Governance Anti Corruption Project Design

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Governance andAnticorruption

inProject DesignOffice of the General Counsel GuideAsian Development Bank


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2010 Asian Development Bank

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

ISBN 978-971-561-872-4

Publication Stock No. TIM090586

Cataloging-In-Publication Data

Asian Development Bank.

Kala Mulqueeny.

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

Guide, Asian Development Bank.

Mandaluyong City, Philippines: Asian Development Bank, 2010.

1. Governance. 2. Anticorruption. I. Asian Development Bank.

The views expressed in this book are those of the author and do not necessarily reflect

the views and policies of the Asian Development Bank (ADB) or its Board of Governors

or the governments they represent.

ADB does not guarantee the accuracy of the data included in this publication and

accepts no responsibility for any consequence of their use.

Use of the term country does not imply any judgment by the author or ADB as to the

legal or other status of any territorial entity.

ADB encourages printing or copying information exclusively for personal and

noncommercial use with proper acknowledgment of ADB. Users are restricted from

reselling, redistributing, or creating derivative works for commercial purposes without

the express, written consent of ADB.

Asian Development Bank

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Tel +63 2 632 4444

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For orders, contactDepartment of External Relations

Fax +63 2 636 2648

[email protected]


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Contents

Foreword v

Acknowledgments

Abbreviations

Executive Summary ix

Purpose of the Governance Guide ix

How to Use this Governance Guide ix

ADB Policies and Strategies x

Multilateral Initiatives on Governance and Anticorruption xi

Tools Available to Project Counsel xii

Project-Specific Risks xiv

Project-Specific Governance and Anticorruption Measures xv

Introduction 1

The Governance and Anticorruption Agenda in Context 3Meanings of Governance and Corruption 5

Governance and Corruption Risks 7

Structure of the Guide 9

Chapter 1: ADBsGovernance and Anticorruption 11

Policies, Strategies, and Procedures

Overview 11

ADB Policies and Strategies 14

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

Overview 43

International Law 43

Multilateral Harmonization Initiatives 48Multilateral Development Bank Policies and Procedures 51

International Organizations 64

Regional Initiatives 68


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Chapter 3: Governance 73

and Anticorruption ToolsOverview 73

Governance Tools 74

Anticorruption Tools 81

Tools on Procurement 84

Chapter 4: Governance and Anticorruption 87Measures in ADB Interventions

Overview 87

Risk Analysis and Institutional Assessments 87

Indicators of Corruption Risks in Projects 92

Governance and Anticorruption Project Design Measures 95

Chapter 5: Public Sector Covenants 125

Overview 125

Governance Policy 125Anticorruption Policy 126

Governance as Sound Management Design Features 128

Project Design Features: Supervision and Monitoring 131

Chapter 6: Specific Cases of Governance 145

and Anticorruption

General 145

Corporate Governance 145Governance and the Regulation of Public UtilitiesWater and Energy 153

Social SectorsHealth and Education 168

Decentralization 173

Disasters and Emergencies 180

Anti-Money Laundering 184

Environmental and Natural Resource Governance 188

Climate Change Governance 197

References 201

Appendix 1 225

Appendix 2 241


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Foreword

Governance is a key issue and a driver of change that cuts across the Asian

Development Banks (ADB) three strategic priorities of inclusive economic

growth, environmentally sustainable growth, and regional integration. ADB

staff need to understand governance and anticorruption issues to successfully

employ these strategic priorities and incorporate measures promoting good

governance and corruption prevention in ADB projects. Moreover, the

mandate of the Office of the General Counsel (OGC) to assist operational

departments with promoting project-specific governance measures stemsfrom Article 14 (xi) of the ADB Charter. This requires ADB to ensure that the

proceeds of any grant, loan, guarantee, or investment are used solely for the

purposes for which ADB provided the finance.

This publication Governance and Anticorruption in Project Design:

Office of the General Counsel Guide (the Governance Guide)evolved from

ADBs response to the 2004 Asian tsunami disaster. As part of that response,

OGC developed and coordinated an approach to assist ADB staff working

on ADBs tsunami assistance projects to promote good governance andanticorruption in ADBs tsunami response projects in India, Indonesia, the

Maldives, and Sri Lanka. Innovative and interested project teams in South

Asia and Southeast Asia were receptive to and encouraged these governance

themes in the four post-tsunami projects. Later in 2005, a similar approach

to governance and anticorruption was taken in the Pakistan Earthquake

Emergency Assistance Project. OGC has since worked with operations

departments to develop governance and anticorruption design features for

other projects, where project leaders consider such measures appropriate.The Governance Guide seeks to collect this operational knowledge and

provide ADB staff, principally counsel from OGC, with guidance on ways to

help project teams and developing member countries formulate corruption-

prevention measures and sound governance features in a projects design,

particularly for non-core governance sectors.

Jeremy H. Hovland

General CounselOffice of the General Counsel


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Acknowledgments

Several departments and individuals contributed and supported the

preparation of this Governance Guide. Sandra Nicoll (Regional and Sustainable

Development Department [RSDD]), Clare Wee (Office of Anticorruption and

Integrity [OAI]), and Hamid Sharif (Central Operations Services Office [COSO])

provided support, encouragement, and helpful comments. Raza Ahmad and

Surya Shrestha of RSDD; Nigel Savidge, Genevieve Abel, H. Lorraine Wang,

and Patrice Sam of OAI; and Robert Rothery and Joel Syquia of COSO also

gave helpful comments.Sekhar Bonu (South Asia Department) developed operational guidelines

for governance, in conjunction with OGC, in the 2005 Bangladesh Second

Urban Primary Health Care Project. Those guidelines were subsequently

adopted in other projects in South Asia and formed the basis for some of

the work included here. Sekhar Bonu, Laurence Pochard (Special Office in

Timor-Leste), Debra Kertzman (Central and West Asia Department), and

Harsha Fernando (Sri Lanka Resident Mission) gave comments, sharing

important operational perspectives.Said Zaidansyah (OGC) contributed to Chapter 1 and added important

information on governance in decentralization. Rita OSullivan (OGC) gave

valuable inputs on anti-money laundering. Irum Ahsan (OGC), Leslie Lahm

(INRM), and Ramit Nagpal (OGC) also gave valuable help on earlier drafts.

Ma. Priscila P. del Rosario, Muriel Ordoez, Anthony H. Victoria, Portia

Andres, Edith Creus, Vicente M. Angeles, Aldwin Thadeus S. Sutarez, and

Rodel Bautista of the Department of External Relations gave extraordinary

assistance. Kathleen Marie R. Leycano, Remedios Paningbatan, Laarni Zapanta,and Mark Alain V. Villocero provided helpful administrative support.

Eveline Fischer, as deputy general counsel and head of OGCs Law and

Policy Reform program, guided and encouraged this work. Kala Mulqueeny,

senior counsel, OGC, is the lead author for this work. A team compromised

of Angelique Badelles, legal specialist (consultant); Sherielysse Bonifacio, legal

research associate (consultant); and January A. Sanchez, then-legal specialist

(consultant), supported research and production.


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Abbreviations

ACT anticorruption and transparency expert task force

ADB Asian Development Bank

ADF Asian Development Fund

AfDB African Development Bank

AML anti-money launderingAPEC AsiaPacific Economic Cooperation

CAPE country assistance program evaluation

CGA country governance assessment

COSO Central Operations Services Office

CPA country performance assessment

CPIA country policy and institutional assessment

CPS country partnership strategy

CSO civil society organization

DMC developing member country

EA executing agency

EBRD European Bank for Reconstruction and Development

GACAP II Second Governance and Anticorruption Action Plan

IA implementing agency

IDB Inter-American Development Bank

IFC International Finance Corporation

IFI international financial institution

KRA key result area

LTSF long-term strategic framework (20012015)

MDB multilateral development bank

MIGA Multilateral Investment Guarantee Agency

MTS II medium-term strategy II (2006)

NGO nongovernment organization


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

OAI Office of Anticorruption and Integrity

ODI Overseas Development InstituteOECD Organisation for Economic Co-operation and

Development

OGC Office of the General Counsel

OM operations manual

PAI project administration instructions

PBA performance-based allocation

PMO project management officePPMS Project Performance Management System

PPRA project procurement related audit

RSGP Public Management, Governance and Participation

Division, Regional and Sustainable Development

Department

RRP report and recommendation of the President

TA technical assistance

UN United Nations

UNCAC United Nations Convention against Corruption

UNDP United Nations Development Programme

WBG World Bank Group


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Executive Summary

A. Purpose o the Governance Guide

All Asian Development Bank (ADB) staff have a duty to consider and

address governance and anticorruption in all ADB-financed activities. This

duty originates from the Agreement Establishing the Asian Development

Bank (Charter)1 and has been elaborated upon in other ADB policies and

procedures.

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

This requirement extends to grants, technical assistance, and the newer, more

innovative modes of financing that ADB has begun to undertake. Designing

projects that incorporate sound governance features and measures to prevent

corruption supports this Charter requirement. It also contributes to ensuring

development effectiveness within ADBs developing member countries (DMCs).

This Governance Guide was prepared to assist ADB staff, including counsel

from the Office of the General Counsel (OGC), working in project teams onpublic sector projects or programs (project counsel) formulate projects that

incorporate governance and anticorruption measures. In doing so, they should

be aware that this Guide focuses on identifying and managing project-specific

governance and anticorruption risks by incorporating project specific measures.

ADB also conducts governance work such as diagnostic risk assessments

performed at the country and sector level, which may assist identify and design

project specific measures. These are also mentioned in this Guide.

B. How to Use this Governance Guide

This Guide can be read from cover to cover as a general introduction

to governance and anticorruption. However, it has been prepared as a

general reference and operational guide for ADB staff, particularly project

counsel, working upon ADB projects and seeking to identify and manage

project-specific governance and anticorruption risks. Each chapter is a

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


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fairly self-contained module that can be referred to separately as needed.

It contains chapter summaries for quick ready reference and highlights key

points in boxes. Important material in the text is highlighted in blue.

C. ADB Policies and Strategies

Under the mandate afforded by its Charter, ADB has formulated policies and

strategies to promote governance and combat corruption. The governance

policy (1995) is the foundation policy. ADB considers governance to be

the manner in which power is exercised in the management of a countryseconomic and social resources for development.3

The governance policy identifies four elements of good governance:

accountability, transparency, participation, and predictability. It emphasizes

that a legal environment conducive to development is essential for all DMCs

and that overarching legal frameworks are needed to achieve these elements.

The second key governance-related policy is ADBs anticorruption policy

(1998), which identifies accountability, transparency, participation and

predictability. ADBs approach on anticorruption issues has three core objectives:(i) supporting competitive markets and efficient, effective, accountable, and

transparent public administration as part of ADBs work on good governance

and capacity building; (ii) supporting promising anticorruption efforts and

improving ADBs dialogue with DMCs on governance issues, including

corruption; and (iii) ensuring that its projects and staff adhere to the highest

ethical standards.

The third key policy relating to governance is ADBs private sector

development strategy (2000), which highlights governance as one of the four

areas of operational focus for promoting private sector development and pro-

poor growth.

ADBs poverty reduction strategy (1999) identifies good governance as

a key pillar. In 2004, ADB adopted the enhanced poverty reduction strategy

(2004) which stresses the importance of legal reform, and encourages ADB

to assist DMCs to function with transparency and accountability, uphold basic

rights, provide public safety, and promote the rule of law.

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


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Executive Summary xi

Under the long-term strategic framework 20082020 (Strategy 2020)

ADBs vision continues to be an Asia and Pacific region free of poverty. 4

Strategy 2020 reaffirms ADBs support for good governance and capacity

building by (i) further mainstreaming four elements of good governance into its

operations and activities; (ii) linking its anticorruption efforts to broader support

for governance; and (iii) effectively increasing private sector investments by

improving governance, curtailing official corruption, and helping to make

public institutions and organizations more capable.

In 2006, ADB developed the second governance and anticorruption

action plan (GACAP II). GACAP II seeks to prioritize ADBs work in governance

and anticorruption by focusing on the sectors and subsectors where ADB isactive. Thus, the three thematic priorities under GACAP II are public financial

management, procurement, and combating corruption.

The rules and outcomes governing the procurement of goods and

works (the revised procurement guidelines [April 2010]), and engagement

of consultants (the guidelines on the use of consultants by ADB and its

borrowers [April 2010]), also have a significant impact on governance and

corruption. In March 2010, both of these guidelines had been modified based

on changes to the anticorruption policy to reflect cross-debarment amongmultilateral development banks.

D. Multilateral Initiatives on Governance and Anticorruption

In addition to ADBs internal policies and procedures, project counsel should

be aware of the international and multilateral initiatives relating to good

governance and anticorruption, including international conventions, the

policies of other multilateral development banks (MDBs), the work of the

Organisation for Economic Co-operation and Development (OECD), and

regional initiatives for Asia and the Pacific. These are relevant in formulating

the need for project-specific anticorruption and governance measures.

Many international agreements and soft law instruments refer to or have

an impact upon governance and anticorruption in different sectors in which

ADB works, including the United Nations Convention Against Corruption

(UNCAC) and the OECD Convention on Combating Bribery of Foreign Public

Officials in International Business Transactions (Anti-Bribery Convention).

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

20082020. Manila, p. i.


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Moreover, other MDBs also have their own governance and anticorruption

policies and initiatives and have recognized the importance of, and actively

participated in, harmonizing their policies and initiatives.

International organizations such as the United Nations Development

Programme (UNDP) have initiatives to promote democratic governance and

prevent corruption.

Two regional initiatives are currently in force in Asia and Pacific. One is

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

Plan), launched in 1999. The other regional initiative is the AsiaPacific

Economic Cooperations (APEC) Anti-Corruption and Transparency Expert

Task Force, formed in 2005 to steer APECs anticorruption activities.

E. Tools Available to Project Counsel

To formulate project-specific governance measures, a project team needs to

understand the governance context within the country and the particular

sector governance issues. Several tools are available to assist.

1. Governance Tools

ADB Governance Risk Assessments and Risk Management Plans (RAMPs).

GACAP II currently requires ADB staff to conduct governance risk assessments

of countries and sectors as an input to each country partnership strategy.

After risks are assessed, risk management strategies which are an important

part of a country risk assessment can be identified.

ADB Country Governance Assessments (CGA). CGAs were carried out

before the implementation of GACAP II and RAMPs have now replaced CGAs.

Hence, CGAs may contain useful information, but must be used with caution

given they have been replaced.

ADB Country Partnership Strategies (CPSs) and ADB Country Assistance

Program Evaluations (CAPEs). CPSs are prepared substantially by operations

departments, and CAPEs are prepared by the Independent Evaluation

Department. They each usually provide shorter descriptions of the country

governance context.


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Executive Summary xiii

World Bank Country Policy and Institutional Assessment (CPIA). This tool

is designed to describe the quality of policies, institutions and governance in

a country and is used for determining the allocation of concessional grant

resources to an eligible country.

ADBs Performance-Based Allocation (PBA) Policy. This system resembles

the CPIA. It forms an important basis for determining the Asian Development

Fund (ADF) resource allocations for an ADF eligible country.

World Bank Governance Indicators. These measure the quality of

governance of more than 200 countries and rank those countries on an indexbased upon six dimensions of governance.

Other Governance Assessments. Various other assessments that provide

both quantitative and qualitative data on governance are also available.

2. Anticorruption Tools

ADBs Risk Assessment Sourcebook. The sourcebook refers to severaldiagnostic tools, including the ADB/OECD Country Self-Assessment.

United Nations Anti-Corruption Toolkit. This toolkit is published by

the United Nations Office on Drugs and Crime and contains a range of

anticorruption strategy options.

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

has the results of the in-depth 2006 review on mutual legal assistance,

extradition, and the recovery of proceeds of corruption.

Transparency International National Integrity System Reports. These

reports detail and assess the anticorruption systems within a country.

Transparency Internationals Toolkits. These are business tools, reports,

actions, and information that can help prevent corruption on construction

projects.


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3. Tools on Procurement

ADBs Sourcebook: Diagnostics to Assist Preparation of Governance Risk

Assessments. This sourcebook refers to a range of diagnostic tools, including

(i) Benchmarking and Assessment Methodology for Public Procurement

Systems (OECD/Development Assistance Committee); (ii) the Country

Procurement Assessment Report (World Bank); and (iii) the Procurement

Capacity Assessment (ADB).

The OECDs Checklist for Enhancing Integrity in Public Procurement. This

toolkit contains 10 key recommendations on how to develop and implement

a policy framework for enhancing integrity at each stage of the public

procurement cycle.

ADB/OECD Anti-Corruption Initiatives Fighting Bribery in Public

Procurement in Asia and the Pacific. This initiative produced materials on

fighting bribery and corruption in public procurement.

F. Project-Specifc Risks

Project counsel must look out for risks and corruption indicators associated

with different stages of the ADB project cycle and different levels of risk.

Project counsel can assist project teams to undertake a preliminary

assessment of the institutions and organizations involved in a project. Two

general tools for those involved in project formulation can be used.

a risk mapproducing a risk map helps project teams identify

the potential risks throughout the project cycle and also identify

mitigants for those risks; and

a risk assessment checklistworking through the checklist helps

project teams better understand the specific governance issues

relating to an agency, entity, or organization.


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Executive Summary xv

G. Project-Specifc Governance and Anticorruption Measures

Specific cases of governance and anticorruption include:

Corporate Governance

Governance and the Regulation of Public UtilitiesWater and

Energy

Social SectorsHealth and Education

Decentralization

Disasters and Emergencies

Anti-Money Laundering (AML)

Environmental and Natural Resource Governance

Climate Change Governance

Project counsel can help project teams design project-specific governance

and anticorruption measures that focus on transparency, participation,

accountability, and predictability. These strategies and measures may

incorporate features that instill good management, limit theopportunity for corruption and leakages, and create disincentives

to engaging in corrupt practices;

provide sufficient supervision and monitoring;

allow public and local stakeholders to access relevant project

information;

involve local stakeholders in project preparation and

implementation;

consider project accountability and grievance redress mechanismsfor the project; and

assess the legal environment of the country where the project is

located.


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Introduction

Inclusive economic growth, environmentally sustainable growth, and

regional integration are the Asian Development Banks (ADB) strategic

priorities.5 Governance is a key issue and a driver of change that cuts across

these strategic priorities. To successfully employ these strategic priorities,

ADB staff need to understand the particular governance and anticorruption

issues and risks related to each strategic priority. They must also be able to

incorporate measures into ADB projects that promote good governance and

prevent corruption. This Governance Guide seeks to equip project counsel

with the knowledge to assist project teams in integrating governance and

anticorruption measures into ADB projects and across ADBs core priorities.

Governance is the manner in which power is exercised in the

management of a countrys economic and social resources for development.6

Governance is now firmly recognized as an essential component of reducing

poverty and creating sustainable development. A countrys government holds

much of the power to manage development resourcesas exercised by its

executive, judicial, administrative, and legislative branches. Thus, the successof governance will often depend on the quality and capacity of each branch

of government. However, governance is a wider concept than the operation

of a countrys government. The concept covers the institutions that allow

citizen participation in the task of governing, as well as in governing private

sector entities. Good governance requires effective management. Corruption,

which ADBs anticorruption policy defines as the misuse of public or private

office for personal gain,7 occurs where governance is weak and management

is unsound.8

Unsound management, weak governance, and corruption can directly

affect the impact of development programs and projects and reduce the

overall effectiveness of development aid. ADB recognizes the potential for

these risks to materialize in projects and has developed policies, strategies,

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

20082020.6 ADB. 1995. Governance: Sound Development Management. p. 3. This cited: Websters New

Universal Unabridged Dictionary, London: Dorset & Baber, 1979.7 ADB. 1998.Anticorruption Policy. paras. 1 and 17.8 Kaufmann, D. 2005. Myths and Realities of Governance and Corruption. In World Economic

Forum. Global Competitiveness Report 20052006.


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and procedures to tackle them on a systematic sector and programmatic

basis. Increasingly, ADB is considering ways to address the risk that unsound

management, weak governance, and corruption present to the success of

specific projects.

ADB has provided financial assistance to many developing member

countries (DMCs) for noteworthy core governance sector programs.

Such programs have been designed to systematically help DMCs tackle

core governance issues and support the institutions responsible for public

administration and fiscal management, judicial reform, and anticorruption.9

Many projects that ADB supports in sectors that are not directly

governance related have also been designed with specific measures to promotegood governance and prevent corruption (for example, infrastructure, and

disaster and emergency projects). Increasingly, specific measures to improve

governance and combat corruption are being introduced into all sectors

that ADB supports. It is important to continue with and expand up on these

measures to ensure that the significant risks and negative impacts resulting

from unsound management, weak governance, and corruption do not defeat

the purposes of an ADB program or project.

The Office of the General Counsel (OGC) advises other ADB departmentsand can advise on the measures necessary to ensure that the proceeds of any

ADB grant, loan, guarantee, or investment are used solely for the purposes

for which ADB provided the finance.

This Guide seeks to provide ADB staff, principally counsels from

the Office of the General Counsel (project counsel) who are working on

sovereign transactions, with guidance on ways to help project teams and

DMC governments formulate corruption-prevention measures and sound

governance features in a projects design. This guide has been specifically

drafted to help project teams consider governance and anticorruption issues

when designing projects for non-core governance sectors. However, if project

teams are planning a more extensive program of core governance reforms,

they may start with this guide but will need to undertake a deeper analysis

than that presented herein.

9 Examples of ADB-funded programs are the (i) Bangladesh Good Governance Program, (ii) Nepal

Governance Reform Program, (iii) Pakistan Access to Justice Program, (iv) Philippine Judicial Reform

Program, and (v) Sri Lanka Fiscal Reform Program.


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Introduction 3

A. The Governance and Anticorruption Agenda in Context

1. Governance

Governance as a theme and an agenda gained prominence within the development

community during the 1990s.10 Since then, economists and development

practitioners have examined the causal links between governance, on the one

hand, and economic growth and development on the other. In recent times, the

development community has reached a consensus that governance matters for,

or is a vital factor in, achieving growth.11 However, the development community

remains divided on the extent of the causal links between these concepts, the

particular aspects of governance that are conducive to development, and the

relative importance of governance vis--vis varying levels of development.12

Donors and other international organizations have also developed

assessment tools and/or indicators for measuring these links.13 In particular,

the World Bank developed the Worldwide Governance Indicators project,14

the Overseas Development Institute developed the world governance

assessment,15 and the United Nations Development Programme (UNDP)

developed the Governance Indicators Project.16 More recently, UNDPidentified direct and indirect links between governance and ways to achieve

the Millennium Development Goals (MDGs).17

10 Resnick, D., and R. Birner. 2006. Does Good Governance Contribute to Pro-poor Growth?: A Review

of the Evidence from Cross Country Studies. DSDG Discussion PaperNo. 30. See also Woods, N.

1999. Good Governance in International Organizations. Global Governance. Vol. 5, No. 1.11 Bhatta, G. 2008. Governance Innovations in the AsiaPacific Region: Trends, Cases, and Issues. pp.

2346. Quoted in Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology

to do Risk Assessments at the Program Level. See also Quibria, M.G. 2006. Does GovernanceMatter? Yes, No or Maybe: Some Evidence from Developing Asia.12 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development

Bank 20082020. See also Kumar Roy, D. 2005. Governance, Competitiveness and Growth: The

Challenges for Bangladesh. ADB Institute Discussion PaperNo. 52; Rodrik, D. 2008. Thinking

Governance. In North, D., D. Acemoglu, F. Fukuyama, and D. Rodrik, eds. Governance, Growth,

and Development Decision-Making; and, Khan, M.H. 2007. Governance, Economic Growth and

Development since the 1960s. DESA Working PaperNo. 54.13 Khan, M.H. 2007. Governance, Economic Growth and Development since the 1960s. DESA

Working PaperNo. 54.14 Kaufmann, D., and A. Kraay. 2003. Governance and Growth: Causality which way?Evidence for

the World, in brief. See also the Worldwide Governance Indicators Project.15

Hyden, G., K. Mease, M. Foresti, and V. Fritz. 2008. Governance Assessments for Local Stakeholders:What the World Governance Assessment Offers. Working Paper287.16 For more details, see www.undp.org/oslocentre/flagship/governance_indicators_project.html17 UNDP. 2007. Governance for the Millennium Development Goals: Core Issues and Good Practices.


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Introduction 5

for development.25 In response to this empirical research, MDBs have

become more willing to tackle issues that might have been perceived

as too political for them in the past. For example, in 2006, the World

Banks former senior vice president and general counsel issued an opinion

that expanded the scope of considerations that are relevant to the World

Banks decisions and activities. He concluded that apart from economic

considerations, it is also within the World Banks mandate to recognize

human rights dimensions of its development policies and activities.26

2. Corruption

Since the mid-1990s, together with the governance agenda, international

organizations, including MDBs, have also sought to address corruption.27

Some claim that prior to this time corruption was tolerated on various bases,

including that it was only a stage of development, that it provided a reasonable

supplement to the low incomes of poor civil servants, and that it performed

a valuable redistributive role.28 In any event, MDBs, in conjunction with their

member countries, now actively seek to address corruption in projects and

programs.

B. Meanings o Governance and Corruption

1. Governance and GoodGovernance

The term governance has been defined and applied variously. ADB prefers

the straightforward definition contained in the Webster Dictionary: the

25 Kaufmann, D., and A. Kraay. 2003. Governance and Growth: Causality which way?Evidence for

the World, in brief. See also World Bank. 2008. Governance Matters 2008: Worldwide Governance

Indicators Project 19972007; and, Kaufman, D. 2004. Human Rights and Governance: The

Empirical Challenge. Kaufmann wrote: These findings, if corroborated through further research,

have important implications for the donor aid community and emerging economies alike. In

particular, it would point to the potential need to account for first generation human rights issues

in enhancing effectiveness of development aid and its projects... Further, it would also point to the

need to deepen the integration of the corruption and rule-of-law dimensions of governance in aid

strategies so to enhance effectiveness related to socio-economic human rights and development.26 Danino, R. 2006. Legal Opinion on Human Rights and the Work of the World Bank.27 World Bank. 2007. Strengthening World Bank Group Engagement on Governance and

Anticorruption. See also African Development Bank. 2009. Overview: Good Economic and

Financial Governance; EBRD. 2006.Anti-corruption Homepage; and, ADB. 2009. Anticorruption

and Integrity.28 Transparency International. 2005.Anti-Corruption Handbook .


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Introduction 7

the Organisation for Economic Co-operation and Development

(OECD) uses: the exercise of political, economic and administrative

authority necessary to manage a nations affairs;32

UNDP uses: the exercise of economic, political, and adminis-

trative authority to manage a countrys affairs at all levels and the

means by which states promote social cohesion, integration, and

ensure the well-being of their populations;33 and

the World Bank now uses: the manner in which public officials

and public institutions acquire and exercise the authority to

provide public goods and services, including the delivery of basic

services, infrastructure, and a sound investment climate.34

2. Corruption

ADB has defined corruption as the abuse of public or private office for

personal gain.35 More comprehensively, corruption includes public and private

sector officials attempting to improperly and unlawfully enrich themselves and/

or those close to them, or inducing others to do so by misusing their position.36

Chapter 2 more extensively reviews ADBs corruption-related definitionsincluding corrupt, fraudulent, collusive, and coercive practices; conflicts of

interest; obstructive practices, and abuse.

C. Governance and Corruption Risks

Together with all other stakeholders involved in a project, the ADB project

team has an interest in ensuring that necessary measures to achieve good

governance and avoid or minimize corruption are incorporated into a

projects design. Several ADB policies also oblige project teams to incorporate

strategies for good governance into a project. These are discussed further in

Chapter 1.

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

No. 1. See also UNDP. 1997. Chapter 1: Good governanceand sustainable human development.

In UNDP. Governance for Sustainable Human Development. A UNDP Policy Document.34 The World Bank recently reviewed and changed its definition of governance. Its former definition

was identical to ADBs current definition. World Bank. 2007. Strengthening World Bank Group

Engagement on Governance and Anticorruption. Annex E, p. 67.35 ADB. 1998.Anticorruption Policy. paras. 1 and 17.36 Ibid.


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Introduction 9

A good way to become familiar with these and other similar risks is to

review the Governance Risk Mapping Table in Appendix 1 and the relevant

questions in the Governance Risk Assessment Checklist in Appendix 2 of this

Guide. These documents are extensive and not intended to be used from start

to end for every project. However, they cover a large range of issues that will

help project counsel reveal the governance gaps and risks of most projects.

The project team could also complete a risk mapping table or a governance

risk assessment checklist to assess the corruption risks in any particular project

under processing.

D. Structure o the Guide

The Governance Guide is structured as follows:

Chapter 1provides an overview of ADBs internal policy and strategy

documents relating to good governance and anticorruption.

Chapter 2 provides an overview of international and multilateral

initiatives relating to good governance and anticorruption, includinginternational conventions, other MDB policies, the OECDs work,

and regional initiatives in Asia and the Pacific.

Chapter 3 sets out the tools that project counsel may access in

formulating project-specific good governance and anticorruption

measures.

Chapter 4 sets out some governance and corruption risks

indicators in projects, the questions relevant to project counsel

in undertaking an institutional assessment of institutions or

organizations and their governance and corruption risks, and

project-specific governance and integrity strategies that project

counsel may adopt after identifying the risks and conducting the

assessment.

Chapter 5 sets out sample covenants for many issues discussed

in Chapter 4.

Chapter 6 provides an overview of the issues arising in special

governance cases and projects: corporate governance, governance

and the regulation of public utilities, health and education projects,decentralization, disaster and emergency projects, anti-money

laundering, and environmental, natural resource, and climate

change projects.


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CHAPTER 1

ADBs Governance and Anticorruption

Policies, Strategies, and Procedures

A. Overview

The Asian Development Bank (ADB) has formulated policies and strategies

aimed at promoting governance and combating corruption. The governance

policy (1995)37 and the anticorruption policy (1998),38 form the core of ADBs

policy approach to governance and anticorruption. They derive principal

authority from the Agreement Establishing the Asian Development Bank

(Charter) under which ADB must:

take the necessary measures to ensure that the proceeds of

any loan made, guaranteed, or participated in by the Bank are

used only for the purposes for which the loan was granted...Article 14 (xi).39

The governance policy and the anticorruption policy each recognize the

importance of the principles of accountability, transparency, participation,

and predictability to development, and so reinforce the other.

The private sector development strategy (2000) also supports governance

by promoting corporate governance in private and public sector entities and

encouraging the development of national legal frameworks for private sectordevelopment.40

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


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ADBs Governance and Anticorruption Policies, Strategies, and Procedures 13

1

Key messages in Chapter 1

Project counsel should know that

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

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

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

coercive, and collusive practices under the anticorruption policy, the

procurement guidelines, and consultancy services guidelines; ADBs investments must be limited to companies that candemonstrate the capacity to establish and maintain soundcorporate governance structures and practices;

ADBs strategic framework for poverty reduction provides anoverarching foundation for including good governance measures inprojects;

there are still weaknesses in the implementation of the governancepolicy;

they must explain to the project leaders the project-specific

recommendations identified in the Governance and AnticorruptionAction Plan II (GACAP II);

strengthening projects and project design by including governanceand anticorruption components is one of the four key result areasunder GACAP II;

GACAP IIs priority areas are public financial management,procurement, and anticorruption;

improving and mainstreaming governance in the public and privatesectors is integral to ADBs new long-term strategic agenda;

capacity development is important for development effectiveness

and ADB has a framework and action plan operationalizing it inprojects; and

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


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B. ADB Policies and Strategies

1. Governance Policy (1995)

Since 1995, ADB has recognized the important role good governance plays

in helping a government develop and institute effective development policies

and effectively use development assistance. ADBs governance policy identifies

four elements of good governance: accountability, transparency, participation,

and predictability. These elements are key for designing and implementing

programs and projects for developing member countries (DMCs).

The governance policy also emphasizes that DMCs need a legal

environment conducive to development. This conducive legal environment

can be achieved by establishing overarching legal frameworks as they are

relevant to promoting predictability, and contribute to accountability,

participation, and transparency. For this reason, the governance policy focuses

on legal reform activities that seek to improve sector policy frameworks and

provide legal training in the public and private sectors. ADB acknowledges

that promoting private sector development requires an especially strong legal

foundation.There are three important sections of the governance policy: (i) the

discussion of Article 36 of the Charter,46 (ii) the analytical framework for

good governance, and (iii) the specific action areas for implementing good

governance.

Article 36 Discussion. ADBs analytic framework is comprised

of four elements: accountability, transparency, participation, and

predictability. The governance policy separately addresses andsummarizes the then-general counsels opinion on the ability of

ADB to engage in governance in a way that would not contravene

Article 36 of the Charter.

Good Governance Analytic Framework. The governance policy

distinguished the World Banks basic approach to governance

from ADBs. The World Bank had identified key dimensions of

governance as (i) public sector management, (ii) accountability,

(iii) legal framework for development, and (iv) transparency

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


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and information.47 The governance policy observed that ADB

is also concerned directly with the manner in which the public

sector is managed in DMCs, and with the legal framework for

development. However, in formulating an analytical framework

for addressing governance issues, rather than following the

World Bank approach, ADB distinguished the four elements of

good governance (accountability, transparency, participation, and

predictability) from the specific areas of action (e.g., public sector

management) in which they could be promoted or their existence

enhanced.

This distinction is important because it shows how ADB deliberately

avoided collapsing the analytic framework for good governance

into the specific actions for implementing it. Project counsel con-

sidering reviews of the governance policy should keep this in mind.

Specific Action Areas for Good Governance. The governance

policy emphasizes that the four elements of good governance are

distinct48 but also interlinked.49 The four elements cover different

specific areas of action, and different stakeholders as follows:

47 ADB. 1995. Governance: Sound Development Management. para. 15.48 Ibid., paras. 1832.49 Ibid., para. 33.

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


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

the anticorruption policy that55

introduced new definitions for fraud and corruption,

recommended that ADBs anticorruption procedures be amended

to give ADB more latitude to impose sanctions where it determines

that an entity that is eligible to participate in an ADB activity has

not maintained the highest ethical standards,56 and

amended relevant sections of ADBs procurement guidelines57 and

guidelines on the use of consultants by ADB and its borrowers.58

These clarifications are set out in section C5/BP of the OM.59 In September

2006, ADB and the other main multilateral development banks (MDBs)

agreed upon standardized definitions for corrupt, fraudulent, collusive, and

coercive practices.60 ADB incorporated these definitions into the procurement

guidelines and guidelines on the use of consultants by ADB and its borrowers.

In March 2010, ADBs Board approved modifications to the Procurement

Guidelines and the Guidelines on the Use of Consultants to allow ADB to enter

into an agreement for the mutual enforcement of debarment actions (alsoreferred to as cross-debarment) by and between ADB, African Development

Bank, European Bank for Reconstruction and Development, Inter-American

Development Bank, and the World Bank Group. This agreement will allow

ADB to bar any firm or individual found by any of these institutions to have,

directly or indirectly, engaged in corrupt, fraudulent, collusive, coercive or

other prohibited practices, or failed to have observed the highest ethical

standards.61 Prior to these revisions, ADB had no basis under its eligibility

rules, as reflected in ADBs procurement and consulting services guidelines,62

to take such action.

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

Procurement Guidelines.56 These provisions were previously contained in: ADB. 2003. Operations Manual. OM 55: Enhancing

the Asian Development Banks Role in Combating Money Laundering and the Financing of

Terrorism. This was superseded by: ADB. 2008. Operations Manual. OM C5/BP: Anticorruption.57 ADB. 2007. Procurement Guidelines.58 ADB. 2007. Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers.59 ADB. 2006. Operations Manual. OM C5/BP: Anticorruption.60

See page 49 of this Guide for these definitions.61 ADB. 2010.Anticorruption Policy: Harmonization of Debarments.62 Procurement Guidelines (February 2007), clauses 1.8(d) and 1.14(d); and Guidelines on the Use of

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


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

1.13(e) of the Guidelines on the Use of Consultants to include a reference to

ADBs Anticorruption Policy and Integrity Principles and Guidelines to exclude

the possibility that a sanctioned or cross-debarred firm or individual could

benefit financially or otherwise from an ADB-financed or ADB-administered

project; and (ii) modified clauses 1.14(d) of the Procurement Guidelines

(2007) and 1.23(d) of the Guidelines on the Use of Consultants (2007) to

remove the restriction that the corrupt or fraudulent practices shall have

occurred only in competing for, or in executing, an ADB-financed contract

and thus allow ADB to cross-debar and enforce sanctions imposed by the

Participating Institutions in the cross debarment agreement.63 These changesare reflected in the Procurement Guidelines (2010) and the Guidelines on the

Use of Consultants (2010).

3. Private Sector Development Strategy (2000)

ADBs private sector development strategy (2000)64 is founded upon three

strategic pillars: (i) creating enabling conditions for private sector investment,

(ii) generating business opportunities, and (iii) catalyzing private sector

investments.65

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

Key Points for Project Counsel. Project counsel should know that under

the anticorruption policy:

a project team should identify where potential corruption and

leakage may occur in a project and incorporate measures toaddress it during the project processing stage,

they have an obligation to report allegations of corruption to the

Office of Anticorruption and Integrity (OAI) irrespective of whether

they have received any evidence substantiating the allegation,

they are expressly forbidden from undertaking any preliminary

investigatory inquiries into a corruption allegation, and

the possibility of cross debarment based on sanctions imposed

by other multilateral development banks now exists.


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The private sector development strategy also identifies public and private

sector governance as a key area of operational focus under which ADB can

promote private sector development and pro-poor growth.66 The strategyregards governance as being comprised of

public sector governance,

commercialization and privatization of public enterprises, and

corporate governance.

The strategy envisages a large role for law and policy reform under these

three focus areas of governance as set out below.67

a. Public Sector Governance

To advance private sector development, ADB needs to promote public sector

governance. The private sector development strategy indicates several ways

this could be done, which are:

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

systems;

formulating sound and transparent regulation of industry;

strengthening public administration;

fighting corruption;

removing impediments to investment and reducing transaction

costs; and

establishing efficient and competitive markets that are supported

by appropriate fiscal, monetary, and trade policies.68

The strategy also proposes that ADB develop public sector governance

by providing its DMCs with TA to educate and modernize their bureaucracies.

Likewise, ADB can provide TA to support DMCs efforts to build their

agencies capacity to regulate and supervise their respective private sectors.69

66 The other three focus areas are (i) financial intermediation, (ii) publicprivate partnerships, and

(iii) regional and subregional cooperation. See: ADB. 2000. Private Sector Development Strategy.pp. 1617.

67 Ibid.68 Ibid.69 Ibid.


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b. Commercialization

Many DMCs are inclined to privatize their public sector utilities and services,

but are often confronted with severe constraints in meeting the challenges of

privatization.70 The private sector development strategy recognizes that ADBcan help with commercialization by

providing technical advice, particularly in defining sound

privatization strategies;

establishing and implementing effective privatization programs;

designing and operating sound post-privatization regulatoryframeworks; and

undertaking individual transactions transparently and professionally.71

c. Corporate Governance

The private sector development strategy recognizes that the 1997 Asianfinancial crisis elevated the importance of the quality of corporate governancein the private sector. ADBs role is to promote corporate governance by

providing TA to

help DMCs review their commercial laws and regulations;

establish credible accounting and auditing standards, and

corporate disclosure rules that require corporate entities to make

timely and accurate disclosure;

establish sound environmental, labor, and social standards;

establish corporate regulations that protect minority shareholder

rights; establish effective bankruptcy and foreclosure regimes; and

help train corporate directors on their duties and responsibilities and

on how they can effectively balance the interests of shareholders

and other stakeholders such as employees, customers, suppliers,

investors, and communities.72

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


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The private sector development strategy also envisages that ADB can

provide ongoing support to reform policy and build the capacity of institutions

that will strengthen DMCs financial systems. Specifically, the strategy suggests

that ADB focus on helping governments enhance regulation and supervision,

develop sound banking systems, deepen and broaden securities markets, and

create bond markets.73

The private sector development strategy makes enhancing publicprivatepartnerships another priority. ADB is to

help establish effective regulatory frameworks for private sectorparticipation in infrastructure,

build the capacity of relevant regulatory agencies,

strengthen the capacity of public utilities to deal with the private

sector as an offtaker or supplier, and

train and develop the skills of public officials who are responsible

for implementing infrastructure development activities.74

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

ADBs private sector development strategy entails strengthening the financial systems of developing member countries

to enhance regulation and supervision, develop sound banking systems, deepen and broaden securities markets, and

create bond markets.


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Weak governance hurts the poor disproportionately compared to other social

groups. Public sector inefficiency, corruption, and waste do not leave enough

resources to support the level of public services and antipoverty programs that

are needed.81 Thus, the poverty reduction strategy indicated that ADB would

promote good governance through the way it processed and implemented its

projects, as well as through specific governance-related initiatives.82

ADB undertook a comprehensive review of the poverty reduction

strategy, and in 2004, presented the reviews results. The review sought

feedback on ADBs experience with implementing the poverty reduction

strategy. It also examined the strategys continuing relevance to Asia and

the Pacific. Based on the review, the ADB Board approved the enhancedpoverty reduction strategy (the enhanced strategy).83

The enhanced strategy refines ADBs strategic direction. On the issue

of good governance, it encourages ADB to assist its DMC governments to

function with transparency and accountability, uphold basic rights, provide

public safety, and promote the rule of law. It also stresses the importance of

legal reform.8485

These strategies are contained in the OM.8586

81 Ibid., p. 13.82 Ibid., p. 23.83 ADB. 2004. Enhancing the Fight against Poverty in Asia and the Pacific.84

Ibid., p. 32.85 ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. p. 23.86 ADB. 2004. Operations Manual. OM C1/BP: Poverty Reduction.

Key Points for Project Counsel. Project counsel should know that the

poverty reduction strategy and enhanced strategy

(together with the Charter) provide an overarching foundation

for including good governance measures in projects, and

indicate that ADB will promote good governance through its

projects as well as through specific governance-related initiatives.86


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5. Long-Term Strategic Framework (20012015) and Promoting

Good Governance: ADBs Medium-Term Agendaand Action Plan (2000)

Project counsel should know that the long-term strategic framework

(20012015)87 (LTSF) and medium-term agenda and action plan (2000)88

have now been superseded by the long-term strategic framework 20082020

(Strategy 2020),89 but should be aware of their historical significance to the

development of ADBs governance agenda.

Adopted in March 2001, the LTSF identified promoting good governance

as one of its core strategies, along with sustainable economic growth and

inclusive social development. It observed that poor governance constrains as

well as retards and distorts the development process. Poor governance also

has a disproportionate impact on the poorer and weaker sectors of society.90

Implementing the first LTSFs good governance agenda involved

developing a medium-term action plan for the period 20002004 (the

medium-term agenda and action plan). The medium-term agenda and action

plan was based on an assessment of ADBs governance operations since the

governance policy was adopted in 1995.91

Drawing on the lessons learned from implementing projects with

governance objectives, the medium-term agenda and action plan sought to

include programs within DMCs, and regional initiatives among them, that

would focus on governance issues common to the region or to groups of

DMCs.92 The medium-term agenda and action plan recommended six majorgovernance activities:

enhancing the quality of governance in DMCs,

elevating good governance to the top level of the developmentagenda in Asia and the Pacific,

fighting corruption by establishing a zero-tolerance of corruption

and promoting the spread of good financial and other internal

control systems,

87 ADB. 2001. Moving the Poverty Reduction Agenda Forward In Asia and the Pacific: the Long-Term

Strategic Framework of the Asian Development Bank (20012015).88 ADB. 2000. Promoting Good Governance: ADBs Medium-Term Agenda and Action Plan.

89 ADB. 2008.Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank20082020. p. i.

90 ADB. 2001. Moving the Poverty Reduction Agenda Forward In Asia and the Pacific: the Long-Term

Strategic Framework of the Asian Development Bank (20012015). p. 20.91 ADB. 2000. Promoting Good Governance: ADBs Medium-Term Agenda and Action Plan.92 Ibid., Appendix 3.


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coordinating the governance work of MDBs and other development

agencies,

strengthening ADBs governance capacity, and

monitoring implementation of the medium-term agenda and

action plan.93

6. Medium-Term Strategy II (2006)

The MTS II (2006) has now been superseded, but is summarized here to show

its contribution to the evolution of ADBs approach to governance. It sought

to enhance ADBs relevance to achieving its mission of poverty reduction inAsia and the Pacific by establishing strategic priorities that respond to the key

regional development challenges in reducing poverty.94

The MTS II recognized that weak governance and high levels of corruption

occur in many DMCs.95 Strengthening governance and reducing corruption

are essential to poverty reduction and enhancing ADBs development impact.96

The strategy identified improving governance and preventing corruption as

one of its five strategic priorities.97

The MTS II also highlighted the importance of ADB being selective aboutand maintaining its focus on key priorities. It proposed that ADBs governance

interventions give priority to

public financial management, including procurement and public

expenditure management; and

the legal and regulatory framework and capacity development in

sectors and subsectors where ADB is active.98

The MTS II also supported ADBs theme of harmonizing policies with other

MDBs and aligning MDB policies with those of DMCs (harmonization and

alignment). It suggested that ADB work closely with other MDBs to develop a

uniform framework for preventing and combating fraud and corruption.

93 Ibid., para. 88.94 ADB. 2006. Medium-Term Strategy 20062008. para. 3.95 Ibid., para. 13.96 Ibid., para. 45.97 Ibid., para. 3.98 Ibid., para. 47.


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7. Review o the Implementation o Governance

and Anticorruption Policies (2006)

In February 2006, ADB completed a review of the governance and

anticorruption policies (the Review). The Review candidly discussed ADBs

experience with implementing the governance and anticorruption policies and

the areas in which ADB needed to significantly improve its implementation

of these policies.99The Review indicated that ADB

has been successful in raising the profile of governance in the

region,100

has achieved some success in dealing with fraud and corruption in

procurement,101 and

has achieved some success in increasing awareness of the

anticorruption policy.102

However, the Review found there were various weaknesses associated

with ADBs implementation of the governance policy, which included the

following:

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

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

Key Points for Project Counsel. Project counsel should know that

the MTS II has been superseded,

the MTS II provided further internal strategic support to ADBs

policy directive to incorporate governance measures into

projects, and

encouraged by MTS II, international processes of harmonization

and alignment will cause ADBs governance and anticorruption

approach to be influenced by the approaches of other MDBs.


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ADB had not paid enough attention to adopting a multidimensional

approach to governance that would allow for local participation

and take into account the local circumstances;103

institutional development and infrastructure investments had not

been effectively integrated into sector lending and development

projects;104

ADB had made poor progress in assessing the impact of corruption

on DMCs ability to meet their development goals;105

many project documents did not contain explicit arrangements for

implementation, supervision, and oversight of project activities;106

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

the risk of corruption is particularly high when projects are

implemented through stand-alone mechanisms such as project

management units that report to specially created steering

committees that operate outside official structures.108

The Review also found that ADBs mechanisms for checking corruption

are significantly deficient, moreover that:

financial due diligence is not adequately reported in about 20% of

reports and recommendations of the President (RRPs);109

the project administrative instructions (PAIs) do not give clear

guidance on how project review missions could provide valuable

opportunities for looking into corruption issues;110

project staff have insufficient time to thoroughly evaluate bid

documents and bids for the award of contracts before giving a

no-objection clearance to a DMC;111

103 ADB. 2006. Improving Governance and Fighting Corruption: Implementing the Governance and

Anticorruption Policies of ADB. para. 65(i).104 Ibid., para. 65(vii).105 Ibid., para. 66.106 Ibid., para. 46.107 Ibid., para. 46.108 Ibid., para. 47.109 Ibid., citing ADB. 2005. 2004 Financial Diligence Retrospective Report, prepared by ADBs Public

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

110 ADB. 2006. Review of the Implementation of ADBs Governance and Anticorruption Policies:

Findings and Recommendations. para. 84.111 Ibid., para. 84.


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The Review concluded that ADB must focus its lending and nonlending

activities in governance areas in which (i) DMCs demand is the greatest,115

(ii) DMCs have plans or commit to develop plans to improve their performance,

and (iii) ADB has sufficient staff with appropriate skills and can provide the

right external experts.116 It also concluded that ADB should renew its corporate

commitment to its anticorruption agenda.117

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

Key Points for Project Counsel. To design specific project measures that

avoid or minimize governance deficiencies that the Review identified had

existed in previous ADB projects, project counsel should know that

the Board of Directors had been concerned that the MTS II lacked

strategic direction on governance issues and placed considerable

importance on the Reviews findings on governance indicating

the need for further action;

project teams need to adopt a multidimensional approach to

governance that allows for local participation and circumstances;

the design of physical infrastructure, like roads and railways,

needs to be integrated with sector policy and sector governance,

including the development of relevant sector institutions, such

as sector regulatory bodies;

project documents including RRPs and financing agreements

should contain explicit arrangements for implementing,

supervising, and overseeing project activities;

contracts for local expertise should specify anticorruption measures;

the process for conducting financial due diligence should be

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

party will act as monitor, and how the monitoring will be

carried out, documented, and reported.


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8. Second Governance and Anticorruption Action Plan (2006)

(GACAP II)

GACAP II is designed to improve ADBs implementation of the governance

and anticorruption policies in ADBs most active sectors and subsectors.118 Itwas developed at the request of the Board of Directors following discussions

on the Review. It emphasizes the core themes of public financial management,

procurement, and anticorruption.

GACAP II has four key result areas (KRAs). Each KRA relates to a set

of outcomes that are desired over the medium to long term to improve

implementation of the governance and anticorruption policies. Each outcomehas a specific set of actions and sub-actions that must be done to achieve it.

The four KRAs are to119

improve country strategies and programming, midterm reviews

of country programming strategies, and annual country portfolio

review missions by identifying and managing the risks of poor

governance and institutions, and corruption;120

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

strengthen program and project administration, and portfolio

management, by effectively managing program and project risks

and performance reporting; and

improve organizational structures, build human resource capacity,

and provide access to expertise.

118 ADB. 2006.Second Governance and Anticorruption Action Plan. para. 4.119 Ibid., para. 21.120 Country strategies and programs (CSPs) were renamed in 2006 as country partnership strategies

(CPSs) following the proposals made by a working group that was tasked to review and propose

improvements in refining CSP and business processes. ADB. 2006. Further Enhancing CountryStrategy and Program and Business Processes.


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

public financial management,

procurement, and

combating corruption.121

ADB continues to support GACAP II. In January 2007, the Board

approved a TA designed to support its implementation.122 The TA focuses on

the development of methodologies and tools for public financial

management; and corruption risk assessments for country partnership strategies,

including subnational assessments, where relevant, and sector

governance, institutional, and corruption risk assessments.123

In May 2008, ADB issued the guidelines for implementing GACAP II (the

Guidelines) to guide ADB staff.124 The Guidelines describe the processs for

implementing GACAP II and the relevant requirements set out in the Country

Partnership Strategy (CPS) Guidelines.125 These CPS Guidelines had requiredthat before a CPS process, ADB conduct governance risk assessments and

prepare risk management plans for national and subnational government

systems and relevant sectors in which ADB is engaged (RAMPs) as part of

the CPS process itself. However, in 2009, the CPS Working Group tasked

with reviewing the relevance, effectiveness, and efficiency of the existing CPS

process recommended that thematic reviews (like RAMPs) be delinked from

the CPS preparation process.126 As a result, the preparation of RAMPs is now

delinked from the main CPS preparation. Although RAMPs are required tobe available in time to be included as an input to the CPS process, they need

121 ADB. 2006.Second Governance and Anticorruption Action Plan. para. 35.122 ADB. 2006. Technical Assistance for the Governance and Capacity Development Initiative.123 Ibid., para. 10.124 ADB. 2008. Guidelines for Implementing ADBs Second Governance and Anticorruption Action

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

Country Partnership Strategy Working Group Report, Country Partnership Strategy: Responding to

the New Aid Architecture (see alsoStreamlining Country Partnership Strategies, A Quick Guide,available www.adb.org/Documents/Guidelines/CPS-Quick-Guide.pdf)


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not be prepared as part of the CPS process itself.127 They are now considered

to be a stand-alone product which is to be prepared at the best time for

the DMC and other development partners to inform project preparation and

policy dialogue.

Because GACAP II does not emphasize the political economy or rule

of law aspects of governance, in order to consider and manage political

economy, institutional, and rule of law-related risks and issues in particular

projects it may be necessary to look beyond GACAP IIs recommendations.

These additional issues include access to administrative justice and access to

justice through the courts, as well as the link between good governance and

the rule of law.

9. Strategy 2020: The Long-Term Strategic Framework

o the Asian Development Bank, 20082020

On 5 May 2007, during ADBs 40th annual meeting in Kyoto, Japan, ADB

announced that it was undertaking a review of the then-current LTSF. ADB

initiated an early review of its LTSF because of stated dynamic changes in

127 ADB. 2010. Country Partnership Strategy. Operations Manual. OM A2/OP. The OM requires the

RAMPs as as input to the CPS process. It does not make the delinking process express.


GACAP IIs second key result area (KRA) deals with strengthening

governance and anticorruption. Therefore, it is the most relevant

KRA for project counsel when advising project teams on dealing

with project-specific governance issues.

GACAP IIs project-specific recommendations and guidance onproject design are set out in Table 1.1.

GACAP II emphasizes public financial management, public

procurement, and anticorruption rather than the political

economy or rule of law aspects of governance.

to determine and manage all of a projects risks, it may be

necessary to look beyond GACAP IIs recommendations and

consider risks which may be managed by improving administrative

justice, justice through counts, and the rule of law.


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Table 1.1: GACAP IIs Project-Specific Recommendations

for Improving Governance and Anticorruption Measuresin Programs and Projects

Project Document Proposed Actions

Project Concept Notes conductapreliminaryassessmentoffinancialmanagement, procurement, and corruption risks

confirmthatthetermsofreferencefor

conducting detailed risk assessments andpreparing financial management, procurement,and corruption risk management plans have

been developed confirmthattheskillssetandperson-months

needed to complete the work in accordancewith the terms of reference and duringthe project preparation period have beendetermined

Program andProject Design

includefindingsbasedonthegovernance,

institutional, and corruption risk assessmentsconducted at the national, subnational, andsector levels for country programming

checkthattheprojectadministration

requirements are based upon the projects riskassessments

Project Documentation prepareacleardescriptionofrisksandriskmanagement and mitigation measures

Report andRecommendationof the President (RRP)

reportontheoutcomesofthefinancial

management, procurement, and corruption riskassessment for the project and/or program

discussthespecificmeasurestobetakenin

project design to mitigate risks summarizetheactionstobetakenbythe

borrower and/or recipient to mitigate the risksduring project implementation, and include inRRP and financing agreements as covenants

reportonthefurthergovernanceand

anticorruption measures that must be taken byADB during the projects implementation

provideadescriptionofthehumanand

financial resource requirements necessary forsuccessful project administration

Source: ADB. 2006.Second Governance and Anticorruption Action Plan. Manila, pp. 58.


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1

the region.128 These stated changes include the unprecedented high rates of

growth, global capital flows into Asia and the Pacific, the coexistence of high

rates of savings and the need for high rates of investment in Asia and the

Pacific, and significant adverse environmental implications associated with

the high rates of growth.129

On 8 April 2008, Strategy 2020 was launched replacing the LTSF as

ADBs principal strategic document.130 Strategy 2020 reaffirms ADBs support

for good governance and the building of development capacities. ADB also

commits to bring the four elements of good governance (accountability,

participation, predictability, and transparency) deeper into the mainstream of

its operations and activities.131Under Strategy 2020, ADB intends to link its anticorruption efforts to

broader support for governance and improvement in the quality and capacities

of the public sector. Likewise, ADB plans to increase private sector investments

by improving governance, curtailing official corruption, and helping make

public institutions and organizations more capable.132

10. Integrity Principles and Guidelines (2010)

ADB and other MDBs met in Singapore in September 2006 and jointly

endorsed a set of principles and guidelines for use by MDBs when conducting

fraud and corruption investigations. ADB and the other MDBs also endorsed

a set of policies, rules, regulations, and privileges and immunities applicable

to fraudulent and corrupt practices.133

128 In June 2006, ADB convened an eminent persons group to provide ADB with insight on its

appropriate future strategic role in the region. The group completed its report in March 2007. The

report envisioned a dramatically transformed Asia by 2020. See: ADB. 2007. Toward a New Asian

Development Bank in a New Asia Report of the Eminent Persons Group to the President of the

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

(20082020).131 Ibid., para. 32.132 Ibid., para. 33.133 African Development Bank (AfDB), ADB, EBRD, European Investment Bank Group (EIBG),

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


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In November 2006, ADB first adopted the integrity principles and

guidelines, which set out general principles to guide investigations into

fraudulent, corrupt, coercive, and collusive practices, and to define misconduct

(including abuse and conflicts of interest).134 They also outline the rights and

obligations of ADB (as an organization and in relation to its staff), procedural

guidelines, and sanctions. OAI is the designated investigative unit in ADB

for conducting investigations. Under the integrity principles and guidelines,

OAI must use its best efforts to encourage and protect whistle-blowers and

witnesses.

Likewise, OAI must protect the whistle-blowers and witnesses

identities from unauthorized disclosure throughout and following aninvestigation.135 In 2009, ADB issued an administrative order136 providing

operational procedures on whistle-blower and witness protection,

including the protections afforded to whistle-blowers and witnesses. The

order protects people reporting or providing information on a suspected

integrity violation or misconduct.137

On 28 May 2010, ADB approved updates to the Guidelines, including

references to (i) the administrative order on whistle-blower and witness

protection; (ii) the cross-debarment agreement amongst MDBs; (iii) relatedharmonized sanctioning guidelines; and (iv) new internal procedures on

debarment and appeals.

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


the integrity principles and guidelines establish guidelines for

ADBs investigation procedures, which must be followed in

cases of fraud and corruption, and may need to be explained

to DMCs, but are not directly related to project design;

understanding how ADB deals with cases of fraud and corruption,

will enable them to highlight the need for anticorruption and

good governance features in project design; and

they can obtain further information on the integrity principles

and guidelines on ADBs website at the frequently asked

questions on anticorruption and integrity page.138


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1

11. Capacity Development Medium-Term Framework

and Action Plan (2007)

ADB considers capacity development to be important for improving

development effectiveness (Poverty Reductio

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