the Republic of the Maldives for the Tsunami Emergency Assistance Project; ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Cook Islands for the Cyclone Emergency Assistance Project; ADB. 2007. Report and Recommendation of the President to the Board of Directors on Proposed Loans and Grants to the Democratic Socialist Republic of Sri Lanka for the Tsunami-Affected Areas Rebuilding Project and the North East Community Restoration and Development Project II; and, ADB. 2005. Report and Recommendation of the President to the Board of Directors on Proposed Loan, Pakistan Earthquake Fund Grant, and Technical Assistance Grant Islamic Republic of Pakistan: Earthquake Emergency Assistance Project.

437 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of Terrorism. para. 5.


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• integration—the funds reenter the legitimate economy as clean money.438

Once the money has been laundered, the criminal may then invest freely in real estate, buy luxury assets, or enter into new business ventures.439

Financing terrorism is related to money laundering. The term “financing terrorism” is self-explanatory. It occurs when secret and fictitious bank accounts are used to fund terrorist activities, and when the pervasive network of financial foundations for terrorists use seemingly legitimate business enterprises, charities, religious groups, trusts, educational and research institutes, political groups, and individuals.

Terrorism is typically financed either with laundered money or legitimate funds.440 The distinction between the sources of the funds is important. Under most national anti-money laundering (AML) laws, terrorism financed with the proceeds of crime qualifies as money laundering and financing terrorism. However, terrorism financed with legitimate funds that are channeled through seemingly genuine “fronts” is harder to restrict, particularly where many legal systems do not impose sufficiently strict rules requiring adequate transparency, accounting, and auditing on transactions.


Money laundering and financing terrorism pose a significant threat to international markets and security, and hinder economic development. According to some, the amount of money laundered each year totals 3%–5% of the global gross domestic product, or about $2.17 trillion– $3.61 trillion.441 To stem this significant flow of funds related to crime and terrorism, government authorities must understand the extent of money

438 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of Terrorism. p. 2.

439 Ibid.440 Ibid., paras. 11 and 12. 441 United States Department of State, Bureau of International Narcotics and Law Enforcement

Affairs, 2008. International Narcotics Control Strategy Report, Volume II, March. See also Lal, D. 2008. Endangering the War on Terror by the War on Drugs. World Economic. Vol. 9, No. 3, July–September.


laundering and financing terrorism, and adapt to new vulnerabilities, such as the use of mobile phones to transfer funds and gamble online.442

Money laundering undermines financial sector governance.443 The normal way money is laundered involves “depositing funds into banks and then arranging wire transfers of those funds to other financial institutions, often in foreign jurisdictions.”444 Money launderers are constantly developing new techniques, including

the use of Internet gambling and other Internet “services”; on-line banking; trusts, international business companies, shell companies, and other noncorporate vehicles, using local proxies to shield the true beneficial owners; “gatekeepers” such as lawyers, accountants, financial consultants, and securities and insurance professionals; new payment technologies such as electronic purses and Smartcards; trade and false invoicing for the supply of goods and services; real estate; vehicles; and gold and other precious metals.”445

3. What Does ADB’s Anti-Money-Laundering Policy Say?

ADB’s AML policy, approved on 1 April 2003, contains four major components: (i) assist DMCs in establishing and implementing legal and institutional regimes, (ii) increase collaboration with other international and development partners, (iii) strengthen internal controls, and (iv) upgrade ADB staff capacity.446

4. How Does ADB Promote Anti-Money-Laundering?

The best approach to take in protecting against the risk of money laundering will depend upon the type of project or loan. Project-specific design measures aimed at promoting checks and balances are important in mitigating against this risk. Good measures include financial and performance audits, review

442 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of Terrorism. para. 9.

443 Ibid., para. 60. 444 Ibid., para. 7. 445 Ibid., para. 9. 446 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and

the Financing of Terrorism.


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missions, imprest account monitoring, and procurement controls. Together with these project controls, ADB also has internal controls to determine the identity of contractors (such as corporate registration checks) and to ensure that funds are sent to the correct bank accounts.

For public sector grants and loans, the project team must determine whether such checks and balances are likely to prevent (or at least limit) corruption, fraud, and stealing. Assuming they are, project counsel will not need to include specific provisions covering AML measures. In short, specific AML provisions are unnecessary in public sector grants and loans that already contain provisions covering corruption, fraud, and stealing because those measures will mitigate against the risk of money laundering. Thus, public sector loan and grant projects generally do not contain covenants requiring specific AML measures.

For loans or grants involving on-lending and relending, the situation is similar. Project counsel should carefully conduct due diligence on such projects to ensure they contain multilevel internal institutional controls. Loans or grants to development banks should require that the bank comply with national regulations that relate to AML. Such regulations will cover “know your client” procedures that must be followed before bank accounts are opened. They will also require banks to report large cash transactions or suspicious transactions to the regulator.

ADB requires similar internal controls in technical assistance projects.ADB generally does not trace the use of funds under program loans.

However, all financial sector program loans should incorporate mechanisms to establish or enhance an existing AML regime. They should also provide technical assistance to effect the necessary reforms.

Programs that have required such measures include program loans in Indonesia, the Lao People’s Democratic Republic, Sri Lanka, and Viet Nam. ADB has also provided technical assistance for AML to several countries including Indonesia, Mongolia, the People’s Republic of China, the Philippines, Thailand, and various countries in the Pacific.447448

447 Ibid.448 ADB. 2009. Anti-Money Laundering Toolkit.

Key Point for Project Counsel. Project counsel should refer to the Office of the General Counsel’s (OGC) AML toolkit for further information.448


H. Environmental and Natural Resource Governance

1. What is Environmental Governance? What is Natural Resource Governance?

Environmental governance includes state, private sector, and civil society action at the local, provincial, national, and international or global levels to formulate policy, or establish laws, regulations, or other informal standards to affect or change the behavior of actors and individuals to achieve environmentally sustainable outcomes for society. It is a subset of all governance and includes the elements of predictability, accountability, participation, and transparency.

Natural resource governance (and climate change governance discussed in Section I below) are a subset of environmental governance. Natural resource governance relates more specifically to environmental governance that is concerned with natural resources such as forests, fisheries, land, extractive materials and minerals, and biodiversity.


Environmental and natural resource governance, including forest governance, is frequently a sensitive issue in DMCs. Many people in positions of power—including those in politics, the military, and the police—often have a significant stake in illegal or unsustainable projects. Consequently, DMCs frequently face much pressure not to reform governance in these sectors. In such circumstances, project specific design features that promote sound governance become critical.

a. Environmental governance

The issues and risks involved in environmental governance relate to the nature of environmental policies, laws and institutions in a particular DMC. Environmental policies, laws and institutions have been strengthened in most countries since the advent of the environmental movement in the early 1970s. However, the extent of environmental change in Asia and the Pacific over the past 10 to 20 years has been dramatic and presents many environmental challenges that have not been sufficiently addressed in those early policy and regulatory frameworks or existing ones.


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Many DMCs have accepted international obligations under new or changed international environmental and climate law that need to be appropriately reflected in national legislation. Moreover, many DMCs have adopted new environmental policies and laws and yet have not been able to translate these broad framework policies and laws into implementing rules and regulations at the national, provincial and local levels. Even where DMCs have appropriate policy, legal and regulatory frameworks, effective enforcement and compliance continues to pose challenges. These challenges are brought about by:

• often weak political commitment;• low levels of institutional capacity (which may occur as a result of

lack of skills, lack of financial resources, or insufficient numbers of staff); and

• inadequate budget allocations and inappropriate financial mechanisms.

Independent loggers measure the trunk of a felled tree in Panama’s El Filo del Tallo Preserve in the Darien Forest on the border with Colombia to estimate how much wood the tree will yield. The Government of Panama has launched a campaign against illegal tree cutting, but lacks the resources to enforce the program. The Panamanian forest service reports that indiscriminate and illegal logging is threatening one of Central America’s largest forests.


Moreover, DMC environmental ministries and agencies often do not hold a strong position within their respective governments, and coordination amongst other relevant sector ministries such as forestry, mining, land use, fisheries, and energy, is often inadequate. In this regard, many DMCs have decentralized the responsibility for implementing environmental laws and regulations to local governments. Local governments often have different incentives, and less capacity for implementing environmental mandates, and so often-times the local setting provides a very weak link for implementing environmental policy and law.

The unclear roles and mandates of government agencies, the lack of transparency, and the limited active involvement of civil society, including the media also contribute to the problem. Further, institutions and agencies involved in environmental compliance and enforcement, such as the police, prosecutors, and the judiciary, do not always have direct environmental mandates, and hence weak capacity exacerbates problems of environmental compliance here too.

b. Natural resource governance

The issues and risks involved in natural resource governance are in many ways a subset of the broader issues of environmental governance. Natural resource governance is connected with ADB’s work in land use and land tenure, agriculture, forestry, environment, biodiversity and climate change, but would also include issues relating to mining and fisheries.

Forest governance is a significant and important issue of natural resource governance for many of ADB’s DMCs.449 From 1990 to 2005, the rate of forest decline was estimated at 13 million hectares per year.450 Southeast Asia experienced the largest decline, an annual net loss that exceeded 2.76 million hectares per year or 1.3% of the region’s forest area. This decline has barely improved from the net loss of 2.79 million hectares per year or 1.2% of the region’s forest area from 1990 to 2000.451 Illegal logging is the major cause of this forest loss and degradation.

449 Although ADB’s direct work in forestry has declined, it is relevant to ADB’s work because of the relationship between forests and other sectors such as agriculture and environment. Moreover, ADB expects a cautious re-engagement in the forestry sector as a result of its anticipated work on reduced emissions from deforestation and degradation (REDD) Projects under any new post-Kyoto international climate change regime.

450 Food and Agriculture Organization (FAO). 2006. Global Forest Resources Assessment 2005: Progress Towards Sustainable Forest Management. p. 19.

451 FAO. 2007. State of the World’s Forests. p. 15. See also Stibig, H.-J., F. Stolle, R. Dennis, and C. Feldkotter. 2007. Forest Cover Change in Southeast Asia: The Regional Pattern.


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Many DMCs lose large amounts of potential revenue from deforestation through taxes and fees that are not paid due to illegal logging: land concessions that have been granted in weak regulatory and enforcement contexts for amounts that do not amount to the true value of the land resource; and unsustainable land management and use. In other DMCs, forests are only valued for their other potential uses—particularly for agricultural production such as palm oil plantations. Forest governance and corruption problems may arise particularly in relation to decentralization, where the interests of central governments to sustainably manage and use land may differ from the interests of provincial and local governments, which seek to exploit forests.

In view of the important financial, economic, and environmental issues surrounding forest governance, several governments, NGOs, donor agencies (led by the United States Agency for International Development [USAID] and the World Bank), and members of the private sector met in 2001 and drafted the Forest Law Enforcement and Governance initiative.452 The initiative addresses the urgent need to combat the root causes of deforestation and forest degradation. The World Bank subsequently applied the initiative in other regions of the world. In 2004, the World Bank established a multidonor trust fund supporting the ministerial processes and actions taken pursuant to the initiative. The World Bank also facilitated bilateral memoranda of understanding between Indonesia and developed countries.453

In the years ahead, the following five natural resource governance issues are likely to pose serious threats:

• legal and institutional frameworks are weak as is law enforcement and compliance;

• many DMCs have ineffective systems of land allocation and demarcation, leading to disputes over property and concessions;

• global problems impinge on domestic issues of food insecurity exacerbating food insecurity and increasing the likelihood that habitats will be converted to use for unsustainable production;

• foreign direct investment into natural resource sectors may continue to increase without adequate controls which will worsen environmental and social problems;

• natural resource sectors will need to adapt to a changing global climate, including changed patterns of drought and rainfall,

452 World Bank. 2009. Forest Law Enforcement and Governance (FLEG)—East Asia & Pacific.453 Ibid.


which will radically affect existing natural and man-made habitats; and

• regional cooperation is likely to increase the demand for agricultural products, creating more pressure to convert forest areas into plantations, whether or not concessions are granted legally.

3. What do ADB’s Environmental and Natural Resource Policies Say About Governance?

Strategy 2020 indicates that ADB will seek to “strengthen[..] the legal, regulatory, and enforcement capacities of public institutions in regard to environmental considerations.”454 As of end February 2010, ADB is preparing an environmental strategy that will contain a strategic operational agenda for implementing this and other environmental governance aspects of ADB’s operations. Project counsel will need to consider these environmental governance aspects of the environmental strategy once it has been approved.455

In relation to natural resources, ADB’s forest policy covers important governance issues relating to the forest sector and incidentally covers the associated natural resource sectors. The forest policy promotes appropriate policy and regulatory frameworks as well as institutional strengthening, such as increasing the capacity of forest law enforcement officials.456 For example, ADB encourages the creation of (i) land use policies, (ii) zoning policies and regulations including distinguishing forest land from agricultural land, and (iii) strengthening mechanisms to ensure that adequate forest cover is retained in DMCs.457

ADB also promotes land tenure policies that empower sustainable management by forest dwelling and forest dependent communities and

454 ADB. 2008. Strategy 2020: Long-Term Strategic Framework of the Asian Development Bank 2008–2020. p 14.

455 Until the effective date of Safeguard Policy Statement which occurred on 20 January 2010, ADB’s policies were contained in the Environmental Policy (2002). Thereafter, they will be contained in the environment strategy that is not finalized as of 31 May 2010. ADB retired its fisheries policies, following a 2006 special evaluation study conducted by ADB’s then operations evaluation department. One reason it was considered unsuccessful was because it had not adequately accounted for governance dimensions. ADB. 2006. Special Evaluation Study on the Fisheries Study of the Asian Development Bank.

456 ADB. 1995. The Bank’s Policy on Forestry. For other natural resource related policies, see ADB’s fisheries policy (www.adb.org/Documents/Policies/Fisheries/fisheries.pdf) and agricultural resource policy (www.adb.org/documents/policies/agriculture-natural-resources/agri-natural-resourcespdf).

457 ADB. 1995. The Bank’s Policy on Forestry. p. 12.


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concessionaires.458 Moreover, consistent with ADB’s governance policy, the forest policy actively promotes early public consultation among all stakeholders, including forest dwelling and forest dependent communities, and concessionaires, in policy formulation and implementation.459

ADB works toward strengthening the capacity of institutions in the natural resource and forest sector. ADB has recognized that in some DMCs, weak enforcement and the lack of enforcement capacity has hampered efforts to protect forests and natural resources.460 Thus, ADB supports DMCs in adopting appropriate legislation and strengthening forest regulation and enforcement agencies.461

In 2008, ADB endorsed the Extractive Industries Transparency Initiative (EITI) and became a supporting organization. By endorsing EITI, ADB encourages its DMCs to ensure that natural resource wealth translates into equitable economic growth, and that the process of creating the necessary transparency and accountability frameworks to facilitate this goal must respect the sovereignty of countries and existing contracts and laws.462

4. How Does ADB Promote Good Environmental and Natural Resource Governance?

ADB’s overarching support for enhancing environmental governance can occur partially through providing support for the institutions, policies, and legal and regulatory frameworks that establish the basis for good environmental governance.

Any sector specific environmental governance needs to be grounded in ADB’s governance policy and anticorruption policy, hence it needs to promote (i) accountability, (ii) transparency, (iii) participation, and (iv) predictability, and also support Strategy 2020. Box 6.5 sets out an indicative list of questions that will help project counsel identify these sector specific governance issues, and hence promote their inclusion within project design. Box 6.6 also includes indicative questions that focus on the natural resource sector. In answering these questions, project counsel will be able to consider governance issues that assist the project team to formulate measures to address in project design.

458 Ibid., p. 13.459 Ibid., p. 14. 460 Ibid., p. 18–19. 461 Ibid., p. 19. 462 ADB. 2008. Extractive Industries Transparency Initiative.


Key Point for Project Counsel. Project counsel should consider the indicative lists of questions in Box 6.5 for environmental governance issues and Box 6.6 for natural resource governance issues where appropriate.

Box 6.5: Indicative Checklist of Some Relevant Issues in Environmental Governance

Predictability• Is there support to government agencies and sectors to integrate

and address environmental and climate change considerations at all level of development?

• Are environmental considerations mainstreamed within integrated national and sector development plans, policies, laws, and regulations, and systems for enforcement and compliance?

• Is there assistance for DMCs to reflect new or changed international environmental and climate law in national legislation and/or translate broad framework policies and laws into implementing rules and regulations at the national, provincial, and local levels?

• Is there support to achieve efficient implementation and compliance with environmental policy and law, particularly at local levels by legal reforms that strengthen accountability for local resource management?

• Are policy and market failures corrected to improve incentives for sound environmental management and sustainable energy goals?

• Have environmental and climate change concerns and objectives been integrated into national and sector economic development policies, plans, strategies and regulations?

• How are environmental monitoring, compliance and enforcement capacities being strengthened?

• How is ADB promoting better mainstreaming of environmental sustainability considerations for project planning, project design standards, assessment and approval processes?

• Is there a national action plan to promote and strengthen country safeguard systems and implementation capacity?

• Is there safeguard and environmental training where needed?

Accountability• Are the roles and responsibilities of environmental ministries and

agencies, sector ministries and agencies, and provincial and local authorities clear?



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• What is the role of other agencies involved in environmental compliance and enforcement, such as the police, prosecutors, and the judiciary, and do they understand their environmental obligations?

Participation• What is the private sector’s role in environmental governance of

the project?• Is there a role for voluntary environmental standards, corporate

social responsibility initiatives, and certification schemes, in addition to appropriate policy and legal frameworks?

• What is the actual role of NGOs and civil society organizations (CSOs) in environmental governance of the project?

• Are their environment champions and watchdogs, and media, within civil society who can drive a more proactive environmental governance approach? If so, how can they be involved in the project?

Transparency• How else can ADB assist the DMC with measures that improve

the quantity and quality of environmental information available to experts, government, the private sector, members of the public, and particularly people affected by environmental decisions?

Source: Authors.

Box 6.5: continued


Box 6.6: Indicative Checklist of Some Relevant Issues for Natural Resources Governance

• Is there corruption and/or weak governance in environmental, natural resource, energy, or agriculture ministries, agencies, or local governments that is likely to impact the project?

• Is there corruption and weak governance in environmental, natural resource, energy, or agriculture markets that is likely to impact on the project?

• Do the relevant ministries or agencies have clear roles and responsibilities with respect to the project? If not, can this be clarified under ADB’s financing agreement?

• What effects do perverse incentives, subsidies and taxes have on the natural resource, energy, and agriculture sectors?

• Over the project’s life, is the project area vulnerable to increased disaster and emergencies as a result of environmental degradation or climate change? Thus, is there a need for increased transparency, accountability, and other emergency governance measures?

• Is it possible to phase in or sequence environmental and natural resource governance steps over several years even if it is difficult to introduce quickly?

• Where land is allocated under concessions, whether used for forest production or agriculture, is it possible to conduct a concession review and assessment to ensure that concessions are issued in accordance with government planning, zoning, environmental and other legislation, and subject to applicable environmental conditions?

• If so, can a detailed database be developed that clearly identifies the concessionaire and the location and size of the concession, and that allows users to post information on a public website?

• Is it possible to publish information concerning land concessions in the local language at local markets and on the project internet site?

• Is it possible to publish information regarding regulatory licenses or concessions?

• Is any of this information already collated by the provincial governments and fed through to the relevant natural resource ministry?

• Does the relevant natural resource ministry record the commercial terms and conditions of individual land concessions and monitor the concessionaire’s compliance with and administration of the terms of the concession? If not, can the project help?

Source: Authors.


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I. Climate Change Governance

1. What is Climate Change Governance?

Climate change is the change in the earth’s average temperate resulting from increases in global greenhouse emissions caused by human activity. Although there is broad scientific consensus that the earth’s average temperature will increase overall, the extent of temperature changes in localized geographic regions may vary.463

Climate change is expected to result in a range of impacts including an increase in extreme weather events and natural disasters such as storms, monsoons, hurricanes, and flooding and an increase in the severity of those events. Sea levels will rise. Glaciers are melting and will continue to melt. Coastal cities such as Bangkok, Jakarta, Manila, Mumbai, and Shanghai will be particularly affected. Within Asia, agriculture productivity will decline, likely resulting in food and freshwater shortages. Many thousands of people may be forced to leave their homes, particularly in Bangladesh, the Maldives, and the Pacific.

Climate change governance involves environmental governance directed to the issues of climate change. On the one hand, it may be considered a subset of environmental governance. Yet, on the other hand, because climate change has the potential to worsen almost every other environmental challenge we are facing today, it also may be considered as embracing almost all of the challenges of environmental governance.


Because events caused by climate change will place increased stressors on a government’s ability to govern, provide public services, and protect its people, climate change is likely to exacerbate the effects of preexisting factors and conditions that lead to governance risks. Thus, practitioners from climate change and governance communities increasingly consider that a link exists between climate change and governance issues.464

463 ADB. 2008. Climate Change ADB Programs: Strengthening Mitigation and Adaptation in Asia and the Pacific. pp. 6–7.

464 13th International Anti-Corruption Conference. 2008. Plenary 3: Climate Change and Corruption.


Increased global greenhouse emissions (which will ultimately lead to increases in the global mean temperature) are, among other things, related to corruption and weak management in government.465 For example, increased illegal logging and corruption leading to deforestation and forest degradation in some DMCs is directly linked to climate change.466

Increased greenhouse gas emissions are also linked to governance issues through development financing; national development strategies; energy policies; agriculture policies, subsidies, and taxes in both sectors; public financial management and the rule of law; the delivery of public services, and increased emergencies and disasters resulting from climate change.467

“Climate change governance” is a new term, not yet a new discipline, but not really a new idea. The large volume of literature published on

465 ADB. 2008. Climate Change ADB Programs: Strengthening Mitigation and Adaptation in Asia and the Pacific.

466 Ibid.467 Ibid.

A farmer waits for rain on his drought-hit paddy field in Morigoan, Assam, India.


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environmental governance and the related issues could be usefully applied to issues of climate governance.468

3. What Do ADB Policies and Strategies Say?

In Strategy 2020, ADB affirmed its commitment to the issues of climate change, environment, and governance. Under Strategy 2020, ADB has a climate change program that seeks to bring into the mainstream the core climate change issues of adaptation, mitigation, and forest and land use. It also requires ADB to reduce its carbon footprint.469 Climate governance issues would fall within the broader strategy and governance and anticorruption policy. In April 2010, ADB approved its overarching strategic priorities for climate change in a paper called Addressing Climate Change in Asia and the Pacific: Priorities for Action. It records the widespread acknowledgment of the “enormous amount of policy, governance, and institutional work” needed to mainstream national climate change mitigation actions and adaptation action programs, into concrete actions. It also acknowledges that supporting DMC requests for assistance in strengthening policies, governance, and capacity in relation to climate change fits well with ADB’s role and should be a priority action area. ADB proposes increasing interventions in these areas.

4. How Does ADB Promote Good Climate Governance?

ADB has an increasing portfolio of projects that aim to help DMCs mitigate or adapt to the effects of climate change. In those projects, project counsel should consider the link between climate change and governance, and, if appropriate, seek to work with the project team to incorporate relevant governance measures into the project.

468 See Foa, R. 2009. Social and Governance Dimensions of Climate Change: Implications for Policy. World Bank Policy Research Working Paper No. WPS 4939; Najam, A., M. Papa, and N. Taiyab. 2006. Global Environmental Governance: A Reform Agenda; Badenoch, N. 2002. Transboundary Environmental Governance: Principles and Practice in Main land Southeast Asia.

469 ADB. 2008. Strategy 2020: Long-Term Strategic Framework of the Asian Development Bank 2008–2020. p. 14.


Box 6.7: Checklist of Relevant Issues in Climate Change Governance

• Is there a national and subnational climate change mitigation and adaptation plan and policies and sector road map?

• How can climate risk management be mainstreamed into the project’s design planning, assessment, and approval processes?

• Is there a need to assess and address possible economic and social impacts of climate change, including implications for migration, human health, and gender equality in the project?

• What other project-related risks and issues might be exacerbated by climate change?

• Is there corruption and/or weak governance in natural resource, energy, or agriculture markets that is likely to impact on the project?

• What effects do perverse incentives, subsidies and taxes have on the natural resource, energy, and agriculture sectors?

• How effective are market-based climate mitigation schemes (such as emissions-permitting schemes) in overtly corrupt sectors within DMCs? What is their effect on the market given such corruption and weak governance?

• Over the project’s life, is the project area vulnerable to increased disasters and emergencies as a result of climate change? Is there a need for increased transparency, accountability, and other disaster and emergency governance measures?

Source: Authors.


• consider ADB’s Strategic Priorities for Climate Change when they are adopted in 2010; and

• review the checklist of environmental governance issues in Box 6.5 to determine if any are relevant, and consider the indicative list of climate change governance issues set out in Box 6.7.

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cont

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•Governmentmayidentifyhigh

disbursementsectorssuchas

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tangibleservicesectorslikehealth,

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areastointervene(e.g.,

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mayallowcorruptionratherthan

utilityservicepolicyreformwhich

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•Keystakeholdersensurethata

projectisskewedinfavoroftheir

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•Maintaintheintegrityofthe

processbyidentifyingand

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forpersonsandentities

involved.

•Maintaintheintegrityofthe

processbyidentifyingand

avoidingconflictsofinterest

forpersonsinvolved.

226 GovernanceandAnticorruptioninProjectDesign:OfficeofGeneralCounselGuide

Appendix1

cont

inue

d

Act

ivit

yR

isks

(U

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s)

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aprojectteambyincluding

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akickbacktoengagealess

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knownconsultantsovermore

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lowercost.

•EAand/orIAshouldprepare

aplanofhumanresource

needsthattakesintoaccount

thetypesofskillsneededby

personnelovertheshort,

medium,andlongtermsto

ensurethatpersonnelare

matchedwithworkneeds.

•Fact-findingmissionsshould

conductbasicduediligence

tocheckthatEAand/orIA

officialsinvolvedinthe

cont

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Appendix1 227

cont

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itig

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groupsorindividualsrather

thanfocusingondelivering

resultsthatareinthebest

interestsoftheprojectand

itsbeneficiaries.

•DonororEAand/orIAprefersto

engagefriendsorrelativesinstead

ofthosewhoaremostcompetent.

projecthavenodirector

indirectpersonalinterestin

theprojectand,wherethey

dohaveapersonalinterest,

requesttheirreplacement.

•EAand/orIAshouldconfirm

measuresinthefact-finding

orappraisalmemorandumof

understanding.

PPTA

prep

arat

ion

andPPTAand

PPNapproval

Recruitmentof

consultants

•Ministers,secretaries,EA,

and/orIAofficialsmay

improperlyinfluenceofficers,

personnel,andconsultants

taskedtoprepareand

approvePPTAsandPPNs.

•EAorIAconductsanunfair

consultantbiddingand/or

selectionprocess.

•Stakeholdersmayadvance

theiroverallpolitical

influencewithinthesociety

ortheirpositioninthe

project.


theirauthoritytogainor

maintaininfluenceor


fromanyensuingproject.

•Groupsorindividualsmay

benefitfinancially(from

bribes),socially,orpolitically

•Secretaryofpublichighways

persuadestheprojectfeasibility

designconsultantstobuildroads

inthelocalareaandelectoral

constituencyoftheministerof

publichighways.

•Anindividualconsultantisthesecond

cousinoftheadditionalsecretary

overseeingtheprojectfromtheEAs

•Fact-findingmissionsshould

conductbasicduediligence

tocheckthatEAand/or

IAofficialsinvolvedinthe

projecthavenodirector


theprojectandrequesttheir

replacementiftheydo.

•EAand/orIAshouldconfirm

thisinthefact-findingor

appraisalmemorandumof

understanding.

•Stringentapplicationofthe

Gui

delin

es o

n th

e U

se o

f Co

nsul

tant

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Appendix1

cont

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uide

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Use

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Dev

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rrow

ers.Manila.Available:www.adb.org/documents/guidelines/consulting/Guidelines-Consultants.pdf


Appendix1

cont

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d

Act

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isks

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Exam

ple

sM

itig

atio

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easu

res

Projectdesign

•EAand/orIAofficialsmay

inflatetheproject’sneeds

orotherwiseimproperly

influencetheshape,size,or

locationoftheproject.

•Otherstakeholders(notably

governmentofficials)may

exertpressureontheEA

and/orIAregardingproject

design.

(fromfavors)byrecruiting

consultantswhoarenotthe

bestqualifiedandlowest

cost

.

•Ratherthanservingthe

bestinterestsofthepoor,

theprojectmayservethe

interestsofspecificgroups

orindividualsbymaking

financialorothergains,

orgainingormaintaining

influenceorresources.

and/orconsultingfirmsthathave

linkstotheEAofficials(including

familyandfriends).

•Thechiefexecutiveofficerof

theprojectcompanyIAselects

aconsultingfirminwhichthey

previouslyheldapositionaspartner.

•Budgetingforthecostofconsultancy

servicesisnottailoredtothespecific

projectandadditionalpadded

amountsaregiventoconsultantsor

usedandappliedbytheEA.

•Changingthelocationofaroad

projecttoavoidpassingthroughthe

homeofapersonconnectedtothe

government.

•Changingthelocationofaroad

projecttoensuretheroadpasses

nearanindividual’spropertyto

increasethevalueofthatproperty.

•Inflatingtheproject’scoststotake

thembeyondthethresholdsize

ofnationalbudgetingandqualify

itfordonorassistancetoprovide

opportunitiesforfurthercorruption.

•IdentifyEAand/orIA

officialswhohavelinksto

consultantsoraninterestin

consultingfirms(suchasa

shareholding).

•CheckthatEAand/orIA

officialshavenodirector


theproject.

•Assessthevulnerabilityof

theEAand/orIAtobeing

influencedbyexternal

part

ies.

•Vigorouslyassessacurracyof

proposedprojectbudgets.

cont

inue

d on

nex

t pag

e

Appendix1 229

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

Duediligence,

appraisal,

andrisk

management

review

Loanand

grant

negotiations


influenceofficersand

personneltomakeinaccurate

findings,appraisals,and

reviewsthatarefavorableto

stakeholders.

•Stakeholdersmay

improperlyinfluenceofficers

andpersonnelduring

negotiations.

•Stakeholdersgainfrom

favorablefindingsby

securingdirectorindirect

assistanceresultingfromthe

project,attheexpenseof

ADBandintendedproject

beneficiaries.

•Termsandconditionsare

includedinloansandgrants

thatservetheinterestsof

specificgroupsorindividuals

ratherthanthebestinterests

ofADBandintendedproject

beneficiaries.

•Concealingorfailingtoreportan

encumbranceonaproperty.

•Omittingquestionabletransfersof

propertyinaduediligencereport.

•Failingtohighlightnegativeaspects

oftheprojectinreportsduetofear

oflosingtheprojectfundingor

havingstringentmonitoringand

evaluationcriteriaimposed.

•Omittingrisksforwhichtheproponents

oftheprojectcannotprovide

acceptablesolutions(e.g.,inthelikely

eventofanoutbreakofconflict,orlikely

saleofaspecialpurposecompanyor

partofabusiness).

•Termsandconditionsareloosely

draftedtoensuretheycomplywith

projectrulesduringimplementation

butotherwiselackclarity,sodonot

facilitateaneffectiveproject.

•Reluctanceofthepartiestogoback

toprojectdesignifseriousproblems

areencounteredatthenegotiation

stage.

•Maintaintheintegrityof

theappraisalandrisk

managementreviewby

identifyingandavoiding

anyconflictsofinterestfor

personsinvolved.

•Protectagainstthe

occurrenceofconflictsof

interestsbychecking

-thatEAand/orIAofficials

orbankpersonneldonot

haveanydirectorindirect

personalinterestinthe

project,and/or

-whatlinksorrelationships

Appendix1

cont

inue

d

cont

inue

d on

nex

t pag

e


Appendix1

cont

inue

d

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

•Excessiveuseof“boilerplate”clauses

withoutappropriatecontextual

amendments.

existbetweenEAand/or

IAofficialsandpersonnel.



influencedbyexternalparties.

Consideration

andapproval

ofRRPsand

loanandgrant

documents


persuadeofficersand

personneltoconsideror

endorseRRPsandloan

documents.

•Termsandconditionsare

includedinloansorgrants

thatservetheinterestsof

specificgroupsorindividuals

ratherthanthebestinterests

ofADBandintended

beneficiaries.

•Insufficientconsultationwithother

stakeholdersinfinalizingtheproject

preparationanddesign.

•Protectagainstthe

occurrenceofconflictsof

interestsbychecking

-thatEAand/orIAofficials

orbankpersonneldo

nothaveanydirector

indirectpersonalinterest

intheproject,and/or

-whatlinksor

relationshipsexist

betweenEAand/orIA

officialsandpersonnel.



influencedbyexternalparties.

III. W

orki

ng w

ith

Loca

l Org

aniz

atio

ns (I

n A

ddit

ion

to A

ll of

the

Ris

ks L

iste

d in

the

Oth

er T

able

s th

at E

qual

ly A

pply

to

Impl

emen

ting

Loc

al O

rgan

izat

ions

)

ChoosingEAs

andIAs


influencewhichEAsand/

orIAsareselectedforthe

project.

•Politiciansandindividuals

otherthanintended

beneficiariesgainfinancially

fromtheproject.

•HeadsorofficialsofEAsmaychoose

IAsheadedbyand/orcomposed

ofrelativesorfriends,orIAswith

noproventrackrecordorofpoor

reputation.

•MonitortheEAandIA

selectionprocessesand

inquireintoanyattemptto

engageaspecificEAorIAor

tochangethechosenEAorIA.

cont

inue

d on

nex

t pag

e

Appendix1 231Appendix1

cont

inue

d

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

•Governmentsarereluctantto

workwithorganizationsthathave

reputationashumanrightslobbyists.

•Checkthattheofficialsof

thechosenEAorIAhave

noconflictofinterestin

theprojectbyundertaking

referencechecksandrequiring

financialandtaxdisclosures.

•Fundscouldbedivertedto

servetheinterestsofspecific

groupsorindividuals.

•Concentrationof

responsibilitiesand/orpowers

withafewindividualsmay

allowthosepeopletoengage

inirregularpracticesthatserve

•Politiciansandindividuals

otherthanintended

beneficiariesgainfinancially

fromtheproject.

•Specificindividualsorgroups

ratherthantheproject’s

intendedbeneficiariesmay

benefit,financiallyor

otherwise.

•Theaccountantinaprojectunitof

aneducationprojecttransfersfunds

fromtheprojectimprestaccount

totheirownaccountandtheEA

andtheprojectunithavelittleother

capacityandareunabletodetectthe

fraud.

•EAand/orIAofficersmayholdall

keyresponsibilitiesduringtheproject

implementationprocess(fromthe

procurementprocesstoreviewing

thecontractexecution),

•ChecktheEA’scapacityto

implementandoverseethe

projectbyreviewingtheirprior

experience;havediscussions

withdonors,development

partners,andgovernment;

andreviewgovernmentor

donorauditreports.

•Definewhichministryand/or

directorateorgovernmentunitto

whichtheEAand/orIAreports.

•VisittheEA’sand/orIA’s

premisesandmeettheirofficials.

•ReviewandassesstheEA’s

and/orIA’sorganizational

chartandhavethemestablish

aclearhumanresources

strategy. co

ntin

ued

on n

ext p

age


Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

theinterestofspecific

individualsorgroupsrather

thantheproject’sintended

beneficiaries.

enablingthemtoeasilyactin

favorofspecificbiddersandgain

kickbacks.

•Secretaryofthelineministrymay

serveastheprojectdirector

allowinghimtoappointfriendsand

familytotheproject.



influencedbyexternalparties

(suchasseniorgovernment

officialsorpoliticians).

•Includecovenantspecifiying

staffingrequirements.

IV. P

rocu

rem

ent

and

Log

isti

cs R

isks

Procurement

ofgoodsand

services

•Inclusionofanunqualified

supplierinatenderlist.

•Specificgroupsorindividuals

maybenefit,financiallyor

otherwise,fromthe

engagementofcontractors

deliveringsubstandardor

uncompetitivegoodsor

services.

•Short-listingunqualifiedbiddersby

eitherendorsingfalseinformation

submittedbythem,ormodifying

thebiddingrequirementsto

specificallyallowthemtosubmita

bid.

•Listingbidders’qualificationsina

waythatfitsthedescriptionofa

preselectedentity.

•Checkconsistencyofbidding

requirements.

•Reviewdocumentation

relatedtotheprocurement

process,including

-expressionsofinterest

andtenders,and

-minutesofpreselection

and/orselection

committeemeetings.

•Checkforconflictsofinterest

affectingEAand/orIAofficials.

Appendix1

cont

inue

d

cont

inue

d on

nex

t pag

e

Appendix1 233

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

•EAsand/orIAsgiveundue

preferencetocertaintender

offersandsuppliers.

•Specificgroupsorindividuals

maybenefit,financiallyor

otherwise,fromthe

engagementofcontractors

deliveringsubstandardor

uncompetitivegoodsor

services.

•Predeterminingthewinningbidders

beforeplacingtheadvertisement—

otherbiddersthreateningorforcing

towithdrawtheirbidorsubmitan

uncompetitivebid.

•Reviewdocumentation

relatedtotheprocurement

process,including

-expressionsofinterest

andtenders,and

-minutesofpreselection

and/orselection

committeemeetings.

•Checkforconflictsof

interestsaffectingEAand/or

IAofficials.

•Reviewtheinternal

organizationstructureof

theEAand/orIAtocheck

fortheconcentrationof

responsibilitiesonspecific

individuals.

•EAsandcontractorsrequest

excessivepriceincreases.

•Contractorand/orEAbenefit

frominflatedpricesat

expenseofgovernmentand

intendedbeneficiaries.

•Laborandequipmentcostsfor

buildingruralroadsandwater

supplytreatmentincreasesby150%

evenaftersupplementaryfinance

hasalreadybeenprovidedtocover

prio

r cos

t inc

reas

es.

•Checkbasisforprice

incr

ease

s.

•Coveronlypre-agreedcosts

andrequiregovernmentto

financeescalations.

Appendix1

cont

inue

d

cont

inue

d on

nex

t pag

e

234 GovernanceandAnticorruptioninProjectDesign:OfficeofGeneralCounselGuideAppendix1

cont

inue

d

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

Warehousing,

fleet,andasset

control

•Improperuseofproject

assetsbyEAand/orIA

officialsbecausethey

divertstock,vehicles,parts,

andfuel,andusethem

personally.

•Projectassetsareusedto

benefitspecificindividuals

orgroupsratherthanfor

theprojectandintended

beneficiaries.

•Assetsaredivertedfromtheir

intendeduse,suchasprojectcars

beingusedbygovernmentorEA

and/orIAofficialsforpersonaluse

orforgeneralgovernmentwork

unrelatedtotheproject.

•Fuelallottedforprojectvehicles

isconsumedbyEA’sand/orIA’s

personalvehicles.

•Fleetandequipmentmanagement

isconsidereda“mundane

administrativeissue”meaning

thattheheadoftheEAisvested

withtotalcontroloverthisissue

andhasdiscretiontousethefleet

and/orequipmentforpurposesthat

areonlylooselyconnectedtothe

project.

•Officialprojectvehiclesor

equipmentareprovidedtopart-

timeprojectpersonnel.

•Checkthephysicalexistence

andpresenceofproject

assetsintheprojectarea,

suchasthecar,fleet,and

computerequipment.



influencedbyexternal

part

ies.

Supply

•Acceptanceanduseofout-

of-datesuppliesorsupplies

thataresubstandard.

•Suppliersgainattheexpense

oftheprojectandits

beneficiaries.

•Inexchangeforkickbacks,EAor

IAofficialsmayacceptdeliveryof

medicalsuppliesthatareeither

outofdateordonotcomplywith

qualitystandards.

•

Useof

equipmentand

supplies

•Unauthorizeduseor

diversion.

•Suppliersorusersgainatthe

expenseoftheprojectandits

beneficiaries.

•SellingADB-financedmedical

suppliesonlocalmarkets.

cont

inue

d on

nex

t pag

e

Appendix1 235

Appendix1

cont

inue

d

cont

inue

d on

nex

t pag

e

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

V. T

arg

etin

g a

nd R

egis

trat

ion

Risk

s

Targetingand

registration

•Illegitimateinclusionor

exclusionofindividualsor

groupsonbeneficiarylists.

•Projectbenefitsaregranted

topersonswhoarenot

supposedtogainfromthe

project.

•Authoritiesgainpolitical

influence.

•Peopleareidentifiedasproject

beneficiarieseventhoughtheydo

notsatisfytheprojectcriteria.

•OnepersonwithintheEAholds

allresponsibilityforgivingbenefits

(suchasmicro-loans,micro-

insurance,orsmallgrants)requiring

insufficientchecksandbalances

fromotherstaff.

•Extendedfamilymembersliving

outsideoftheprojectareaarelisted

asprojectbeneficiaries,meanwhile

thereareinadequatelistsof

beneficiarieslivingwithintheproject

area

.

•Checkforanyconflictsof

interestaffectingtheEA

and/orIAofficials.

•Checkwhoholdsreal

responsibilityandpower

withinEAand/orIA.

•Dependingonthenatureof

theproject,checkthelistof

beneficiaries.

•Stakeholders,officers,and

personnelgivepreference

toindividualorgroupsof

beneficiariesbecauseof

bias,socialobligations,or

coercion,orbribes.

•Intendedbeneficiariesare

nottreatedequallyanddo

notreceiveanequitable

shareofprojectbenefits.


influence.

•Agovernment-ownedconstruction

companymaybegivenpreference

becausesomeoftheservices

arebundledtogetherwiththose

servicesthatthecompanyisbound

underlawtoprovide,yetthe

companyisnotqualifiedornot

competitiveregardingallservices.

•Housesarereconstructedforsome

membersofacommunityandnot

othersinanemergencyproject,

becausebribesarepaid.


affectingEAand/orIA

officials.



withintheEAand/orIA.

•Monitorandauditlistsof

beneficiariesandbenefits

received.


Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

•Stakeholderswithinthe

communitymanipulate

beneficiarylists.

•Theprojectbenefitspersons

whoarenotsupposedto

gainfromtheproject.

•Stakeholdersgainpolitical

influence.

•Stakeholdersmaypadthenumber

ofactualbeneficiariestoincrease

theamountofassistance.

•Village-levelofficialsmayfalsely

certifythatpersonsareeligible

forprojectassistancedespitenot

meetingeligiblecriteria.

•Reviewbeneficiaries’

approvalprocess.

•Conductspotchecksand

audits.

VI.

Imp

lem

enta

tion

and

Dis

trib

utio

n Ri

sks

Compliance

withlocal

regulations

•Publicapprovaland

regulatoryauthoritiesand

supervisingengineersextort

companiesandcontractors

toprovideapprovalsfor

legitimateandshoddywork.

•Suppliersandauthorities

gainattheexpenseofthe

projectanditsbeneficiaries.

•TheEAand/orIAacceptspoor

qualitybitumenforaroadfrom

acontractorandbribesone

independentengineertocertifyitas

satisfactory.

•Localofficialsarebribedtospeed

uplocalconstructionapprovalsand

leaveprojectpersonnelvulnerable

toillegalpayments.

•Physicallyinspectmaterials

andservicesprovided.

•Reviewtheselectionand

engagementprocessand

checkforfavoritismfromthe

EAand/orIA.

Construction

•Contractorssupplyanduse

substandardmaterialsto

savecostsandappropriate

fundsforpersonaluse.

•Inadequateadherenceto

constructionstandards.

•Substandardworkmanship.

•Suppliersgainattheexpense

oftheprojectandits

beneficiaries.

•Deliveringsubstandardequipment

andserviceswiththeconsentof

EAand/orIAofficialswhoreceive

kickbacks.

•Substandardhousingor

infrastructureisconstructed.

•Physicallyinspectmaterials

andtheconstructionprocess.

•Reviewtheselectionand

engagementprocessand

checkforfavoritismfromthe

EAand/orIA.

Appendix1

cont

inue

d

cont

inue

d on

nex

t pag

e

Appendix1 237Appendix1

cont

inue

d

cont

inue

d on

nex

t pag

e

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

Distributions

•Thoseinvolvedinthe

distributiondivertassistance

forprivategain.

•Theprojectbenefitspersons

whoarenotsupposedto

gainfromtheproject.


influence.

•Inamicrofinanceproject,anIA

officialpersonallycollectsloan

installmentsthatwereintendedfor

distributiontoloanbeneficiaries.

•AministerinchargeofanEA’s

constituencyreceivespriority

treatmentinproject

implementation.

•EAorIAstaffsellprojectrelief

goodsforafeeratherthan

distributingthemforfree.


amongpersonsinvolvedin

thedistributionofproject

benefits.




•Othermitigationmeasures

aresubjecttothenatureof

theproject.

•EAsand/orIAsandother

personsresponsiblefor

distributionextort

beneficiariesinreturnfor

theirassistance.

•Stakeholdersgainpolitical

influenceintheircommunity

withthoseintendedas

beneficiaries.

•EAand/orIAofficialsoremployees

takebribestodistributemorethan

theallocatedvolumeofgoodstoa

specificdistrictattheexpenseofa

nearbydistrict.

•Localpoliticiansmayuseproject

fundstosatisfytheirownpolitical

agendas,includingbenefitingfrom

freepublicityundertheguiseof

appearingatproject-relatedevents.



thedistributionofproject

asse

ts.



withinEAand/orIA.

•Conductmeetingsand

interviewswiththeproject’s

ultimatebeneficiaries.



theproject.


Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

Feesand

chargesfor

usage

•EAsand/orIAsorother

officialschargefeesfor

goodsorservicestobe

providedforfreeortobe

billedseparately.

•EAsand/orIAsgain

personallyattheexpenseof

beneficiaries.

•Policeandlocalgovernmentofficials

chargeatolltouseanewroad.

•Staffofawaterutilitychargeupto

$1,000equivalenttomakeillegal

wat

er c

onne

ctio

ns.

•Takestrongmeasuresagainst

staffincludingdismissal.

•Cross-checkphysicaldataon

conn

ectio

ns.

Post

distribution

•Localauthoritiesimpose

taxesonthereceiptof

projectgoodswithoutany

legalbasis.

•Localauthoritiesgain

politicalinfluence.

•Localauthoritiestaxdisasterrelief

goodsdespitetheirclearstatus

•EAorIAstaffdeclareinwriting

reportthatallprojectgoodswere

distributedwhennotallwere

distributed.



thedistribution.






theproject.

VII.

Mon

itor

ing

, Rep

orti

ng, a

nd E

valu

atio

n Ri

sks

Projectvisits

andwriting

internalreports

•Falseorexaggerated

reportingbyprojectofficers

andpersonnel.

•Personsbenefitorsuffer

becauseofactionsresulting

fromfalseorexaggerated

repo

rts.

•Thenumbersofbeneficiariescanbe

padded.

•Largeamountsofspendingatthe

endofthefinancialyearcanoccur

whentheEAand/orIAistryingto

meetitsdisbursementtargets—this

canresultintheEAorIAfunding

activitiesonanadhocbasisrather

thanfundingactivitiesthatare

directlyconnectedtotheproject,

andmoneycanbesiphonedoff.



withinEAand/orIA.

•Conductasmanyfieldvisits

aspossible.



theproject.

Appendix1

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inue

d

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inue

d on

nex

t pag

e

Appendix1 239

Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

Auditing

•Favorablereportshide

financialproblems.

•Personsbenefitorsuffer

becauseofactionsresulting

fromapooraudit.

•Payingorgivinggiftstotheauditor

toapprovefinancialadvancesthat

havenotbeensubstantiatedwith

receiptsortoignoreirregularities

intheaccountingorfinancial

statements.

•Auditorswithlimitedcapacitymay

limitauditstoassessingquantitative

outputsratherthanholistically

assessingwhethermoneywasused

foritsintendedpurpose.

•Checkthegeneral

consistencyofthefinancial

informationprovided.

•Verifyfinancialdataprovided

againstexternaldocuments

(bankstatements,external

confirmation)and

nonfinancialinformation

(physicalinventory).

VIII

. Fin

ance

, Ad

min

istr

atio

n, a

nd H

uman

Res

ourc

es R

isks

Fundtransfers

•Diversionoffundsbeingpaid

totheborrowers,EAs,orIAs.

•Personsresponsiblefor

divertingfundsgainan

advantageorbenefit.

•Fundsfromimprestaccountswere

usedfornonprojectrelatedexpenses.•Requestandreview

disbursementsand/orcash

flowstatementswhere

applicable.

Recruitmentof

personnel

•Coerciontoselectcertain

peopleforjobs.

•Personsresponsiblefor

coerciongainpoliticalor

othercapitalandunqualified

personnelgainemployment

opportunities.

•Hiringanaccountantoraprivate

auditorwhoisarelativeorclose

friendofanEAand/orIAofficial

orpersonnelmembertoexercise

“control”overhowauditsare

conductedandhowfinancial

statementsaredrafted.

•Checkforpersonallinks

amongtheEAand/orIA

officials.

•CheckforEAand/orIA

officialswithrelationsto

seniorgovernmentofficials

orpoliticians.

Appendix1

cont

inue

d

cont

inue

d on

nex

t pag

e


Act

ivit

yR

isks

(U

nw

ante

d

Prac

tice

s)

Co

st t

o t

he

Pro

ject

, C

ou

ntr

y, a

nd

/or

Pers

on

al G

ain

Exam

ple

sM

itig

atio

n M

easu

res

Paymentof

wagesand

salaries

•Payrollfrauds(e.g.,ghost

employeesorpersonnel

beingpaidmorethantheir

authorizedsalary).

•Persons“perpetratingfraud

gainfunds.

•Keepingterminatedemployees

onthepayrollandcollectingtheir

salaries.

•Paddingtheactualcostofwages.

•Makinghiddenpaymentsinthe

formoffuel,entertainment,and

allowances.

•Reconcilepayrollstatements

withthelistofemployees.

•ReviewtheEA’sand/orIA’s

listofemployeesandassess

whetheritisconsistentwith

theEA’sand/orIA’sstructure

andorganizationandthe

natureoftheproject.

Reimbursement•Falseorexaggerated

reportingofreimbursable

accountsand/orexpenses.

•Personsseektobe

reimbursedformoremoney

thantheyactuallyspent.

•Usingreceiptsforpersonal

purchasesinliquidatingsupposed

officialpurchases.

•Tamperingwithandusingtampered

officialreceiptsorsalesinvoices.

•Stringentlyapplythe

reimbursementguidelines.

CPS=countrypartnershipstrategy;EA=executingagency;IA=implementingagency;NGO=nongovernmentorganization;OAI=IntegrityDivision,OfficeoftheAuditor

General;PPN=projectpreparatorynote;PPTA=projectpreparatorytechnicalassistance;RRP=reportandrecommendationofthePresident;stakeholders=government,civil

society,privatesector,andexternalfundingagencies.

Source:ModifiedandsupplementedfromOverseasDevelopmentInstituteandManagementAccountingforNGOs.2006.M

appi

ng t

he R

isks

of

Cor

rupt

ion

in H

uman

itaria

n A

ctio

n.OverseasDevelopmentInstitute.Available:www.odi.org.uk/hpg/papers/TIU4.pdf;and,ADB.2005.T

echn

ical

Ass

ista

nce

to B

angl

ades

h fo

r Sup

port

ing

Goo

d G

over

nanc

e.

Manila.Available:www.adb.org/Documents/TARs/BAN/tar-ban-4140.pdf

Appendix1

cont

inue

d

APPENDIX 2

Governance Risk Assessment Checklist

A. General

TheGovernanceRiskAssessmentChecklistdescribedbelow(theGovernanceChecklist)providesanextensiveindicativelistofquestionstoassistwiththeassessmentofgovernance risks surroundinganyparticularorganizationoragency.Notallof thequestions listed in theGovernanceChecklistwillberelevantforeveryorganizationoragency.However,theseprovidequestionsthatcanbeusedtofacilitateobtainingdetailedinformationinavarietyofcircumstances.

Mostofthetimeagovernanceriskassessmentwillhavebeenconductedduringprojectpreparation,priortoaprojectcounsel’sinvolvement.However,theGovernanceChecklistcanbeusedtosupplementorcross-checkexistinginformationifnecessary.

B. Analysis of Results

The results of the information gathering exercise should be analyzed. Inconductingtheanalysis,projectteamsidentifythefollowing:

• riskareas,includingtherelativeextentandlikelihoodofoccurrenceofeventswithnegativeimpact;

• ineffectivecontrolsandpoorgovernancepractices;• processindicators,measurements,andbenchmarks;and• areaswhere riskpreventionor control improvementprocedures

couldenhanceoperations,accountability,andtransparency.

Theclearestwaytopresenttheresults isoftenintableformat,clearlyshowingthefinding,potentialconsequences,andrecommendedresponse.


C. The Checklist

1. Legal Framework

a. Legislative

• What laws, rules, and regulations govern the organization oragency?Identify

� thelegislationcreatingtheorganizationoragencyandincludeany additional government or presidential directives andorders thathavebeenmade in relation to theorganizationoragency,

� anyotherexternalrulesandregulationsdirectlyaffectingtheorganizationoragencyoritswork,and

� anylegislationthattheorganizationoragencyisresponsibleforadministering.

• Whatinternalrulesandregulationsexistwithintheorganizationoragency?

• Has the legislative and regulatory framework been regularlyupdatedorconsolidated?

• Areallrelevantpersonnelawareofthelegislativeandregulatoryframework?How?

b. Political

• What political influence is there on the organization or agency(i.e.,personnelappointments,policy,directives,andapprovals)?

c. Economic

• Whateconomicfactorsmostaffecttheorganizationoragency?

d. Social and Cultural

• Whataretheprincipalsocial,cultural,andreligiousinfluencesontheorganizationoragency?

Appendix2 243

e. Commercial

• Does the organization or agency competewith or subcontractservicedeliverytocommercialorganizations?

• Are there other commercial pressures on the organization oragency?

f. Changes and Challenges

• Whatchangesorchallengesdoestheorganizationoragencyfaceintheshort,medium,andlongterms?

g. Relationships with Other Agencies

• What other government, semi-government, or nongovernmentagencies (NGOs) does the organization or agency deal with?Considerthefollowing:

� Whatisthebasisoftherelationshipoftheagencies? � Whatisthenatureoftheinterrelationshipineachcase? � In what respects is the organization or agency dependentupontheperformanceofthoseotheragencies?

h. Stakeholders

• Does the organization or agency have an external focus on theneedsofserviceusersandstakeholders,reflectingdiverseviewsindecisionmaking,producinggreaterownershipamongstakeholders,andmaintainingtheorganization’soragency’sclearpurpose.

• Whoarethekeystakeholders?• Does the organization or agency work in partnership with

stakeholders?Askthefollowingquestions:

� Isthereaclientorcustomerfocus? � Dostakeholdersfeelinvolved? � Isthereequitabletreatmentofstakeholders?


• Arestakeholdersmadeawareoftheirrightsandservicestandards?How?

• Whatcommunicationchannelsexistwithstakeholders?• Are policies (such as investigation and prosecution policies)

communicatedtostakeholders?• Arefeesandchargesthatareimposedonstakeholdersprominently

displayedatalloftheorganization’soragency’soffices?

i. Public Relations

• Is the organization or agency open, providing easy access toinformationtoall?

• Dopoliciesaccountforregionalstakeholders,theilliterate,clientswhospeakotherlanguages,etc.?

• Does the organization or agency encourage feedback or inputfrompersonnelandstakeholders?How?

• Isthereapublicrelations,media,and/orcomplaintsofficer?• Is the public relations, media, and/or complaints officer aware

of theAsianDevelopment Bank’s (ADB) Integrity Principles andGuidelines, and the role of the Office of Anticorruption andIntegrity(OAI)?

• Is there an effective complaints procedure? Ask the followingquestions:

� Whatrecordsarekept? � Are complaints analyzed to assess effectiveness and servicedelivery?

� Isactiontakentoredesignprocedures?

• Istheprocedureforhandlingcomplaintsadequatelycommunicatedtopersonnelandstakeholders?

• Does the procedure require that all complaints relating tocorrupt,fraudulent,collusive,orcoercivepracticesarereferredtoOAI?

• Arepersonneladequatelytrainedinhandlingcomplaints?

Appendix2 245

2. Mission

Does the organization or agency have a mission statement that is clearly communicated to personnel and stakeholders? Is there an appropriate strategic plan through which the organization or agency implements its mission?

a. History

• Whatisthebriefhistoryanddevelopmentoftheorganizationoragency?

b. Purpose and Function

• Isthereamissionstatementidentifyingthepurposeoftheorganization oragency?

• Is the mission statement made available to personnel and stakeholders?How?

c. Strategic Plan

• Istherealong-termstrategicplan?Ifso,obtainthemostrecentcopy.Whatinformationiscontainedintheplan?Doesitsetouttheorganization’soragency’s

� mission, � plan, � priorities, � indicators, � budget,and � otherrelevantfactors?

• Doesthestrategicplanconformtothemissionstatement?• Doesthestrategicplanconsiderlocalissues?• Istherelocalinputtothestrategicplan?• Isthestrategicplanrealisticandbaseduponachievableoutcomes?• Doesthestrategicplanconsiderresourceavailability(i.e.,skillsand

supportservices)?


• Is the strategic plan zero-based (i.e., are resources required tofulfilloutcomes)?

• Arespecificofficersresponsibleforspecificoutcomes?• Were the assumptions upon which the strategic plan is based

publishedinadvance?• Arerisksidentified,suchastheeffectofchangesinassumptions?• Doesthestrategicplanconsiderexpectedfutureevents?• Areplansdiscussedwidelybeforepublication?• Isthestrategicplanformallyapproved?Whogivestheapproval?• Isthestrategicplanmadeavailabletostakeholders?• Areoutcomescomparedtothestrategicplan?• Arevariationstothestrategicplanidentifiedpromptly?

d. Powers

• Whatpowersdoestheorganizationoragencyhave?Doesithavepower to

� grantlicenses, � providebenefits, � commenceordropactions, � authorizeexpenditure,and/or � undertakeregulatoryfunctions?

e. Weaknesses

• Hasmanagement identifiedanyweaknesses in theorganizationoragency?

• Doesmanagement have a plan tominimize or eliminate theseweaknesses?

f. Independence

• To what extent is the organization or agency independent ofgovernment?

• Is the organization or agency funded in whole or part by thegovernment?

• Areanyoftheorganization’soragency’sboardmembersorseniormanagementappointedbyaministerofthegovernment?

Appendix2 247

g. Integrity

• How is the integrity of the organization or agency viewed byinternalandexternalparties?

h. Professionalism

• Does the organization promote professional conduct of itspersonnel(skills,conduct,leadership,etc.)?

g. Alternatives

• Wouldanalternativestructureprovideamoreeffectivemeansofmeetingtheobjectivesoftheorganizationoragency?Forexample,wouldtheorganizationoragencyperformbetterifit

� mergedwithanotherexistingorganizationoragency, � privatized, � splitintosmallerunits,or � used a commercial organization to undertake some of itsfunctions?

3. Structure

Is the organization or agency appropriately structured to fulfill its mission and are there clear lines of accountability and responsibility?

a. Leadership

• Does the organization or agency have an effective leadershipthat establishes a vision; generates clarity about strategy andobjectives,roles,andresponsibilities;andfostershighstandardsofbehavior?

• Dotheleaderspromotehighethicalstandards?• Dotheleadersregularlycommunicateopenlyandhonestly?• Dotheleadersbasedecisionsonpublicpolicyprinciples?• Do the leaders take action against thosewhobreach rules and

regulations?


• Dotheleadersprotectpersonnelwhoreportwrongdoing?• Do the personnel and stakeholders have confidence in the

organization’soragency’sleadership?• Is leadership traininggiven to seniormanagerson inductionor

promotion?

b. Locations

• Howmanybranches,offices,oragenciesarethere?• Whyhasthisstructurebeenselected?• Aretheresurplusbranchesorduplicatedactivities?• Doesthisstructuremeettheclients’needs?

c. Management

• Howmanymanagementlayersarethere?• Isthestructurebalanced(i.e.,aremanagersabletomanagetheir

subordinates)?• Isthereanyoverlaporduplicationinthemanagementstructure?• Isthemanagementstructureflexible?• Arethereclearandshortreportinglinesbetweenmanagers?• Is there a clear demarcation of responsibility between

managers?• Arepolicy,support,andcontrolfunctionsdemarcated?• Iseachfunctionalareaclearlydefinedandarethereclearlydefined

policies and/or rules regulating the relationship between andresponsibilitiesowedtootherfunctionalareas?

• Is management’s discretion clearly delineated and exclusionsidentified?

• Whatistheschemeofdelegation?Forexample

� Aremonetaryvaluesplacedondelegationlimits? � Towhatextentcanregionalofficesmakedecisions?

• Arejuniorandmiddlemanagersadequatelyinformedofdecisionsbyseniormanagement?

• Aredecision-makingpowersdelegatedtofrontlinemanagersasfaraspossible?

Appendix2 249

d. Accountability

• Is a specifically identified officer made accountable for keyrequirements?Isthereanofficerwhoisresponsiblefor

� budgetpreparation, � accountspreparation, � maintenanceofinternalcontrols,and � compliancewithlawsandregulations?

• Whatistheofficer’ssenioritylevel?

e. Reporting

• Is there a clear timetable for submitting reports? Are reportspreparedontime?

• Isunnecessarydataexcludedfromreports?• Is there a policy ofmarking files confidential or using ”exempt

information”provisions?

f. Culture

• Is the organization’s culture based on openness and honesty,where decisions and behaviors can be challenged and there isclearaccountability?

• What is thecultureof theorganizationoragency (internalandexternalperceptions)?

• Doesmanagementpromoteaparticularculture?

4. Activities and Service Delivery

Does the organization or agency implement its objectives in an effective and efficient manner?

a. Processes

• Whataretheprincipalservicedeliverymechanisms?Considerthefollowing:


� Aretheservicedeliverymechanismsflexibleandresponsive? � Doestheorganizationoragencyinitiateservicedelivery,andhowdoesitidentifyandrankneeds(e.g.,repairs)?

b. Resources

• What resources are required to deliver the organization’s or agency’sservices?

• Are there resource shortages in any areas (skills, technology, equipment,and/orfunding)?

• Whatstepshastheorganizationoragencytakentoremedytheshortage?

c. Short-Term Planning

• Isthereashort-termoroperationalplan?Howoftenisitpreparedandupdated?Obtainacopyoftheplan.

• Istheplanashort-termimplementationoflong-termstrategy?• Doestheplanconsiderlocalissues?• Istherelocalinputintotheplan?• Istheplanrealisticandbaseduponachievableoutcomes?• Doestheplanidentifyrisks?• Doestheplantakeresourceavailabilityintoaccount(i.e.,skillsand

supportservices)?• Is the plan zero-based (i.e., are resources required to fulfill

outcomes)?• Arespecificofficersresponsibleforspecificoutcomes?• Weretheassumptionsonwhichtheplanwasbasedpublishedin

advance?• Istheplanformallyapproved?Whoapprovedtheplan?• Wastheplandiscussedwidelybeforepublication?• Areoutcomescomparedtotheplan?• Arevariationsoftheplanidentifiedpromptly?

d. Budgeting

• Areshort-andlong-termbudgetsprepared?Obtainacopyofthebudget(s).

Appendix2 251

• Arebudgetslinkedtolong-andshort-termstrategicplans?• Are there separate capital and development budgets, including

overthelongandshortterms?• Whenisthebudgetpreparedoramendedandwhatisthetiming

ofthepreparationandapprovalprocess?• Who plans the budget? Is it the central government or the

organizationoragency?• Isthebudgetformallyapproved?Whoapprovedtheplan?• Is the budget zero-based (i.e., are resources required to fulfill

outcomes)ortop–down?• Is the budget flexible within vote codes (i.e., can funds be

redistributedwithintheorganizationoragency)?Whatapprovalisrequired?

• Areindividualbudgetholdersidentified?Whatdiscretiondotheyhaveinspendingovertheirbudget?

• Doesthesystemconsidersurplusesorshortfall?• Areoutcomescomparedtoplan?• Arevariationsidentifiedpromptly?• Dorevenuebudgetsconsiderissuesrelatedtocapital(depreciation,

interest,andrepairs)?• Howaredonorfundsaccountedfor?• Isthereanunofficialbudget?

e. Workflow Management

• Arealljobsdocumentedatinitiationanddated?Isareceiptgivenifappropriate?

• Howisworkallocated?Aredeadlinesset?• Is thereworkflowplanning, forecasting,and/orscheduling?Are

peaksandtroughsinworkflowidentified?• Isthereanoperationsmanual?Whenwasitlastupdated?• Do personnel work in teams? Are the teams activity-based or

functional?• Do operations personnel have regular contact with clients

regardingworkprogressorproblems?• How is workflow monitored (time, resources used, activities,

outputs,andtimeliness)?Inparticular,are


� keystagesanddecisionsidentified,and � bottlenecksandbacklogsmeasured?

• How isworkflow reported (i.e.,with statistics, or are problemslisted)?Isreportingcomplete,accurate,andtimely?Inparticular,

� Whatdocumentsareused? � Areproductivityandefficiencymeasuredandcompared? � Isthereaproactiveapproachtoformsdesignandinformationcollection?

� Aredefectsandfailuresreported? � Isdowntimereported? � Aredevelopmentsandefficienciesreported? � Isfeedbackencouraged? � Is comparison made of service delivery times to identifypotentialqueuejumping?

• Aretherequalitycontrolmechanisms?• Areformscarefullydesigned?Thatis,

� Aretheyclear? � Aretheycomprehensive? � Dotheyidentifykeyissues? � Aretheyproactiveindetectingpotentialerrorsoffrauds? � Aretheyredesignedinlightofexperience?

• Isthereajobacceptanceorrejectionpolicy?• Is thereahealthandsafetypolicy? Is thereahealthandsafety

officer?• Arethereparticularworkpracticeissues(i.e.,stress,overwork,and

nightshifts)?

f. Performance Indicators

• Areperformanceindicatorsorworkflowmeasurementindicatorsidentified?

• Arekeyindicatorsisolated?• Areperformancemeasuresused?When?How?• Howareefficiencyandeffectivenessmeasured?

Appendix2 253

• Isperformancebenchmarkedtointernal,national,orinternationalstandards?

g. Technology

• Whattechnologiesareused?• Areproprietarytechnologiesprotected?• Whatdevelopmentsintechnologyarerequiredand/orforecast?• How does the organization or agency respond to technology

requirements?

h. Manuals and Guidance

• Are there adequate policy and procedure manuals, guidancestatements,andpolicies?Viewthedocumentsandquestion:

� Are they comprehensive and clear (are all major areas covered)?

� Aretheyavailable.toallrelevantpersonnel? � Havetheybeenupdatedregularly?

• Is there an accessible library and/or knowledge base system tosupporttechnicalissues?

• Aretherestandardsand/orqualitycontrolrequirements?

5. Resources

How does the organization or agency identify the resources necessary for implementing its objectives; obtain, use, and protect its resources; and measure the effectiveness of its resource use?

a. Human Resources

• Reviewtherecruitmentprocedures—methods;sources;educationrequirements;selectioncriteria(curriculumvitae,interview,and/ortest);qualifications;induction;probation;andcosts.

� Aretherecruitmentpoliciesandprocedurestransparent?Aretherecruitmentproceduresfairandequitable?


• Are there guidelines on the use of temporary personnel andcontractors?

• Isthereajobdescriptionforeachposition(indicatingqualifications,skills, tasks, and responsibilities)? Are there contracts ofemployment?

• Doeseachofficerhaveacareerplan?• Arepersonnelmadeawareoftheirspecific role, responsibilities,

delegations(inwriting),andreportinglines?• Doeseachmemberofpersonnelholdasingleposition?• Isthereapersonnelmanual?• Is there a code of conduct for allmanagers and personnel? Is

thecodeof conductcommunicated toallpersonnelupon theirinductionandmadeavailablethereafter?

• Whatskillsarerequiredandhowaretherequiredskillsidentifiedand obtained? Are there internal and external training optionsofferedtopersonnelsothattheycanobtaintheneededskills?

• Isaregulartrainingneedsanalysisconducted?• Doeseachpersonnelmemberhaveaclear trainingplan? Is the

training plan recorded and does each personnel member havereadyaccesstothetrainingplan?

• Ispersonnelperformancemeasuredorassessed?Howoften?Whatmethodisusedtomeasureorassesspersonnelperformance?

• Is personnel performance measured using clear, objective, andquantifiablemeasures?Askthefollowing:

� Howfrequentlyispersonnelperformancereviewed? � Whatmeasuresareusedtoreviewpersonnelperformance—results,training,targets,experience,etc.?

� Who assesses a personnel member’s performance—a linemanager,someonefromthehumanrelationsdepartment,oraperformancereviewcommittee?

� Isthereaprocedureforreviewingperformanceassessments? � Does the performance assessment affect the personnelmember’scareer?

• Whatistheremunerationpolicy?• Howdoestheremunerationpolicycomparetootheragenciesand

privatefirms?• Ispromotionbasedonmerit?Ifso,askthefollowingquestions:

Appendix2 255

� Istherepoliticalinfluence? � Istherecronyismorfavoritism? � Arethereanyotherunduepreferences? � Arepromotionopportunitieswidelypublicized?

• Arethereadequatepromotionprospects?• Aretherebonusand/orrewardschemes?Arethebonusesand/or

rewardslinkedtoclearlydefinedpersonnelperformancemeasuresthateachpersonnelmembercanworktowardachieving?

• Are there benefit schemes (subsidized housing, medical, food,allowances, etc.) and do they provide adequate incentives forstrongperformance?Arethey independentorpartofthetermsofengagement?

• Isthereapensionscheme?Inparticular,

� Can a personnel member’s pension benefits be reduced (i) in theeventofamisdemeanor, (ii) in theeventofgrossfraudorcorruption,(iii)atall?

� How does the scheme compare to the private sector’sschemes?

• Can personnel choose their work location and apply fortransfers?

• Arepersonnellocatedinappropriateplacesthatmeettheclients’needs?Alsoask:

� Arepersonnel reluctant tobebased in regionsor theheadoffice?

� How does the organization or agency manage personnelconcernsaboutworklocations?

• Doestheorganizationoragencyactivelypromotehighstandardsofethicalbehavior?Inparticular, � Isthereastatementofethicalstandardsorprinciples? � Is the statement of ethical standards or principlescommunicatedto,understoodby,andappliedtopersonnel?

� Is the statement of ethical standards or principles regularlyupdated?


� Howaretheethicalstandardsmonitored? � Howcananindividualreportapotentialconflictofinterestorobtainadviceonethicalissues?

� Arethereup-to-dateregistersofgifts,personneldeclarationofconflicts,etc.?

� Whatdisciplinaryproceduresareinplacefornoncomplianceorbreachesofthecodeofethics?

• Whatisthedisciplinaryscheme?Askifthedisciplinaryscheme

� isunderstoodbyallpersonnel, � requires that decisive action be taken in the event ofbreaches,

� requires an investigation into the alleged behavior by anindependentthirdparty,

� putsintoplaceconfidentialitymeasuresthatapplythroughoutthecourseoftheinvestigation,and

� providesanappealsprocess?

• Isthereaninternalorexternalgrievancemechanism?• Whatabilitydomanagershavetodisciplinepersonnelorterminate

theiremployment?• Whataretheterminationandretirementpolicies?• Istimeorattendancerecorded?Ifso,isthismatchedtoworkload?

Howisabsenteeismidentified?• What is the level of personnel morale? What is the level of

personnelturnover?• Howmanypostsareunfilled?• Isthereasystemtoidentify“ghost”employees?• Arethereopportunitiesforjobrotationwhichwouldallowfraud

tobedetected?• Howishumanresourcedatarecordedandstored?Whatreports

areproduced?• Howdoestheorganizationoragencydealwithhealthandsafety

issues?Howdoesitdealwithinjuredpersonnel?

b. Property and Equipment

• Reviewthefollowingcategoriesofplantandequipmentownedorusedbytheorganizationandmakeassessmentsaboutitsfeatures:

Appendix2 257

� Buildings—age,locations,andcondition; � Plant—age,adequacy,andpreventativemaintenance; � Office equipment—adequacy, age, preventativemaintenance,andconditioni.e.,neworused;

� Vehicles—adequacy,andmaintenance; � Information technology (IT)—age, network, downtime,availability,use,disasterplan,preventativemaintenance,andsecurity;and

� Other—items such as physical protection equipment andweapons.Askthefollowinginrelationtophysicalprotectionequipment:

(i) Aretheassetsproperlyrecordedandsecured?(ii) Arephysicalchecksperformedoftheassets?(iii) Aresurplusassetsidentified?(iv) Whatadditionalequipmentisneeded?(v) Whatistheacquisitionpolicy?(vi) Isadequatecapitalavailableforbuyingnewequipment?

Howisitobtained?

c. Funding

• Howistheorganizationoragencyfunded?• Aretheredelaysinreceivingfunds?• Arethereunofficialfunds,trustaccounts,off-balance-sheetdonor

funding?

d. Data and Knowledge Base

• Istherealibraryaccessibletoallpersonnel?Inparticular,

� Areallrelevantexternalmaterialscollectedandavailable? � Areinternalmaterialsdisseminated? � Arepresscuttingscollected? � Isinternetaccessavailable? � Are case studies and other experience recorded for futurereference?


• How is information archived? Are archive facilities adequate(secure,protected,andrecorded,etc.)?

• Doestheorganizationoragencyrecognizethevalueofdata?• Is data and intellectual property protected from damage and

theft?• Whatinformationsystemsexist?Isthereaninformationtechnology

groupandaninformationtechnologymanual?• Howisinformationsharedwithintheorganizationoragency?

e. Communications

• Does the organization or agency have access to adequatecommunicationsfacilitiessuchas

� telephone, � mobilephones, � radiocommunications, � fax, � internet,and � courierservices?

f. Support Services

• Howdothefollowingtrainingfacilitiesandmethodsoperate:

� Wherearethetraininglocations? � Whoarethetrainers?Whatistheirprofessionalstandardandwhattraininghavetheyundertaken?

� Whattrainingfacilitiesareavailable.Whatisthequalityoftheavailablefacilitiesandequipment?

� Howmanypersonnelhaveundergonetraining? � Does the training curriculum match the organization’s oragency’sneeds?

� Doestheorganizationoragencyruntrainingonacontinuousbasis?

� Whatplanningfortrainingisundertaken? � Are any joint training sessions conducted with otherorganizationsoragencies?

Appendix2 259

� How is training conducted—by lecture, discussion, casestudies, seminar, homework, on the job training, usingmentors,and/orusingcoaching?

� Istrainingevaluated? � Whatqualificationsareawardedattheendofthetraining?

• Isthereasecurityteam?Howdoesthesecurityteamfunction?• Is there an administration team? How does the administration

teamfunction?• Are thereother support services suchas technicalor laboratory

services?

6. Internal and Financial Controls

Accountability should be supported by systems and processes such as risk management, financial management, performance measurement, and internal financial controls. These systems and processes should be robust and produce reliable and timely information to enable better decisions about what needs to be done to achieve the organization’s or agency’s objectives.

• Whoisresponsibleforestablishinganinternalcontrolsystem?• Isthereaninternalauditdepartment?Ifthereis,

� Towhatextentistheinternalauditdepartmentindependent—what are its reporting lines, does it operate independently,andwhatisitsscope?

� Are there sufficientpersonnelworking in the internal auditdepartmentwithadequateskills,grades,andexperience?

� Aretheinternalauditdepartment’sreportsobjective? � Doestheinternalauditdepartmentusemoderntechniques,suchassystembasedauditing,andriskanalysis?

� Areinternationalstandardsapplied? � Arereportsfollowedupandactedupon?

• Isthereaninternalfraudand/orcorruptioninvestigationunit?• Isthereapolicyonreportingfraudorcorruptiontothepoliceor

totherelevantanticorruptioncommission?


• Basedonexistingstructures,policies,andprocedures, isthereawaytoensurethateventsoffraudand/orcorruptionarebroughttotheattentionofOAI?

• Areaccountspreparedonacashoraccrualbasis?Querywhether

� abalancesheetisprepared,or � an annual report is produced? If so, find out when is itproducedandobtainthelatestcopyofit.

• What major procurement does the organization or agencyundertake?Whenundertakingaprocurementprocess.

� Arethereclearprocurementpoliciesandprocedures? � Aretherepoliciesforthedisposalofassets? � Isthereanindependenttenderunit? � Docontractorsagreetocomplywithabusinessethicspolicy? � Arecontractorssubjecttopenaltiesforbreachesofcontractandtheprocurementpolicy?

• Isthereariskmanagementplan?• Isthereawhistle-blowingorconfidentialreportingsystem?Under

thesystem,

� Arethererewardsforreporting? � Arewhistle-blowersofferedanyprotections?

• Istherearegularcomparisonofactualresultstobudgetedtargets?• Arereportsadequate,complete,accurate,andtimely?• Arebestvalueprinciplesusedtoensureeffectiveness,efficiency,

andeconomy?• Whatbillingproceduresare inplace toensurecompletenessof

income?Are

� allfinancialandnonfinancialtransactionscapturedatthesource,and

� adequateindependentreconciliationsofthebooksconductedpriortoanaudit?

Appendix2 261

• Areproceduresinplacetoensurethatpaymentismadeonlyforgoodsandservicesthathavebeensupplied?

� How are suspect, unusual, or irregular transactionsidentified?

• Are there established procedures or complaints mechanismsthatprovideforclientstoreportatransactionthathasnotbeenconductedproperly?

• Arethereclearrulesrequiringtheretentionofrecords?Forhowlongmustrecordsberetained?

• Are there penalties for failing to record transactions, delayingrecordingtransactions,andalteringordeletingrecords?Dotheorganization’soragency’ssystems

� identifywhichpersonsenteredintowhattransactions,and � makeitclearwhoisresponsibleforenteringspecificdata?

• Isthereadequatesegregationofdutiesamongpersonneltoavoidconflictsofinterest?

• Arethereclearguidelinesregardingtheclaimingofexpensesandallowances?

• What is the organization’s or agency’s history of fraud andcorruption?Whatarethetypes,areas,andamountsoffraudandcorruption, and the organization’s or agency’s response to thefraudandcorruption?

• Aretherestatisticsonthetypesandvolumesoftransactions?• What steps are taken to identify fraud or error? Does the

organizationoragencyundertakeanydatamatchingof

� publicrecords, � internalrecords,or � recordsfromotheragencies?

• Are account balances regularly reconciled against independentand reliable recordsor confirmedbydirect communication (bypersonsindependentofrelevantrecordkeeping),particularlyfor

� bankstatements, � creditorsstatements,


� debtors’confirmationletters, � bankdepositconfirmations,and � assetsheldbythirdparties?

• Arespotcheckscarriedouttodetectandprotectagainstfraudulentactivitiesandinefficientprocessessuchas

� ghostemployeesremainingonthepayroll, � fictitiousinvoicesororganizations, � untimelycompletionofrecords, � personnelabsenteeism, � cashshortages, � misuseofresources, � stockshortages, � equipmentshortages, � procurementnoncompliance, � account balances not being reconciled (i.e., by checkingagainstbankstatements),and

� suspenseaccountbalancesnotbeingcleared?

• What is the level of cash handling (income and expenditure)? Askthefollowing:

� Istherearegisterofcashlocations? � Arepersonneladequatelytrainedincashhandling? � Canthelevelofcashbereduced? � Isthereadequatesegregationofduties? � Isthereregularrotationofpersonnel?

• How often are external audits undertaken? If they have beenconducted,ask

� Aretheauditorsreliable? � Havetherebeenspecialaudits? � Whoobtainstheauditreportsandresolutionofpoints?

• Areallimportantmeetingsbetweentheorganizationoragencyandtheirclientsattendedbyatleasttwoagencypersonneltopreventfraud(i.e.,whencertificatesaresuppliedorapprovalsgiven)?

Appendix2 263

• Depending upon the nature of the organization or agency, itmaybenecessarytoexamineotherspecificareasinmoredetail,includingthefollowing:

� storesandstockcontrol, � purchasing, � contracting, � payments, � receipts, � payroll, � cashhandling, � lending,and � grantsand/orclaims.

7. Other Issues

When conducting interviews or developing questionnaires or surveys, it may be beneficial to ask respondents the following general questions.

• What do you think are the most problematic areas in theorganizationoragency?

• Whataretheorganization’soragency’sgreateststrengths?• Whatkeystepsdoyouthinktheorganizationoragencycantake

toimproveitsfunctioning?• Whatdoyouperceiveasbeingthekeyfinancialandservicedelivery

risksinyourarea?

Printed in the Philippines

Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.orgISBN: 978-971-561-872-4Publication Stock No. TIM090586


Inclusive economic growth, environmentally sustainable growth, and regional integration are the Asian Development Bank’s (ADB) strategic priorities. Governance is a key issue and a driver of change that cuts across these strategic priorities. To successfully employ these strategic priorities, ADB staff need to understand the particular governance and anticorruption issues and risks related to each strategic priority. They must also be able to incorporate measures into ADB projects that promote good governance and prevent corruption. This Governance Guide seeks to equip project counsel with the knowledge to assist project teams in integrating governance and anticorruption measures into ADB projects and across ADB’s core priorities.

About the Asian Development Bank

ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.


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