Governance: Sound

Development Management
 Governance: Sound
Development Management

August 1995
Published by Asian Development Bank, 1999

The Asian Development Bank encourages the use of the material

presented herein, with appropriate credit given to ADB. Please address
inquiries for copies to the Chief, Office of External Relations, Asian
Development Bank, P.O. Box 789, 0980 Manila, Philippines.

All rights reserved

ISBN: 971-561-262-8
Publication Stock No.: 090699
Contents

Executive summary v
Introduction 1
Good governance defined 3
The elements of good governance 7
Accountability 8
Participation 9
Predictability 10
Transparency 11
Interlinkages among the elements of governance 12
The Bank’s concern with governance quality 15
Policy context of the Bank’s project lending 15
Focus on equity and development performance 16
Project quality 17
The East Asian experience 18
Outlook for the future 19
The Bank’s approach to governance issues 21
The Bank’s charter and governance activities 21
Need for flexible country-specific approaches 24
Promoting the elements of good governance in Bank operations 25
Building governance capacity 26
Participatory development processes 33
Legal frameworks 38
Information openness 42
The Bank’s modalities for enhancing governance in DMCs 45
Resource implications 49
Reporting arrangements 51

iii
Abbreviations

ADF - Asian Development Fund

BIR - Bureau of Internal Revenue
CPC - Committee for Planning and Cooperation
DMC - developing member country
GCI - General Capital Increase
GDP - gross domestic product
IA - Irrigators’ Association
IMF - International Monetary Fund
KESC - Karachi Electricity Supply Corporation Limited
MOF - Ministry of Finance
NGO - nongovernment organization
NIA - National Irrigation Authority
OECD - Organisation for Economic Co-operation
and Development
OGC - Office of the General Counsel
O&M - operation and maintenance
PBPM - Program Budgeting and Project Monitoring
PPBF - planning, programming, budgeting, and
financing process
RWSS - rural water supply and sanitation
SPO - Strategy and Policy Office
TA - technical assistance
TFIPQ - Task Force on Improving Project Quality
UNDP - United Nations Development Programme
VAT - value-added tax

iv
Executive summary

(i) In recent years, there has been increasing concern about

governance issues in the development debate. In February 1994,
the President issued interim staff instructions on governance.
Subsequently, in May 1995, the Board considered a Working Paper
on the subject. The present Paper takes into account the views
expressed by the Board at that time and sets out the role, approach,
and policy of the Bank in relation to governance issues.

(ii) Being concerned directly with the management of the

development process, from the Bank’s point of view, governance
has to do with the institutional environment in which citizens
interact among themselves and with government agencies/
officials. The capacity of this institutional environment is important
for development because it helps determine the impact achieved
by the economic policies adopted by the government. Hence,
this capacity, and the governance quality it reflects, is a vital
concern for all governments.

(iii) Although policy aspects are important for development, the Bank’s
concept of good governance focuses essentially on the ingredients
for effective management. Irrespective of the precise set of
economic policies that find favor with a government, good
governance is required to ensure that those policies have their
desired effect. In essence, it concerns norms of behavior that help
ensure that governments actually deliver to their citizens what
they say they will deliver.

(iv) Similarly, the experience so far, especially within the region, shows
that successful development has taken place in countries with
different political systems. However, the common features that
stand out in respect of the high-performing economies are stability
in broad policy directions, flexibility in responding to market
signals, and discipline in sticking with measures necessary for

v
 meeting long-term objectives despite short-term difficulties, all
hallmarks of sound development management, i.e., good
governance.

(v) A basic issue that arises in relation to governance is the proper

role of government in economic management. With governments
having limited access to information, there is a growing consensus
that markets generally allocate resources more efficiently.
However, even in market economies, governments are expected
to perform certain key functions, namely (a) maintaining
macroeconomic stability, (b) developing infrastructure,
(c) providing public goods, (d) preventing market failures, and
(e) promoting equity.

(vi) Governments decide the policies they adopt to perform these

functions. Once those policy choices are made, good governance
is required to make sure that implementation is effective and
consistent. As a development partner, the Bank has a clear and
direct interest in the capacity of borrowing governments to fulfill
their economic role by implementing the associated policies. More
specifically, the success of the Bank’s project investments depends
crucially on the efficacy of the institutional framework in
developing member countries (DMCs) and the consequent
capability for purposive implementation.

(vii) A number of multilateral organizations have reflected on the

elements of governance and their relation to development. Insofar
as the Bank is concerned, the approach of the World Bank is the
most relevant. For the World Bank, the essence of governance is
sound development management, and the key dimensions of
governance are public sector management, accountability, the
legal framework for development, and information and
transparency.

(viii) The Bank, too, regards questions of governance from the

standpoint of their relation to the effectiveness with which
development assistance is used, the impact of development
programs and projects, and the absorptive capacity of borrowing
DMCs. However, the Bank’s analytical framework for addressing
governance issues draws a distinction between, on the one hand,

vi
 elements of good governance and, on the other, the specific areas
of action (e.g., public sector management), in which they could
be promoted or their existence enhanced.

(ix) Accordingly, and building upon the approach of the World Bank,
the Bank has identified four basic elements of good governance:
accountability, participation, predictability, and transparency.

(x) The Bank’s interest in governance issues has intensified, over time,
as a result of several factors. These include (a) the growing
recognition of the importance of the policy environment in which
development takes place, (b) an increasing focus on equity issues
and development performance, (c) the lessons highlighted by the
Task Force on Improving Project Quality, and (d) the experience
of the high-performing economies of the region.

(xi) The Bank’s approach to governance issues will be guided by the

provisions of its Charter. These explicitly exclude political activities
and considerations. Hence, the Bank cannot act as an agency for
political reform in DMCs. Nevertheless, if on purely economic
grounds, the Bank has considered an action or measure worth
supporting, it has not hesitated to do so even though the action
or measure may have had political implications. The Bank’s work
on governance will follow this pragmatic approach.

(xii) Differences in political history have resulted in a diversity of

political systems and institutional cultures in the Asian and Pacific
region. None of these can reasonably claim to have any
comparative advantage from the point of view of governance.
There can, accordingly, be many institutional alternatives for
managing the development process soundly. When applying the
criteria of good governance, therefore, the Bank will take into
account the characteristics and situation of individual countries.

(xiii) To make the elements of good governance operationally relevant,

the Bank needs to translate them into specific areas of action. To
this end, this Paper indicates some ways in which these elements
can be promoted in the context of Bank operations. In most of
these areas, the Bank is already contributing to quality governance
and has been doing so for some time. The areas of action include

vii
Accountability (building government capacity)
• public sector management
• public enterprise management and reform
• public financial management
• civil service reform

Participation (participatory development processes)

• participation of beneficiaries and affected groups
• public sector/private sector interface
• decentralization of public and service delivery functions
(empowerment of local government)
• cooperation with nongovernment organizations (NGOs)

Predictability (legal frameworks)

• law and development
• legal frameworks for private sector development

Transparency (information openness)

• disclosure of information.

(xiv) The Bank will integrate governance dimensions into its operations.
To the extent possible, Bank-supported programs and projects
will be designed such that they raise governance quality in the
sectors concerned (e.g., through inclusion of appropriate policy
measures, project components, or technical assistance [TA]). In
addition, the Bank will provide, on request, advisory TA for
specific governance-oriented policy studies, seminars, and
training. In all cases, the guiding principle for the Bank will be to
act on the basis of DMC requests, rather than to seek loan
conditionalities.

(xv) The Bank’s modalities for enhancing governance in DMCs

encompass the full range of its operations. In due course, it is
likely that capacity-building activities and assistance for legislative
reform will become central pieces in the Bank’s efforts to help
improve governance in DMCs.

(xvi) Enhancing the governance dimension of its development

assistance will have resource implications for the Bank. These

viii
 relate to staffing, staff training, staff consultants, business travel,
and loan and TA resources. With respect to staffing, the Bank
would need to strengthen in-house expertise in various aspects
of governance and institutional development. However, given the
current constraints on the budget, any new staff positions required
would have to be accommodated through ongoing redeployment
efforts within the Bank. Necessary trade-offs with other activities
of lower priority would be worked out. Similarly, insofar as the
other resource implications are concerned, these would be
adjusted so as to be accommodated within the relevant budget
allocations.

(xvii) Two years after Board approval of the Bank’s operational policy
on governance issues (i.e., in late-1997), a Board paper will be
circulated, analyzing the Bank’s experience with governance
activities, proposing modifications to the operational approach,
as necessary, and indicating more specific resource implications.

ix
Introduction

I
n recent years, there has been increasing concern about gover-
nance issues in the development debate. This has been reflected
in the ongoing discussion within the Bank on the objectives, pri-
orities, and approaches to its operational programs. It received attention,
for example, during the discussions leading to the fifth replenishment
of the Asian Development Fund (ADF VI). The document ADF VI:
Report of the Donors noted “the vital connection between sound and
responsive systems of public administration and the effective and
equitable operation of the economy.”1 In this context, reference was
also made to the need for “participatory and democratic frameworks”
and for strengthening “the legal system and regulatory agencies.” Simi-
larly, during the negotiations concluded last year for the Bank’s Fourth
General Capital Increase (GCI IV), emphasis was placed on governance
and its impact on the effectiveness of Bank operations.2 It was indicated
that the Bank would seek to address governance issues in its operations.
In view of the importance and urgency of the subject, the Presi-
dent issued interim staff instructions on governance in February 1994.
Subsequently, in May 1995, the Board considered a Working Paper on
the subject.3 The present Paper takes into account the views expressed
by the Board at that time and sets out the role, approach, and policy of
the Bank in relation to governance issues.

1 Doc. R230-91, Revision 1, Final, Replenishment of the Asian Development Fund and the
Technical Assistance Special Fund, 16 January 1992. ADF VI: Report of the Donors was an
attachment to this document.
2 Doc. R40-94, Fourth General Capital Increase (GCI IV): (Draft) Report of the Board of
Directors to the Board of Governors, 14 March 1994 (Attachment 1).
3 Doc. Working Paper 1-95, Governance, 15 March 1995.

1
 To this end, the chapters that follow (i) define what governance
should mean for the Bank, (ii) identify elements of good governance,
(iii) explain the factors that have intensified the Bank’s concern with
governance issues, (iv) discuss two general considerations that have a
bearing on the Bank’s approach to governance, (v) relate the elements
of good governance to Bank operations, and (vi) indicate specific ways
in which the Bank will address governance issues in its developing
member countries (DMCs). Two concluding chapters deal briefly with
resource implications and the reporting arrangements for the Bank’s
governance activities.

2
Good governance defined

T
he term “governance” means different things to different people.
It is useful, therefore, for the Bank to clarify, at the very outset,
the sense in which it understands the word. Among the many
definitions of “governance” that exist, the one that appears the most
appropriate from the viewpoint of the Bank is “the manner in which
power is exercised in the management of a country’s economic and
social resources for development.”4 On this meaning, the concept of
governance is concerned directly with the management of the devel-
opment process, involving both the public and the private sectors. It
encompasses the functioning and capability of the public sector, as
well as the rules and institutions that create the framework for the con-
duct of both public and private business, including accountability for
economic and financial performance, and regulatory frameworks
relating to companies, corporations, and partnerships.5 In broad terms,
then, governance is about the institutional environment in which citi-
zens interact among themselves and with government agencies/
officials.
The capacity of this institutional environment is important for
development because it helps determine the impact achieved by the
economic policies adopted by the government. It has been observed
that, while many governments have undertaken broadly similar reform
packages, the outcomes have varied significantly across countries.
There are several factors underlying these differences, but clearly one
is the quality of governance in the countries concerned; in other words,

4 Webster’s New Universal Unabridged Dictionary, London: Dorset & Baber, 1979.
5 Managing Development: The Governance Dimension, World Bank, June 1991.

3
the ability of governments to implement effectively the policies they
have chosen. Hence, “getting policies right” may not, by itself, be suf-
ficient for successful development, if standards of governance are poor.
It is for this reason that improving governance, or sound development
management, is a vital concern for all governments.
Although policy aspects are important for development, the Bank’s
concept of good governance focuses essentially on the ingredients for
effective management. In other words, irrespective of the precise set
of economic policies that find favor with a government, good gover-
nance is required to ensure that those policies have their desired effect.
In essence, it concerns norms of behavior that help ensure that gov-
ernments actually deliver to their citizens what they say they will deliver.
Similarly, the experience so far, especially within the region, does
not establish any direct correlation between the political environment,
on the one hand, and rapid economic growth and social development,
on the other. Successful development has taken place in countries with
different political systems. However, the common features that stand
out in respect of high-performing economies are stability in broad policy
directions, flexibility in responding to market signals, and discipline in
sticking with measures necessary for meeting long-term objectives
despite short-term difficulties, all hallmarks of good governance.
A basic issue that arises in relation to governance is the proper role
of government in economic management. The growing consensus
among development specialists in this regard is that, with the limited
access of governments to information, markets generally allocate
resources more efficiently. In market economies, production and con-
sumption decisions are based essentially on the price mechanism.
However, even in such economies, governments are expected to per-
form certain key functions. These include (i) maintaining macroeco-
nomic stability, (ii) developing infrastructure, (iii) providing public
goods, (iv) preventing market failures, and (v) promoting equity.
Without macroeconomic stability, business prospects are uncer-
tain and investment risks are high. Inflation and external imbalances
do not provide a healthy environment for rational business decisions.
An important dimension of macroeconomic stability is the link with
equity. While the adverse effects of inflation are felt economy-wide, it

4
is the lower-income groups that are usually the hardest hit, since they
have limited scope for reducing consumption in response to price
increases. Thus, macroeconomic instability militates against equity in
the distribution of economic welfare, a stated objective of most
governments.
By developing infrastructure, governments can create conducive
conditions for private investment in commercial activities. However,
given the fiscal constraints of most governments, the role of the private
sector in infrastructure development is likely to increase. The challenge
for governments is to devise a policy and institutional framework that
allows wider participation to the private sector in infrastructure devel-
opment and management, while safeguarding the public interest at
the same time.
Public goods are those that are jointly demanded and whose
consumption by one individual does not diminish their availability to
others. Education and health care are common examples of public
goods. In most countries, governments assume responsibility for the
provision of public goods, with fiscal resources being channeled in a
preferential manner to ensure their supply. This also contributes to
improving equity in the economy (although user fees may be levied to
promote cost recovery where feasible).
In a market-oriented economy, the government has the obligation
to see to it that markets function efficiently and that the playing field is
level for all participants. This requires mobility of factors of produc-
tion, free flow of information regarding prices and technology, and
competition among buyers (for outputs) and sellers (for inputs). Market
regulation by the government should ensure that the operating rules
do not discriminate between individual participants or interest groups.
This implies wide publicity for legislation and administrative rules and
their fair and transparent application.
A key responsibility of government is ensuring that the benefits of
economic growth are equitably distributed across society. Taxation and
expenditure measures are prominent instruments for this purpose.
While taxes should not be excessive (so as not to discourage produc-
tion and growth), they should be collected effectively to provide
adequate revenue for essential services (and help maintain fiscal bal-
ance). The latter consideration also requires that public spending avoid

5
excessive debt-service burdens, and subsidies for low priority activities
be phased out. This underscores the close relationship between equity
and macroeconomic stability.
Given the role of government as economic development manager,
as outlined above, policies that best suit these responsibilities need to
be followed. Once those policy choices are made, however, good gov-
ernance is required to make sure that implementation is effective and
consistent. As a development partner, the Bank has a clear and direct
interest in the capacity of borrowing governments to fulfill their eco-
nomic role by implementing the associated policies. More specifically,
the success of the Bank’s project investments depends crucially on the
efficacy of the institutional framework in DMCs and the consequent
capability for purposive implementation.

6
The elements of
good governance

A
number of multilateral organizations (e.g., the United Nations
Development Programme [UNDP] and the Organisation for
Economic Cooperation and Development [OECD]) have reflected
on the elements of good governance, and on their relation to develop-
ment. As the ethos and experience of these organizations vary, so, too,
do their perceptions of what constitutes good governance. Insofar as
the Bank is concerned, though, it is the approach taken by the World
Bank—drawn from its global experience with project and adjustment
lending—that is the most relevant. The World Bank’s interest in gover-
nance stems from its concern with the effectiveness of the develop-
ment efforts it supports. From this perspective, sound development
management, in the broadest sense of the phrase, is critical for ensur-
ing adequate returns and efficacy of the programs and projects financed,
and for the World Bank’s underlying objectives of helping countries
reduce poverty and promoting sustainable growth. Hence, the World
Bank’s emphasis in recent years has shifted from its own interventions
to the overall country context (i.e., the governance climate) within
which those interventions take place. In doing so, it has been guided
by the nature of its operations and the opportunities for action that
these offer. Accordingly, the key dimensions of governance identified
by the World Bank are (i) public sector management, (ii) accountabil-
ity, (iii) legal framework for development, and (iv) transparency and
information.

7
 The Bank also regards governance as synonymous with sound
development management. It therefore relates governance to the
effectiveness with which development assistance is used, the impact
of development programs and projects (including those financed by
the Bank), and the absorptive capacity of borrowing DMCs. 6
Accordingly, like the World Bank, the Bank, too, is 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, the Bank
prefers to draw a distinction between, on the one hand, elements of
good governance and, on the other, the specific areas of action (e.g.,
public sector management) in which they could be promoted or their
existence enhanced. In line with this reasoning, and building upon
the approach of the World Bank, the Bank has identified four basic
elements of good governance: (i) accountability, (ii) participation,
(iii) predictability, and (iv) transparency.
The following sections consider briefly the relevance of the four
elements of good governance to the development process.7

Accountability
Accountability is imperative to make public officials answerable for
government behavior and responsive to the entity from which they
derive their authority. This may be achieved differently in different
countries or political structures, depending on the history, cultural
milieu, and value systems involved. The mechanisms employed may
vary from audit covenants, at one level, to broadly elected legislatures
or more narrowly conceived consultative committees, at another.
Accountability also means establishing criteria to measure the per-
formance of public officials, as well as oversight mechanisms to ensure
that the standards are met. The litmus test is whether private actors in
the economy have procedurally simple and swift recourse for redress
of unfair actions or incompetence of the executive authority. Lack of
accountability tends in time to reduce the state’s credibility as an
economic partner. It undermines the capacity of governments to sustain

6 Doc. R158-94, ADF VI: Progress Report, 7 April 1994 (para. 92).
7 The specific areas of action in which these elements of good governance will be applied are
dealt with in the chapter “Promoting the elements of good governance in Bank operations”.

8
the long-term business confidence essential for growth-enhancing pri-
vate sector investment. Looked at from this angle, accountability can
help reduce sovereign risk.
The accountability of public sector institutions is facilitated by
evaluation of their economic and financial performance. Economic
accountability relates to the effectiveness of policy formulation and
implementation, and efficiency in resource use. Financial accountabil-
ity covers accounting systems for expenditure control, and internal
and external audits.

Participation
The principle of participation derives from an acceptance that people
are at the heart of development. They are not only the ultimate benefi-
ciaries of development, but are also the agents of development. In the
latter capacity, they act through groups or associations (e.g., trade
unions, chambers of commerce, nongovernment organizations [NGOs],
political parties) and as individuals (e.g., through letters to newspaper
editors, participating in radio and television talkshows, voting). Since
development is both for and by people, they need to have access to
the institutions that promote it (e.g., representative bureaucracies).
Participation is often related to accountability, but not necessarily
so. In representative democracies, where citizens participate in gov-
ernment through the electoral process, public officials are, indeed,
accountable ultimately to the electorate. This may not be the case,
however, in other political systems (although accountability is still
important). For all economies, though, the benefits of participatory
approaches can be considerable. These include improved performance
and sustainability of policies, programs, and projects, as well as
enhanced capacity and skills of stakeholders.
At the grass roots level, participation implies that government struc-
tures are flexible enough to offer beneficiaries, and others affected,
the opportunity to improve the design and implementation of public
programs and projects. This increases “ownership” and enhances
results. At a different level, the effectiveness of policies and institu-
tions impinging on the economy as a whole may require the broad
support and cooperation of major economic actors concerned. To the

9
extent that the interface between public agencies and the private sector
is conducive to the latter’s participation in the economy, national eco-
nomic performance (comprising the combined contributions of the
public and private sectors) will be enhanced.
Participation in economic life by agents other than the state would
cover not only the role of the private sector, but also the activities (grow-
ing in recent times) of NGOs. These elements of civil society offer an
alternative means of channeling the energies of private citizens. They
can be helpful in identifying people’s interests, mobilizing public opin-
ion in support of these interests, and organizing action accordingly.
Being close to their constituents, NGOs can provide governments with
a useful ally in enhancing participation at the community level and
fostering a “bottom-up” approach to economic and social development.

Predictability
Predictability refers to (i) the existence of laws, regulations, and poli-
cies to regulate society; and (ii) their fair and consistent application.
The importance of predictability cannot be overstated since, without
it, the orderly existence of citizens and institutions would be impos-
sible. The rule of law encompasses both well-defined rights and duties,
as well as mechanisms for enforcing them, and settling disputes in an
impartial manner. It requires the state and its subsidiary agencies to be
as much bound by, and answerable to, the legal system as are private
individuals and enterprises.
The importance of rule-based systems for economic life is obvi-
ous. They are an essential component of the environment within which
economic actors plan and take investment decisions. To the extent,
therefore, that legal frameworks help ensure that (i) business risks can
be assessed rationally, (ii) transaction costs are lowered, and (iii) gov-
ernmental arbitrariness is minimized, they should prove conducive to
risk taking, growth, and development. In the opposite scenario, the
capricious application of rules generates uncertainty and inhibits the
growth of private sector initiatives. Regulatory uncertainty also tends
to raise the cost of capital by increasing the risk of investment.8

8 The Regulation of Private Monopoly in Developing Countries, Price Waterhouse, London,

April 1994.

10
 Besides legal and regulatory frameworks, consistency of public
policy is also important. Government policies affect the investment
climate directly, and economic actors require reasonable assurance
about the future behavior of key variables such as prices, the exchange
rate, and employment levels. However, consistency does not mean
rigidity. Governments do need to respond flexibly to changing cir-
cumstances and to make midcourse corrections, as necessary. Also,
when governments change, the successor administration will, under-
standably, want public policy to reflect its priorities, rather than those
of its predecessor. Barring such situations, though, consistency in the
broad directions of government policy is valuable (with modifications
being limited, as far as possible, to fine-tuning).
Predictability can be enhanced through appropriate institutional
arrangements. For example, it has been argued that an autonomous
central bank could lead to more predictable monetary and exchange
rate policies. Many governments face the challenge of regulating money
supply, while pursuing expansionary fiscal policies to encourage
investment. In such situations, if monetary policy is too accommodat-
ing, inflationary pressures can put investor confidence at risk, thus
defeating the very objective of the fiscal policy. In some countries,
managing the fiscal deficit may be made more difficult by compul-
sions to bail out a politically manipulated banking sector. Granting
greater autonomy to the central bank is one way that governments can
signal investors that macroeconomic policy will be prudent and sound.
Insulating economic ministries from political pressures can have simi-
lar benefits, but may be even more difficult to achieve.

Transparency
Transparency refers to the availability of information to the general
public and clarity about government rules, regulations, and decisions.
Thus, it both complements and reinforces predictability. The difficulty
with ensuring transparency is that only the generator of information
may know about it, and may limit access to it. Hence, it may be useful
to strengthen the citizens’ right to information with a degree of legal
enforceability. For similar reasons, broadly restrictive laws that permit
public officials to deny information to citizens (e.g., an Official Secrets

11
Act) need to provide for independent review of claims that such denial
is justified in the greater public interest.
Access to accurate and timely information about the economy and
government policies can be vital for economic decision making by the
private sector. On grounds of efficiency alone, such data should be
freely and readily available to economic agents. While this is true across
all areas of the economy, it is especially relevant in the case of those
sectors that are intrinsically information intensive, such as the finan-
cial sector in general and capital markets in particular.
Transparency in government decision making and public policy
implementation reduces uncertainty and can help inhibit corruption
among public officials. To this end, rules and procedures that are simple,
straightforward, and easy to apply are preferable to those that provide
discretionary powers to government officials or that are susceptible to
different interpretations. However well-intentioned the latter type of
rule might be in theory, its purpose can be vitiated in practice through
error or otherwise.9
In practice, though, it may sometimes be necessary to place limits
on the principle of transparency. In doing so, it may be helpful to dis-
tinguish information as a commodity from information as a process.
For example, intellectual property rights may need to be protected in
order to encourage innovation and invention; but decision making on
the establishment of intellectual property and rights thereto (i.e., to
whom they are granted and why) should be transparent.

Interlinkages among
the elements of governance
Conceptually, the four elements of governance indicated above tend
to be mutually supportive and reinforcing. Accountability is often
related to participation, and is also the ultimate safeguard of predict-
ability and transparency. In the absence of accountability to affected
groups, even predictable decision making of autonomous government
agencies may result in the latter placing agency interests above those

9 For example, a uniform tariff rate (where merchants know exactly what customs duty pay-
ment is required) is preferable, on this ground, to multiple tariff rates that offer customs
officials discretion over the classification of goods.

12
of the former. Similarly, transparency and information openness can-
not be assured without legal frameworks that balance the right to dis-
closure against the right of confidentiality, and without institutions that
accept accountability. Again, predictability in the functioning of the
legal framework would be helpful for ensuring the accountability of
public institutions. At the same time, predictability also requires trans-
parency, because without information about how similarly placed
individuals have been treated, it may be difficult to ensure adherence
to the rule of equality before the law. Finally, a transparent system
facilitates governmental accountability, participation, and predictability
of outcomes.

13
14
The Bank’s concern with
governance quality

A
s mentioned, for the Bank (and the World Bank), governance is
synonymous with development management. Given its involve-
ment in the development of DMCs, the Bank has a legitimate
and direct interest in governance issues. However, several factors have,
over time, intensified the Bank’s interest in the field of governance. These
include (i) the growing recognition of the importance of the policy envi-
ronment in which development takes place, (ii) an increasing focus on
equity issues and development performance, (iii) the lessons highlighted
by the Task Force on Improving Project Quality (TFIPQ),10 and (iv) the
experience of the high-performing economies of the region.

Policy context of the Bank’s project lending

The Bank’s principal activity has been—and remains—project lend-
ing. In that context, the Bank observed early on that weak implemen-
tation capacity in the public sector of borrowing DMCs impacts
adversely (and significantly) on the performance of otherwise techni-
cally sound projects. The policy environment in the DMC concerned
also influences the success of projects. Even well-designed and well-
implemented projects can fail if they must function in a poor sector
policy framework.11 In view of this, the Bank undertakes policy dialogue
and program (or policy-based) lending to complement its project

10 Report of the Task Force on Improving Project Quality, January 1994.

11 The macroeconomic policy environment is also relevant, but traditionally this has been
addressed by the Bretton Woods institutions.

15
financing activities. Economic and sector work provides the analytical
underpinning for policy dialogue and for program and project design,
as well as for the more holistic approach to lending systematized in
the strategic country planning documents (i.e., country operational
strategy studies and country assistance plans). These efforts at helping
DMCs “get policies right” are now commonplace in the Bank, and have
led it to take greater interest in the capacity of borrowing governments
for policy formulation and implementation. While the policy objective
in a particular DMC sector might be clear enough, knowledge of the
institutional framework and its capability will be helpful in the design
of reform measures. In such cases, the Bank seeks to work with the
DMC concerned to ensure that the institutional configuration is appro-
priate for giving effect to the sector policy objectives as agreed upon.

Focus on equity and development performance

The need for greater attention to the social dimensions of the develop-
ment process has been broadly accepted by the Bank’s shareholders,
both donors and recipients (e.g., the understandings related to the ADF
VI and GCI IV exercises). In line with this consensus, the proportion of
the Bank’s project portfolio addressing social issues has increased. Since
1993, the Bank has sought to ensure that at least half of the projects it
finances (by number) address social and/or environmental concerns,
either primarily or secondarily.12 Going further, the share of such lend-
ing (in terms of loan volume) is expected to reach 35 percent by 1997,
and 40 percent by 2000.13
The Bank’s interest in governance quality in DMCs has deepened
in tandem with this expanded concern with social and environmental
development. The success of programs to increase economic oppor-
tunities for all requires an institutional and legal environment in which
political and social authority are used equitably. It also implies that all
segments of society should have recourse to courts of justice,14 and be
protected from both the power of the state and that of dominant social
groups (e.g., ethnic majorities, economic elites, etc.). Likewise implied is
12 The Bank’s Medium-Term Strategic Framework (1993–1996).
13 Three-Year Rolling Work Plan (1995–1997) with Budget Implications.
14 Such recourse should be available not only in theory, but also in practice. It matters little to
citizens that they have access to the courts, if the high cost of legal proceedings effectively
puts them out of their reach.

16
a system of governance that ensures that money spent to improve the
social infrastructure is indeed used to benefit the sectors targeted. Equally
important, a government’s ability to effectively foster economic growth
and implement social programs is conditional on its institutional and
administrative capabilities. While implementation capacity is crucial across
the board, it is particularly so in the case of programs and projects
addressing social concerns. Thus, the Bank’s growing emphasis on equity
issues (e.g., poverty reduction, women in development, environment)
has highlighted the need to focus on government capacity.
The ADF VI understandings also intensified the focus on develop-
ment performance. It was indicated that the Bank would emphasize
development performance as a criterion for the allocation of ADF
resources.15 For this purpose, development performance was defined
broadly as comprising (i) sound economic management; (ii) efforts
towards growth with equity, and poverty reduction; and (iii) efforts
towards sustainable economic and social development. This balanced
concept of development (combining considerations of efficiency,
equity, and sustainability) is assessed in terms of (i) economic man-
agement, and (ii) progress on “crosscutting concerns.” The Bank now
carries out such performance assessments of DMCs, annually for the
major borrowing countries and once every two years for other
DMCs.16 By their nature, these assessments reflect, to a considerable
degree, the quality of governance in the countries concerned.

Project quality
One of the major themes identified by the TFIPQ was the importance
of institutional capacity in DMCs and project “ownership” by execut-
ing agencies and potential beneficiaries.17 In view of this, it was
emphasized that the Bank should help strengthen DMC capacities for
policy analysis, formulation, and management. A related priority was
assisting DMCs to reform and strengthen public sector management,
particularly in its functions of establishing and maintaining public

15 Doc. R230-91, Revision 1, Final (para. 28). It was also noted (para. 3) that many of the
understandings concerning ADF operations should apply, where relevant, to operations
financed from ordinary capital resources as well (though such application would be the
subject of separate proposals to the Board, in due course).
16 Bank Operations and Country Performance, 1 September 1992.
17 Report of the Task Force on Improving Project Quality, January 1994.

17
infrastructure, the delivery of public services, the mobilization and man-
agement of domestic resources, and the creation and enforcement of
an appropriate legal framework. It was also recommended that the
Bank encourage governments to shed roles and functions that could
be fulfilled by the private and nongovernment sectors with greater
efficiency and effectiveness. This would be conducive not only to
sustainability, but also to wider participation in the development pro-
cess in DMCs (which was highlighted as being a value in itself).18

The East Asian experience

The high-performing economies of the Bank’s region are now widely
accepted as being prime examples of sound development management.
These DMCs have not only registered high rates of economic growth on
a consistent basis, they have also been effective in improving their social
indicators (Table 1). Remarkably, these DMCs also “achieved unusually
low and declining levels of inequality, contrary to historical experience
and contemporary evidence in other regions.” The positive association
between growth and low inequality in these high-performing economies,
and the contrast with other economies, has been well illustrated by the
World Bank. Forty economies were ranked by the ratio of the income
share of the richest fifth of the population to the income share of the
poorest fifth and by per capita real gross domestic product (GDP) growth
during 1965–1989. Of the seven high-growth, low-inequality economies,
six were developing economies in East Asia (i.e., Hong Kong, China;
Indonesia; Republic of Korea; Singapore; Taipei,China; and Thailand) and
the seventh was Japan (Figure 1).
The development record of the East Asian high performers is clearly
of considerable interest to the Bank, and to other DMCs. Their achieve-
ment of balanced and equitable development (“shared growth” is the
expression of the World Bank) suggests high-quality governance.
Lessons drawn from the East Asian experience could be useful for other
DMCs, and the Bank is, therefore, implementing a regional TA project
for this purpose.19 This TA project is expected, among other things, to
throw light on the degree to which the success of these high-performers
18 Op cit. (Box 1).
19 TA REG 5605: Governance and Development: Lessons of the East Asian Experience
(December 1994).

18
 Table 1: East Asia’s Development Performance

GNP per Capita Real GDP Life Expectancy Female

Annual Growth Annual Growth at Birth Adult Literacy
Rate (1980–1991) Rate (1980–1991) (1991) (1990)
Economy (%) (%) (years) (%)

Hong Kong, China 5.6 6.9 78 64.1

(1975)
Korea, Rep. of 8.7 9.6 70 93.5
Singapore 5.3 6.6 74 74.0
(1985)
Taipei,China 9.8 (GDP) 7.7 77 a 84.0
Indonesia 3.9 5.6 60 75.3
Malaysia 2.9 5.7 71 70.4
Thailand 5.9 7.9 69 91.3
China, People’s
Rep. of 7.8 9.4 70 61.8
Low and middle-
income developing
countries, all regions
(average) 1.3 3.3 64 46.0
a Refers to female in 1990.
Sources: World Bank, World Development Indicators 1993; ADB, Key Indicators, 1993.

reflected (i) accountability of public officials, (ii) an effective public/

private sector interface, (iii) predictable application of rules and regu-
lations (or changes thereto), and (iv) sharing of market information
between the government and private actors.

Outlook for the future

As a result of the factors discussed above, issues of governance are now
considered in the Bank in various contexts and at various levels (e.g.,
country operational program, project design and implementation, advi-
sory TA). Given the Bank’s strategic objective of supporting economic
growth that is socially equitable and environmentally sustainable, its
determination to enhance the quality and impact of project operations,
19
and the situation of borrowing DMCs, especially those in the low-income,
transitional (i.e., erstwhile centrally planned) and small island categories,
this focus on governance aspects can be expected to grow.

Figure 1: Income Inequality and Growth of GDP, 1965–1989

GDP growth per capita (percent)

8

Rep. of Korea •Botswana

7 •
Taipei,China•
Singapore• •Hong Kong, China
•Gabon
6

Japan •Mauritius
5 • •Indonesia

•Malaysia
GDP growth per capita (percent)

•Thailand
4
• Italy •Brazil
•Austria
3 Spain
• •France
•Belgium
United Kingdom•
•Australia •Colombia
2 •Sri Lanka
Switzerland• •Philippines
•Pakistan Mexico• •Kenya
•Venezuela
1 • •India
Malawi• Nepa l •Chile •Argentina
• Bolivia• •Peru
Bangladesh
0 •Cote d’Ivoire
•Mauritania
•Ghana
•Sudan
-1
•Zambia

-2
0 5 10 15 20 25 30 35
Income inequality

Note: Income inequality is measured by the ratio of the income shares of the richest 20 percent
and the poorest 20 percent of the population.
Source: The East Asian Miracle-Economic Growth and Public Policy (World Bank, 1993)

20
The Bank’s approach to
governance issues

T
he Bank’s approach to governance issues will be guided by two
general considerations. These are (i) the provisions of its Charter
as they relate to governance, and (ii) the need for flexible (i.e.,
nondoctrinaire) and country-specific approaches.

The Bank’s charter and governance activities

The General Counsel is circulating to the Board separately an opinion
on the implications of the Charter provisions for governance activities.
He has summarized this opinion as follows. Governance has at least
two dimensions: political (e.g., democracy, human rights) and eco-
nomic (e.g., efficient management of public resources). In dealing with
governance and the promotion of the fundamental elements of
accountability, participation, predictability, and transparency, the Bank
needs to stay close to its mandate for accelerating the process of eco-
nomic development in DMCs.20 Accordingly, the Bank regards good
governance from the perspective of sound development management,
and does not concern itself with aspects of governance not related
directly to the latter. Such an approach is also justified by the fact that
the Bank’s role in the field of governance is strictly circumscribed by
its Charter. This is evident from Article 36 of the Charter, “Prohibition

20 Agreement Establishing the Asian Development Bank (Article 1).

21
of Political Activity: The International Character of the Bank.” In view
of its importance in this context, the Article is reproduced in full below.

“1. The Bank shall not accept loans or assistance that may in any way
prejudice, limit, deflect or otherwise alter its purpose or functions.
“2. The Bank, its President, Vice-President(s), officers, and staff shall
not interfere in the political affairs of any member, nor shall they
be influenced in their decisions by the political character of the
member concerned. Only economic considerations shall be
relevant to their decisions. Such considerations shall be weighed
impartially to achieve and carry out the purpose and functions of
the Bank.
“3. The President, Vice-President(s), officers, and staff of the Bank,
in the discharge of their offices, owe their duty entirely to the
Bank and to no other authority. Each member of the Bank shall
respect the international character of this duty and shall refrain
from all attempts to influence any of them in the discharge of
their duties.”21

Article 36(2) first prohibits interference in the “political affairs” of a

member and, second, being influenced by its “political character.” It then
stipulates that “Only economic considerations shall be relevant” to deci-
sion making in the Bank, and that such consideration should be “weighed
impartially... to achieve the purpose and functions of the Bank.” The pur-
pose of the Bank under Article 1 of the Charter is to foster “economic
growth and cooperation” in the region and to contribute to the process of
“economic development” of DMCs in the region. The focus of the Bank’s
purpose is, therefore, economic, and the Charter clearly seeks to estab-
lish a technical and functional financial institution that is, as far as pos-
sible, free from ideological and partisan political considerations and
influences in its decision-making process. The Charter, therefore, gives
primacy to economic considerations in the achievement and carrying out
of the Bank’s purpose and functions.
The term “economic considerations,” however, has been widely
interpreted by the Bank. A narrow and somewhat mistaken definition

21 Op cit.

22
of “economic considerations” would exclude the Bank from engaging
in some of the programming considered most important by its mem-
bers; for example, programs that focus on the environment, educa-
tion, or the position of women. While such programming may be
viewed as “social,” the Bank finances such programs on the basis of a
clear consensus that they are based on direct linkages to economic
development and that they can be justified on the basis of the eco-
nomic effects of such noneconomic “social” factors. Therefore, while
Article 36 prevents certain types of political activities, it does not prohibit
the Bank from taking into account demonstrable and direct economic
effects of noneconomic factors as part of the “economic considerations”
on which the Bank must base its decisions. The economic effects of such
noneconomic factors must, however, be clearly established before the
Bank finances programs focusing on such noneconomic factors.
The Bank’s internal processes, in which the Economic and Devel-
opment Resource Center and the Office of the General Counsel are
involved, provide adequate and reasonable assurance that the provi-
sions of Article 36 are not violated and that Bank financing in respect
of apparently noneconomic factors is justified on “economic consider-
ations,” i.e., the demonstrable and direct economic effects of such non-
economic factors. A further safeguard against the Bank basing its
decisions on noneconomic and political considerations is provided by
Article 14(iii) of the Charter, under which the DMC concerned has the
final say over financing of any undertaking in its territory.22
It is pertinent to mention that governance activities of the type con-
templated in this Paper are carried out by the Bank’s sister institutions,
especially the World Bank, under charters with almost identical prohi-
bitions on political activities and provisions directing that decision
making should be on the basis of economic considerations alone.
Accordingly, the Bank will steer clear of overtly political goals, such
as parliamentary democracy and human rights (however desirable these
may be, for their own sake). That being said, however, it also needs
stressing that, in many ways, the Bank’s operations are conducive, albeit
indirectly, to the pursuit of these goals (e.g., through wider participa-
tion in development activities, raising living standards, expanding

22 An exception is the European Bank for Reconstruction and Development, whose Charter
embodies political considerations.

23
access to public goods and services, women in development). Hence,
though the Charter provisions explicitly preclude any role for the Bank
in the political aspects of governance, efforts to enhance the quality of
economic governance in DMCs (i.e., management of resources for
development) could well redound to the benefit of the former.

Need for flexible country-specific approaches

The Asian and Pacific region is the site of ancient civilizations, where
the science of government has had a long and distinguished tradition.
At the same time, differences in political history have resulted in a
diversity of political systems and institutional cultures. None of these
can reasonably claim to have any comparative advantage from the point
of view of governance. Countries accepted to be political democracies
seem as prone to fall short of governance standards as those in which
parliaments are weak or nonexistent. Indeed, governance quality
appears indifferent to the type of political system, and aspects of good
governance can be found in countries with widely dissimilar political
construction, ranging from the Western democracies to the high-
performing economies of East Asia. There has been much analysis and
discussion in recent times of the development experience in these
DMCs, and interpretations of the phenomenon vary. What is not dis-
puted, though, is that the institutions accounting for East Asian suc-
cess differed dramatically from those associated with the rise of the
Western democracies. Clearly, then, there are many institutional alter-
natives for managing the development process soundly.
Hence, promotion of the elements of good governance needs to
take into account the characteristics and situation of individual coun-
tries. The specific features of public administration in each DMC reflect,
and respond to, its own political and bureaucratic evolution, cultural
norms, and social values. This underscores the need for home-grown
approaches for enhancing governance quality in DMCs. Lessons derived
from the experience of any one country or group of countries, regard-
less of how successful it or they may have been, cannot be transplanted
directly (i.e., without suitable modification). Instead, the Bank needs
to identify general criteria or objectives to guide the search for local
solutions, rooted in the public administration traditions of the country
concerned.
24
Promoting the elements
of good governance
in Bank operations

T
he elements of good governance set out in an earlier chapter are
abstract and conceptual in nature. To make them operationally
relevant, the Bank needs to translate them into specific catego-
ries or areas of action. To this end, this chapter indicates ways in which
these elements will be pursued in the context of Bank operations. As
will be seen, in most of these areas, the Bank is already contributing to
governance quality, and has been doing so for some time. The areas in
question are the following.

(i) Accountability (building government capacity)

• public sector management
• public enterprise management and reform
• public financial management
• civil service reform
(ii) Participation (participatory development processes)
• participation of beneficiaries and affected groups
• public/private sector interface
• decentralization of public and service delivery functions
(empowerment of local government)
• cooperation with NGOs

25
(iii) Predictability (legal frameworks)23
• law and development
• legal framework for private sector development
(iv) Transparency (information openness)
• disclosure of information

The succeeding sections of this chapter deal with each of the above
areas of action.

Building governance capacity

Good governance implies the capacity to provide citizens with an
acceptable level of public services, in an effective and efficient man-
ner. From the Bank’s point of view, a DMC’s institutional capacity to
conduct public business determines in large part its ability to under-
take economic reforms and implement projects successfully. Hence,
failure to establish effective public sector capacity undermines the cred-
ibility of reform initiatives and impacts adversely on the performance
of development projects, raising costs for both borrowers and the Bank.
Insofar as Bank operations are concerned, efforts to build (and
strengthen) governance capacity in DMCs would cover (i) public sec-
tor management, (ii) public enterprise management and reform,
(iii) public financial management, and (iv) civil service reform.

Public sector management

The Bank’s bread-and-butter business has been—and is—assisting the
public sector in DMCs. As such, the Bank has always taken a major
interest in the ability of public sector agencies (line ministries and
departments, as well as project executing agencies) to manage their
affairs. This includes not only the capacity to design and execute pro-
grams and projects effectively, but also, more broadly, to formulate
and implement policies, plan operations, and monitor feedback—in
short, the capability to anticipate, enhance, and manage change.

23 Although legal frameworks are related directly to Predictability and are dealt with here
accordingly, it needs to be recognized that they are overarching in scope and thus relevant
also for Accountability, Participation, and Transparency.

26
 Right from the start, therefore, lending to the public sector has been
accompanied by TA for institutional strengthening. Progressing from
the provision of ad hoc advisory inputs (attached to loans or other-
wise), the Bank shifted to more focused, long-term support to specific
DMC institutions, often in the context of repeat loans. Moving on, the
Bank is now undertaking a strategic approach to capacity-building
activities. These will become an important element of country strate-
gies and will be reflected accordingly in country assistance plans. To
this end, the Bank’s economic and sector work will seek to identify
underlying weaknesses and suggest remedial measures.24 As always,
the primary responsibility for developing institutional and organiza-
tional capacity rests with the DMCs themselves, but the Bank has—
and will continue to have—a substantial role to play in assisting their
efforts in this regard.
Box 1 describes a recent example of the Bank’s strategic approach
to capacity building.

Box 1: Public Sector Management

I n Indonesia, the Capacity Building Project in the Water Resources Sector (1994)
takes a holistic approach to improving the management of a critical natural resource.
It will help (i) establish a national body to monitor demand, supply, and allocation
nationwide and by province, undertake policy reviews, introduce new policies as
appropriate, and coordinate allocation; (ii) set up water management committees,
hydrometeorological networks, and quality control systems in selected provinces; and
(iii) strengthen the capacity of the Directorate General of Water Resources Develop-
ment for policy review, general and project management, human resources manage-
ment and development, and technical support to the regional agencies, as well as to
the private sector. By strengthening water policies and water quality standards, and
establishing a database at the national level, the Project will result in allocation of
water among competing users on a sustainable and economic basis, smoother project
implementation with reduced delays, greater participation of beneficiaries, and bet-
ter quality construction of water resources infrastructure.

24 Doc. IN.161-94, Bank Support for Capacity Building in Developing Member Countries,
7 September 1994.

27
Public enterprise management and reform
At a fundamental level, public enterprise reform should begin with
consensus-building in respect of an appropriate role for the state in a
market-friendly economy. Downsizing the public sector may not be
an end in itself, but is likely to result from an unbiased examination of
which goods and services are provided better by private institutions.
At the same time, the ability and willingness of governments to trim
profitable state-owned enterprises could depend on the availability of
other sources of revenue. Where this is the case, enlarging the tax base
would help smooth the path of public enterprise reform. While prob-
lems in the management of public enterprises can occur anywhere,
they may be particularly acute in the former centrally planned econo-
mies that are undertaking the transition to market-oriented systems
and in South Asian DMCs.
The reassessment of the rationale of a public enterprise and its
economic prospects could result in a confirmation of its continued
validity or in a recommendation for reform. If the former, the focus
would be on ensuring more effective operations. This may require
increased autonomy in day-to-day functioning (say, through conver-
sion to a joint stock company), on the one hand, and greater account-
ability (to its principal shareholder, the government), on the other.
Reconciling these twin goals may involve shifting from ex ante (or
input-oriented) controls to ex post (or output-oriented) ones. Further,
as a rule of thumb, state-owned enterprises serving commercial ends
could be made to maximize profits, while those that are monopoly
providers could concentrate on minimizing costs instead.
Reform of public enterprises could follow several directions. In
some cases, liquidation may be the answer, with market mechanisms
taking over the function previously rendered by the enterprise con-
cerned. In others, it may be decided to merge two or more enterprises
and rationalize their operations. For some, privatization may be the
preferred option, though this is often the most difficult decision to
implement, on account of the political and social costs involved. Typi-
cally, the process of privatization takes longer to complete than is origi-
nally anticipated. Nevertheless, an extended, but successful, program
for divestiture is better than an underprepared privatization that fails
or is thwarted. The damage caused by the latter could sap the will of

28
the government to pursue other privatizations, and thus reduce the
momentum for economic liberalization.
Where privatization is the chosen route, experience suggests some
ground rules. Creating a competitive operating environment for the
enterprise concerned should normally take priority over the objective
of increasing government revenues in the short run. Hence, public
monopolies should not normally be replaced by private ones. Enter-
prise sales should be transparent, and assets should be evaluated by
an independent firm to avoid the danger that only political insiders
have accurate assessments of plant capacities and liabilities. Labor
should be invited to participate in the process, to avert subsequent
organized unrest. For the same reason, the proceeds of divestiture could
be used for social safety nets or other social purposes (and/or for pri-
ority investments in physical infrastructure). The sale of shares to local
financial institutions and individuals could also help garner political
support for privatization. Public disinvestment should not crowd out
local capital markets, but be used instead to stimulate them.
The success of the Bank’s efforts to assist public enterprise reform
depends largely on two preconditions: first, the commitment of gov-
ernments to improve public sector operations; and second, movement
towards an appropriate macroeconomic and sector policy framework
(including trade liberalization, exchange rate decontrol, and market-
oriented interest rates, and other basic prices in the economy).
Box 2 provides two examples of the Bank’s activities in the field of
public enterprise reform.

Public financial management

Improvements in accounting and auditing procedures are the first line
of reforms in the public finance system. The Bank’s loan agreements
routinely incorporate covenants on accounting and auditing require-
ments, and executing agencies are encouraged to strengthen financial
management practices (for example, through performance-based bud-
geting and external audits). Going beyond the level of individual
executing agencies, the focus of attention has to be the government
budget, and the need for fiscal discipline. Given the concern with
sustainability of programs and projects (e.g., allocations for operation
and maintenance), what is of interest is not just public investment plans,

29
but public expenditure as a whole (i.e., both capital and recurrent
expenditures). Also important in this context are budgetary allocations
within and between sectors, and the overall adequacy of the
government’s development expenditures. Although the Bank endeav-
ors to analyze these budgetary issues in DMCs, and to raise them in
policy dialogue as appropriate (e.g., during country programming), it
needs to be recognized that its capacity for full-blown public expendi-
ture reviews is still limited.

Box 2: Public Enterprise Management and Reform

I n conjunction with the Sixth Road Improvement Project in the Lao People’s Demo-
cratic Republic (1993), an advisory technical assistance was provided for the priva-
tization and management of road sector institutions. This institutional support to the
Ministry of Communication, Transport, Post and Construction covers (i) management
assistance to already privatized road transport enterprises, (ii) privatization of the
remaining government-owned road transport organizations, and (iii) privatization of
the government-operated road construction and maintenance industry. The objective
is to focus on maximizing private sector participation within a regulatory framework,
with the Government increasingly adopting the role of supervisor and regulator rath-
er than carrying out operations on its own.
The Water and Power Development Authority of Pakistan is implementing a stra-
tegic plan for privatization of the power sector in the country. Under the proposed
structure for the power sector, a vertically integrated authority such as the Karachi
Electricity Supply Corporation Limited (KESC) would be an anachronism. To deter-
mine the optimal method of privatizing this enterprise, the Bank financed an organiza-
tional and financial restructuring study, which recommended that KESC be restructured
around subsidiary companies encompassing the core business of generation, trans-
mission, and retail distribution. Since the technical and financial conditions of the
enterprise were not attractive, the KESC Sixth Power (Sector Loan) Project (1994)
seeks to rehabilitate the transmission and distribution system, and to finance a further
study for recommending actions for the restructuring and privatization of KESC.

An aspect that has been receiving increasing attention from donor

countries is excessive “nonproductive” (e.g., military) expenditures by
some recipient countries. The concern is twofold: first, budgetary
allocations for military purposes should not crowd out development
activities; and second, since money is fungible, external assistance for
economic development should not have the effect of freeing up
resources for unreasonably high military-related expenditure. These

30
concerns are understandable and valid (although, to some extent, mili-
tary expenditures may be supply-driven by armaments exporters from
donor countries). At the same time, governments have a sovereign
duty to protect their citizens and territories, and they act in accordance
with their own perceptions of threat, rather than those of outsiders. To
address these issues in a balanced, coordinated, and effective manner,
funding agencies have used the forum provided by country aid groups
or consortia (usually organized by the World Bank). Thus, in recipient
countries where the military budget seems unduly large, the aid
community usually expresses its concern at the annual consortium
meeting, with the clear implication that the level of the overall aid
commitments reflects that concern. As a member of such aid consor-
tia, the Bank associates itself fully with such expressions of concern,
provided the economic effect of military expenditure on the develop-
ment process in the DMC concerned is unequivocal and demonstrable.
In addition to expenditure matters, the Bank also looks at ways to
help DMC governments improve their domestic resource mobilization
efforts, more directly through enhanced cost recovery by public utili-
ties, but also including TA for policy reforms. Taxation is another aspect.
Indeed, in many ways, the manner and effectiveness with which a
government collects taxes are reflective of the standard of governance
that prevails. Hence, the Bank provides training for tax policymakers,
as well as TA for improving tax collection and administration.
Box 3 provides a flavor of the Bank’s activities for helping improve
public financial management in DMCs.

Civil service reform

Civil service reform is perhaps the most elusive transformation facing
a government engaging in reforms to strengthen market-friendly pro-
cesses of development. One major aspect of this problem, namely,
public sector wage bills that are unsustainably high (in relation to gov-
ernment revenues or expenditure), is a direct function of the size of
the state system, and will benefit from any downsizing that takes place.
Other ills that afflict the public service include low morale and productivity,
uncertain prospects for career development, and insufficient linkage of
merit to promotion. When combined with inadequate salary scales, the
cumulative effect can be pervasive corruption among public officials.

31
 Box 3: Public Financial Management

I n collaboration with the United Nations Development Programme (UNDP), the Bank
has helped institutionalize program budgeting and project monitoring (PBPM) in
Nepal. Under the first phase (1986), a program budgeting system for efficient and
economical allocation of scarce resources in the public sector, and a project monitor-
ing system, were set up in the Ministry of Finance (MOF). The second phase (1986)
improved (i) the program budgeting system by including clear criteria and weights to
accommodate multiple objective considerations when ranking projects in order of
priority; and (ii) the project monitoring system by introducing a quantitative method-
ology, developing appropriate interface points among MOF, line ministries, and other
government bodies, and providing training manuals and workshops. In the final phase
(1989), PBPM systems in MOF were improved further and extended to line ministries
with the long-term objective of making PBPM the basis for an integrated government
system.
The Committee for Planning and Cooperation (CPC) is responsible for strategy
and investment planning, management of foreign investment, and coordination of ex-
ternal assistance. Since CPC is constrained by shortages of skills and experience, UNDP,
in cooperation with the International Monetary Fund (IMF) and the World Bank, pro-
vided technical assistance (TA) for taxation and customs reform, privatization, foreign
investment promotion, and public investment planning. The Bank provided comple-
mentary assistance in macroeconomic planning (1990). Under a follow-on project of
the Government, UNDP, IMF, and the Bank (1993), an integrated framework is being
introduced for the planning, programming, budgeting, and financing (PPBF) process.
The Bank’s contribution would strengthen the capacity of CPC and selected line min-
istries to undertake macroeconomic planning, policy analysis, formulation, and coor-
dination, and help establish a public investment programming system that is integrated
effectively into the PPBF process.
The Philippines introduced a value-added tax (VAT) in 1988, in replacement of a
variety of sales taxes. Although, since then, the VAT emerged as a dynamic compo-
nent of tax revenue, its potential yield (levied at 10 percent) seemed much larger than
the amount of VAT actually collected (less than 1 percent). The Bank has, therefore,
assisted the Bureau of Internal Revenue (BIR) to improve the VAT assessment, collection and
planning systems, and computerization of these systems (1991). The major outputs of this
TA were (i) an integrated final Information Systems Plan, as the basis for computerization of
all the taxes administered by BIR and (ii) a detailed VAT information system. Together, these
systems would help ensure a more uniform and widespread implementation of tax laws.
Financial accountability is a particular concern of the Bank in the Pacific developing member
countries (DMCs). Although this problem is not unique to these DMCs, it is exacerbated by
the lack of qualified auditors and the dearth of systematic training. The Bank, therefore,
financed a program of audit manpower development workshops for the South Pacific DMCs
to introduce updated audit techniques and to upgrade the technical skills of the participants
(1989). This was followed by an audit training program for the same DMCs, covering two
workshops: one on financial audit management and supervision, and the other on computers
in the audit process (1994). The workshops emphasized in-house training and development
of informal regional support networks for national audit offices.

32
 A professional and accountable civil service that can administer
rules, maintain standards and competition, and respect property rights
is critical for private sector confidence in the government’s efforts at
economic reform. What is needed, therefore, is to move progressively
towards public administration systems that provide clear career paths,
adequate compensation and benefits, and incentives that tie
advancement in the civil service more closely to staff performance and
productivity. While downsizing operations should facilitate such
improvements, it will not by itself obviate the requirement for more
sophisticated management and control systems.
Reforms of this nature, especially action to tackle salary erosion
and wage compression, should also impact favorably on the incidence
of corruption. So, too, should market-friendly economic reforms in
general, by reducing the discretionary powers of public officials. In
addition, however, effective oversight mechanisms can help prevent
government agencies from serving their own interests and, thus, reduce
corruption. The Bank’s region offers several good examples of such
institutionalized oversight (especially in Hong Kong, China; Republic
of Korea; and Singapore). By familiarizing policymakers with what has
worked elsewhere, the Bank could help DMCs design tailor-made over-
sight systems to fit their own civil service environments. However, in
this—as in other areas—the Bank will proceed on the basis of requests
made by the DMCs concerned.
Box 4 outlines a modest initiative taken by the Bank in the field of
civil service reform.

Participatory development processes

Participation is necessary for governments to make informed choices
in respect of people’s needs, while allowing social groups to protect
their rights. The Bank could help expand participation in several ways,
such as through (i) participation in projects, (ii) the public sector/pri-
vate sector interface, (iii) decentralization of economic functions
(empowerment of local government), and (iv) cooperation with NGOs.

33
 Box 4: Civil Service Reform

T he Bank, in cooperation with the United Nations Development Programme

(UNDP) and the World Bank, is involved in a modest way with public service
reform in the Republic of the Marshall Islands. Rationalization of the public service is a
pressing need, as compensation of government employees preempts nearly 60 per-
cent of all external funds received by the country. Ensuring an affordable public ser-
vice and enhancing the effectiveness of government operations are thus the crucial
objectives of reform in this regard. A Presidential Committee appointed in October
1992 identified six major dimensions of the problem: (i) an overstaffed public service,
(ii) inefficient delivery of public services, (iii) a large number of unproductive employ-
ees, (iv) a serious shortage of technically qualified manpower, (v) organizational struc-
tures that are excessively fragmented and tiered, and (vi) widespread functional
duplication among units. The specific measures suggested for addressing these weak-
nesses included streamlining of administrative structures, privatization and contract-
ing out of services, reduction of nontechnical staff, and reduction in average personnel
costs. A strategy for implementing these measures in the short and medium term was
also outlined. To reinforce local ownership of the reforms, a seminar-cum-workshop
was organized under Bank technical assistance, involving key political dignitaries and
public officials. This collaborative exercise helped spread understanding of what needs
to be done as part of the reform, and mustered support and commitment for the
changes envisaged. Implementation of the reform measures is now being undertaken
through assistance from UNDP.

Participation of beneficiaries and affected groups

The representation and participation of citizens heightens effective-
ness and accountability in development activities. This is particularly
true in the case of rural or community development projects and those
in the social sector at the grass roots level. Given the Bank’s growing
emphasis on equity issues, and hence on projects of this nature, The
Bank’s Medium-Term Strategic Framework (1993–1996) foreshad-
owed a shift from “blueprint” (or engineering-intensive) projects to
“process-oriented” (or beneficiary-involvement) projects. Unlike
projects in the former category (where project parameters are reason-
ably well known in advance), process-oriented projects commence
with only a broad but flexible design concept, the details of individual
components being worked out subsequently in close consultation with
potential beneficiaries. Even in blueprint projects, the Bank will ensure
consultations with groups likely to be positively or adversely affected,
providing an opportunity to improve project design or suggest ways
of mitigating adverse impacts.
34
 To help ensure implementation of more participatory approaches,
the pamphlet Guidelines for Incorporation of Social Dimensions into
Bank Operations was prepared and distributed to DMC agencies and
Bank staff concerned. The pamphlet also includes guidelines for social
preparation of beneficiaries, essentially a preinvestment phase designed
to strengthen the absorptive capacity of communities by helping them
form local (grass roots) organizations that can serve their development
needs in an ongoing way. The report of the TFIPQ emphasized the
need for beneficiary consultation at even earlier project stages, such as
during project identification and programming. However, as that report
pointed out, there remain serious constraints that inhibit greater use of
participatory techniques of project design and implementation. These
include inadequate appreciation by government agencies of the sig-
nificance of participation, their lack of related skills and capacity, lack
of appropriate skills and capacity of the beneficiary groups, as well as
the limited number of experienced, socially oriented consulting firms,
both within DMCs and internationally.
Box 5 contains two illustrations of Bank projects in which benefi-
ciary participation has been promoted actively.

Public sector/private sector interface

The manner in which the public and private sectors function together
in an economy is one test of the effectiveness of the participation prin-
ciple. From the point of view of economic growth and development,
this interface can work at two levels. First, market-friendly economic
reforms (i.e., a conducive environment for private enterprise) help
release the energies and dynamism of the private sector and enable it
to contribute more fully to the development process (thus, making it
more broad-based and participatory). Second, consultative mechanisms
for dialogue between government and private actors (e.g., business
councils) can give the latter opportunities to provide effective input
into the policy process. Such business councils can be valuable to the
government as well. By including the relevant parties in the discus-
sion, they increase the government’s capacity to achieve consensus on
policy initiatives. Other advantages include enhanced credibility of the
government’s commitment to growth, and increased safeguards against

35
 Box 5: Beneficiary Participation

T he National Irrigation Authority (NIA) of the Philippines has been active in

involving beneficiaries in its operations. Of around 1.5 million hectares under irri-
gation in the country, about 42 percent is served by national irrigation systems, another
42 percent by communal irrigation systems, and the remaining 16 percent by pump
irrigation systems. The communal and pump systems are operated and maintained by
farmer Irrigators’ Associations (IAs), which were first introduced in the Philippines
some 20 years ago (with assistance of the Ford Foundation). The performance of IAs
in operation and maintenance (O&M) of communal systems has encouraged NIA to
extend the concept of beneficiary-implemented O&M to the (larger-size) national sys-
tems. With support from the World Bank and the United States Agency for Interna-
tional Development (USAID), NIA is undertaking a program of restructuring and
strengthening IAs to help them cope better with these additional O&M responsibili-
ties. Under the Bank’s Irrigation Systems Improvement Project (1990), five national
systems financed by earlier Bank-assisted projects are being rehabilitated and handed
over to IAs for O&M. Participation of IAs is envisaged under all phases of project
development, viz., preparation, implementation, and operation. Their involvement in
the implementation of the civil works would recompense beneficiaries for any tem-
porary decrease of farm productivity caused by interruptions in water supply during
construction. The IAs will also be empowered increasingly to collect the irrigation
service fees. An institutional development component aims to reorganize the IAs into
cohesive larger groups with greater self-reliance, and to initiate a cooperative pro-
gram that will give them better access to the credit facilities of the Land Bank of the
Philippines and other rural financing institutions.
In Pakistan, the Bank, along with the World Bank and other funding agencies, is
supporting the Social Action Program (SAP; 1994). The SAP, which covers the entire
country for a five-year period, embraces four subsectors: (i) primary education,
(ii) primary health, (iii) population welfare, and (iv) rural water supply and sanitation
(RWSS). Its design is based on an annual assessment of objectives, targets, and policy
and institutional reform measures, and includes a review of the entire public sector
expenditure program related to the four subsectors. The SAP aims to improve access
and quality in the delivery of basic social services, with particular emphasis on rural
and underserved areas and with a considerable gender bias towards women. A pro-
cess approach has been followed in preparing and implementing the SAP, stressing
community involvement and participation of nongovernment organizations (NGOs)
and the private sector. Users’ committees are being introduced in all RWSS activities,
and Village Education and Parent-Teacher Committees are being established for
supervision of schools. During FY1992/93, about 100 communities built their own
schools staffed by women teachers, paid by the Government. Similarly, increasing the
number of female, village-level family planning workers will help community participation
under the population program, while community health workers will achieve the same pur-
pose in the health subsector. To promote NGO involvement, education and health founda-
tions are being established in the provinces, and privatization of basic health units and rural
health centers will be considered, where feasible. As a multiagency effort, the SAP will also
provide major opportunities for dialogue with the Government on social sector policy reform.

36
corruption.25 A notable feature of the successful economies of East Asia
is that most developed effective government-business deliberation
councils, fostering rule-bound decision making by government, and
rendering it harder for government to renege on agreements made.
Their example suggests that, designed properly, consultative mecha-
nisms can increase not only participation and accountability, but also
transparency and predictability in policy formulation and implementation.

Decentralization of public and service delivery functions

As a rule, the Bank prefers that the obligations related to its loans be
borne fully by the agencies that ultimately use the loan proceeds. This
is also conducive to greater “ownership” on the part of project agen-
cies. By analogy, it is likely that devolution of authority to smaller
administrative units (e.g., provinces, districts, and municipalities) will
foster greater responsiveness to local situations and possibilities than
may be displayed by decision makers in a distant capital. At the same
time, some government functions are best handled in a centralized
manner. Also, the distribution of powers between central and provin-
cial authorities usually reflects the political imperatives of national
governance. Hence, decisions on the scope and degree of decentrali-
zation are best left to the governments themselves.
That said, however, once a DMC chooses to embark on devolu-
tion, the Bank can assist the process by helping identify those charac-
teristics of decentralization that are market preserving and that can
enhance economic performance. Often, a critical issue is whether
financial accountability of different levels of government can be
assessed accurately, so that local authorities can benefit from policies
that produce a revenue surplus. Allowing local governments to raise
funds through taxation or borrowing makes them more accountable
for the fiscal and financial consequences of their policies. When obliged
to compete among themselves for access to financial resources, they
experience fully the costs of any unsound economic policies or deci-
sions. However, the central government must ensure that local
authorities do not transfer the costs of unsound policies to their neigh-
bors by erecting local trade barriers. If requested to do so, the Bank

25 Once actions of civil servants are open to the scrutiny of consultative councils, secret deals
between officials and preferred clients become more difficult to arrange.

37
will provide TA for analyzing these and other issues related to decen-
tralization, and thus help smooth its implementation.

Cooperation with NGOs

NGOs offer borrowers and the Bank another possibility of engaging
civil society in project formulation and implementation. Small, nimble,
and with good local knowledge, NGOs can be effective and efficient
vehicles for mobilizing and reaching project beneficiaries. On the nega-
tive side, there has been a proliferation of NGOs in recent times, and
some have political agenda. While their lack of formal structures
facilitates fast response times, it also implies some lack of accountabil-
ity. Many NGOs face financial constraints that limit continuity of their
program work. Also, by their nature, NGOs prefer to maintain their
own identity by staying within the informal sector. Still, the better-
managed NGOs can usefully assist in discharging some of the respon-
sibilities in Bank-financed projects. They can act as consultants, financial
intermediaries, contractors, or implementation monitors. In time, the
Bank may also consider ways of providing financial assistance to them,
where appropriate.26 The types of activities in which NGOs can be
especially helpful include poverty reduction, empowerment of marginal
groups, challenging gender discrimination, and delivering emergency
relief.
Box 6 shows some ways in which the Bank has sought to cooperate
with NGOs.

Legal frameworks
Law and development
A legal environment conducive to development is essential for all DMCs.
It would cover the traditional concept of the rule of law, the existence
of a stable and predictable legal system, as well as law reform for eco-
nomic development. It would also imply effective and efficient admin-
istration of law. This legal framework impacts the entire process of
development and is, therefore, directly relevant to efforts for promot-
ing the latter. This is seen most clearly in the need for market-friendly,
26 The Bank’s policies already permit provision of TA to NGOs.

38
 Box 6: Cooperation with NGOs

T he nongovernment organization (NGO)-Microcredit Project in the Philippines

(1988) sought to reduce poverty, particularly in rural areas, by supporting the
Government’s Tulong Sa Tao (Self-Employment Loan Assistance) Program. It financed
microenterprises and cottage industries using low technology and local raw materials.
The proceeds of the Bank loan were channelled to the intended beneficiaries through
selected NGOs that acted as credit intermediaries. In conjunction with this Project,
technical assistance (TA) was provided for (i) institutional strengthening and technical
guidance of self-help groups among the low-income poor, and (ii) institutional strength-
ening of about 30 NGOs that were accredited under the Project (both for project
implementation purposes and to enhance their effectiveness in longer-term contribu-
tion to poverty reduction in the country). The Project covered six selected regions of
the country; Bank support to the Tulong Sa Tao Program was continued through the
Second NGO-Microcredit Project (1991), which extended the coverage nationwide.
In Bangladesh, a TA has been provided for ensuring closer involvement of NGOs
in the design and implementation of the Government’s development projects. The
objectives of the TA are to establish effective mechanisms for Government-NGO
cooperation, strengthen the NGO Affairs Bureau, and provide assistance to NGOs. It
comprises four components: (i) institutional support for both the NGO Affairs Bureau
and the NGO sector, (ii) a regional training program, (iii) support for establishing a
formal Government-NGO Consultative Council, and (iv) monitoring and evaluation.
It is expected that the project will increase the understanding of the NGO Affairs
Bureau in its work with NGOs; improve the capacity of the NGOs involved for
professionalism and self-regulation; and help prepare guidelines, regulations, and leg-
islation for Government-NGO collaboration, including a framework for participation
of NGOs in externally funded projects. Since a process approach is being employed,
the monitoring and evaluation component will assess its effectiveness, and will also
identify further work required to achieve the original objectives of the project.

economic reform to be matched by laws suited for the purpose. How-

ever, the requirement of appropriate legal dispensations is no less in
other areas, such as improvement of the status of women and protec-
tion of the environment.
The Bank’s operations will help legal reform in several ways. The
most obvious and direct contribution is through improvement of sec-
tor policy frameworks. Legal training in development law is another.
Where the legal system suffers from accumulated arrears, recourse to
commercial arbitration and alternative dispute resolution mechanisms
could be promoted, with the Bank offering information on best prac-
tice in other (preferably regional) countries. Similarly, competition
policy varies greatly in the region, and a systematic analysis of the
39
relative costs and benefits of different regulatory regimes may be use-
ful to DMC policymakers.
The erstwhile centrally planned economies in transition to market-
oriented systems represent a special situation. Rules originating under
their existing jurisprudence may penalize activities considered normal
business practice in a competitive economy. There are also enterprises
that are neither purely public nor private, and in which the rights and
responsibilities of management are ambiguous. Transfer of ownership
in such cases can be problematic. As these economies open them-
selves to foreign investment and trade, they may need to undertake
wide-ranging reform of their legal systems.
Similarly, the special cultural circumstances of Pacific DMCs may
also need to be recognized in this regard. These economies are yet to
be fully monetized, with many transactions in the outer islands re-
maining outside the money economy. Land is held in the name of the
community as a whole, and land transactions are subject to customary
law. The coexistence of Western political, legal, and administrative
systems, on the one hand, and communal property rights and tradi-
tional forms of conflict resolution, on the other, and their interface
present considerable challenges to the governments concerned, ne-
cessitating careful and sympathetic adjustments.

Legal frameworks for private sector development

Promoting development of the private sector in general, and that of
the financial sector and securities markets in particular, requires an
especially strong legal underpinning. This is needed because the sys-
tem must protect private property, regulate transfers, and register titles,
so that property can be used as collateral, thus enhancing credit and
liquidity. The system is also required for enforcing contracts, reducing
the costs of bankruptcies, and setting competition policy, including
rules for entry and exit. By determining the ease with which creditors
can attach assets of borrowers in case of default, the effectiveness of
the legal system can affect the willingness of lenders to make loans.
More generally, the enforceability of contracts and agreements is vital
for the promotion of investment and trade. In its absence, economic
uncertainty increases, raising costs all around.

40
 Another consequence of a poorly functioning legal apparatus is
growth of the informal sector, which in turn further undermines the
legal order. Informal enterprises function in the shadow of the law
and, lacking access to formal dispute settlement procedures, have to
resort to extra legal methods. By encouraging such entrepreneurs to
register their operations, reform of the legal environment enhances
the sustainability of the liberalization process by expanding the size of
the formal sector. It also enlarges the government’s revenue base.
Box 7 provides examples of Bank assistance in the field of legal
frameworks.

Box 7: Legal Frameworks

T o facilitate Mongolia’s transition from a centrally planned to a market economy,

the Bank is providing technical assistance (TA) to help develop a legal system
conducive to private enterprise (1993). This TA aims to

(i) review the existing institutional and legal framework in order to formulate a plan to
coordinate all future foreign assistance to the legal sector;

(ii) review existing business and commercial laws, with particular attention to the impact of
such laws on the country’s industry sector;

(iii) identify the legislative action required to make the legal system more suited to a market
economy, and assist in the drafting of the necessary legislation; and

(iv) enhance the capacity of the institutions concerned by appropriate training, and strengthen
the resource base for legal training, including the establishment of a clearing-house for
legal information and a center for translation assistance.

An ongoing regional TA project focuses on legal training in devel-

opment law (1992). Short workshops are being held for midcareer law-
yers and official legal advisers in Cambodia, People’s Republic of China,
Lao People’s Democratic Republic, and Viet Nam. The topics covered
include (i) legal aspects of privatization, (ii) managing international
investment agreements and international trade transactions, and
(iii) legal framework of financial sector and capital market development.

41
 As another regional TA, the Bank is financing a comprehensive,
comparative, and integrative study of regulations governing securities
market operations and supervisory practices in Bangladesh; Hong
Kong, China; India; Republic of Korea; Malaysia; Philippines; Singapore;
and Taipei,China (1992). The study also reviewed the results of earlier
Bank-financed studies on People’s Republic of China, Indonesia,
Pakistan, Sri Lanka, and Thailand. Based on this review and compara-
tive study, a rationalization plan for each DMC is being prepared, in
consultation with the government concerned, to cover gaps in policy
and improve the quality and degree of regulation and supervision. A
blueprint for implementing the recommended changes will also be
finalized. In addition, specific proposals and areas for future Bank
assistance will be identified.

Information openness
Disclosure of information
Information flows between the government and the private sector con-
tribute greatly to the efficiency of market-oriented economies. Since
the actions of governments are considered in the risk calculations of
private enterprises, the latter value accurate information about gov-
ernment regulations and decisions. Publicly available knowledge also
reduces information asymmetry between lenders and borrowers,
thereby moderating interest rates to a commensurate extent. Govern-
ments, too, must have access to reliable information from the private
sector, as an aid for effective economic decision making. The principal
barrier to such information flows from the private sector is fear of
opportunistic behavior by government officials. A cooperative, rather
than adversary, relationship between government agencies and their
constituencies helps the two-way exchange of information, facilitating
constructive decisionmaking. Governments can also help private firms
by supplying market intelligence as a public service (especially useful
to exporters and small businesses, which may initially find it too costly
to make the necessary investment in information).
The ready availability of high-quality information brings many
advantages. Openness and competition are mutually reinforcing.

42
Institutions that facilitate dialogue between regulator and regulated
serve as safeguards against corruption, since open participation in rule
making is the most effective oversight of all. At the same time, the civil
service is insulated from the pressures of powerful firms and individu-
als. Thus, two-way information flows between the private and public
sectors not only ensure transparency, but also contribute to account-
ability, participation, and predictability. As in the case of legal reform,
the Bank will serve as a clearinghouse for knowledge on best practice
within the region and elsewhere, and will assist, upon request, in the
evaluation of different consultative mechanisms.

43
44
The Bank’s modalities
for enhancing governance
in DMCs

T
he Bank has always contributed significantly to increasing the
quality of governance in its DMCs. This has been especially true
since the adoption (in 1992) of the Bank’s medium-term strategic
frameworks and the pronounced emphasis on the equity and
sustainability aspects of economic development. But even before 1992,
indeed, from their very inception, the Bank’s operations have had an
impact, to a greater or lesser degree, across the full range of the areas
of action indicated in the previous chapter. Given the nature of the
Bank’s activities, however, the categories of action that have benefited
most directly have been public sector management and participatory
development processes. This is likely to be the case in the future also,
although the other areas mentioned will be targeted as well. As its
focus on governance issues sharpens, the Bank will ensure that this
dimension of its development assistance is highlighted appropriately.
This will be achieved by identifying systematically, in consultation with
the DMCs concerned, the opportunities for promoting quality gover-
nance in individual operations and procedures.
In making its approach to governance operational, the Bank will
build on the experience gained thus far. As mentioned, Bank opera-
tions have contributed generally to improving governance standards
in DMCs. More specifically, the manner in which the Bank has
addressed “crosscutting” concerns (e.g., environmental protection)

45
offers a useful analogy. Together, these considerations suggest that
the Bank should integrate governance dimensions into its operations.
This means ensuring, to the extent possible, that Bank-supported pro-
grams and projects are designed such that they raise governance qual-
ity in the sectors concerned (e.g., through inclusion of appropriate
policy measures, project components, or TA). In addition, the Bank
will provide, on request, advisory TA for specific governance-oriented
policy studies, seminars, and training. In all cases, the guiding prin-
ciple for the Bank will be to act on the basis of agreement with the
DMC concerned.
Given this approach, the Bank’s focus on governance improve-
ment will cover, as appropriate

(i) discussion in the country operational strategy study of governance

issues in specific sectors, with a view to addressing them in the
country assistance plan;
(ii) more detailed analysis of governance aspects in the context of
loan-related economic and sector work, including assessments
of the institutional capacity of borrowing entities;
(iii) coverage of governance aspects in policy dialogue and policy-
intensive lending operations;
(iv) integration of capacity-building initiatives into the country
assistance plan through advisory TA and project preparation and
implementation (emphasizing in both cases longer term links with
selected DMC agencies, for maximum impact);
(v) implementation of the shift towards process-oriented projects,
with participation of beneficiaries (as well as affected groups) at
different stages of the project cycle;
(vi) expanding cooperation with NGOs;
(vii) TA in support of the privatization initiatives of DMCs;
(viii) advisory TA for reform of laws and regulations dealing with tariffs,
trade, environmental legislation, and the like;
(ix) compilation of best practice, in the region and elsewhere,
concerning relevant governance aspects; and
46
(x) regional TA for analyzing public sector reform in general, and
success cases in particular.

In due course, it is likely that capacity-building activities and assis-

tance for legal reform will become central pieces in the Bank’s efforts
to help improve governance in DMCs. The focus in respect of capacity
building will be on sector-level and national institutions in DMCs, aim-
ing at enhancing the effectiveness of public administration and devel-
opment management. Where appropriate, it will also cover institutional
development of the local/provincial agencies and the private sector.27
As regards legal reform, the Bank will emphasize customs, tariff, and
other trade laws, laws and regulations affecting direct foreign and
portfolio investment, banking and capital market regulations, and
environment laws.
To signal its commitment to fostering quality governance in DMCs,
the Bank is also simultaneously taking a number of initiatives to improve
its own performance in this regard. These include the TFIPQ, and fol-
low-up thereto;28 reorganization of the Bank’s structure; adoption of a
new policy concerning confidentiality and disclosure of information;
consideration of an inspection function within the Bank; and articula-
tion of a human resources development strategy for the Bank.

27 Doc. IN.161-94, Bank Support for Capacity Building in Developing Member Countries,
7 September 1994.
28 The commitment of DMCs to improving development performance was highlighted in the
recent Regional Workshop on Improving Project Quality (28 November–1 December 1994).

47
48
Resource implications

E
nhancing the governance dimension of its development
assistance will have resource implications for the Bank. These
would cover (i) staffing, (ii) staff training, (iii) staff consultants
(for economic and sector work), (iv) business travel, and (v) loan and
TA resources, which are discussed briefly below.
The Bank will need to build up its own institutional capacity for
analyzing, assessing, and addressing governance issues in DMCs. This
will require strengthening of the in-house expertise available to the
Bank in the various aspects of governance and institutional develop-
ment. However, given the current budgetary constraints, any new staff
positions required would have to be accommodated through the
ongoing redeployment efforts within the Bank. The Strategy and Policy
Office (SPO), which has been designated as the Bank’s interim focal
point for capacity building in DMCs,29 and the Office of the General
Counsel (OGC) will be responsible for formulating policy and guide-
lines on governance matters.
Current staff, as well as new staff, in the operational departments/
offices will have to be sensitized to and trained in the various aspects
of governance related to Bank activities. The Bank has already started
conducting staff training seminars on topics such as (i) strategies for
institutional development, (ii) privatization and market regulation,
(iii) incorporation of participatory approaches into project design and
implementation arrangements, (iv) cooperation with NGOs, and
(v) legal issues of operational interest to the Bank.30 These programs
29 Doc. IN.161-94.
30 Training and Development Handbook, 1994.

49
will continue, and new ones will be added as the focus on governance
sharpens. As is the case at present, Bank staff will serve as resource
persons, to the extent feasible; nevertheless, there will continue to be
a need for external consultants, especially for the more specialized
subjects. In order to cater to these requirements within the Bank’s train-
ing budget, activities of lower priority will have to be reduced.
The Bank’s governance initiatives will be articulated through the
Bank’s existing modalities and activities, i.e., country and sector docu-
ments, and loan and TA projects. Addressing governance aspects in
these contexts may add to lead times and complexity, as do other issues
of Bank concern, such as women in development and environmental
protection. It is difficult to estimate the resource increases necessary to
do so. However, in several areas, the Bank is already carrying out the
work involved (e.g., participatory approaches to project design and
implementation), and, in some cases, has been doing so for a long
time (e.g., public enterprise reform). Hence, any extra expenditure, in
terms of staff time, business travel, and loan and TA resources would
be adjusted and reflected in the relevant allocations made in the Bank’s
three-year rolling work program and budget implications.

50
Reporting arrangements

T
o monitor (and coordinate) the Bank’s efforts with respect to gov-
ernance issues in DMCs, departments and offices concerned
would be requested to provide SPO and OGC (in respect of legal
frameworks and legal issues of relevance to other areas of action) with
periodic reports on governance-related activities. SPO and OGC would
then collate the information received, serve as the clearinghouse on
best practice, and offer suggestions for further work.
Two years after Board approval of the Bank’s operational policy
on governance issues (i.e., in late-1997), a Board paper will be circu-
lated, analyzing the Bank’s experience with governance activities, pro-
posing modifications to the operational approach as necessary, and
indicating more specific budgetary and other resource implications.

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