PCR: Mongolia: Second Phase of the Governance …...Second Phase of the Governance Reform Program 2011 Capacity Building for Governance Reform Project Government of Mongolia Ministry

Completion Report

Program Number: 35376Loan Numbers: 2010 and 2011December 2011

Mongolia: Second Phase of the GovernanceReform Program

CURRENCY EQUIVALENTS

Currency Unit – togrog (MNT)

At Appraisal At Project Completion15 August 2003 31 May 2011

MNT1.00 = $0.00088 $0.00080$1.00 = MNT1,136 MNT1,245

ABBREVIATIONS

ADBCAPE

––

Asian Development Bankcountry assistance program evaluation

CBGRCPA

––

Capacity Building for Governance Reformscertified public accountant

CSCECTACFFS

–––

Civil Service CouncilEconomic Capacity Building Technical Assistance Creditfiscal framework statement

GDNT – General Department of National TaxationGRPIMFIPSAS

–––

Governance Reform ProgramInternational Monetary FundInternational Public Sector Accounting Standards

MECS – Ministry of Education, Culture and ScienceMICPA – Mongolian Institute of Certified Public AccountsMNAO – Mongolia National Audit OfficeMOF – Ministry of FinanceMOH – Ministry of HealthMSWL – Ministry of Social Welfare and LaborNCAC – National Council on AnticorruptionNDIC National Development and Innovation CommitteeOECD – Organisation for Economic Co-operation and DevelopmentPIP – public investment programPFM – public financial managementPSMFL – Public Sector Management and Finance LawSBP – strategic business planSDR – special drawing rightTATSA

––

technical assistancetreasury single account

NOTE

In this report, “$” refers to US dollars

Vice-President S. Groff, Operations 2Director General K. Gerhaeusser, East Asia Department (EARD)Director Y. Qian, Officer-in-Charge, Public Management, Financial Sector and

Regional Cooperation Division, EARDTeam leaderTeam member

J. Hansen, Senior Financial Sector Specialist, EARDC. Javier, Project Analyst, EARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROGRAM AND PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2B. Program and Project Output 3C. Program Costs 9D. Disbursements 10E. Program Schedule 10F. Implementation Arrangements 10G. Conditions and Covenants 10H. Related Technical Assistance 11I. Consultant Recruitment and Procurement 11J. Performance of the Borrower and the Executing Agency 11K. Performance of the Asian Development Bank 12

III. EVALUATION OF PERFORMANCE 12

A. Relevance 12B. Effectiveness in Achieving Outcome 13C. Efficiency in Achieving Outcome and Output 14D. Preliminary Assessment of Sustainability 14E. Impact 14

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 15

A. Overall Assessment 15B. Lessons 15C. Recommendations 15

APPENDIXES1 Design and Monitoring Framework (Loan 2010) 162 Policy Matrix on Compliance with Conditions before Loan Negotiations (Loan 2010) 213 Policy Matrix on Compliance with Second-Tranche Release and Monitoring 23

Conditions (Loan 2010)4 Status of Compliance with Loan Covenants (Loan 2010) 345 Status of Compliance with Loan Covenants (Loan 2011) 38

BASIC DATA

A. Loan Identification

1. Country2. Program Loan Number3. Program Title4. Project Loan Number5. Project Title6. Borrower7. Executing Agency8. Amount of Loan

a. Program Loanb. Technical Assistance Loan

9. Program Completion Report Number

Mongolia2010Second Phase of the Governance Reform Program2011Capacity Building for Governance Reform ProjectGovernment of MongoliaMinistry of Finance

SDR9,699,000.00 SDR1,437,000.001285

B. Loan Data1. Appraisal

– Date Started– Date Completed

2. Loan Negotiations– Date Started– Date Completed

3. Date of Board Approval

4. Date of Loan Agreement

5. Date of Loan Effectiveness– In Loan Agreement– Actual– Number of Extensions

6. Closing Datea. Program Loan

– In Loan Agreement– Actual– Number of Extensions

b. Project Loan– In Loan Agreement– Actual– Number of Extensions

7. Terms of Loana. Program Loan

– Interest Rate

– Maturity– Grace Period

b. Project Loan– Interest Rate

– Maturity– Grace Period

2 June 200314 June 2003

11 August 200313 August 2003

14 October 2003

9 December 2003

8 March 200427 January 2004None

31 December 200519 December 20082

31 March 20074 August 20113

1.0% per annum during grace period1.5% per annum thereafter24 years8 years

1.0% per annum during grace period1.5% per annum thereafter32 years8 years

ii8. Disbursements

a. Dates(i) Program Loan

Initial Disbursement

3 Feb 2004

Final Disbursement

20 Dec 2005

Time Interval

22 months

Effective Date

27 Jan 2004

Original Closing Date

31 Dec 2005

Time Interval

23 months

(ii) Project Loan

Initial Disbursement

13 Oct 2004

Final Disbursement

4 Aug 2011

Time Interval

74 months

Effective Date

27 Jan 2004

Original Closing Date

31 Mar 2007

Time Interval

38 months

b. Amounts(i) Program Loan (million)

Tranche Number Date Disbursed

Amount Disbursed

SDR $ Equivalent

First tranche 03 Feb 2004 3.592 5.321

Second tranche 20 Dec 2005 6.107 8.796

(ii) Project Loan (SDR million)

CategoryOriginal

Allocation

LastRevised

AllocationAmount

CanceledAmount

DisbursedUndisbursed

Balance

Output costingsystem–based audit support

0.050 0.052 0.001 0.051 0.000

Output costing—Computer hardware and software

0.273 0.058 0.000 0.058 0.000

Training 0.090 0.289 0.009 0.280 0.000

Consulting services 0.916 1.006 0.099 0.907 0.000

Project implementation

0.022 0.030 0.007 0.023 0.000

Unallocated 0.086 0.002 0.002 0.000 0.000

Total 1.437 1.437 0.118 1.319 0.000

Total US$ equivalent 2,000,000 2,008,691

Note: Figures may not add up to the totals given because of rounding.

C. Program Data

1. Program Cost (million)

CostAppraisal Estimate Actual

US$ equivalent SDR US$ equivalent SDRForeign exchange cost 13.5 9.699 14.12 9.699

Total 13.5 9.699 14.12 9.699SDR = special drawing rights.

2. Project Cost (million)

CostAppraisal Estimate Actual

US$ equivalent SDR US$ equivalent SDRForeign exchange cost 2.000 1.437 2.009 1.319Local currency cost 0.400 0.000 0.400 0.000

Total 2.400 1.437 2.409 1.319SDR = special drawing right.

3. Financing Plan (million)

(i) Program Loan Appraisal Estimate ActualImplementation Costs US$ equivalent SDR US$ equivalent SDR

ADB-financed 13.5 9.699 14.12 9.699

Total 13.5 9.699 14.12 9.699

(ii) Project Loan Appraisal Estimate ActualImplementation Costs US$ equivalent SDR US$ equivalent SDR

ADB-financedBorrower-financed

2.0000.400

1.4370.000

2.0090.400

1.3190.000

Total 2.400 1.437 2.409 1.319

ADB = Asian Development Bank, SDR = special drawing rights.

4. Cost Breakdown, by Component (SDR million)(i) Program Loan

Component Appraisal Estimate Actual

First tranche release 3.592 3.592Second tranche release 6.107 6.107

Total 9.699 9.699

(ii) Project Loan (SDR million)

Component Appraisal Estimate ActualOutput costing system–based audit support 0.050 0.051Output costing—Computer hardware and software 0.273 0.058Training 0.090 0.280Consulting services 0.916 0.907Project implementationUnallocated

0.0220.086

0.023

Total 1.437 1.319

iv5. Program Schedule

(i) Program Loan

Component/Activities Appraisal Estimate ActualFirst tranche Jan 2004 Feb 2004Second tranche Jul 2005 Dec 2005First Extension of loan closing Jun 2007Second Extension of loan closing Mar 2008

(ii) Project Loan

Component/Activities Appraisal Estimate Actual

Consulting services Mar 2005Output costing May 2008Training activities Jun 2005Support services

6. Program Performance Report Ratings

(i) Program Loan

Implementation Period

Rating

Development Objectives Implementation Progress

31 Oct 2003–31 Dec 2003 Satisfactory Satisfactory1 Jan 2004–31 Dec 2004 Satisfactory Satisfactory1 Jan 2005–31 Dec 2005 Satisfactory Satisfactory1 Jan 2006–31 Dec 2006 Satisfactory Satisfactory1 Jan 2007–31 Dec 2007 Satisfactory Satisfactory1 Jan 2008–19 Dec 2008 Satisfactory Satisfactory

(ii) Project Loan

Implementation Period

Rating

Development Objectives Implementation Progress

31 Oct 2003–31 Dec 2003 Satisfactory Satisfactory1 Jan 2004–31 Dec 2004 Satisfactory Satisfactory1 Jan 2005–31 Dec 2005 Satisfactory Satisfactory1 Jan 2006–31 Dec 2006 Satisfactory Satisfactory1 Jan 2007–31 Dec 2007 Satisfactory Satisfactory1 Jan 2008–31 Dec 2008 Satisfactory Satisfactory1 Jan 2009–31 Dec 2009 Satisfactory Satisfactory1 Jan 2010– 4 Dec 2010 Satisfactory Satisfactory

D. Data on Asian Development Bank Missions

(i) Program Loan

Name of Mission DateNo. of

Persons

No. ofPerson-

DaysSpecialization of Members

Initial fact-finding 14–28 Feb 2003 4 15 a, b, c, d, ePolicy consultation 30 Mar–8 Apr 2003 3 10 a, b, c, dAppraisal 2–4 Jun 2003 4 13 a, b, c, dInception 22–23 Mar 2004 2 4 f, gReview 1 18–22 Oct 2004 2 10 a, bReview 2 4–6 Oct 2005 1 3 hReview 3 4–6 Apr 2005 1 3 iReview 4 6–8 Nov 2006 1 3 jReview 5 12 Feb 2007 1 1 jReview 6 30 Apr 2007 3 3 g, jReview 7 29 Feb 2008 3 3 jReview 8 20 Oct 2008 1 1 jReview 9 13–14 May 2010 1 2 ja = senior corporate and financial governance specialist, b = financial management specialist, c = senior counsel, d = senior economics officer, e = consultants, f = governance specialist, g = assistant project analyst, h = economist (banking and capital markets), i = associate project analyst, j = financial sector specialist.

(ii) Project Loan

Name of Mission DateNo. of

Persons

No. ofPerson-

DaysSpecialization of Members

Initial fact-finding 14–28 Feb 2003 4 15 a, b, c, d, ePolicy consultation 30 Mar–8 Apr 2003 3 10 a, b, c, dAppraisal 2–4 Jun 2003 4 13 a, b, c, dInception 22–23 Mar 2004 2 4 f, gReview 1 18–22 Oct 2004 2 10 a, bReview 2 12 Oct 2005 1 1 hMidterm review 9–11 Nov 2006 1 3 iReview 3 26–29 Apr 2007 3 12 i, jReview 4 16–20 Jun 2008 1 5 iReview 5 21–24 Oct 2008 1 4 iReview 6 12–14 Dec 2008 1 3 iReview 7 8–10 Jun 2009 2 6 g, iReview 8 14–16 Sep 2009 2 6 g, iReview 9 13–14 May 2010 1 2 iReview 10 8–10 Dec 2010 1 3 iReview 11 23–25 May 2011 2 6 g, ka = senior corporate and financial governance specialist, b = financial management specialist, c = senior counsel, d = senior economics officer, e = consultants, f = governance specialist, g = assistant project analyst, h = economist (banking and capital markets), i = financial sector specialist, j = associate project analyst, k = senior financial sector specialist.

I. PROGRAM AND PROJECT DESCRIPTION

1. The Governance Reform Program (Phase 1) (GRP I)1, which was approved by the Asian Development Bank (ADB) for an amount of $25 million in December 1999, was the first phase of a multi program public sector reform strategy designed by the Government of Mongolia in collaboration with ADB. The overall goal of GRP I was to facilitate the transition to a new structure of public sector governance in Mongolia by establishing a sound system of financial management and accounting in the public sector and a transparent system of data and information dissemination. The centerpiece of GRP I was the introduction on a pilot scale of public sector governance reforms, including strategic planning, output specification, and performance management, in selected budgetary agencies. GRP I closed in September 2002after three extensions.

2. The passing of the Public Sector Management and Finance Law (PSMFL) in June 2002, after extensive consultations in 1997–2002, was the most important milestone of GRP I. The PSMFL seeks to improve public sector management by introducing institutional mechanisms based on best international practice. While it was acknowledged that the scope and demands of the PSMFL exceeded the capacity and infrastructure of Mongolia, the government’s willingness to push this agenda forward was strong. The Parliament stalled the passage of the law for almost 5 years, partly because it disagreed with proposed intergovernmental arrangements that would reconcentrate core activities in the central government.

3. The program completion report,2 prepared in December 2002, rated GRP I successful, but the program performance evaluation report,3 released in September 2008, gave GRP I only a partly successful rating. The 1997–2007 Mongolia country assistance program evaluation (CAPE), 4 released in September 2008, concluded that efforts to introduce output-based budgeting in Mongolia were overly ambitious and less than successful because of capacity constraints in the public sector.

4. On 14 October 2003, ADB approved a program loan of SDR9.699 million ($13.5 million) for the Second Phase of the Governance Reform Program (GRP II)5 and a technical assistance (TA) loan of SDR1.437 million ($2.0 million) from Special Funds resources for Capacity Building for Governance Reforms (CBGR).6 GRP II would build on and complement the efforts of GRP I by expanding and mainstreaming the reforms to cover the entire public sector and civil service. GRP II was initially designed as a program cluster with two subprograms to facilitate learning by doing, by gradually implementing reforms in 2003–2009. The CBGR was meant to help the government strengthen its overall capacity to implement key governance-related measures under GRP II. The scope of the CBGR covered (i) financial management reforms in public sector accounting, auditing, and asset valuation; (ii) support for strategic planning in relation to PSMFL implementation; and (iii) software and limited hardware support for efficient financial audits and output costing.

1 ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to

Mongolia for the Governance Reform Program. Manila (Loan 1713-MON for $25 million, approved on 2 December).

2 ADB. 2002. Completion Report: Governance Reform Program in Mongolia. Manila.3 ADB. 2008. Performance Evaluation Report: Governance Reform Program (First Phase) in Mongolia. Manila.4 ADB. 2008. Country Assistance Program Evaluation: Mongolia, 1997–2007. Manila.5 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster of

Loans and Technical Assistance Loan for the Second Phase of the Governance Reform Program in Mongolia. Manila (Program Loan 2010-MON, for $13.5 million, and TA Loan 2011-MON, for $2 million, both approved on 14 October).

6 The government was expected to provide $400,000 equivalent in counterpart facilities.

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5. The objective of GRP II was to increase accountability and efficiency in the public sector, as measured by fiscal sustainability and tangible improvements in the delivery of key public services. GRP II and the CBGR took effect on 27 January 2004, at which time the first tranche of SDR3.592 million ($5.32 million) for GRP II was released. The second tranche of SDR6.107 million ($8.80 million) was released in December 2005, after all 10 disbursement conditions were deemed to have been complied with.7 At the request of the Government of Mongolia, the loan closing date for GRP II was extended twice, from 31 December 2005 to 31 March 2008 to provide enough time for the government to comply fully with the monitorable conditions. The CBGR was also extended three times, until 31 May 2011. The policy framework for GRP II had three components, which were structured around 36 policy conditions—6 first-tranche conditions, 10 second-tranche conditions, and 20 monitoring conditions. The Ministry of Finance (MOF) was the executing agency for GRP II and the CBGR.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

6. Since 1995, ADB has approved one loan and 10 TA projects in Mongolia in support ofpublic sector governance reforms.8 The rationale for the reforms was valid. Poor public sector governance was contributing to unsustainable budget deficits, misallocation of resources, inefficient delivery of public services, and limited accountability in the public sector.

7. The government, having formulated a comprehensive program of public sector governance reforms to be implemented in 1999–2009, sought ADB’s help, through GRP I, in implementing the initial phase of reforms over 1999–2002. In response, ADB backed public financial management (PFM) reform and later approved GRP II and the CBGR to sustain the reforms and widen their reach. But while the rationale for GRP II and the CBGR was valid, the program framework was overly ambitious. Wide-ranging and complex public management reforms based on international best practice were to be adopted in the relatively short period of 2 years.

7 ADB. 2005. Progress Report: Release of Second Tranche of Loan 2010-MON(SF) for the Second Phase of the

Governance Reform Program in Mongolia. Manila.8

These were (i) ADB. 1999. Report and Recommendation of the President to the Board of Directors: Proposed Loan for the Governance Reform Program in Mongolia. Manila (Loan 1713-MON for $25 million, approved on 2 December 1999); (ii) ADB. 1996. Technical Assistance to Mongolia for Institutional Support for Local Government and Decentralization (Phase 1). Manila (TA 2549-MON for $100,000, approved on 26 March 1996); (iii) ADB. 1996. Technical Assistance to Mongolia for Restructuring and Staff Rationalization. Manila (TA 2659-MON for $100,000, approved on 7 October 1996); (iv) ADB. 1997. Technical Assistance to Mongolia for Institutional Strengthening of the Local Government and Decentralization (Phase 2). Manila (TA 2769-MON for $580,000, approved on 14 March 1997); (v) ADB. 1997. Technical Assistance to Mongolia for Initial Phase of Civil Service Reforms. Manila (TA 2868-MON, approved in September 1997); (vi) ADB. 1996. Technical Assistance to Mongolia for Strengthening the Taxation System. Manila (TA 2606-MON for $359,000, approved on 9 July 1996); (vii) ADB. 1997. Technical Assistance to Mongolia for Program Preparation for Governance Reforms. Manila (TA 2931-MON for $1,051,300 approved on 10 December 1997); (viii) ADB. 1999. Technical Assistance to Mongolia for InitialPhase of Public Administration Reform. Manila (TA 3316-MON for $1,100,000, approved on 2 December 1999); (ix) ADB. 1999. Technical Assistance to Mongolia for Public Expenditure Management. Manila (TA 3317-MON for $496,000, approved on 2 December 1999); (x) ADB. 1999. Technical Assistance to Mongolia for Study of Central–Local Government Aspects of Reform Implementation. Manila (TA 3318-MON for $235,000, approved on 2 December 1999); and (xi) ADB. 2002. Technical Assistance to Mongolia for Strengthening Public Sector Administration and Financial Management. Manila (TA 3920-MON for $650,000, approved on 5 September 2002).

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B. Program and Project Output

8. The policy framework for GRP II had three high-level components: (i) enhancing institutional capacity to implement budget, planning, and financial management reforms; (ii) improving fiscal sustainability through pension reforms and administrative consolidation; and (iii) mainstreaming governance reforms and enhancing confidence in public institutions. The first component was supported by the CBGR.

1. Enhancing Institutional Capacity

a. Implementing Reforms in Public Sector Management and Finance Law

9. The centerpiece of GRP II was the implementation of the PSMFL. The implementation plan approved by the government in September 2002 envisaged a time frame of 3 years, from 2003 to 2005. The government, with ADB TA support, published a guide in Mongolian on public finance and management reforms for the use of ministers, general managers, and key staff of the main agencies. A government-wide capacity-building program was implemented to increaseawareness of the PSMFL. As necessitated by the adoption of the PSMFL, the government also drafted consequential amendments to 75 laws, including the laws on budget consolidation, civil service, government, and state audit. The Parliament passed the amendments in January 2003.

10. Strategic planning. Performance-based budgeting must be set in the wider context of strategic budget planning. Planning and budgeting are not well integrated in Mongolia’s public sector. The PSMFL requires ministries and agencies to develop strategic business plans (SBPs), reflecting outputs, activities, and required inputs for pursuing the objectives of the ministries and agencies for the coming 3 years. The fully costed outputs of the SBPs (based on accrual accounting methodology) should serve as the basis for budget preparation and approval. With ADB TA support, the Ministry of Education, Culture and Science (MECS), the Ministry of Health (MOH), and the Ministry of Social Welfare and Labor (MSWL) finalized their SBPs for 2004–2006. The progress report for the release of the second tranche found the SBPs to be satisfactory, compatible with the PSMFL, and based on output costs.

11. However, the SBPs covered only the outputs, activities, and costing of the central offices of line ministries, which together represent only a small fraction of line-ministry expenditure.Most ministries have since stopped producing SBPs. Most of the work had been carried out byinternational consultants. Line ministries and agencies lack capacity and skills for strategic planning. The draft Integrated Budget Law submitted to the Parliament no longer requires the preparation of SBPs.

12. As part of GRP I, the government developed a 3-year rolling framework for its public investment program (PIP), integrating capital and recurrent expenditures for 2002–2004. However, investment planning for subsequent years was not based on a comprehensive multi-year PIP. Investment planning provided neither the rationale for selected investments norstrategic prioritization and formal linkage with sector priorities. The government established the National Development and Innovation Committee (NDIC) under the prime minister’s office in mid-February 2009 to provide and coordinate national strategic planning and strengthen policy screening role in central government by taking over and enhancing MOF’s strategic planningresponsibilities. NDIC prepared the first comprehensive PIP (for 2011–2015) in 2010 with support from the CBGR. The PIP was submitted to the cabinet in 2010, but did not have any impact on preparation of the draft budget for 2012.

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13. Output-based costing and budgeting. Under GRP II, MECS, MOH, and MSWL prepared output budgets for presentation purposes for a few years until 2007. The budgets were implemented and audited on the traditional line-item basis. In 2007, the World Bank Economic Capacity Building Technical Assistance Credit (ECTAC) project introduced program budgeting.9

For the implementation of the new budget methodologies under GRP II, most of the work was done by the ADB consultants under the CBGR. Despite the emphasis of GRP II on output-based budgeting, ministries and central and local government agencies are still practicing line item budgeting. Output specification, costing, benchmarking, and budgeting has not been adopted as part of the regular budget process.

14. Output-based budgeting requires skills in accounting, costing, and performance measurement that are in short supply in the public sector in Mongolia. Substantial capacity building is needed over the medium term. A key weakness is the lack of understanding and ability to define and cost output. Efforts to introduce output-based budgeting in Mongolia have been less than successful, according to the 1997–2007 CAPE for Mongolia (footnote 4), and output-based budgeting will continue to be beyond Mongolia’s capacity for the foreseeable future.

15. In recent years, program budgeting has been introduced on a pilot basis by the ECTAC project team. The World Bank consultants created a program classification, which was entered into the budget preparation information system for the use of all portfolio ministries. The consultants also prepared annual budget guidelines that adhere to program budgeting principles. However, the use of the budget guidelines and program classification is generally not enforced by MOF and not followed by line ministries. The budget is executed and reported on a line-item basis and in the economic classification. The treasury department of MOF cannot track program expenditures, and thus executes the budget on a cash basis.

16. Strategic budget planning should be anchored in a medium-term budget framework. To strengthen the overall fiscal framework and coordination in budgeting, GRP II supported the development and adoption of a fiscal framework statement (FFS) and a medium-term expenditure framework. However, the information in the FFS for decision makers to formulate fiscal policy is limited. The FFS, approved by the cabinet and the Parliament in April, includes sector ceilings for use in annual budget formulation, but these are generally not followed by the line ministries. Consequently, the FFS does not help to link the annual budget to longer-term policies and fiscal objectives. The medium-term forecasts in the FFS also provide little guidance for the next year’s budget process. Moreover, the PSMFL does not clearly separate executive and legislative functions in the budget process, and the Parliament has full discretion in making changes in the budget. Under the CBGR, at a late stage of implementation, MOF, line ministry,and local government staff were trained in basic budget management and PFM. The drafting of the Fiscal Stability Law10 and the Integrated Budget Law which clarify the powers of Mongolia’s legislative and executive branches were also supported.

17. Expenditure discipline. Mongolia has an effective system of budget execution and monitoring. Since the PSMFL was passed, a functional treasury single account (TSA) has been

9 The project started in January 2007 and introduced medium-term program budgeting. 10 The Fiscal Stability Law was passed in June 2010. It put in place three complementary rules that work together to

ensure fiscal discipline: (i) a ceiling on the “structural” deficit, (ii) a debt ceiling, and (iii) a ceiling on expenditure growth.

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established, a unified and consistent chart of accounts approved, an integrated public debt management information system established, and an integrated government financial management information system deployed.

18. The TSA has enabled the government to control and reduce off-budgetary expendituresby closing public sector agencies’ own bank accounts. The Law on Unified Budget, passed in 2005, prohibits the government from providing guarantees that favor state-owned enterprises or budgetary bodies. While the budget still operates on a cash basis, MOF’s treasury department prepares monthly, quarterly, and annual reports on budgetary expenditure arrears and submits these to the Parliament. The General Department of National Taxation (GDNT) prepares quarterly and annual reports on tax arrears.

19. However, government loan activity does not appear to be regulated by the budget. The government issues loans in amounts that are not authorized in the budget, therebycompromising the budget’s comprehensiveness. Information about contingent liabilities remains incomplete, and a clear analysis of fiscal risks—to be included in the annual budget, as mandated by the PSMFL—has not been prepared.

b. Strengthening Financial Governance Norms

20. Sound oversight of public sector accounting. The accounting policy department of MOF is responsible for setting accounting policies and standards. To strengthen the financial management system and facilitate sound financial reporting, GRP II provided for theconsolidation of general government accounts under an independent accountant general, and the creation of an internal audit function under the accountant general as well as in line ministries and provinces.

21. A cabinet decision in January 2005 established a position equivalent to that of accountant general at the head of the accounting policy department of MOF. The accountant general, who must have certified public accountant (CPA) qualifications, is independent of the treasury department and reports directly to the state secretary. An international accounting adviser to the accountant general was appointed in March 2005, and financed under the CBGR.Chief accountants have been recruited for all line ministries. MOF has developed adequate systems for compiling monthly and annual reports on budgetary transactions. Quarterly budget execution reports are released 4 weeks after each quarter.

22. A sound internal audit function is widely considered a precondition for introducing performance-based budgeting. Internal audit functions have only recently started to be implemented in Mongolia. An internal audit, monitoring and evaluation department was formed in MOF in April 2009 which is responsible for internal audit in both the central government and the provinces. The department employs 10 professional staff and reports to the internal audit committee of MOF which is chaired by the state secretary. Internal audit departments will be established in line ministries after enactment of the Integrated Budget Law. Lack of internal auditing capacity limits the scope of fiscal controls, while actual use of performance indicators inassessing expenditure outcomes is rare. Internal control is centralized in the State Professional Inspection Agency, which carries out the function with a narrow focus on financial compliance and regularity rather than with broader management issues in mind.

23. Transition to accrual accounting. Performance-based budgeting requires the government to move from cash-basis to accrual accounting to identify the full costs of government operations. Under the PSMFL, all budget entities must generate accrual-based

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financial statements in line with International Public Sector Accounting Standards (IPSAS), and MOF must consolidate these financial statements and prepare the overall financial statements of the government, also in accordance with IPSAS.

24. The government has adopted IPSAS and a uniform chart of accounts for use by allgovernment agencies. Budget preparation and implementation is still based on cash accounting, but the preparation of financial statements at year-end is gradually shifting to international accrual accounting standards. The government has introduced modified cash accounting—cash accounting with some supplementary accrual information, including receivables and payables, but excluding accounting for fixed assets and accrued expenses.

25. Sound asset valuation standards. As part of the envisaged transition to an accrual accounting system, GRP II required MOF to draft and adopt asset valuation standards for movable, immovable, and intangible assets. The consultants under the CBGR developed asset valuation standards in compliance with International Valuation Standards and IPSAS, provided methodologies for calculating capital charges, and conducted training. The government has passed regulations governing fixed-asset valuation accounting, including procedures for accounting for depreciation and recording tangible and intangible assets, but has made little progress in implementing those regulations. MOF does not operate a comprehensive asset register.

26. Improved public accounting standards. The reform of Mongolia’s informational public finance infrastructure required an overhaul of accounting and auditing systems. GRP II, supported by consultants under CBGR, provided for the development and amendment of the legal accounting and auditing framework, the constitution of a new professional accounting body, and the establishment of examinations for CPAs.

27. MOF, supported by consultants under the CBGR, designed an examination structure with a revised course program, developed continuing professional education requirements forthe certification of government accountants, and translated the International Accounting Standards into Mongolian.

28. The Mongolian auditing system is mainly regulated by the 1997 Law on Auditing and its amendments in 2001, 2003, 2005, and 2006, and by the State Audit Law. The Law on Auditing regulates the accounting profession. Amendments introduced in the Law on Auditing under GRP II (i) separated the Mongolian Institute of Certified Public Accountants (MICPA) from MOF; (ii) established MICPA as an organization independent from the government; (iii) established a certified government accountant structure; (iv) assigned the CPA examination function, including the awarding of CPA certificates, to MICPA; (v) modified the CPA certification process in line with the completion of different stages of the CPA examination; (vi) preventedgovernment officials from serving as officers and management staff of MICPA; and (vii) raised the standards for entry into the auditing profession. The Law on Auditing, in line with GRP II, makes MOF responsible for overseeing the auditing profession. However, MOF review of auditor quality is currently very limited, and MOF actions with regard to the issuance and revocation of licenses fall short of what is considered good practice.

29. Greater transparency in financial and performance auditing. In 2002, the Parliament adopted the State Audit Law transforming the state audit organization from the previous State Audit Board into the Mongolia National Audit Office (MNAO). Under the State Audit Law, MNAO, an independent agency, reports directly to the Parliament. MNAO is responsible for annual

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financial audits of all government entities, including state-owned enterprises, and forperformance audits of selected functions of budget entities.

30. The capacity of MNAO was significantly strengthened under GRP II. Financial audits are undertaken based on modified interim accounting standards issued by MOF. Consultants under the CBGR conducted training and developed two audit manuals for financial and performance audit based on international standards. Audit software and hardware were also provided under the CBGR. MNAO, with advisory support from the consultants, undertook performance audits of selected functions and outcomes of the Customs General Administration, GDNT, MECS, MOH, and MSWL, and published a summary of the audits in major newspapers. While financial audits are carried out on an annual basis for all ministries and public agencies, performance audits ofselected public bodies are currently done on an occasional basis.

31. The greatest challenge for external audit is ensuring that MNAO has the capacity to conduct robust financial audits. The standard used in external audits formally meets thestandard set by the International Organization of Supreme Audit Institutions for external government auditing. The audit reports are discussed in the Parliament before the final budget performance is approved. However, it is not clear to what extent actions are taken based on the audit findings and recommendations.

32. Forward-looking measures to improve financial management. Budget system reforms have to be based on a solid platform of financial management and internal control within line ministries and other government agencies. Financial inspections, centralized under the State Professional Inspection Agency in 2005, focus narrowly on financial compliance and regularity (imposing penalties and giving instructions for the reimbursement of money that has been wrongly applied) instead of considering broader management issues. There is some overlap in responsibilities between the State Professional Inspection Agency, MNAO, and emerging internal audit units of MOF and line ministries.

2. Improving Fiscal Sustainability

33. The second component of GRP II was aimed at helping to reduce the pressures on the budget through pension reforms and administrative consolidation.

a. Strengthening the Social Security System to Enhance Fiscal Sustainability

34. Mongolia inherited a pay-as-you-go public pension and social security system providing universal coverage and relatively high levels of benefits to full-career workers compared with preretirement income. The pension system was reformed in 1995 and 1999, and a notional defined contribution scheme for workers born since 1960 was introduced. However, key qualifying conditions, such as retirement age, were not adjusted, and the pension system remains a major fiscal burden.

35. GRP II required the government (with support from earlier TA)11 to undertake measures to enhance the fiscal sustainability of the social security system. In line with GRP II, MSWL completed a first draft of a white paper in November 2003 containing its 10-year social security master plan. The paper included provisions for increasing the retirement age on a gender-

11 ADB. 2000. Technical Assistance to Mongolia for Strengthening Financial Sector Development. Manila; and ADB.

1997. Technical Assistance to Mongolia for Social Safety Net. Manila.

8

neutral basis. Besides promoting gender equality, the move would eliminate early-retirement benefits, thereby strengthening fiscal prudence. It would also revamp the notionally defined contributory system and index pensions to the inflation level, reducing short-term deficits in the pension system. The white paper was formally adopted in March 2005 but has not been implemented. Internal government consultations on pension reform, based on the three pillars of a government funded basic pension, individual notional accounts and voluntary pensioninsurance are ongoing and amendments to the pension law are pending.

b. Strengthening Public Resource Management through Central–Local Consolidation

36. Low population density in certain provinces threatens local fiscal stability. The government therefore conceived a plan to develop five regional centers, redress regional imbalances, and distribute the population more evenly to enhance economies of scale in service delivery. The government formulated a three-pronged approach: (i) explore the potential for interprovincial consolidation; (ii) consolidate districts within several provinces; and (iii) establish interprovincial and subprovincial links to consolidate public service delivery, including health, education, taxation, and other components of public administration.

37. By presidential order dated 29 November 2004, a working group headed by the prime minister and comprising representatives from MOF, the cabinet secretariat, and the Ministry of Justice and Home Affairs was established. The working group prepared a draft concept paper on intraprovincial and interprovincial measures that would improve public expenditure management through increased efficiency and economies of scale in service delivery. Under this concept, as envisaged in GRP II, the framework sought to consolidate contiguous provinces, contiguous districts within provinces, and selected public sector agencies and institutions. The government finished drafting the concept paper in April 2005. However, the proposal was not implemented because of conflicts with the Constitution, which stipulates that administrative consolidation of local authorities has to be initiated at the local level. An alternative proposal for administrative consolidation is currently being prepared by the cabinet secretariat. It focuses on institutional consolidation among soums (districts) to increase the efficiency of public expenditure management and service delivery.

3. Mainstreaming Governance Reforms

a. Enhancing the Civil Service Culture

38. Civil service reforms are critical to the sustainability of public sector reforms. The civil service in Mongolia faces fundamental problems, including (i) capacity constraints within the Civil Service Council (CSC) in formulating and enforcing sound guidelines for recruitment and performance-based management; (ii) lack of transparency in the hiring and firing of civil servants; (iii) lack of a civil service culture, with a permanent, merit-based, career-track civil service system; (iv) frequent staff turnover, particularly at senior levels, caused by frequent changes in government in the past; (v) lack of political neutrality in the civil service; (vi) widespread violations of merit principles in recruitment or career progression; and (vii) lack of sound processes for settling disputes and administrative grievances.

39 The government started to institute performance-based management across the public sector in 2004. Performance contracts are drawn up for all public sector staff, from the lowest levels to cabinet ministers, state secretaries, departmental directors, and divisional directors. The introduction of performance contracts for individual staff members has strengthened

9

accountability and enhanced staff management. However, a number of implementation problems remain, and the human resource management practices of agencies are often inconsistent with the PSMFL requirements for a merit-based public sector.

40. GRP II included several measures to strengthen the CSC. The CSC, with support from ADB and World Bank TA, developed a draft code of ethics for Mongolia’s public servants;however, it has not been adopted by the Parliament. The CSC has developed and implemented an improved, competitive entry process for the core civil service and adopted an enforcement mechanism to implement the rules for grievance settlement. However, the CSC lacks thecapacity to fully enforce compliance with government policies. Mongolia’s public service has too few technical staff and the pay scale is low. It remains politicized and suffers from frequent staff turnover.

b. Improving Public Confidence in Key Public Institutions through Increased Transparency

41. In 2003, public confidence in the GDNT and the Customs General Administration was perceived to be low and public service delivery in the health and education sectors was poor. To address these issues, the government established the National Council on Anticorruption (NCAC) in 2003, initially under the prime minister’s office. After the 2004 elections, NCAC was transferred to the office of the speaker of the Parliament.

42. In January 2005, the cabinet secretariat, in line with the March 2003 action plan of NCAC, and with support from the United Nations Development Programme (UNDP) and ADB, established a subgroup within NCAC’s program to comprehensively assess the role, performance, and efficacy of the GDNT, the Customs General Administration, and service delivery mechanisms in the education and health sectors. The subgroup completed its assessment in August 2005 and made public its findings on 31 October 2005. The reform measures formulated by NCAC have been incorporated in the work plan of the Anticorruption Agency, which was established under the Law on Anti-Corruption. The law was adopted by the Parliament on 6 July 2006 and took effect on 1 November 2006.

4. Formulating Effective Social Safety Net Measures and Allocating Budgetary Resources for Them

43. To mitigate any possible adverse impact of its proposed reform measures on the poor and vulnerable, GRP II required MOF to allocate a minimum of $500,000 in each annual budget during 2004–2006 for social safety nets. The government allocated $17 million for social safety net transfers in the 2004 budget, $35 million in 2005, and $59 million in 2006.

C. Program Costs

44. GRP II was designed as a cluster of two subprograms. ADB supported the first subprogram with a loan of SDR9.699 million ($13.5 million). The loan was fully disbursed in two equal installments. The total costs associated with the implementation of the first subprogram were estimated at $18.5 million in the report and recommendation of the President. In addition, SDR1.437 million ($2.0 million) was provided under the CBGR to support the implementation of GRP II. The government later requested the cancellation of the second subprogram.

10

D. Disbursements

45. The proceeds of the loan were withdrawn in accordance with the standard procedures in ADB’s Loan Disbursement Handbook (2007, as amended from time to time) and were intended to finance structural adjustment costs under the program and to provide budget support to the government. No counterpart funds generated from GRP II loan proceeds were allocated for the implementation of specific reform measures.

46. The loan agreement provided for an implementation period from October 2003 to December 2005. GRP II took effect on 27 January 2004. The 2004 elections, which resulted in a hung Parliament and a change in government, delayed the appointment of the project coordinator and the recruitment of consultants under the CBGR. The project director was appointed in September 2004 and the consultants were fielded in November 2004.

47. At the time of appraisal, the second tranche of SDR6.107 million ($8.5 million) was expected to be released in July 2005. Instead the tranche was released about 6 months behind schedule, in December 2005, after all 10 release conditions were deemed to have been complied with. Given the sensitive and time-consuming nature of the reform measures, the appraisal disbursement schedule was unrealistic.

E. Program Schedule

48. The implementation of GRP II was initially delayed in 2004 by issues related to the creation of the position of accountant general and to the midyear general election of Parliament members. The recruitment of the international strategic planning expert under the CBGR was postponed until June 2007 because of the failure of contract negotiations and the unavailability of specialists. The GRP II closing date was subsequently extended twice at the request of the government, from 31 December 2005 to 31 March 2008, to provide more time for compliance with the monitoring conditions. The completion date for the CBGR was extended three times,until 31 May 2011.

F. Implementation Arrangements

49. The MOF was the executing agency for GRP II and the CBGR, with specific responsibilities for implementing the PSMFL, PFM, and social security reforms. MOF formed a project implementation unit in March 2004. The cabinet secretariat was the implementing agency for local government and civil service reforms and for the anticorruption componentunder GRP II. MOF and NDIC were the implementing agencies for the CBGR.

G. Conditions and Covenants

50. The policy framework for GRP II had three components that were structured around 36 conditions—6 first-tranche conditions, 10 second-tranche conditions, and 20 monitoring conditions. The report and recommendation of the President (footnote 5) stated that all six first-tranche conditions were complied with before loan negotiations. The December 2005 progress report to the ADB Board of Directors said that all 10 policy conditions for the release of the second tranche had been fully complied with.

51. Appendixes 2 and 3 indicate the present status of compliance with policy conditions. This evaluation concludes that all 6 first-tranche and 10 second-tranche conditions, and 15 of the 20 monitoring conditions, have been complied with. Several policy conditions of GRP II,

11

while deemed to have been formally complied with, are procedural in nature, and targeted reforms in several cases have not been sustainable. Appendices 4 and 5 report compliance withloan covenants for GRP II and CBGR.

H. Related Technical Assistance

52. MOF was the executing agency, and the project implementation unit established for GRP II also coordinated all activities under the CBGR. During project implementation, the CBGR provided (i) capacity-building assistance in financial and performance audit to MNAO, (ii) revised charts of accounts and capacity-building services and training to the accountant general and chief accountants of line ministries, (iii) asset valuation standards in compliance with good international practice, (iv) advice on strategic planning and output-based budgeting to MOF and selected pilot line ministries, (v) capacity building in basic budget management and PFM for MOF, line ministries and local governments, and (vi) support for the drafting of new fiscal legislation and preparation of the first comprehensive PIP.

53. In accordance with a conclusion in the 1997–2007 CAPE (footnote 4), MOF and ADB agreed in a memorandum of understanding dated 17 December 2008 to cancel the planned procurement of output-costing software and to focus instead on capacity building in core areas of PFM. The CBGR was extended to 31 May 2011 and a minor change in scope and implementation arrangements was approved on 24 April 2009. The major part of the remaining outstanding loan amount was used for training in basic budget management and PFM for MOF, line ministry, and local government staff.12 The Mongolian Academy of Management, under the guidance of senior MOF staff and the International Monetary Fund (IMF) budget planning advisor, provided comprehensive and effective training and capacity building assistance.13

I. Consultant Recruitment and Procurement

54. All international and domestic consultants were recruited individually by the project implementation unit in accordance with ADB’s Guidelines on the Use of Consultants (2010, as amended from time to time. All procurement of goods and services was carried out in accordance with ADB’s Procurement Guidelines (2010, as amended from time to time).

J. Performance of the Borrower and the Executing Agency

55. The performance of the borrower and MOF (as executing agency) was partly satisfactory. The performance of the program implementation unit in the executing agency was satisfactoryand the government met all requirements for report preparation submission. Government ownership, commitment, and understanding of GRP I and II, and to a lesser extent CBGR, which was high at the initial stage of implementation of GRP I, appears to have diminished during implementation of GRP II.

12 In March 2010 a reallocation of loan proceeds and an increase in local cost financing was approved through a

major change in scope and implementation arrangements.13 In addition, two overseas study tours of Malaysia and Belgium were made to improve coordination between

budgeting and planning, and one overseas training program in the implementation of program budgeting, medium-term budgeting, and investment planning and budgeting was carried out.

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K. Performance of the Asian Development Bank

56. ADB’s performance was partly satisfactory. While ADB monitored the implementation of GRP II and the CBGR through missions from headquarters, the focus was on technical compliance with tranche conditions, rather than on policy dialogue on implementation of effective and sustainable reforms and achievement of targeted outcomes. On average, only one or two review missions a year were carried out during the 2004–2008 implementation period, despite significant implementation delays and the comprehensiveness and complexity of the reforms, while two review missions per year were carried out for the CBGR toward the end of the implementation period. ADB maintained contact with other development partners, in particular the IMF and the World Bank, who however held different views regarding the design and implementation of PFM reform in Mongolia. Despite early delays in the implementation of key reform measures and indications of diminishing government commitment and ownership, no corrective actions regarding the scope and implementation arrangements of GRP II—including enhanced capacity building—were considered. The scope of the CBGR was revised at a late stage of implementation to re-focus project activities on basic capacity building in budget management and PFM.

III. EVALUATION OF PERFORMANCE

A. Relevance

57. GRP II and the CBGR were partly relevant in that they responded to a need of the government to improve fiscal sustainability and increase the efficiency of PFM, publicexpenditure, and the civil service. The program’s rationale was consistent with the government’s reform program and ADB’s country strategy and program update 2003–200514 and, hence, was valid both at appraisal and at implementation. It was also reasonably valid at the time of evaluation, as the program’s rationale was in line with Mongolia’s National Development Strategy and ADB’s country strategy and program 2006–2008 15 and country operations business plan 2009–2012.16

58. However, the design of the program was overly ambitious given the implementation time frame, the available resources including the CBGR, and Mongolia’s institutional capacity. GRP II and the CBGR were designed to support the adoption and mainstreaming of a wide range of complex public sector management reforms, based on international best practice. But they did not provide a consistent, strategic, and sequenced approach to the implementation of the most critical PSMFL reforms along the lines of the adopted cluster approach. They also did not adequately identify and manage the risks underpinning comprehensive and complex governance reforms and apply lessons learnt during implementation of GRP I. The initially foreseen implementation period of 2 years was unrealistic. The reforms needed greater diagnostic work and policy dialogue to ensure that they were focused on Mongolia’s priority needs and were consistent with the implementation capacity of key institutions. There was no separate project preparatory TA for GRP II.

59. The PSMFL reform program focused on and strengthened the authority of key central ministries to the neglect of local governments. Although ADB provided a series of TA programs to build local government budgeting and planning capacities, the implementation of the PSMFL

14 ADB. 2002. Country Strategy and Program Update: Mongolia, 2003–2005. Manila.15 ADB. 2005. Country Strategy and Program: Mongolia, 2006–2008. Manila.16 ADB. 2009. Country Operations Business Plan: Mongolia, 2009–2012. Manila.

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caused local agencies to lose control over local expenditure in areas such as health and education.

B. Effectiveness in Achieving Outcome

60. GRP II and the CBGR were less effective. The PSMFL is focused on a series of very ambitious public sector management reforms that capture best practice but are mostly beyond Mongolia’s institutional capacities. Only the most reform-minded developed countries, such as New Zealand and Australia, have come close to having systems with these characteristics. Most Organisation for Economic Co-operation and Development (OECD) countries are far from achieving these standards of performance. The objective and output of GRP II were unrealistic in relation to the available institutional capacity in Mongolia and the program resources and time frame. Progress in building relevant long term institutional capacity was limited.

61. The evaluation found limited progress in, and limited lasting effects from, GRP II key reform measures, while some significant progress was achieved in certain reform areas, in particular accounting and external auditing. There has been little progress in the integration of planning and budgeting. Strategic business planning and the medium-term expenditure framework carry little weight in guiding the annual budget process. Despite the program’s emphasis on output-based budgeting, ministries and government agencies at all levels practiceline-item budgeting. Output specification, costing, benchmarking, and budgeting have not been integrated into the regular budget process. The CBGR, at a late stage of implementation, provided relevant and effective capacity building in basic PFM and effective support for the drafting of new fiscal legislation and the preparation of the first comprehensive PIP.

62. Budget execution and control has improved since the passing of the PSMFL. All bank accounts of government agencies and special funds are incorporated in a TSA at the MOF. Most former extrabudgetary funds have been integrated into the budgeting, accounting, and reporting processes. The gap between actual and planned recurrent expenditure has narrowed over time. Public spending is subject to routine financial audits by MNAO.

63. The government established the positions of accountant general in MOF and chief accountant in line ministries to provide leadership in accounting and financial management reform. The government has adopted IPSAS and a uniform chart of accounts for use by all government agencies. Budget preparation and implementation continues to be based on cash accounting, while the preparation of financial statements at year-end is gradually shifting to international accrual accounting standards. Good progress has been made in the preparation of consolidated financial statements for the central government. Amendments in the legal accounting and auditing framework under GRP II and the CBGR led to the creation of a new independent professional accounting body and the establishment of a certified government accountant structure. The capacity building of MNAO in financial and performance audit under the CBGR was highly effective. Lack of internal auditing capacity limits the scope of fiscal controls, while actual use of performance indicators in assessing expenditure outcomes is rare.

64. Performance contracts have been introduced, but human resource management practices of agencies are often inconsistent with PSMFL requirements for a merit-based public sector and government agencies are often politicized.

14

C. Efficiency in Achieving Outcome and Output

65. GRP II and the CBGR were less efficient. Efficiency suffered from the absence of a gradual, well-sequenced, and time-bound implementation plan for the proposed reforms. In particular, the CBGR did not provide sufficient TA resources to achieve the required capacity development outcomes. The focus of program monitoring by ADB was on technical compliance with tranche conditions rather than on policy dialogue on implementation of effective and sustainable reforms and achievement of targeted outcomes. Despite early delays in the implementation of key reform measures, no corrective actions regarding the scope and implementation arrangements of GRP II—including enhanced capacity-building measures—were considered, while the scope of the CBGR was eventually adapted to the capacity-building needs of counterparts. Because of implementation delays and delayed compliance with policy conditions, the completion of GRP II was delayed by two years and three months.

66. ADB, the World Bank, and other key development partners should have cooperated more closely to support such a large reform effort in the public sector. ADB supported the introduction of output-based budgeting, while a parallel World Bank project supported program-based budgeting. Coordination with development partners improved significantly toward the end of the implementation period of the CBGR.

D. Preliminary Assessment of Sustainability

67. An overly ambitious reform program of public management based on the PSMFL, in combination with a poorly sequenced implementation strategy and lack of implementation capacity, made GRP II and parts of the GBGR less likely to be sustainable. Much work on the implementation of the new methodologies under GRP II was carried out by consultants; this factor, as well as the advanced nature of the reforms and capacity shortages, discouraged the adoption of the methodologies by public sector institutions.

68. Limited staff numbers, a shortage of relevant skills and high turnover of professional staffoften hindered agencies from implementing key GRP II reform measures. The PSMFL is currently been replaced by the Fiscal Stability Law and a draft Integrated Budget Law, which were drafted with support from the CBGR.

E. Impact

69. There is limited evidence of progress in public sector accountability and efficiency as measured by fiscal sustainability and tangible improvements in the delivery of key public services—the objective of GRP II. Fiscal policy in recent years has been overly expansionary and procyclical, contributing to the fiscal crisis in 2008–2009 and the need to conclude a standby arrangement with the IMF in early 2009. The size of the public sector has increased since 2002. There are few signs that public service delivery has become more efficient in achieving outcomes. Meanwhile, GRP II–supported reforms have contributed to sustainable progress in budget execution and control, external audit, and reforms in accounting and reporting. Output-based budgeting and accrual accounting will be beyond Mongolia's capacity for the foreseeable future.

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IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

70. This evaluation rates GRP II partly successful and the CBGR partly successful. Progress and lasting effects of several key aspects of the reform process under GRP II have been limited, while some parts of CBGR have been effective. This conclusion is consistent with related previous assessments of the CAPE 1997–2007 and the program performance evaluation reportfor GRP I.

B. Lessons

71. The evaluation offers lessons regarding the need to properly adapt the scope and time frame of reforms to institutional capacity and to sequence reforms. Budget reform should be regarded as an evolving process and should focus on a more limited set of reforms that are within the reach of government institutions. OECD-type budget systems in developing countries and emerging markets must be based on a solid platform of financial management (the micro basis of broader budget system reform) within MOF, line ministries, and other government agencies. In Mongolia as well as many other developing countries, this aspect of PFM reform has proved to be particularly problematic. Reforming PFM systems is a long-term process, for which a time frame of 15–25 years is often considered realistic.

72. In general, program loans should either exclude highly complex and far-reaching policy reforms or build on intensive policy dialogue and enhanced monitoring and review by ADB. Corrective action regarding the scope and implementation arrangements of the program should be considered at an early stage if implementation is observed to fall behind schedule or government capacity, ownership, and commitment show signs of receding. To improve ADB’s processing and supervision of complex program loans—particularly those that entail policy reforms, development of legislation, and human resource and institutional development—strong in-house specialist expertise, instead of predominant reliance of consultants, should be ensured, in particular sufficient provision of budget for supervision and staff skills.

C. Recommendations

73. Several GRP II and CBGR reform methodologies have not been sustainable and do not seem worth pursuing further in the foreseeable future. Because of the low effectiveness and less-than-likely sustainability of large parts of GRP II, further program-related follow-up measures do not appear warranted. The scope of the CBGR was adjusted to provide relevant capacity building in close cooperation with IMF and the World Bank.

74. ADB should review its strategic approach to governance reform in Mongolia and focus interventions on a more limited set of initiatives that are more adapted to the implementation capacity of government institutions - in close coordination with other development partnersthrough the ADB Mongolia Resident Mission. Rather than being focused on very ambitious final outcomes, public management reforms should be structured to produce useful intermediate improvements, while at the same time strengthening implementation capacity. Further capacity building of MOF, line ministries, and in particular local governments in basic fiscal, budget, and PFM reforms, as eventually pursued under the CBGR, should be considered in future ADB interventions in governance in Mongolia. Improvements in budgeting and planning, notably for public investments, are essential to ensure the efficient allocation of mining revenue, high economic growth and significant progress in poverty reduction.

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LOAN 2010-MON(SF): DESIGN AND MONITORING FRAMEWORK17

Design SummaryPerformance

Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

Goal The goal of the Second

Phase of the Governance Reform Program (GRP-II) is to enhance accountability and efficiency of the public sector in Mongolia, to be measured by fiscal sustainability and tangible improvements in delivery of key public services.

Adherence to overall macroeconomic and fiscal targets under the Poverty Reduction and Growth Facility (PRGF) of the International Monetary Fund (IMF)

Adoption of an internationally comparable fiscal framework statement (FFS) and medium-term expenditure framework

(MTEF) over 2003–2008 Adoption of sound output

specification and costing guidelines by key portfolio ministries

Demonstrated reduction in government administrativeexpenditures over 2003-08

Parliamentary endorsement of the overall financial statement of the Government, as certified by the Mongolia National Audit Office (MNAO)

Compliance with the output benchmarks agreed upon under the program

Demonstrated improvements in service delivery through post-evaluation assessments (built into the strategic planning processes) of health, education and social welfare, and labor portfolios

Published MTEF and FFS reports, reviewed against the Government’s medium-term social and economic development guidelines

Macroeconomic and fiscal framework assessment reports

Asian Development Bank (ADB) review missions

Macroeconomic stability and absence of weather shocks

Political stability Full cooperation from

the civil service in implementing the Public Sector Management and Finance Law (PSMFL)

Purpose Its purpose, following

the measures adopted under GRP on a pilot basis, is to help gradually implement public sector administrative and financial management reforms

Adoption of all budget, output, performance, and financial management provisions of PSMFL in education, health, social welfare, and labor portfolios over 2003-05

Adoption of the above provisions in other portfolios over 2006-08

All portfolios and aimags

Reports submitted from portfolio ministries to Ministry of Finance (MOF) andParliament

Final submission of MTEF documents

Finalized output delivery contracts

Quarterly reports from MOF on

Adequate capacity at all levels

Continuity of reforms without any major change in the policy framework

17 The report and recommendation of the President does not include a separate design and monitoring framework for

Loan 2011.

Appendix 1

17


Targets/Indicators


Mechanisms


(i) Formulate a sound implementation framework to guide public sector governance reforms

(ii) Strengthen financial governance reforms in line with PSMFL

(iii) Strengthen the social security system to enhance fiscal sustainability

submit timely inputs for MTEF in line with PSMFL provisions

All aimags to have entered into well-formulated output delivery contracts with the portfolio ministries

All capacity-building measures implemented, as envisaged in the policy matrix

Strategic business plans (SBPs) for 2004-06, and 2006-08, finalized for education, health and social welfare, and labor portfolios

Adoption of a realistic ceiling on administrative expenditures and satisfactory benchmarks for measuring portfolio outcomes in health, education, social welfare, and labor portfolios

FFS, formulated in a manner satisfactory to ADB

Appointment of an accountant general

Establishment of internal audit units in MOF and all portfolio ministries and aimags over 2003-06

Establishment of the certified government accountant structure

Gradual progress in adopting accrual accounting

Establishment of a unit on asset valuation andadoption of modern norms on valuation

Submission of MNAO’s audited financial statements for education, health, social welfare, and labor portfolios

Mongolian Institute of Certified Public Accountants separated from MOF

Ministry of Social Welfare and Labor to finalize social security reform

program implementation

ADB review missions

Submission of SBPs Joint agreement between

the ministries on the administrative expenditures

End-of-year reports from the accountant general and the advisor (appointed under the technical assistance (TA) loan for Capacity Building for Governance Reforms (CBGR)

MNAO’s reports to Parliament

Finalized social security reform guidelines and the white paper

Sound coordination between MOF and all portfolio ministries

No sensitivities with regard to centralized control of MOF or the central government (in relation to local government affairs)

Adoption of all necessary procedures on time

Availability of sufficient number of qualified accountants to staff the internal control units

Significant political risks associated with introducing sensitive

18


Targets/Indicators


Mechanisms


(iv) Start administrative consolidation

(v) Enhance confidence in public institutions

(vi) Ensure adequate social safety nets to support governance reforms

guidelines, outlining the need to end early retirement privileges and equalize retirement ages of men and women, and formulate a white paper on social security reforms

Cabinet endorsement of the white paper

Submission of the white paper for public consultations and formulation of specific reform measures

Government to draft a concept paper on administrative consolidation to achieve economies of scale in service delivery

Completion of performance audits of Customs General Administration and General Department of National Taxation by MNAO

Civil Service Council (CSC) to assess performance evaluation reports from all ministries and provinces

Full compliance with CSC’s rules on civil service recruitments

Government to constitute a subgroup within the National Council on Anticorruption (NCAC)

Evidence that the budgets over 2004-06 include at least $1.5 million counterpart funds generated from GRP-II

Reports from the Cabinet Secretariat on functional reviews

Endorsement by the Cabinet of the concept

paper on consolidation Performance audit

reports Civil service reform

strategy from CSC Report from the

Government on the outputs of NCAC

ADB reviews

Finalized budgets for the relevant areas

social security reform measures around the time of parliamentary elections, planned for mid-2004

Potential for resistance to thorough functional reviews as well as the administrative consolidation measures

Acceptance among politicians of the need for a career-track civil service system

White paper on rule of law reforms taken seriously by the government and Parliament to address the negative public perception of the judiciary and other key central budgetary bodies

No adverse impact on the poor or vulnerable beyond what the budgetary allocations can remedy

Outputs

(i) Adopt a sound implementation framework to guide public sector governance reforms:

(a) Institutional Consequential Reports from MOF Adequate training

19


Targets/Indicators


Mechanisms


capacity of the portfolio ministries enhanced

(b) Entity-level strategic planning improved in line with PSMFL requirements

(c) Public expenditure management improved

(d) Output-based budgeting mainstreamed

(ii) Strengthen financial governance norms

(a) Sound institutional structures adopted within the Government

(b) Certified government accountant structure established

(c) Internationally recognized public sector accounting norms adopted

(d) Internal control units established in all budgetary bodies

(e) Internationally comparable asset valuation standards adopted

(f) All legal amendments to enable financial governance reforms adopted as per PSMFL

(g) The certified public accountant evaluation system streamlined

amendments to about 75 laws adopted following PSMFL enactment

Training modules on output and financial management finalized, and training-of-trainers provided

SBPs for key portfolios (education, health, social welfare, and labor) finalized

Clear benchmarks developed to monitor outputs of the above 3 key portfolios

MOF finalized an assessment of the quasi-fiscal and contingent liabilities of the Government

Internal audit units fully functional in at least 5 portfolio ministries by end-2004, and in another 5 by end-2006

First set of examinations conducted for accountantsnominated under the certified government accountant structure

Completion of internal control reports in education, health and social welfare, and labor portfolios

Government established asset registers for all government assets

Financial statement audits completed for education, health, and social welfare and labor portfolios

Training provided under ADB TA

Review missions

Reports from MOF andthe 3 key portfolios on their internal controls

MNAO reports Review outcomes Reports from TA loan for

CBGR

for budgetary bodies and local level governments to successfully implement PSMFL

Absorption of the capacity-building measures

Civil servants and government accountants to learn and understand modern financial management methods

20


Targets/Indicators


Mechanisms


(iii) Strengthen the social security system to enhance fiscal sustainability

(iv) Launch measures for administrative consolidation and other reforms(a) CS and MOF

have drafted the concept paper on administrative consolidation

(v) Enhance confidence in public institutions(a) A sound

framework to institute sound ex post verification on budget execution

(b) Improvements to civil service culture by promoting merit-based entry

(c) Adoption of reforms to enhance trust in

public institutions

Draft guidelines stipulating gradual increase in retirement ages and elimination ofearly retirement privileges

Submission of white paper on social security reform

Submission of law on regional development, ensuring that the regional management framework will not lead to any additional layers of public administration

Concept paper to show clear avenues for achieving scale economies in service delivery and reduction in public expenditures

MNAO to publish the performance audit reports in major newspaper

Continuous compliance with CSC’s rules on recruitment and performance evaluation

NCAC has finalized its report on efficacy of taxation, customs, and public service delivery functions in health and education sectors

Government reports

Government reports Review missions

Periodic reports from MNAO and other bodies

Resistance from interest groups and stakeholders

Lack of broad-based political acceptance of the reform measures in an election year

Government takes these measures seriously and allocates sufficient resources to help achieve theprogram goals in this area

Inputs Program cluster

concept to enable implementation of the complex reforms over 2003-09

Program loan of $7 million equivalent to the Government support GRP-II

TA loan of $2 million aimed at CBGR

Cluster concept approved by ADB

Subprogram 1 approved TA loan approved and

procurement finalized by October 2003

The management information system component finalized and procurement underway for costing software by October 2003

ADB review missions (atleast 2 per year)

TA reports and review

Continuous monitoringand concerted policydialogue with thegovernment and thejudiciary

Close coordination with other funding agencies to ensure TA support is well coordinated and benefits maximized

ADB = Asian Development Bank, CBGR = Capacity Building for Governance Reforms, CSC = Civil Service Council, FFS = fiscal framework statement, GRP II = Second Phase of the Governance Reform Program, IMF = International Monetary Fund, MOF = Ministry of Finance, MTEF = medium-term expenditure framework, MNAO = Mongolia National Audit Office, NCAC = National Council of Anticorruption, PRGF = Poverty Reduction and Growth Facility, PSMFL = Public Sector Management and Finance Law, SBP = strategic business plan, TA = technical assistance.Source: Asian Development Bank

21

POLICY MATRIXLOAN 2010-MON(SF): SECOND PHASE OF THE GOVERNANCE REFORM PROGRAM

COMPLIANCE WITH CONDITIONS PRIOR TO LOAN NEGOTIATIONS

Sub-Objective Policy Matrix Conditions Status of ComplianceEnhance Institutional Capacity to Implement Budget, Output, and Financial Management ReformsImplement the Public Sector Management and Finance Law (PSMFL), adopted by Parliament in June 2002.

1. The Ministry of Finance (MOF) and the Cabinet Secretariat (CS), in accordance with Government Decree 119 of 2002, will (i) adopt a time-bound implementation program for PSMFL; (ii) publish and circulate a guide on public sector management and finance reforms, outlining the key reform principles and steps to be adopted by all budget entities; (iii) formulate and initiate a training program on PSMFL for public servants; and (v) initiate transfer of all entities financed from the central and local budgets into the new budget and financial management system under PSMFL.

Complied with. The government approved a PSMFL implementation plan in September 2002 which envisaged a 3-year time frame, 2003–2005. The government, with ADB technical assistance (TA) support, published a detailed explanation guide in Mongolian on public finance management reforms and disseminated over 1,500 copies for use by ministers, general managers, and key staff of the main agencies. The government formulated a capacity building program to enhance awareness of the PSMFL. The government also issued rules and regulations requiring line ministries and budgetary bodies to present their budget estimates in a portfolio format, in line with the PSMFL requirements.

2. Amend 75 relevant laws as required by the adoption of PSMFL, including those on budget, civil service, government service, and state audit.

Complied with. The government drafted consequential amendments to 75 laws, necessitated by the adoption of PSMFL, including the consolidated budget law, civil service law, law on government and state audit law, which Parliament enacted in January 2003.

3. CS will coordinate training on PSMFL implementation for (i) state secretaries of all ministries and general managers of all budget entities, and (ii) all budget and key public administration officials of provinces and their district administrations.

Complied with. The government formulated a capacity building program to enhance awareness of the PSMFL. All state secretaries in line ministries and general managers of all central budgetary bodies have undergone a training program on the basics of the PSMFL. A training-of-trainers program was completed, following which three academic-cum-training institutions provided basic training sessions on PSMFL implementation for central and local government officials in May–July 2003.

Streamline output-based budgeting by setting sound examples in key sectors.

8. MOF will finalize and submit to Parliament the fiscal framework statement for 2004-2006.

Complied with. Since 2004, MOF’s fiscal framework statement for the following budget year and the following two years has been completed annually and submitted to Parliament. However, the fiscal framework statement is still in the process of being developed and has little weight as a guide to the annual budget framework and preparation of multiyear budgets.

Strengthening the 23. MOF will issue internal Complied with. Internal procedures for audit

Appendix 2

22

Sub-Objective Policy Matrix Conditions Status of Compliancepolicy, institutional, legal and regulatory frameworks for private sector accounting and auditing.

procedures for audit firms developed under ADB TA.

firms were issued by the MOF in July 2003.

Improve Fiscal Sustainability through Pension Reforms and Administrative ConsolidationSteer the regional development initiative to attain public sector operational efficiency.

27. CS and MOF will submit to Parliament a draft law on regional development, providing that its implementation will not lead to any additional layers of public sector administration or overlays.

Complied with. The government embarked on a plan to develop five regional centers to redress regional imbalances and evenly distribute the population. While the government's objective is to achieve equity in growth across the country, any development of regional clusters may lead to additional layers of public administration. The cabinet secretariat and the MOF submitted to Parliament a draft law on regional management providing that regional development will not create such additional layers or additional expenditure outlays.

ADB = Asian Development Bank, CS = Cabinet Secretariat, MOF = Ministry of Finance, PSMFL = Public Sector Management and Finance Law, TA = technical assistance.Source: Asian Development Bank.

23

POLICY MATRIXLOAN 2010-MON(SF): SECOND PHASE OF THE GOVERNANCE REFORM PROGRAM COMPLIANCE WITH SECOND-TRANCHE RELEASE AND MONITORING CONDITIONS

Sub-Objective Policy Matrix Conditions(Second-tranche release conditions are in bold)

Status of Compliance

Enhance Institutional Capacity to Implement Budget, Output, and Financial Management ReformsStrengthen entity-level strategic planning, in line with the Public Sector Management and Finance Law(PSMFL) provisions.

4. Strategic business plans (SBPs) for 2004-2006 acceptable to the Asian Development Bank (ADB) will be finalized for the Ministry of Health (MOH);Ministry of Education, Culture and Science (MECS); and Ministry of Social Welfare and Labor (MSWL).

Complied with. ADB technical assistance (TA) provided support to the three ministries to finalize their SBPs for 2004–2006. ADB received English translations of SBPs in August 2005 which were found satisfactory, compatible with the PSMFL, and based on output costs. However, SBPs only comprise outputs, activities, and costing of the central offices of line ministries, and these represent only a small fraction of line ministry expenditure. Subsequently, most ministries have stopped producing SBPs. The requirement to prepare SBPs was dropped from the draft Integrated Budget Law.

Streamline the forward planning processes to improve public expenditure management.

5. The Ministry of Finance(MOF) and the three line ministries listed above will jointly assess their respective public sector administrative expenditures and agree on ceilings on such expenditures, to take effect from 1 January 2005.

Not complied with. The domestic strategic planning expert (SPE) under the Capacity Building for Governance Reforms (CBGR)examined the trends of ratios of administrative expenditures to total current expenditures of the selected three ministries, and in consultation with the Budget Expenditure Division of the MOF, recommended that the headquarters and sector administrative expenditures of these ministries should not increase by more than the rate of increase of the general commodity price index. Subsequently, the international SPE prepared detailed methodological papers and suggested operational benchmarks for various components of output cost, including headquarters and the sector’s administrative expenses. These papers were translated into Mongolian and circulated to the MOF and the other selected line ministries. However, due to lack of capacity and ability in costing and output specification, line ministries do not appear to be in the position to measure and set regular ceilings on their administrative expenditure as part of the annual budget process.

6. MOF and the three line ministries listed above will assess the output costs of their respective portfolios andagree on quantitative norms against which their outcomes can be benchmarked.

Complied with. The international and domestic SPEs examined the norms for ratios for different components of cost in total output cost on the basis of budgetary data for 19 selected budgetary agencies for the budget year 2008. The SPEs also reviewed and suggested measures for improvements in

Appendix 3

24



strategic business planning; identifying outcomes, outputs, and activities; and medium-term expenditure frameworks for six line ministries—MOF, Ministry of Education, Culture and Science (MECS), MOH, Ministry of Justice and Internal Affairs and MSWL(Ministry of Social Welfare and Labor)—for the 2008 portfolio budget and 2008–2010 MTEF. The SPEs advised on output costing and output classifications principles and methods, identification of cost drivers and cost centers which were reflected in the budget appropriations for 2008, and medium-term expenditure frameworks for these six line ministries.

7. MOF will prepare a report on (i) impact of quasi-fiscal and off-budget activities of the budgetary bodies, (ii) contingent liabilities of the Government and guarantees against state-owned enterprises and other budgetary bodies, and (iii) tax and expenditure arrears in the budget.

Complied with. The government (i) promulgated Resolution 101 passed in 2005, and (ii) enacted the Law on Unified Budget, pursuant to the PSMFL. Resolution 101 facilitated the introduction of a single treasury accounting system under which off-budgetary activities of budgetary bodies have been terminated. The Law on Unified Budgetprohibits the government’s provision of guarantees favoring state-owned enterprises or budgetary bodies. Reports on budgetary expenditure arrears are prepared by MOF’s treasury department on a monthly, quarterly, and annual basis and submitted to Parliament. The general department of national taxation (GDNT) prepares quarterly and annual reports on tax arrears. The government’s budget, however, still operates on a cash-based system. Information on contingent liabilities remains incomplete and a clear analysis of fiscal risks has not been prepared in order to be included in the annual budget, as mandated by the PSMFL.

8. MOF will (i) formulate and issue the methodology for medium-term expenditure planning on accrual basis to all line ministries and budgetary bodies, and (ii) formulate and issue guidelines to all line ministries and budgetary bodies to enable the latter to finalize their respective portfolio appropriation estimates in line with PSMFL provisions.

Complied with. (i) Decree No. 61 of March 2005 of the minister of finance which complies with this condition was delivered to ADB. (ii) Decree No. 49 of April 2005 of the minister of finance, which complies with this condition, has been delivered to ADB. The domestic SPE formulated the methodology for medium-term expenditure planning on accrual basis to all line ministries and budgetary bodies and submitted it to the Fiscal Policy and Coordination Department of the MOF. However, the medium-term expenditure framework is still in the process of development and currently has little weight as a guide to the annual budget framework and

25



preparation of multiyear budgets. Mainstream output-based budgeting by setting sound examples in key sectors.

9. MECS, MOH, and MSWL will finalize, to ADB’s satisfaction, (i) the methodology for output specification and costing, and the formats for reporting the outputs and costs, in the education, health, and social sectors; and (ii) sound standards for monitoring the utilization of budgetary allocations against the specified outputs.

Complied with. The three ministries prepared output-based budgets for presentational purposes for a few years until 2007 when program budgeting was introduced under the World Bank Economic Capacity Building Technical Assistance Credit (ECTAC). The methodology for output specification and costing was approved by the finance minister's Order No.388 of 2006, and the formats for reporting outputs and costs for the portfolio ministers and budget entities under them were approved by the finance minister’s Order No. 32 and 388 of 2006. Most work regarding implementation of output-based budgeting was carried out by consultants. The SPEs prepared detailed guidelines on strategic planning, output specification and costing, and accrual accounting. The documents were translated to Mongolian and submitted to the MOF and forwarded to other pilot ministries for their use in yearly budget appropriation, medium-term expenditure targeting, and SBPs. However, ministries and central and local government agencies are practicing line item budgeting. Output specification, costing, benchmarking, and budgeting has not been adopted as part of the budget process.

10. MOF will (i) coordinate and convene a working group of the state secretaries of MOF, MECS, MOH, MSWL, Ministry of Justice and Home Affairs(MJHA), and Ministry of Infrastructure (MOI) to assess the implementation of PSMFL; and (ii) submit lessons learned and recommendations to improve PSMFL implementation for the Cabinet’s consideration.

Complied with. The MOF coordinated a working group of state secretaries from MOH, MECS, MSWL, MJHA, and MOI to assess PSMFL implementation and submit lessons learned to the cabinet. These reports were submitted to the cabinet in March 2004 and March 2005. An English translation of the March 2005 report was submitted to ADB in July 2005 and was found satisfactory.

Establish sound institutional structures for effective public financial management.

11. The Government, through a cabinet decree, will (i) establish the position of accountant general (AG) position at MOF with certified public accountant (CPA) qualifications, to be responsible for all ex ante financial planning and ex post financial reporting, and overall accounting responsibilities of the Government; (ii) appoint

Complied with. (i) The equivalent position of accountant general was established in the MOF. The functions to be performed by the accountant general are included in the work plan of the Accounting Policy and Methodology Division (APMD). ADB was informed about this development through an official letter from the state secretary of the MOF dated 11 January 2005. The APMD was changed to the APM Department by Resolution No.36 of the Government of Mongolia on 7 March 2006 based on

26



an international senior advisor to the AG with support under the TA loan for Capacity Building for Governance Reforms (CBGR); (iii) ensure that a qualified incumbent staff is nominated as chief accountant in each portfolio ministry and province; and (iv) establish a hierarchical link between the AG and chief accountants of portfolio ministries and provinces.

Government Resolution No.170 of 2005 on ''MOF business strategy and organizational structure".(ii) The international accounting adviser was recruited in March 2005.(ii) By Government Resolution No.36 of 2006, finance and economic divisions or departments were established under six portfolio ministries. Chief accountants of portfolio ministries and provinces were certified by completing a training program and passing the certification examination. The certificate was issued by the finance minister’s Order No.346 on 16 December 2005.(iv) The hierarchical link between the accountant general and chief accountants of portfolio ministries and provinces is incorporated in the Financial Statement Consolidation Manual for the Government of Mongolia. This manual was approved by Order No.32 of the minister of finance on 27 January 2006.

12. Government, through a cabinet decree, will (i) establish internal audit functions under the AG’s Office, accountable to the AG, led by the head of internal audit (HIA); (ii) coordinate the nomination of a qualified incumbent staff as an internal auditor in the portfolio ministries, including MOF, and provinces,

reporting to the respective state secretaries and provincial governors; (iii) set up a hierarchical link between the HIA and internal auditors of portfolio ministries and provinces; (iv) ensure the AG formally defines the terms of references of internal audits in line with the operational standards issued by Institute of Internal Auditor (IIA); (v) ensure that the HIA obtains a government internal audit certificate by meeting all requirements of IIA; and (vi) set up continued professional education requirements for internal auditors.

Not Complied with. Implementation of internal audit functions has only started very recently. An internal audit, monitoring and evaluation department was formed in MOF in April 2009. which is responsible for internal audit and control in both central governments and aimags. The department employs 10 professional staff and reports to the internal audit committee of MOF which is chaired by the state secretary. Internal audit departments will be established in line ministries after enactment of the Integrated Budget Law. Lack of internal auditing capacity limits the scope of fiscal controls, while actual use of performance indicators in assessing expenditure outcomes is rare. Internal control is centralized and carried out by the State Professional Inspection Agency (SPIA) with a narrowly defined scope of focusing on financial compliance and regularity rather than on broader management issues.

27



13.MOF will draft and submit to Parliament amendments to the Law on Accounting to strengthen the entry, qualification criteria, job classifications, and categories for the public accountants at the central and local ministries, governors’ offices, and various budgetary bodies.

Complied with. Although the MOF started drafting them, the amendments, were notsubmitted because Government Resolution No.131 of 2001 on “Procedure on appointment and release of Budget Accountant General” includes qualification criteria, job classifications, and responsibilities of the accountant general and chief accountants of portfolio and budget ministers at all levels.

14. MOF will (i) design an examination structure and exam review courses, and develop continued professional education requirements to certify Government accountants; and (ii) conduct the first exam.

Complied with. Under the existing Law on Accounting and the PSMFL, MOF's APMD designed an examination structure under a revised course and developed continuing professional education requirements to certify government accountants. The first examination under the revised course was held on 22 November 2005.

Support transition to implement accrual accounting on a pilot basis.

15. Government, with support under CBGR support, will to implement a pilot program for education and health portfolios, aimed at developing (i) an initial set of accrual- based accounts that will recognize the receivables and payables at the end of each year; and (ii) registers for assets to support valuation for costing.

Complied with. With the help of a TA loan from the World Bank, MOF created a chart of accounts for MECS and MOH in 2003. From the charts of accounts, pro forma accrual accounts for the two ministries were extracted. However, the two ministries' pro forma accounts cannot be integrated into the government's overall system until the overall government has moved to an accrual accounting system. Line Ministries operate asset registers, but their comprehensiveness is not clear.

Introduce internationally accepted asset evaluation standards.

16. MOF’s Accounting Policy and Methodology Department will draft and adopt asset valuation standards on movable, immovable, and nonmaterial assets (e.g., trademarks, copyrights, etc.), with the support of an international advisor under the TA loan for CBGR.

Complied with. The MOF submitted the draft asset valuation standards developed by the international asset valuation expert to ADB. The government has passed regulations governing asset valuation accounting, but there has been little progress in implementation, including depreciation procedures and recording of tangible and nontangible assets. The MOF does not operate a comprehensive asset register.

Strengthen the public sector auditing and financial inspection framework.

17. National Audit Office (MNAO), as part of its work program under PSMFL, will audit financial statement of (i) MECS, MOH, and MSWL and (ii) one province on a pilot basis.

Complied with. The Mongolia National Audit Office (MNAO) has audited the 2003 and 2004 financial statements of MECS, MOH, MSWL, and selected provinces and haspublished its audit summaries in newspapers.

18. The Government will review the functions of SPIA, particularly in financial

Not complied with. A review of the SPIA functions that was conducted within the World Bank ECTAC project was finalized. Financial

28



inspection, and restructure the agency to ADB’s satisfaction.

inspections were centralized in 2005 and primarily address compliance with rules and regulations, imposing penalties and giving instructions for reimbursement of money that has been wrongly applied. There are overlapping responsibilities between the SPIA, MNAO, and internal audit functions which have recently started to emerge in the MOF and a few line ministries. Line ministries have monitoring and evaluation departments which are responsible for supervision of ministerial action plans but not internal financial control.

Strengthen the policy institutional, legal and regulatory frameworks for private sector accounting and auditing.

19. MOF will (i) translate international accounting standards (IAS) into Mongolian to meet IASguidelines; and (ii) revise the Law on Accounting to prevent entities from paying penalties rather than submitting financial statements by enforcing submission of financial statements, in addition to penalties, and removing the requirement for quarterly certification of financial statements.

Not complied with. (i) IAS have been translated. (ii) These issues were reflected in proposed amendments to the Law on Accounting, which have been delivered to the Ministry of Justice and Home Affairs, but have not been passed by Parliament.

20. Government, through MOF, will (i) separate the Mongolian Institute of Certified PublicAccountants (MICPA) from MOF and establish the institute as an independent organization from the Government; (ii) prevent government officials from serving as officers and management of MICPA; and (iii) amend the Law on Auditing to enable MICPA to conduct practice monitoring of audit firms and ethics investigation of MICPA members.

Complied with. The following amendments to the Law on Audit were adopted by the Parliament on 12 January 2006: (i) Article 13 part 1 establishes MICPA as an independent professional nongovernment organization separated from the MOF; (ii) government officials no longer serve as MICPA officers; and (iii) Article 13 part 1 of the Law on Auditing enables MICPA to conduct practice monitoring of audit firms and ethics investigation of MICPA members.

21. MOF will submit to Parliament amendments to the Law on Auditing: (i) abolish the Mongolian Professional Accounting Council (MPAC); (ii) assign the CPA examination function to MICPA, including awarding CPA certificates; (iii) transfer

Complied with. The following amendments to the Law on Audit were adopted by Parliament on 12 January 2006: (i) the MPAC was abolished. (ii) Article 13 part 2 stipulates thatCPA examination and awarding CPA certificates will be shifted to MICPA. (iii) Article 13 part 3, Article 14 part 1, and Article 26 part 2 state that the MOF is responsible for licensing CPAs and audit firms. (iv) Article 13

29



licensing of CPAs and audit firms to MOF; and (iv) shift MPAC’s training activities to MICPA.

part 2 stipulates that training activities will be shifted to MICPA.

22. MOF will submit to Parliament amendments to the Law on Auditing to (i) modify the CPA certification process in line with the completion of different stages of the CPA examinations, with a title CPA-I given those who complete the first stage of 2 years; CPA-II for the second stage of 5 years; and CPA-III for completing the third and final stage of examinations; and (ii) issue license to audits only for those who have completed CPA-II, upon ensuring that the candidates are examined, and qualified, on their understanding of IAS and international standards of auditing.

Complied with. Article 14 part 3 of the revised draft amendment to the Law on Audit covers point (i). Article 30 of the same draft covers point (ii). These revised draft amendments were submitted to Parliament on 28 October 2005 and subsequently enacted.

Improve Fiscal Sustainability through Pension Reforms and Administrative ConsolidationReduce the short- term structural deficits in the pension system.

24. Using assessments prepared under ADB TAs to support financial sector development and social security sector reforms, MSWL will draft a white paper on pension system reform, focusing on the need to increase retirement ages (by eliminating early retirement privileges and equalizing the retirement ages of men and women), revamping the current notional defined contributory system, and indexing pensions.

Complied with. The white paper on pension reform was prepared by the MSWL. Pension reforms for the next 10 years were also included in the Master Plan for the Social Security Sector which was approved in 2003.The white paper includes provisions for increasing the retirement age on a gender-neutral basis. In doing so it promotes gender equality and eliminates early retirement benefits, thereby strengthening fiscal prudence. It revamps the notionally defined contributory system and indexes pensions to the inflation level, reducing short-term deficits in the pension system.

25. MSWL will disseminate the white paper for stakeholder consultations and finalize the reform measures to ADB’s satisfaction.

Complied with. The MSWL disseminated the white paper for stakeholder consultations in November 2003. The paper’s contents were in accordance with ADB’s pension reform goals under GRP II. The white paper was formally adopted in March 2005, but the proposed measures have not been implemented. Internal government consultations on pension reform, based on the three pillars of a

30



government funded basic pension, individual notional accounts and voluntary insurance are ongoing and amendments to the pension law are pending.

Consolidate intra-and interprovincialadministration toachieve economies of scale and efficiency.

26. CS and MOF will draft a concept paper on administrative consolidation within and between provinces to improve public expenditure management and achieve economies of scale in service delivery. A framework will consolidate(i) contiguous provinces on a selective basis, (ii) selected districts within the same or other provinces, and (iii) selected public sector agencies and institutions in the selected provinces and districts.

Complied with. By presidential order dated 29 November 2004, a working group headed by the prime minister and comprising representatives from the MOF, CS, and the Ministry of Justice and Home Affairs was established and tasked to develop a proposal for the reform of administrative and territorial units. By a prime ministerial order dated 18 January 2005, sub–working groups on (i) legal issues, (ii) socioeconomic studies, (iii) publicity and research, and (iv) internal public administration and territorial management were constituted as mandated to assist the working group with specific recommendations in their respective areas. With inputs from the four sub–working groups, the working group prepared a draft concept paper on intraprovincial and interprovincial measures to improve public expenditure management through increased efficiency and economies of scale in service delivery. Under this concept, as envisaged in the program, the framework seeks to consolidate contiguous provinces, contiguous districts within provinces, and selected public sector agencies and institutions. The government finished drafting the concept paper in April 2005. However, the proposal was not implemented because of conflicts with the Constitution which stipulates that administrative consolidation of local authorities has to be initiated at the local level. An alternative proposal for administrative consolidation is being prepared by the CS. It focuses on institutional consolidation between soums(districts) in order to increase efficiency of public expenditure management and service delivery.

Mainstream Governance Reforms and Enhance Confidence in Public InstitutionsInstitute a sound framework to ensure that the public receive good value in return for utilization public sector resources.

28.MNAO, with advisory support from the international advisor to MNAO, will undertake performance audits of selected functions and outcomes of Customs General Administration

Complied with. The MNAO undertook the performance audit of MOH, MECS, CGA, and GDNT for 2004, and published its auditsummaries in newspapers. While financial audits are carried out on an annual basis for all ministries and public agencies, performance audits for selected public bodies are conducted on an occasional

31



(CGA), GeneralDepartment of National Taxation (GDNT), MECS, MOH, and MSWL, and publish a summary of the audits in major newspapers.

basis.

Enhance civil service performance.

29. Civil Service Council (CSC),with advisory support from ADB TA, will develop the criteria and a code of conduct for civil servants, and the Government will adopt the code.

Not complied with. The consultants of the World Bank ECTAC project finalized a draft code of ethics for Mongolia’s public servants and handed it over to the Civil Service Council (CSC). The code of ethics has, however, not been approved by Parliament.

30. CSC will (i) adopt an enforcement mechanism to implement the rules on selection of candidates for senior civil servant positions, as adopted by Parliament, and the grievance/dispute settlement mechanism for settling civil servants’ grievances/disputes; and (ii) submit, as part of CSC’s regular annual report from CSC to Parliament, an assessment of the enforcement outcomes.

Complied with. The CSC has adopted an enforcement mechanism to implement rules for competitive selection of candidates forsenior civil service positions and for grievance settlement. In June 2005 the CSC submitted a report to Parliament assessing enforcement outcomes. However, a number of implementation problems remain and agency practices in terms of human resource management are often inconsistent with PSMFL requirements for a merit-based public sector.

31. CSC will assess (i) performance evaluation reports from selected ministries and provincial administrations to see if they are in line with the evaluation requirements established by CSC, and submit and make publicly available an overall performance evaluation report to Parliament; and (ii) the performance of all ministries and provincial administrations, and report the findings to Parliament.

Complied with. The CSC has evaluated the performance of selected ministries and provincial administrations to determine their compliance with CSC's evaluation requirements under the ADB Public Administration Reform Project as required under the PSMFL. The results of this evaluation have been submitted to the Parliament. A new procedure on Monitoring and Evaluation of Ministries and Provincial Administrations’ Performance was approved by Government Resolution No. 51 of 2006. With regard to implementation of the PSMFL and Government Resolution No.51 of 2006, activities of all ministries and provincial administrations are monitored and evaluated annually by the respective bodies identified in the acts.

Implement the action plans formulated by the National Council

32. CS, in line with item 2 of the March 2003 action plan of NCAC, and with support from the United Nations

Conditions 32 and 34 have been complied with. In January 2005 the NCAC established the subgroup to comprehensively assess the role, performance, and efficacy of the GDNT,

32



on Anticorruption(NCAC) to enhance transparency and accountability in public institutions.

Development Programme (UNDP) and ADB, will (i) coordinate the establishment of a subgroup within NCAC’s program, to comprehensively assess the role, performance, and efficacy of GDNT, CGA, and service delivery mechanisms in the education and health sectors, with participation from civil society, academia, and Parliament, and limited representation from the Government; and (ii) formulate the terms of reference for the subgroup, to undertake the performance assessments and design remedial measures.

CGA, and service delivery mechanisms in the education and health sectors. The subgroup completed its assessment in August 2005 and made public its findings on 31 October 2005. The reform measures formulated by the NCAC have been incorporated in the work plan of the Anticorruption Agency which has been established through the Law on Anti-Corruption which was adopted by the Parliament on 6 July 2006 and entered into force on 1 November 2006.

33. CS and the NCAC subgroup, with support from UNDP and ADB, will submit and make publicly available a comprehensive report on the role, performance and efficacy of the CGA, GDNT as well as service delivery mechanisms in the education and health sectors with proposed remedial measures, based on the subgroup’s assessment.

Complied with. The subgroup was established by the NCAC and the cabinet secretariat in January 2005. It prepared its report in August 2005 and made it available to the public on 31 October 2005.

34. CS will start implementing the reform measures formulated by the NCAC subgroup.

Conditions 32 and 34 have been complied with. In January 2005 the NCAC established the subgroup to comprehensively assess the role, performance, and efficacy of the GDNT, CGA, and service delivery mechanisms in the education and health sectors. The subgroup completed its assessment in August 2005 and made public its findings on 31 October 2005. The reform measures formulated by the NCAC have been incorporated in the work plan of the Anticorruption Agency which has been established through the Law on Anti-Corruption which was adopted by the Parliament on 6 July 2006 and entered into force on 1 November 2006.

Ensure Adequate Social Safety-Net Provisions to Support Governance ReformsGovernment to 35.MOF will allocate a minimum Complied with. The government’s 2003,

33



ensure that thereare adequatebudgetaryprovisions tosupportimplementation ofgovernance reformMeasures.

of $500,000 in each annual budget during 2004-2006 for social safety nets to mitigate adverse impacts of GRP-II reform measures.

2004, and 2005 budgets contained these provisions.

ADB = Asian Development Bank, AG = Accountant General, APMD = Accounting Policy and Methodology Division, CBGR = Capacity Building for Governance Reforms, CGA = Customs General Administration, CPA = certified public accountant, CS = Cabinet Secretariat, CSC = Civil Service Council, ECTAC = Economic Capacity Building Technical Assistance Credit, GDNT = General Department of National Taxation, GRP = Governance Reform Program, HIA = head of internal audit, IAS = International Accounting Standards, MECS = Ministry of Education, Culture and Science, MICPA = Mongolian Institute of Certified Public Accountants, MNAO = Mongolia National Audit Office, MOF = Ministry of Finance, MOH = Ministry of Health, MOI = Ministry of Infrastructure, MPAC = Mongolian Professional Accounting Council, MSWL = Ministry of Social Welfare and Labor, NCAC = National Council on Anticorruption, PSMFL = Public Sector Management and Finance Law, RRP = Report and Recommendation of the President, SBP = strategic business plan, SPE = strategic planning expert, SPIA = State Professional Inspection Agency, TA = technical assistance.Source: Asian Development Bank.

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Appendix 4STATUS OF COMPLIANCE WITH LOAN COVENANTS (Loan 2010)

No. Covenants ReferenceStatus of

compliance

Particular Covenants

1.The Borrower shall cause the Program to be carried out with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and public expenditure management and administration practices.

LA Section 4.01

(a)Complied with.

2.In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to this Loan Agreement.

LA Section 4.01 (b)

Please refer to“Schedule 5: Program Implementation and Other Matters” in Appendix 4.

3.The Borrower shall make available, promptly as needed, the funds, facilities, services and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Program.

LA Section 4.02

Complied with.

4.The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures.

LA Section 4.03

Complied with.

5.The Borrower shall maintain, or cause to be maintained, records and documents adequate to identify the Eligible Items financed out of the proceeds of the Loan and to record the progress of the Program.

LA Section 4.04 (a)

This covenant is formally not complied with -under the condition that program loans are not required to maintain financial statements for the proceeds of the Loan. The Borrower submitted quarterly progress reports of the Program.

6.The Borrower shall enable ADB’s representatives to inspect any relevant records and documents referred to in paragraph (a) of this Section.

LA Section 4.04 (b)

Complied with.

7.

The Borrower shall furnish or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the goods and services financed out of the proceeds of the Loan; (iii) the Counterpart Funds and the use thereof; (iv) the implementation of the Program including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter; (v) financial and economic conditions in the territory of the Borrower and the international balance-of-payments position of the Borrower; and (iv) any other matters relating to the purposes of the Loan.

LA Section 4.05 (a)

This covenant is formally not complied with -under the condition that program loans are not required to maintain financial statements for the proceeds of the Loan. The Borrower submitted quarterly progress reports of the Program.

Appendix 4

35

8.

Without limiting the generality of the foregoing, the Borrower shall furnish, or cause to be furnished, to ADB quarterly reports on the carrying out of the Program and on the accomplishment of the targets and carrying out of the actions set out in the Policy Letter. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

LA Section 4.05 (b)

Complied with. The Borrower submitted quarterly progress reports to ADB.

9.

Promptly after the closing date for withdrawals from the Loan Account, but in any event not later than three (3) months thereafter or such later date as may be agreed for this purpose between the Borrower and ADB, the Borrower shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution of the Program, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan.

LA Section 4.05 (c)

Complied with. TheBorrower submitted its own progress report.

10.

It is the mutual intention of the Borrower and ADB that no other external debt owed a creditor other than ADB shall have any priority over the Loan by way of a lien on the assets of the Borrower. To that end, the Borrower undertakes (i) that, except as ADB otherwise agree, if any lien shall be created on any assets of the Borrower as security for any external debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest charge and any other charge on, the Loan; and (ii) that the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect.

LA Section 4.06 (a)

Complied with.

11.

The provisions of paragraph (a) of this Section shall not apply to (i) any lien created on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property; or (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date.

LA Section 4.06 (b)

Complied with.

12.

The term “assets of the Borrower” as used in paragraph (a) of this Section includes assets of any political subdivision or any agency of the Borrower and assets of any agency of any such political subdivision, including the Bank of Mongolia and any other institution performing the functions of a central bank for the Borrower.

LA Section 4.06 (c)

Complied with.

Schedule 5: Program Implementation and Other Matters

1.Prior to the Effective Date, the Borrower shall establish, in a manner satisfactorily to ADB, a Deposit Account at the Bank of Mongolia for the specific purpose of depositing withdrawals from the Loan Account and utilizing the Counterpart Fund.

A.1

(a)Complied with.

2.

Separate accounts and records in respect of the Deposit Account shall be maintained in accordance with consistently maintained sound accounting principles and shall be audited annually by independent auditors acceptable to ADB in accordance with sound auditing standards. Certified copies of such audited accounts and records shall be furnished to ADB promptly after their preparation but in any event not later than six (6) months after the close of the fiscal year to which they relate, or not later than six (6) months after the date of the closing of the Loan Account, as the case may be.

A.1

(b)

This covenant is formally not complied with -under the condition that program loans are not required to prepare and submit audited financial statements for the proceeds of the Loan. The Borrower submitted quarterly progress reports of the Program.

3.

The Borrower shall ensure that the Counterpart Funds shall be used to finance the local currency costs relating to the implementation of the Program and other activities consistent with the objectives of the Program, as more fully described in paragraph 2 of Schedule 1 to this Loan Agreement and the Policy Letter, and shall,

B.2Complied with.

36

in particular, provide necessary budget appropriations to finance the structural adjustment costs relating to the implementation of the reforms under the Program.

4.

MOF shall be the Program Executing Agency, and shall be responsible for the implementation of all PSMFL-related measures, public sector financial management reforms and social security reforms under the Program. CS shall be the Program implementing agency for all of the local government reform issues and the civil service reform component under the Program. In addition, CS shall ensure that all Cabinet-level coordination necessary for smooth implementation of the Program is provided in a timely and efficient manner.

B.3Complied with.

5.

Within one month of the Effective Date, a Steering Committee and an operational working group shall be established to assist MOF and CS. The Steering Committee shall be comprised of the Chief of CS (as Head of the Committee), the Minister of MOF, the Minister of Social Welfare and Labor, the Economic Advisor to the Prime Minister, and two representatives from the Parliamentary Working Group on Governance.

B.4

Complied with. The Government created an interministerial Steering Committee under the chief of the CS and comprising the Ministers of Finance; Social Welfare and Labor, and representatives of the prime minister’s office.

6.

The operational working group shall be chaired by the Deputy Minister of Finance, and shall include the Deputy Chief of CS in charge of local government reforms, the head of the Fiscal Policy Department of MOF, the head of the Accounting Policy Department of MOF, the head of the department dealing with pensions in the Ministry of Social Welfare and Labor, the head of the relevant department of the Civil Service Commission, and the head of administration of the Mongolia National Audit Office (MNAO). The Deputy Minister of Finance and the Deputy Chief of CS shall inform the Steering Committee of implementation of key aspects of the Program.

B.5

Complied with. On 25 February 2004, the Prime Minister signed a resolution creating a working group under the Steering Committee to advise and support the CS and MOF in implementation. The working group was chaired by the Deputy Minister of Finance and comprised representatives of the CS, the heads of the Fiscal Policy and Accounting and Auditing Departments of the MOF, and the heads of administration of the MNAO.

7.

The Borrower shall also ensure that the Program Implementation Unit (PIU) established in MOF coordinates all Program implementation arrangements, with support from the domestic and international consultants under the technical assistance (TA) Loan. During the Program implementation period, the PIU shall be comprised of at least three counterpart supporting staff, with one of the staff nominated from CS and the others from MOF, and shall report to the head of the operational working group. The PIU shall report to the State Secretary of MOF, and shall coordinate with the operational working group on a monthly basis to report on progress in Program implementation. The PIU shall also coordinate preparation of

B.6Complied with. The PIU was formed in March 2004.

37

the quarterly progress reports on implementation of the Program and the TA Loan. The PIU shall also prepare the Program completion report at the end of the Program implementation period.

8.

The Borrower and ADB shall continue to engage in policy dialogue on sector issues, policy reforms, and other public administration reform-related measures, and additional reforms that may be considered necessary or desirable particularly in relation to the continuation of the implementation of the Borrower’s Second Phase of the Governance Reform Program.

B.7Complied with.

9.

The Borrower shall (a) ensure that the policies adopted and actions taken as described in the Policy Letter prior to the date of this Loan Agreement continue to be in effect, and (b) timely adopt the other policies and take other actions included in the Program as specified in the Policy Letter and this Loan Agreement.

B.8Complied with.

10.

The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral agencies that have implications for implementation of the Program, and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower shall take ADB’s views into consideration before finalizing and implementing such proposals.

B.9Complied with.

11.

Program Review: During each year of the Program implementation period, the Borrower and ADB shall carry out at least three (3) reviews to assess Program implementation and progress on policy reforms under the Program and the Borrower’s Second Phase of the Governance Reform Program. Coordination on emerging issues and needs during Program implementation shall be addressed by the Borrower and ADB with the involvement of ADB’s Mongolia Resident Mission

B.10

On average, 1-2review missions peryear were carried out during the 2004–2008 implementation period.

ADB = Asian Development Bank, CS=Cabinet Secretariat, MNAO = Mongolia National Audit Office, MOF = Ministry of Finance, PIU = Program Implementation Unit, PSMFL=Public Sector Management and Finance Law, TA=technical assistance.Source: Asian Development Bank.

38

Appendix 5STATUS OF COMPLIANCE WITH LOAN COVENANTS (Loan 2011)

No. Covenants ReferenceStatus of

compliance

Particular Covenants

1.The Borrower shall cause the Project to be carried out with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and public expenditure management and administration practices.

LA Section 4.01

(a)Complied with.

2.In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 6 to this Loan Agreement.

LA Section 4.01 (b)

Please refer to “Schedule 6: Assurances” in Appendix 5.

3.

The Borrower shall make available, promptly as needed, the funds, services and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project and for the operation and maintenance of the Project facilities.

LA Section 4.02

Complied with.

4.

In the carrying out the Project, the Borrower shall cause competent and qualified consultants and contractors, acceptable to the Borrower and the Bank, to be employed to an extent and upon terms and conditions satisfactory to the Borrower and the Bank

LA Section 4.03 (a)

Complied with.

5.

The Borrower shall cause the Project to be carried out in accordance with plans, specifications, work schedules and construction methods acceptable to the Borrower and the Bank. The Borrower shall furnish, or cause to be furnished, to the Bank, promptly after their preparation, such plans, specifications and work schedules and any material modifications subsequently made therein, in such detail as the Bank shall reasonably request.

LA Section 4.03 (b)

Complied with.

6.

The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Project and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures.

LA Section 4.04

Complied with.

7.The Borrower shall make arrangements satisfactory to the Bank for insurance of the Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice.

LA Section 4.05 (a)

Complied with.

8.

Without limiting the generality of the foregoing, the Borrower undertakes to insure, or cause to be insured, the goods to be imported for the Project and to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such goods.

LA Section 4.05 (b)

Complied with.

9.

The Borrower shall maintain, or cause to be maintained, records and accounts adequate to identify the goods and services and other items of expenditure financed out of the proceeds of the Loan, to disclosure the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the agencies of the Borrower responsible for the carrying out of the Project and operation of the Project facilities or any part thereof.

LA Section 4.06 (a)

Complied with.

10.The Borrower shall (i) maintain, or cause to be maintained, separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent

LA Section 4.06 (b)

Complied with.

Appendix 5

39

auditors whose qualifications, experience and terms of reference are acceptable to the Bank; (iii) furnish to the Bank, as soon as available but in any event not later than six (6) months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the covenants of this Loan Agreement as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language; and (iv) furnish to the Bank such other information concerning such accounts and financial statements and the audit thereof as the bank shall from time to time reasonably request.

11.

The Borrower shall enable the Bank, upon the Bank’s request, to discuss the Borrower’s financial statements for the Project and its financial affairs related to the Project from time to time with the Borrower’s auditors and shall authorize and require any representative of such auditors to participate in any such discussions requested by the Bank, provided that any such discussion shall be conducted only in the presence of an authorized officer of the Borrower unless the Borrower shall otherwise agree.

LA Section 4.06 (c)

Complied with.

12.

The Borrower shall furnish, or cause to be furnished, to the Bank all such reports and information as the Bank shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the goods and services and other items of expenditure financed out of the proceeds of the Loan; (iii) the Project; (iv) the administration, operations and financial condition of the agencies of the Borrower responsible for the carrying out of the Project and operation of the Project facilities, or any part thereof; (v) financial and economic conditions in the territory of the Borrower and the international balance-of-paymentsposition of the Borrower; and (vi) any other matters relating to the purposes of the Loan.

LA Section 4.07 (a)

Complied with.

13.

Without limiting the generally of the foregoing, the Borrower shall furnish, or cause to be furnished, to the Bank quarterly reports on the carrying out of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in detail and within such a period as the Bank shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

LA Section 4.07 (b)

Complied with.

14.

Promptly after physical completion of the Project, but in any event not later than three (3) months thereafter or such later date as may be agreed for this purpose between the Borrower and the Bank the Borrower shall prepare and furnish to the Bank a report, in such form and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan.

LA Section 4.07 (c)

Complied with.

15.The Borrower shall enable the bank’s representatives to inspect the Project, the goods financed out of the proceeds of the Loan, and any relevant records and documents.

LA Section 4.08

Complied with.

16.The Borrower shall ensure that the Project facilities are operated, maintained and repaired in accordance with sound administrative, financial, engineering, environmental, and maintenance and operational practices.

LA Section 4.09

Complied with.

17.

It is the mutual intention of the Borrower and the Bank that no other external debt owed a creditor other than the Bank shall have any priority over the Loan by way of a lien on the assets of the Borrower. To that end, the borrower undertakes (i) that, except as the Bank may otherwise agree, if any lien shall be created on any assets of the Borrower as security for any external debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest charge and any other charge on, the Loan; and (ii) that the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect.

LA Section 4.10 (a)

Complied with.

18. The provisions of paragraph (a) of this Section shall not apply to (i) any lien created LA Section Complied with.

40

on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property; or (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing nor more than one year after its date.

4.10 (b)

19.

The term ”assets of the Borrower” as used in paragraph (a) of this Section includes assets of any political subdivision or any agency of the Borrower and assets of any agency of any such political subdivision, including the bank of Mongolia and any other institution performing the functions of a central bank for the Borrower.

LA Section 4.10 (c)

Schedule 6: Assurances

1.

MOF shall be the Project Executing Agency, with coordination and implementation support provided by CS for the Project component on strategic planning. The PIU shall be responsible for the day-to-day implementation of the Project, shall report to the State Secretary of MOF, and shall coordinate regularly with the operational working group for the Program, The PIU shall prepare and submit quarterly progress reports to the Bank on the implementation of the Project during the Project implementation period.

LA Assurances

Complied with. The PIU was formed in March 2004.

2.Without limiting the generality of Section 4.02 of this Loan Agreement, the Borrower shall ensure that adequate counterpart funds are provide on a timely basis for the successful implementation of the Project.

LA Assurances Complied with.

3.

During each year of the implementation period of the Program, the Borrower and ADB shall carry out at least three (3) reviews to assess Program implementation and progress on policy reforms under the Program and the Borrower’s Second Phase of the Governance Reform Program. These reviews shall include an assessment of the implementation of the Project and progress achieved in supporting the Program and the Borrower’s Second Phase of the Governance Reform Program. Coordination on emerging issues and needs in connection with implementation of the Program and the Project shall be addressed by the Borrower and ADB with the involvement of ADB’s Mongolia Resident Mission.

LA Assurances

On average, 1-2review missions peryear were carried out 2004-2007 and2 review missions per year 2008-2011.

4.

In November 2004, MOF and the Bank shall carry out a midterm review of Project implementation. Such review shall cover the entire scope of the Project to determine whether any adjustments in scope or implementation arrangements need to be made to address any outstanding issues relating to procurement, financing, implementation schedule, coordination with the implementation of the Program and the Second Phase of the Governance Reform, and other matters.

LA Assurances Complied with. Themidterm review was carried out in 2007.

ADB = Asian Development Bank, CS=Cabinet Secretariat, MOF = Ministry of Finance, PIU = Program Implementation Unit.Source: Asian Development Bank.

PCR: Mongolia: Second Phase of the Governance …...Second Phase of the Governance Reform Program 2011 Capacity Building for Governance Reform Project Government of Mongolia Ministry

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