Governance Anti Corruption Project Design

Governance and Anticorruption in Project Design
Inclusive economic growth, environmentally sustainable growth, and

regional integration are the Asian Development Bank’s (ADB) strategic
priorities. Governance is a key issue and a driver of change that cuts
across these strategic priorities. To successfully employ these strategic

priorities, ADB staff need to understand the particular governance and
anticorruption issues and risks related to each strategic priority. They must
also be able to incorporate measures into ADB projects that promote good
governance and prevent corruption. This Governance Guide seeks to equip
project counsel with the knowledge to assist project teams in integrating
governance and anticorruption measures into ADB projects and across
ADB’s core priorities.
About the Asian Development Bank
ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to
help its developing member countries substantially reduce poverty and
improve the quality of life of their people. Despite the region’s many
successes, it remains home to two-thirds of the world’s poor: 1.8 billion
people who live on less than $2 a day, with 903 million struggling on less
than $1.25 a day. ADB is committed to reducing poverty through inclusive
economic growth, environmentally sustainable growth, and regional
integration.
Based in Manila, ADB is owned by 67 members, including 48 from the
region. Its main instruments for helping its developing member countries
are policy dialogue, loans, equity investments, guarantees, grants, and
technical assistance.
Asian Development Bank

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ISBN: 978-971-561-872-4
Publication Stock No. TIM090586 Printed in the Philippines
Governance and
Anticorruption
in Project Design
Office of the General Counsel Guide
© 2010 Asian Development Bank
All rights reserved. Published 2010.

Printed in the Philippines.
ISBN 978-971-561-872-4
Publication Stock No. TIM090586
Cataloging-In-Publication Data
Asian Development Bank.

Kala Mulqueeny.
Governance and Anticorruption in Project Design: Office of the General Counsel
Guide, Asian Development Bank.
Mandaluyong City, Philippines: Asian Development Bank, 2010.
1. Governance. 2. Anticorruption. I. Asian Development Bank.
The views expressed in this book are those of the author and do not necessarily reflect
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Contents
Foreword v
Acknowledgments vi
Abbreviations vii
Executive Summary ix
Purpose of the Governance Guide ix
How to Use this Governance Guide ix
ADB Policies and Strategies x
Multilateral Initiatives on Governance and Anticorruption xi
Tools Available to Project Counsel xii
Project-Specific Risks xiv
Project-Specific Governance and Anticorruption Measures xv
Introduction 1
The Governance and Anticorruption Agenda in Context 3
Meanings of Governance and Corruption 5
Governance and Corruption Risks 7
Structure of the Guide 9
Chapter 1: ADB’s Governance and Anticorruption 11

Policies, Strategies, and Procedures
Overview 11
ADB Policies and Strategies 14
Chapter 2: International Law 43

and Multilateral Initiatives on Governance
and Anticorruption
Overview 43
International Law 43
Multilateral Harmonization Initiatives 48
Multilateral Development Bank Policies and Procedures 51
International Organizations 64
Regional Initiatives 68
iv Governance and Anticorruption in Project Design: Office of the General Counsel Guide
Chapter 3: Governance 73
and Anticorruption Tools
Overview 73
Governance Tools 74
Anticorruption Tools 81
Tools on Procurement 84
Chapter 4: Governance and Anticorruption 87

Measures in ADB Interventions
Overview 87
Risk Analysis and Institutional Assessments 87
Indicators of Corruption Risks in Projects 92
Governance and Anticorruption Project Design Measures 95
Chapter 5: Public Sector Covenants 125

Overview 125
Governance Policy 125
Anticorruption Policy 126
Governance as “Sound Management” Design Features 128
Project Design Features: Supervision and Monitoring 131
Chapter 6: Specific Cases of Governance 145

and Anticorruption
General 145
Corporate Governance 145
Governance and the Regulation of Public Utilities—Water and Energy 153
Social Sectors—Health and Education 168
Decentralization 173
Disasters and Emergencies 180
Anti-Money Laundering 184
Environmental and Natural Resource Governance 188
Climate Change Governance 197
References 201
Appendix 1 225
Appendix 2 241
Foreword
Governance is a key issue and a driver of change that cuts across the Asian
Development Bank’s (ADB) three strategic priorities of inclusive economic
growth, environmentally sustainable growth, and regional integration. ADB
staff need to understand governance and anticorruption issues to successfully
employ these strategic priorities and incorporate measures promoting good
governance and corruption prevention in ADB projects. Moreover, the
mandate of the Office of the General Counsel (OGC) to assist operational
departments with promoting project-specific governance measures stems
from Article 14 (xi) of the ADB Charter. This requires ADB to ensure that the
proceeds of any grant, loan, guarantee, or investment are used solely for the
purposes for which ADB provided the finance.
This publication—Governance and Anticorruption in Project Design:
Office of the General Counsel Guide (the Governance Guide)—evolved from
ADB’s response to the 2004 Asian tsunami disaster. As part of that response,
OGC developed and coordinated an approach to assist ADB staff working
on ADB’s tsunami assistance projects to promote good governance and
anticorruption in ADB’s tsunami response projects in India, Indonesia, the
Maldives, and Sri Lanka. Innovative and interested project teams in South
Asia and Southeast Asia were receptive to and encouraged these governance
themes in the four post-tsunami projects. Later in 2005, a similar approach
to governance and anticorruption was taken in the Pakistan Earthquake
Emergency Assistance Project. OGC has since worked with operations
departments to develop governance and anticorruption design features for
other projects, where project leaders consider such measures appropriate.
The Governance Guide seeks to collect this operational knowledge and
provide ADB staff, principally counsel from OGC, with guidance on ways to
help project teams and developing member countries formulate corruption-
prevention measures and sound governance features in a project’s design,
particularly for non-core governance sectors.
Jeremy H. Hovland
General Counsel
Office of the General Counsel
Acknowledgments
Several departments and individuals contributed and supported the
preparation of this Governance Guide. Sandra Nicoll (Regional and Sustainable
Development Department [RSDD]), Clare Wee (Office of Anticorruption and
Integrity [OAI]), and Hamid Sharif (Central Operations Services Office [COSO])
provided support, encouragement, and helpful comments. Raza Ahmad and
Surya Shrestha of RSDD; Nigel Savidge, Genevieve Abel, H. Lorraine Wang,
and Patrice Sam of OAI; and Robert Rothery and Joel Syquia of COSO also
gave helpful comments.
Sekhar Bonu (South Asia Department) developed operational guidelines
for governance, in conjunction with OGC, in the 2005 Bangladesh Second
Urban Primary Health Care Project. Those guidelines were subsequently
adopted in other projects in South Asia and formed the basis for some of
the work included here. Sekhar Bonu, Laurence Pochard (Special Office in
Timor-Leste), Debra Kertzman (Central and West Asia Department), and
Harsha Fernando (Sri Lanka Resident Mission) gave comments, sharing
important operational perspectives.
Said Zaidansyah (OGC) contributed to Chapter 1 and added important
information on governance in decentralization. Rita O’Sullivan (OGC) gave
valuable inputs on anti-money laundering. Irum Ahsan (OGC), Leslie Lahm
(INRM), and Ramit Nagpal (OGC) also gave valuable help on earlier drafts.
Ma. Priscila P. del Rosario, Muriel Ordoñez, Anthony H. Victoria, Portia
Andres, Edith Creus, Vicente M. Angeles, Aldwin Thadeus S. Sutarez, and
Rodel Bautista of the Department of External Relations gave extraordinary
assistance. Kathleen Marie R. Leycano, Remedios Paningbatan, Laarni Zapanta,
and Mark Alain V. Villocero provided helpful administrative support.
Eveline Fischer, as deputy general counsel and head of OGC’s Law and
Policy Reform program, guided and encouraged this work. Kala Mulqueeny,
senior counsel, OGC, is the lead author for this work. A team compromised
of Angelique Badelles, legal specialist (consultant); Sherielysse Bonifacio, legal
research associate (consultant); and January A. Sanchez, then-legal specialist
(consultant), supported research and production.
Abbreviations
ACT – anticorruption and transparency expert task force

ADB – Asian Development Bank
ADF – Asian Development Fund
AfDB – African Development Bank
AML – anti-money laundering
APEC – Asia–Pacific Economic Cooperation
CAPE – country assistance program evaluation
CGA – country governance assessment
COSO – Central Operations Services Office
CPA – country performance assessment
CPIA – country policy and institutional assessment
CPS – country partnership strategy
CSO – civil society organization
DMC – developing member country
EA – executing agency
EBRD – European Bank for Reconstruction and Development
GACAP II – Second Governance and Anticorruption Action Plan
IA – implementing agency
IDB – Inter-American Development Bank
IFC – International Finance Corporation
IFI – international financial institution
KRA – key result area
LTSF – long-term strategic framework (2001–2015)
MDB – multilateral development bank
MIGA – Multilateral Investment Guarantee Agency
MTS II – medium-term strategy II (2006)
NGO – nongovernment organization
viii Governance and Anticorruption in Project Design: Office of the General Counsel Guide
OAI – Office of Anticorruption and Integrity

ODI – Overseas Development Institute
OECD – Organisation for Economic Co-operation and
Development
OGC – Office of the General Counsel
OM – operations manual
PAI – project administration instructions
PBA – performance-based allocation
PMO – project management office
PPMS – Project Performance Management System
PPRA – project procurement related audit
RSGP – Public Management, Governance and Participation
Division, Regional and Sustainable Development
Department
RRP – report and recommendation of the President
TA – technical assistance
UN – United Nations
UNCAC – United Nations Convention against Corruption
UNDP – United Nations Development Programme
WBG – World Bank Group
Executive Summary
A. Purpose of the Governance Guide
All Asian Development Bank (ADB) staff have a duty to consider and
address governance and anticorruption in all ADB-financed activities. This
duty originates from the Agreement Establishing the Asian Development
Bank (Charter)1 and has been elaborated upon in other ADB policies and
procedures.
The Charter requires that the proceeds of any loan made, guaranteed, or
participated in by ADB be used only for the purposes for which it was granted.2
This requirement extends to grants, technical assistance, and the newer, more
innovative modes of financing that ADB has begun to undertake. Designing
projects that incorporate sound governance features and measures to prevent
corruption supports this Charter requirement. It also contributes to ensuring
development effectiveness within ADB’s developing member countries (DMCs).
This Governance Guide was prepared to assist ADB staff, including counsel
from the Office of the General Counsel (OGC), working in project teams on
public sector projects or programs (project counsel) formulate projects that
incorporate governance and anticorruption measures. In doing so, they should
be aware that this Guide focuses on identifying and managing project-specific
governance and anticorruption risks by incorporating project specific measures.
ADB also conducts governance work such as diagnostic risk assessments
performed at the country and sector level, which may assist identify and design
project specific measures. These are also mentioned in this Guide.
B. How to Use this Governance Guide
This Guide can be read from cover to cover as a general introduction

to governance and anticorruption. However, it has been prepared as a
general reference and operational guide for ADB staff, particularly project
counsel, working upon ADB projects and seeking to identify and manage
project-specific governance and anticorruption risks. Each chapter is a
1
ADB. 1966. Agreement Establishing the Asian Development Bank.
2
Ibid., Article 14 (xi).
x Governance and Anticorruption in Project Design: Office of the General Counsel Guide
fairly self-contained module that can be referred to separately as needed.

It contains chapter summaries for quick ready reference and highlights key
points in boxes. Important material in the text is highlighted in blue.
C. ADB Policies and Strategies
Under the mandate afforded by its Charter, ADB has formulated policies and
strategies to promote governance and combat corruption. The governance
policy (1995) is the foundation policy. ADB considers governance to be
“the manner in which power is exercised in the management of a country’s
economic and social resources for development.”3
The governance policy identifies four elements of good governance:
accountability, transparency, participation, and predictability. It emphasizes
that a legal environment conducive to development is essential for all DMCs
and that overarching legal frameworks are needed to achieve these elements.
The second key governance-related policy is ADB’s anticorruption policy
(1998), which identifies accountability, transparency, participation and
predictability. ADB’s approach on anticorruption issues has three core objectives:
(i) supporting competitive markets and efficient, effective, accountable, and
transparent public administration as part of ADB’s work on good governance
and capacity building; (ii) supporting promising anticorruption efforts and
improving ADB’s dialogue with DMCs on governance issues, including
corruption; and (iii) ensuring that its projects and staff adhere to the highest
ethical standards.
The third key policy relating to governance is ADB’s private sector
development strategy (2000), which highlights governance as one of the four
areas of operational focus for promoting private sector development and pro-
poor growth.
ADB’s poverty reduction strategy (1999) identifies good governance as
a key pillar. In 2004, ADB adopted the enhanced poverty reduction strategy
(2004) which stresses the importance of legal reform, and encourages ADB
to assist DMCs to function with transparency and accountability, uphold basic
rights, provide public safety, and promote the rule of law.
3
ADB. 1995. Governance: Sound Development and Management. p. 3.
Executive Summary xi
Under the long-term strategic framework 2008–2020 (Strategy 2020)

ADB’s vision continues to be “an Asia and Pacific region free of poverty.”4
Strategy 2020 reaffirms ADB’s support for good governance and capacity
building by (i) further mainstreaming four elements of good governance into its
operations and activities; (ii) linking its anticorruption efforts to broader support
for governance; and (iii) effectively increasing private sector investments by
improving governance, curtailing official corruption, and helping to make
public institutions and organizations more capable.
In 2006, ADB developed the second governance and anticorruption
action plan (GACAP II). GACAP II seeks to prioritize ADB’s work in governance
and anticorruption by focusing on the sectors and subsectors where ADB is
active. Thus, the three thematic priorities under GACAP II are public financial
management, procurement, and combating corruption.
The rules and outcomes governing the procurement of goods and
works (the revised procurement guidelines [April 2010]), and engagement
of consultants (the guidelines on the use of consultants by ADB and its
borrowers [April 2010]), also have a significant impact on governance and
corruption. In March 2010, both of these guidelines had been modified based
on changes to the anticorruption policy to reflect cross-debarment among
multilateral development banks.
D. Multilateral Initiatives on Governance and Anticorruption
In addition to ADB’s internal policies and procedures, project counsel should

be aware of the international and multilateral initiatives relating to good
governance and anticorruption, including international conventions, the
policies of other multilateral development banks (MDBs), the work of the
Organisation for Economic Co-operation and Development (OECD), and
regional initiatives for Asia and the Pacific. These are relevant in formulating
the need for project-specific anticorruption and governance measures.
Many international agreements and soft law instruments refer to or have
an impact upon governance and anticorruption in different sectors in which
ADB works, including the United Nations Convention Against Corruption
(UNCAC) and the OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions (Anti-Bribery Convention).
4
ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank
2008–2020. Manila, p. i.
xii Governance and Anticorruption in Project Design: Office of the General Counsel Guide
Moreover, other MDBs also have their own governance and anticorruption
policies and initiatives and have recognized the importance of, and actively
participated in, harmonizing their policies and initiatives.
International organizations such as the United Nations Development
Programme (UNDP) have initiatives to promote democratic governance and
prevent corruption.
Two regional initiatives are currently in force in Asia and Pacific. One is
the ADB/OECD Anti-Corruption Action Plan for Asia and the Pacific (Action
Plan), launched in 1999. The other regional initiative is the Asia–Pacific
Economic Cooperation’s (APEC) Anti-Corruption and Transparency Expert
Task Force, formed in 2005 to steer APEC’s anticorruption activities.
E. Tools Available to Project Counsel
To formulate project-specific governance measures, a project team needs to

understand the governance context within the country and the particular
sector governance issues. Several tools are available to assist.
1. Governance Tools
ADB Governance Risk Assessments and Risk Management Plans (RAMPs).

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

before the implementation of GACAP II and RAMPs have now replaced CGAs.
Hence, CGAs may contain useful information, but must be used with caution
given they have been replaced.
ADB Country Partnership Strategies (CPSs) and ADB Country Assistance

Program Evaluations (CAPEs). CPSs are prepared substantially by operations
departments, and CAPEs are prepared by the Independent Evaluation
Department. They each usually provide shorter descriptions of the country
governance context.
Executive Summary xiii
World Bank Country Policy and Institutional Assessment (CPIA). This tool
is designed to describe the quality of policies, institutions and governance in
a country and is used for determining the allocation of concessional grant
resources to an eligible country.
ADB’s Performance-Based Allocation (PBA) Policy. This system resembles

the CPIA. It forms an important basis for determining the Asian Development
Fund (ADF) resource allocations for an ADF eligible country.
World Bank Governance Indicators. These measure the quality of

governance of more than 200 countries and rank those countries on an index
based upon six dimensions of governance.
Other Governance Assessments. Various other assessments that provide

both quantitative and qualitative data on governance are also available.
2. Anticorruption Tools
ADB’s Risk Assessment Sourcebook. The sourcebook refers to several

diagnostic tools, including the ADB/OECD Country Self-Assessment.
United Nations Anti-Corruption Toolkit. This toolkit is published by

the United Nations Office on Drugs and Crime and contains a range of
anticorruption strategy options.
ADB/OECD Anti-Corruption Initiative for Asia and the Pacific. The initiative
has the results of the in-depth 2006 review on mutual legal assistance,
extradition, and the recovery of proceeds of corruption.
Transparency International National Integrity System Reports. These

reports detail and assess the anticorruption systems within a country.
Transparency International’s Toolkits. These are business tools, reports,

actions, and information that can help prevent corruption on construction
projects.
xiv Governance and Anticorruption in Project Design: Office of the General Counsel Guide
3. Tools on Procurement
ADB’s Sourcebook: Diagnostics to Assist Preparation of Governance Risk

Assessments. This sourcebook refers to a range of diagnostic tools, including
(i) Benchmarking and Assessment Methodology for Public Procurement
Systems (OECD/Development Assistance Committee); (ii) the Country
Procurement Assessment Report (World Bank); and (iii) the Procurement
Capacity Assessment (ADB).
The OECD’s Checklist for Enhancing Integrity in Public Procurement. This

toolkit contains 10 key recommendations on how to develop and implement
a policy framework for enhancing integrity at each stage of the public
procurement cycle.
ADB/OECD Anti-Corruption Initiative’s Fighting Bribery in Public

Procurement in Asia and the Pacific. This initiative produced materials on
fighting bribery and corruption in public procurement.
F. Project-Specific Risks
Project counsel must look out for risks and corruption indicators associated
with different stages of the ADB project cycle and different levels of risk.
Project counsel can assist project teams to undertake a preliminary
assessment of the institutions and organizations involved in a project. Two
general tools for those involved in project formulation can be used.
• a risk map—producing a risk map helps project teams identify

the potential risks throughout the project cycle and also identify
mitigants for those risks; and
• a risk assessment checklist—working through the checklist helps
project teams better understand the specific governance issues
relating to an agency, entity, or organization.
Executive Summary xv
G. Project-Specific Governance and Anticorruption Measures
Specific cases of governance and anticorruption include:
• Corporate Governance
• Governance and the Regulation of Public Utilities—Water and
Energy
• Social Sectors—Health and Education
• Decentralization
• Disasters and Emergencies
• Anti-Money Laundering (AML)
• Environmental and Natural Resource Governance
• Climate Change Governance
Project counsel can help project teams design project-specific governance

and anticorruption measures that focus on transparency, participation,
accountability, and predictability. These strategies and measures may
• incorporate features that instill good management, limit the

opportunity for corruption and leakages, and create disincentives
to engaging in corrupt practices;
• provide sufficient supervision and monitoring;
• allow public and local stakeholders to access relevant project
information;
• involve local stakeholders in project preparation and
implementation;
• consider project accountability and grievance redress mechanisms
for the project; and
• assess the legal environment of the country where the project is
located.
Introduction
priorities.5 Governance is a key issue and a driver of change that cuts across
these strategic priorities. To successfully employ these strategic priorities,
ADB staff need to understand the particular governance and anticorruption
issues and risks related to each strategic priority. They must also be able to
incorporate measures into ADB projects that promote good governance and
prevent corruption. This Governance Guide seeks to equip project counsel
with the knowledge to assist project teams in integrating governance and
anticorruption measures into ADB projects and across ADB’s core priorities.
Governance is “the manner in which power is exercised in the
management of a country’s economic and social resources for development.”6
Governance is now firmly recognized as an essential component of reducing
poverty and creating sustainable development. A country’s government holds
much of the power to manage development resources—as exercised by its
executive, judicial, administrative, and legislative branches. Thus, the success
of governance will often depend on the quality and capacity of each branch
of government. However, “governance” is a wider concept than the operation
of a country’s government. The concept covers the institutions that allow
citizen participation in the task of governing, as well as in governing private
sector entities. Good governance requires effective management. Corruption,
which ADB’s anticorruption policy defines as the misuse of public or private
office for personal gain,7 occurs where governance is weak and management
is unsound.8
Unsound management, weak governance, and corruption can directly
affect the impact of development programs and projects and reduce the
overall effectiveness of development aid. ADB recognizes the potential for
these risks to materialize in projects and has developed policies, strategies,
5
2008–2020.
6
ADB. 1995. Governance: Sound Development Management. p. 3. This cited: Webster’s New
Universal Unabridged Dictionary, London: Dorset & Baber, 1979.
7
ADB. 1998. Anticorruption Policy. paras. 1 and 17.
8
Kaufmann, D. 2005. Myths and Realities of Governance and Corruption. In World Economic
Forum. Global Competitiveness Report 2005–2006.
2 Governance and Anticorruption in Project Design: Office of the General Counsel Guide
and procedures to tackle them on a systematic sector and programmatic

basis. Increasingly, ADB is considering ways to address the risk that unsound
management, weak governance, and corruption present to the success of
specific projects.
ADB has provided financial assistance to many developing member
countries (DMCs) for noteworthy core governance sector programs.
Such programs have been designed to systematically help DMCs tackle
core governance issues and support the institutions responsible for public
administration and fiscal management, judicial reform, and anticorruption.9
Many projects that ADB supports in sectors that are not directly
governance related have also been designed with specific measures to promote
good governance and prevent corruption (for example, infrastructure, and
disaster and emergency projects). Increasingly, specific measures to improve
governance and combat corruption are being introduced into all sectors
that ADB supports. It is important to continue with and expand up on these
measures to ensure that the significant risks and negative impacts resulting
from unsound management, weak governance, and corruption do not defeat
the purposes of an ADB program or project.
The Office of the General Counsel (OGC) advises other ADB departments
and can advise on the measures necessary to ensure that the proceeds of any
ADB grant, loan, guarantee, or investment are used solely for the purposes
for which ADB provided the finance.
This Guide seeks to provide ADB staff, principally counsels from
the Office of the General Counsel (project counsel) who are working on
sovereign transactions, with guidance on ways to help project teams and
DMC governments formulate corruption-prevention measures and sound
governance features in a project’s design. This guide has been specifically
drafted to help project teams consider governance and anticorruption issues
when designing projects for non-core governance sectors. However, if project
teams are planning a more extensive program of core governance reforms,
they may start with this guide but will need to undertake a deeper analysis
than that presented herein.
9
Examples of ADB-funded programs are the (i) Bangladesh Good Governance Program, (ii) Nepal
Governance Reform Program, (iii) Pakistan Access to Justice Program, (iv) Philippine Judicial Reform
Program, and (v) Sri Lanka Fiscal Reform Program.
Introduction 3
A. The Governance and Anticorruption Agenda in Context
1. Governance
Governance as a theme and an agenda gained prominence within the development

community during the 1990s.10 Since then, economists and development
practitioners have examined the causal links between governance, on the one
hand, and economic growth and development on the other. In recent times, the
development community has reached a consensus that governance matters for,
or is a vital factor in, achieving growth.11 However, the development community
remains divided on the extent of the causal links between these concepts, the
particular aspects of governance that are conducive to development, and the
relative importance of governance vis-à-vis varying levels of development.12
Donors and other international organizations have also developed
assessment tools and/or indicators for measuring these links.13 In particular,
the World Bank developed the Worldwide Governance Indicators project,14
the Overseas Development Institute developed the world governance
assessment,15 and the United Nations Development Programme (UNDP)
developed the Governance Indicators Project.16 More recently, UNDP
identified direct and indirect links between governance and ways to achieve
the Millennium Development Goals (MDGs).17
10
Resnick, D., and R. Birner. 2006. Does Good Governance Contribute to Pro-poor Growth?: A Review
of the Evidence from Cross Country Studies. DSDG Discussion Paper No. 30. See also Woods, N.
1999. Good Governance in International Organizations. Global Governance. Vol. 5, No. 1.
11
Bhatta, G. 2008. Governance Innovations in the Asia–Pacific Region: Trends, Cases, and Issues. pp.
23–46. Quoted in Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology
to do Risk Assessments at the Program Level. See also Quibria, M.G. 2006. Does Governance
Matter? Yes, No or Maybe: Some Evidence from Developing Asia.
12
ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development
Bank 2008–2020. See also Kumar Roy, D. 2005. Governance, Competitiveness and Growth: The
Challenges for Bangladesh. ADB Institute Discussion Paper No. 52; Rodrik, D. 2008. Thinking
Governance. In North, D., D. Acemoglu, F. Fukuyama, and D. Rodrik, eds. Governance, Growth,
and Development Decision-Making; and, Khan, M.H. 2007. Governance, Economic Growth and
Development since the 1960s. DESA Working Paper No. 54.
13
Khan, M.H. 2007. Governance, Economic Growth and Development since the 1960s. DESA
Working Paper No. 54.
14
Kaufmann, D., and A. Kraay. 2003. Governance and Growth: Causality which way?—Evidence for
the World, in brief. See also the Worldwide Governance Indicators Project.
15
Hyden, G., K. Mease, M. Foresti, and V. Fritz. 2008. Governance Assessments for Local Stakeholders:
What the World Governance Assessment Offers. Working Paper 287.
16
For more details, see www.undp.org/oslocentre/flagship/governance_indicators_project.html
17
UNDP. 2007. Governance for the Millennium Development Goals: Core Issues and Good Practices.
Governance is directly linked to the MDGs because achieving the MDGs

entails implementing reforms in policies and institutions, which in turn involves
commitment to the principles of transparency, accountability, subsidiarity, and
combating corruption.18 There is also an indirect link between governance and
the MDGs. The decision to invest in and improve education and health—both
MDGs—supports economic growth and is related to governance. Thus, MDGs
may be achieved by investing in human capital, public sector management,
and infrastructure.19
All multilateral development banks (MDBs) have similar restrictions in
their respective articles of agreement that prohibit them from engaging in
political activities in their member countries. As such, in 1991, the World
Bank sought to establish the legal basis for engaging in governance activities,
by distinguishing governance links to economic activities from governance
directly associated with only political activities, or with the Bank engaging in
political activities. The World Bank emphasized the important links between
the economic considerations of governance and development.20
ADB first recognized these links in 1995 with the approval of its
governance policy. Similarly, in 2000, ADB confirmed this view by undertaking
a governance review that recognized that “the political and economic
aspects of governance are often inseparable and the latter cannot be
addressed in isolation.”21 Therefore, ADB also considers that undertaking
programs to encourage good governance is consistent with ADB’s Charter.22
Most MDBs have also justified their governance programs on the
basis that governance can contribute to economic growth.23 Hence,
many MDBs have adopted governance policies and launched operational
governance programs.24 Recent empirical findings provide further evidence
of the link between the political and economic aspects of governance
18
Ibid., pp. 17–18.
19
Ibid., p. 17.
20
Shihata, I. 1991. The World Bank and ‘Governance’ Issues in its Borrowing Members. The World
Bank in a Changing World: Selected Essays and Lectures.
21
ADB. 2000. Promoting Good Governance: ADB’s Medium-Term Agenda and Action Plan. para. 7.
22
23
ADB. 1995. Governance: Sound Development Management. pp. 21–23. The European
Development Bank for Reconstruction and Development (EBRD) bases its governance agenda on
different principles. Those principles are further discussed in Chapter 2 of this guide.
24
For examples of governance policies, see: (i) African Development Bank (www.afdb.org/en/topics
-sectors/sectors/economic-financial-governance/), (ii) ADB (www.adb.org/Governance/default.asp),
(iii) World Bank (www.worldbank.org/wbi/governance), and (iv) UNDP’s Democratic Governance
Practice (www.undp.org/governance/about.htm).
Introduction 5
for development.25 In response to this empirical research, MDBs have

become more willing to tackle issues that might have been perceived
as too political for them in the past. For example, in 2006, the World
Bank’s former senior vice president and general counsel issued an opinion
that expanded the scope of considerations that are relevant to the World
Bank’s decisions and activities. He concluded that apart from economic
considerations, it is also within the World Bank’s mandate to recognize
“human rights dimensions of its development policies and activities.”26
2. Corruption
Since the mid-1990s, together with the governance agenda, international

organizations, including MDBs, have also sought to address corruption.27
Some claim that prior to this time corruption was tolerated on various bases,
including that it was only a stage of development, that it provided a reasonable
supplement to the low incomes of poor civil servants, and that it performed
a valuable redistributive role.28 In any event, MDBs, in conjunction with their
member countries, now actively seek to address corruption in projects and
programs.
B. Meanings of Governance and Corruption
1. Governance and Good Governance
The term “governance” has been defined and applied variously. ADB prefers
the straightforward definition contained in the Webster Dictionary: “the
25
Kaufmann, D., and A. Kraay. 2003. Governance and Growth: Causality which way?—Evidence for
the World, in brief. See also World Bank. 2008. Governance Matters 2008: Worldwide Governance
Indicators Project 1997–2007; and, Kaufman, D. 2004. Human Rights and Governance: The
Empirical Challenge. Kaufmann wrote: “These findings, if corroborated through further research,
have important implications for the donor aid community and emerging economies alike. In
particular, it would point to the potential need to account for first generation human rights issues
in enhancing effectiveness of development aid and its projects... Further, it would also point to the
need to deepen the integration of the corruption and rule-of-law dimensions of governance in aid
strategies so to enhance effectiveness related to socio-economic human rights and development.”
26
Danino, R. 2006. Legal Opinion on Human Rights and the Work of the World Bank.
27
World Bank. 2007. Strengthening World Bank Group Engagement on Governance and
Anticorruption. See also African Development Bank. 2009. Overview: Good Economic and
Financial Governance; EBRD. 2006. Anti-corruption Homepage; and, ADB. 2009. Anticorruption
and Integrity.
28
Transparency International. 2005. Anti-Corruption Handbook.
manner in which power is exercised in the management of a country’s

economic and social resources for development.”29 This was also the original
definition adopted by the World Bank.30
ADB equates “good” governance with sound development
management. Further, both the public and private sectors must contribute
to good governance.31 ADB has established an analytical framework for
good governance comprised of accountability, participation, predictability,
and transparency. Within this analytical framework are specific action areas
which relate to each element of the analytic framework through which
parties may implement good governance. The elements and corresponding
action areas are
• accountability—public sector management, public enterprise

management and reform, public financial management, and civil
service reform;
• participation—participation of beneficiaries and groups, the
public–private interface, decentralization of public service delivery,
and cooperation with nongovernment organizations;
• predictability—law and development (including the rule of law)
and the legal framework for private sector development; and
• transparency—disclosure of information.
Different institutions adopt different formal definitions of governance.

Like ADB’s approach, most institutions’ definitions cover the core elements
of (i) an exercise of power (or authority); (ii) the manner, process, procedures,
and institutions through which it is exercised; and (iii) the use of power (or
authority) to allocate resources and grant or deny rights. However, the level of
detail and overall purpose used in different definitions does vary. In Chapter 2,
these different meanings of governance will be more closely considered. To
highlight the differences, it will suffice for now to list a few of the definitions
of governance used by different institutions:
29
Merriam Webster. 1979. Webster’s New Universal Unabridged Dictionary. Quoted in ADB. 1995.
Governance: Sound Development Management. p. 3.
30
Kaufmann, D., and K. Aart. 2008. Governance Indicators: Where Are We, Where Should We Be
Going? World Bank Research Observer 23(1). Spring. p. 4. This cited: World Bank. 1992.
Governance and Development.
31
Merriam Webster (1979) as quoted in ADB. 1995. Governance: Sound Development Management.
p. 3.
Introduction 7
• the Organisation for Economic Co-operation and Development

(OECD) uses: “the exercise of political, economic and administrative
authority necessary to manage a nation’s affairs”;32
• UNDP uses: “the exercise of economic, political, and adminis-
trative authority to manage a country’s affairs at all levels and the
means by which states promote social cohesion, integration, and
ensure the well-being of their populations”;33 and
• the World Bank now uses: “the manner in which public officials
and public institutions acquire and exercise the authority to
provide public goods and services, including the delivery of basic
services, infrastructure, and a sound investment climate.”34
2. Corruption
ADB has defined corruption as “the abuse of public or private office for
personal gain.”35 More comprehensively, corruption includes public and private
sector officials attempting to improperly and unlawfully enrich themselves and/
or those close to them, or inducing others to do so by misusing their position.36
Chapter 2 more extensively reviews ADB’s corruption-related definitions
including corrupt, fraudulent, collusive, and coercive practices; conflicts of
interest; obstructive practices, and abuse.
C. Governance and Corruption Risks
Together with all other stakeholders involved in a project, the ADB project
team has an interest in ensuring that necessary measures to achieve good
governance and avoid or minimize corruption are incorporated into a
project’s design. Several ADB policies also oblige project teams to incorporate
strategies for good governance into a project. These are discussed further in
Chapter 1.
32
OECD. 2007. Glossary of Statistical Terms: Governance.
33
UNDP. Undated. UNDP and Governance: Experiences and Lessons Learned. Lessons-Learned Series
No. 1. See also UNDP. 1997. Chapter 1: Good governance—and sustainable human development.
In UNDP. Governance for Sustainable Human Development. A UNDP Policy Document.
34
The World Bank recently reviewed and changed its definition of governance. Its former definition
was identical to ADB’s current definition. World Bank. 2007. Strengthening World Bank Group
Engagement on Governance and Anticorruption. Annex E, p. 67.
35
ADB. 1998. Anticorruption Policy. paras. 1 and 17.
36
Ibid.
Project counsel must become familiar with the common risks presented
by corruption, poor management, and weak governance before they can help
project teams address project-specific risks. Several examples of situations
where common governance and corruption-related risks arise are given in
Box 1.1 below.
Box 1.1: Common Governance and Corruption-Related Risks
• A stakeholder tries to influence the location of an infrastructure

project such as a highway or rural road to position it near their own
land to increase the value of their property.
• Politicians or officials recommend unqualified persons for a position
and insist on using certain subcontractors or suppliers during the
selection processes for contractors.
• Project office staff are included in a procurement evaluation committee,
improperly influencing the procurement of goods and creating the
risk that contract awards will be predetermined or delayed.
• Employees or contractors of a project office or project management
unit may inflate the number of attendees at workshops to claim
additional reimbursement or per diem on account of those attending
the workshop.
• “Ghost employees” are listed on the payroll of a ministry or state-
owned enterprise by inserting the names of imaginary or dead
persons, or former staff.
• Construction contractors use inferior cement, and other construction
materials, compared to the materials required under the contract and
the technical engineer accepts a bribe to remain silent and certify the
quality of the materials.
• Project office staff are appointed because they are friends or
relatives of, or owed favors by, the person or committee making the
appointment.
• An executing agency appoints a trained and qualified accountant
with 2 years’ post-qualification experience and no experience with
ADB’s financial procedures to be the sole accountant in a project
management office responsible for the project accounts of three ADB
loans totaling $700 million.
Introduction 9
A good way to become familiar with these and other similar risks is to
review the Governance Risk Mapping Table in Appendix 1 and the relevant
questions in the Governance Risk Assessment Checklist in Appendix 2 of this
Guide. These documents are extensive and not intended to be used from start
to end for every project. However, they cover a large range of issues that will
help project counsel reveal the governance gaps and risks of most projects.
The project team could also complete a risk mapping table or a governance
risk assessment checklist to assess the corruption risks in any particular project
under processing.
D. Structure of the Guide
The Governance Guide is structured as follows:
• Chapter 1 provides an overview of ADB’s internal policy and strategy

documents relating to good governance and anticorruption.
• Chapter 2 provides an overview of international and multilateral
initiatives relating to good governance and anticorruption, including
international conventions, other MDB policies, the OECD’s work,
and regional initiatives in Asia and the Pacific.
• Chapter 3 sets out the tools that project counsel may access in
formulating project-specific good governance and anticorruption
measures.
• Chapter 4 sets out some governance and corruption risks
indicators in projects, the questions relevant to project counsel
in undertaking an institutional assessment of institutions or
organizations and their governance and corruption risks, and
project-specific governance and integrity strategies that project
counsel may adopt after identifying the risks and conducting the
assessment.
• Chapter 5 sets out sample covenants for many issues discussed
in Chapter 4.
• Chapter 6 provides an overview of the issues arising in special
governance cases and projects: corporate governance, governance
and the regulation of public utilities, health and education projects,
decentralization, disaster and emergency projects, anti-money
laundering, and environmental, natural resource, and climate
change projects.
CHAPTER 1
ADB’s Governance and Anticorruption

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

any loan made, guaranteed, or participated in by the Bank are
used only for the purposes for which the loan was granted...
Article 14 (xi).39
The governance policy and the anticorruption policy each recognize the
importance of the principles of accountability, transparency, participation,
and predictability to development, and so reinforce the other.
The private sector development strategy (2000) also supports governance
by promoting corporate governance in private and public sector entities and
encouraging the development of national legal frameworks for private sector
development.40
37
ADB. 1995. Governance: Sound Development Management.
38
ADB. 1998. ADB’s Anticorruption Policy.
39
40
ADB. 2000. Private Sector Development Strategy.
ADB emphasizes the important role of governance in the poverty

reduction strategy (1999),41 enhanced poverty reduction strategy (2004),42
and the long-term strategic framework (2008–2020).43 The medium-term
strategy II (2006–2008) (MTS II)44 and ADB’s review of its governance and
anticorruption policies in 2005 led the ADB Board of Directors to call for
increased attention to governance in ADB operations. ADB then launched the
second governance and capacity action plan (GACAP II) in 2006.45 GACAP II
focuses on public financial management, procurement, and anticorruption as
core areas given ADB’s need to be selective in its interventions and focus on
areas where it has the resources to most add value. It takes an approach to
governance that emphasizes these core areas rather than political economy
and the rule of law in governance issues.
The Office of the General Counsel (OGC) plays a unique role in ADB’s
governance and anticorruption activities. OGC is mandated to help ADB
staff uphold the integrity of the Charter and comply with ADB’s policies and
procedures. To address the specific risks of weak governance and corruption
in any particular project under processing, a project counsel will have to work
with
• the project leader and team (including any governance specialist);

• other departments in ADB (especially the Public Management,
Governance and Participation Division of the Regional and
Sustainable Development Department and the Office of the
Auditor General, Integrity Division [OAI]).
Key Point for Project Counsel. Project counsel should know that the
Charter and ADB’s policies give OGC the jurisdiction and mandate to work
with other ADB departments to address the risks of weak governance and
corruption in ADB-financed projects.
41
ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy.
42
ADB. 2004. Enhancing the Fight Against Poverty in Asia and the Pacific.
43
ADB. 2008. Strategy 2020: the Long-Term Strategic Framework of the Asian Development Bank
(2008–2020); ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific:
The Long-Term Strategic Framework of the Asian Development Bank (2001–2015).
44
ADB. 2006. Medium-Term Strategy 2006–2008.
45
ADB. 2006. Second Governance and Anticorruption Action Plan.
ADB’s Governance and Anticorruption Policies, Strategies, and Procedures 13
Key messages in Chapter 1

Project counsel should know that 1
• they must work with other ADB departments to address the risks of
weak governance and corruption in ADB-financed projects;
• a project should be designed to raise governance quality;
• a project should reflect accountability, transparency, participation,
and predictability;
• they must adopt the harmonized definitions of corrupt, fraudulent,
coercive, and collusive practices under the anticorruption policy, the
procurement guidelines, and consultancy services guidelines;
• ADB’s investments must be limited to companies that can
demonstrate the capacity to establish and maintain sound
corporate governance structures and practices;
• ADB’s strategic framework for poverty reduction provides an
overarching foundation for including good governance measures in
projects;
• there are still weaknesses in the implementation of the governance
policy;
• they must explain to the project leaders the project-specific
recommendations identified in the Governance and Anticorruption
Action Plan II (GACAP II);
• strengthening projects and project design by including governance
and anticorruption components is one of the four key result areas
under GACAP II;
• GACAP II’s priority areas are public financial management,
procurement, and anticorruption;
• improving and mainstreaming governance in the public and private
sectors is integral to ADB’s new long-term strategic agenda;
• capacity development is important for development effectiveness
and ADB has a framework and action plan operationalizing it in
projects; and
• a project must comply with the integrity principles and guidelines,
procurement guidelines, and consultants’ guidelines.
B. ADB Policies and Strategies
1. Governance Policy (1995)
Since 1995, ADB has recognized the important role good governance plays
in helping a government develop and institute effective development policies
and effectively use development assistance. ADB’s governance policy identifies
four elements of good governance: accountability, transparency, participation,
and predictability. These elements are key for designing and implementing
programs and projects for developing member countries (DMCs).
The governance policy also emphasizes that DMCs need a legal
environment conducive to development. This conducive legal environment
can be achieved by establishing overarching legal frameworks as they are
relevant to promoting predictability, and contribute to accountability,
participation, and transparency. For this reason, the governance policy focuses
on legal reform activities that seek to improve sector policy frameworks and
provide legal training in the public and private sectors. ADB acknowledges
that promoting private sector development requires an especially strong legal
foundation.
There are three important sections of the governance policy: (i) the
discussion of Article 36 of the Charter,46 (ii) the analytical framework for
good governance, and (iii) the specific action areas for implementing good
governance.
• Article 36 Discussion. ADB’s analytic framework is comprised

of four elements: accountability, transparency, participation, and
predictability. The governance policy separately addresses and
summarizes the then-general counsel’s opinion on the ability of
ADB to engage in governance in a way that would not contravene
Article 36 of the Charter.
• Good Governance Analytic Framework. The governance policy
distinguished the World Bank’s basic approach to governance
from ADB’s. The World Bank had identified key dimensions of
governance as “(i) public sector management, (ii) accountability,
(iii) legal framework for development, and (iv) transparency
46
Article 36 of the Charter prohibits ADB from interfering in the political activities of member states.
and information.”47 The governance policy observed that ADB

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

avoided collapsing the analytic framework for good governance
into the specific actions for implementing it. Project counsel con-
sidering reviews of the governance policy should keep this in mind.
ADB is helping people obtain legal documents after the tsunami in Jaffna, Sri Lanka.
• Specific Action Areas for Good Governance. The governance

policy emphasizes that the four elements of good governance are
distinct48 but also interlinked.49 The four elements cover different
specific areas of action, and different stakeholders as follows:
47
ADB. 1995. Governance: Sound Development Management. para. 15.
48
Ibid., paras. 18–32.
49
Ibid., para. 33.
accountability—public sector management, public enterprise

management and reform, public financial management, and
civil service reform;
participation—participation of beneficiaries and groups, the
public–private interface, decentralization of public service delivery,
and cooperation with nongovernment organizations;
predictability—law and development, including rule of law, and
the legal framework for private sector development; and
transparency—disclosure of information.
ADB’s governance policy was originally contained in section 54 of ADB’s

Operations Manual (OM), issued on 13 January 1997.50 Section 54 has been
superseded by OM C4/BP: Governance, issued on 15 December 2003 and
updated on 27 October 2008.51
Key Points for Project Counsel. Project counsel should know that under
the governance policy
• ADB must integrate governance dimensions into its operations,

including specific projects and programs;
• ADB has four distinct but interlinked governance elements:
accountability, participation, transparency, and predictability;
• ADB-supported projects and programs should be designed to
raise governance quality in the relevant sectors; and
• project teams should not directly transpose governance and
anticorruption measures from one DMC (or group of DMCs) to
another in new projects, regardless of how successful they have
been; project teams must take into account specific DMC and
sector characteristics.
2. Anticorruption Policy (1998)
ADB’s work on building the governance skills and capacity of its DMCs
includes developing strategies to prevent and reduce corruption. Avoiding,
or at least reducing, corruption decreases the financial and social toll that
systemic corruption exacts on Asian governments and economies. Work
50
ADB. 1997. Operations Manual. OM 54: Governance.
51
ADB. 2008. Operations Manual. OM C4/BP: Governance.
toward reducing corruption also satisfies the Charter’s requirement that

measures be taken to ensure that ADB finance is used only for the purposes
for which it is granted. 1
The anticorruption policy has three core objectives:
• supporting competitive markets and efficient, effective, account-

able, and transparent public administration as part of ADB’s broader
work on good governance and building capacity;
• supporting promising anticorruption efforts on a case-by-case
basis and improving the quality of ADB’s dialogue with DMCs on
a range of governance issues, including corruption; and
• ensuring that ADB projects and staff adhere to the highest ethical
standards.
Ensuring high ethical standards requires robust internal measures

and enhances the integrity of ADB’s operations. The anticorruption policy
proposes maintaining the integrity of ADB’s lending and technical assistance
(TA) operations as well as improving the quality of project oversight.52
Like the governance policy, the anticorruption policy identifies four
elements that are crucial to preventing corruption:53
• accountability—government officials must be accountable for

their positions and use of funds;
• transparency—formal monitoring agents, auditors, and the general
public need accurate information to tell if corrupt practices have
occurred;
• predictability—individuals, the general public, and the private
sector must be able to assume that similar actions and transactions
will be treated in the same or a similar way by public officials and
under the law; and
• participation—the general public, civil society groups, the media,
and the private sector need to be included in decision making
that affects them. Public support and the capacity of civil society
groups, the media, and the private sector are necessary over the
long term to combat corruption and malfeasance because they
can potentially act as watchdogs.54
52
ADB. 1998. Anticorruption Policy. para. 53.
53
Ibid., para. 13. This cited ADB. 1995. Governance: Sound Development Management.
54
Ibid., para. 13. This cited ADB. 1995. Governance: Sound Development Management.
In November 2004, the ADB Board of Directors approved clarifications to

the anticorruption policy that55
• introduced new definitions for fraud and corruption,

• recommended that ADB’s anticorruption procedures be amended
to give ADB more latitude to impose sanctions where it determines
that an entity that is eligible to participate in an ADB activity has
not maintained the highest ethical standards,56 and
• amended relevant sections of ADB’s procurement guidelines57 and
guidelines on the use of consultants by ADB and its borrowers.58
These clarifications are set out in section C5/BP of the OM.59 In September
2006, ADB and the other main multilateral development banks (MDBs)
agreed upon standardized definitions for corrupt, fraudulent, collusive, and
coercive practices.60 ADB incorporated these definitions into the procurement
guidelines and guidelines on the use of consultants by ADB and its borrowers.
In March 2010, ADB’s Board approved modifications to the Procurement
Guidelines and the Guidelines on the Use of Consultants to allow ADB to enter
into an agreement for the mutual enforcement of debarment actions (also
referred to as cross-debarment) by and between ADB, African Development
Bank, European Bank for Reconstruction and Development, Inter-American
Development Bank, and the World Bank Group. This agreement will allow
ADB to bar any firm or individual found by any of these institutions to have,
directly or indirectly, engaged in corrupt, fraudulent, collusive, coercive or
other prohibited practices, or failed to have observed the highest ethical
standards.61 Prior to these revisions, ADB had no basis under its eligibility
rules, as reflected in ADB’s procurement and consulting services guidelines,62
to take such action.
55
ADB. 2004. Anticorruption Policy: Proposed Clarifications and Related Changes to Consulting and
Procurement Guidelines.
56
These provisions were previously contained in: ADB. 2003. Operations Manual. OM 55: Enhancing
the Asian Development Bank’s Role in Combating Money Laundering and the Financing of
Terrorism. This was superseded by: ADB. 2008. Operations Manual. OM C5/BP: Anticorruption.
57
ADB. 2007. Procurement Guidelines.
58
ADB. 2007. Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers.
59
ADB. 2006. Operations Manual. OM C5/BP: Anticorruption.
60
See page 49 of this Guide for these definitions.
61
ADB. 2010. Anticorruption Policy: Harmonization of Debarments.
62
Procurement Guidelines (February 2007), clauses 1.8(d) and 1.14(d); and Guidelines on the Use of
Consultants (February 2007), clauses 1.13(e) and 1.23(d).
The revisions (i) modified clauses 1.8(d) of the Procurement Guidelines and
1.13(e) of the Guidelines on the Use of Consultants to include a reference to
ADB’s Anticorruption Policy and Integrity Principles and Guidelines to exclude 1
the possibility that a sanctioned or cross-debarred firm or individual could
benefit financially or otherwise from an ADB-financed or ADB-administered
project; and (ii) modified clauses 1.14(d) of the Procurement Guidelines
(2007) and 1.23(d) of the Guidelines on the Use of Consultants (2007) to
remove the restriction that the corrupt or fraudulent practices shall have
occurred only “in competing for, or in executing, an ADB-financed contract”
and thus allow ADB to cross-debar and enforce sanctions imposed by the
Participating Institutions in the cross debarment agreement.63 These changes
are reflected in the Procurement Guidelines (2010) and the Guidelines on the
Use of Consultants (2010).
Key Points for Project Counsel. Project counsel should know that under
the anticorruption policy:
• a project team should identify where potential corruption and

leakage may occur in a project and incorporate measures to
address it during the project processing stage,
• they have an obligation to report allegations of corruption to the
Office of Anticorruption and Integrity (OAI) irrespective of whether
they have received any evidence substantiating the allegation,
• they are expressly forbidden from undertaking any preliminary
investigatory inquiries into a corruption allegation, and
• the possibility of cross debarment based on sanctions imposed
by other multilateral development banks now exists.
3. Private Sector Development Strategy (2000)
ADB’s private sector development strategy (2000)64 is founded upon three

strategic pillars: (i) creating enabling conditions for private sector investment,
(ii) generating business opportunities, and (iii) catalyzing private sector
investments.65
63
ADB. 2010. Anticorruption Policy: Harmonization of Debarments.
64
65
Ibid.
The private sector development strategy also identifies public and private
sector governance as a key area of operational focus under which ADB can
promote private sector development and pro-poor growth.66 The strategy
regards governance as being comprised of
• public sector governance,

• commercialization and privatization of public enterprises, and
• corporate governance.
The strategy envisages a large role for law and policy reform under these
three focus areas of governance as set out below.67
a. Public Sector Governance
To advance private sector development, ADB needs to promote public sector

governance. The private sector development strategy indicates several ways
this could be done, which are:
• strengthening the rule of law through legal and judicial reforms;

• establishing and maintaining effective and equitable taxation
systems;
• formulating sound and transparent regulation of industry;
• strengthening public administration;
• fighting corruption;
• removing impediments to investment and reducing transaction
costs; and
• establishing efficient and competitive markets that are supported
by appropriate fiscal, monetary, and trade policies.68
The strategy also proposes that ADB develop public sector governance
by providing its DMCs with TA to educate and modernize their bureaucracies.
Likewise, ADB can provide TA to support DMCs’ efforts to build their
agencies’ capacity to regulate and supervise their respective private sectors.69
66
The other three focus areas are (i) financial intermediation, (ii) public–private partnerships, and
(iii) regional and subregional cooperation. See: ADB. 2000. Private Sector Development Strategy.
pp. 16–17.
67
Ibid.
68
Ibid.
69
Ibid.
b. Commercialization
Many DMCs are inclined to privatize their public sector utilities and services, 1
but are often confronted with severe constraints in meeting the challenges of
privatization.70 The private sector development strategy recognizes that ADB
can help with commercialization by
• providing technical advice, particularly in defining sound

privatization strategies;
• establishing and implementing effective privatization programs;
• designing and operating sound post-privatization regulatory
frameworks; and
• undertaking individual transactions transparently and professionally.71
c. Corporate Governance
The private sector development strategy recognizes that the 1997 Asian
financial crisis elevated the importance of the quality of corporate governance
in the private sector. ADB’s role is to promote corporate governance by
providing TA to
• help DMCs review their commercial laws and regulations;

• establish credible accounting and auditing standards, and
corporate disclosure rules that require corporate entities to make
timely and accurate disclosure;
• establish sound environmental, labor, and social standards;
• establish corporate regulations that protect minority shareholder
rights;
• establish effective bankruptcy and foreclosure regimes; and
• help train corporate directors on their duties and responsibilities and
on how they can effectively balance the interests of shareholders
and other stakeholders such as employees, customers, suppliers,
investors, and communities.72
70
71
Ibid., p. 19.
72
Ibid., p. 20.
The private sector development strategy also envisages that ADB can
provide ongoing support to reform policy and build the capacity of institutions
that will strengthen DMCs’ financial systems. Specifically, the strategy suggests
that ADB focus on helping governments enhance regulation and supervision,
develop sound banking systems, deepen and broaden securities markets, and
create bond markets.73
ADB’s private sector development strategy entails strengthening the financial systems of developing member countries
to enhance regulation and supervision, develop sound banking systems, deepen and broaden securities markets, and
create bond markets.
The private sector development strategy makes enhancing public–private

partnerships another priority. ADB is to
• help establish effective regulatory frameworks for private sector

participation in infrastructure,
• build the capacity of relevant regulatory agencies,
• strengthen the capacity of public utilities to deal with the private
sector as an offtaker or supplier, and
• train and develop the skills of public officials who are responsible
for implementing infrastructure development activities.74
73
Ibid., p. 21.
74
Ibid., p. 26.
Key Points for Project Counsel. Project counsel should know that the
private sector development strategy requires ADB to
1
• ensure transparency in its DMCs’ privatization-related
activities, including (i) implementing privatization transactions,
(ii) establishing an appropriate tariff policy, (iii) protecting
workers’ legitimate interests in ownership changes, and
(iv) establishing financial market regulations;75
• help establish social safety nets to address the social costs of
labor retrenchment involved in many privatization efforts;76
• consider providing direct financial assistance to privatization
projects supported by ADB and/or MDBs;
• limit its investments in private sector operations to companies
that have the capacity to establish and maintain sound
corporate governance structures and practices;77 and
• invest proactively by (i) diagnosing the quality of corporate
governance in proposed company investments, (ii) benchmarking
the standard of corporate governance against best practice, and
(iii) developing a time-bound action plan to remove deficiencies
and enhance quality.78
4. Poverty Reduction Strategy (1999) and Enhanced Poverty

Reduction Strategy (2004)
In 1999, poverty reduction became ADB’s overarching goal with the adoption
of the poverty reduction strategy (1999), which identifies good governance as
key to reducing poverty.79 The poverty reduction strategy also recognizes that
good governance contributes to participatory pro-poor policies and sound
economic management.80
75
Ibid., p. 19.
76
Ibid., pp. 19–20.
77
Ibid., p. 20.
78
Ibid., p. 20.
79
The other two pillars are (i) pro-poor, sustainable economic growth; and (ii) social development.
ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. p. 6.
80
Ibid., p. 12.
Weak governance hurts the poor disproportionately compared to other social

groups. Public sector inefficiency, corruption, and waste do not leave enough
resources to support the level of public services and antipoverty programs that
are needed.81 Thus, the poverty reduction strategy indicated that ADB would
promote good governance through the way it processed and implemented its
projects, as well as through specific governance-related initiatives.82
ADB undertook a comprehensive review of the poverty reduction
strategy, and in 2004, presented the review’s results. The review sought
feedback on ADB’s experience with implementing the poverty reduction
strategy. It also examined the strategy’s continuing relevance to Asia and
the Pacific. Based on the review, the ADB Board approved the enhanced
poverty reduction strategy (the enhanced strategy).83
The enhanced strategy refines ADB’s strategic direction. On the issue
of good governance, it encourages ADB to assist its DMC governments to
function with transparency and accountability, uphold basic rights, provide
public safety, and promote the rule of law. It also stresses the importance of
legal reform.84 85
These strategies are contained in the OM.8586
Key Points for Project Counsel. Project counsel should know that the
poverty reduction strategy and enhanced strategy
• (together with the Charter) provide an overarching foundation

for including good governance measures in projects, and
• indicate that ADB will promote good governance through its
projects as well as through specific governance-related initiatives.86
81
Ibid., p. 13.
82
Ibid., p. 23.
83
ADB. 2004. Enhancing the Fight against Poverty in Asia and the Pacific.
84
Ibid., p. 32.
85
ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. p. 23.
86
ADB. 2004. Operations Manual. OM C1/BP: Poverty Reduction.
5. Long-Term Strategic Framework (2001–2015) and Promoting

Good Governance: ADB’s Medium-Term Agenda
and Action Plan (2000) 1
Project counsel should know that the long-term strategic framework
(2001–2015)87 (LTSF) and medium-term agenda and action plan (2000)88
have now been superseded by the long-term strategic framework 2008–2020
(Strategy 2020),89 but should be aware of their historical significance to the
development of ADB’s governance agenda.
Adopted in March 2001, the LTSF identified promoting good governance
as one of its core strategies, along with sustainable economic growth and
inclusive social development. It observed that poor governance constrains as
well as retards and distorts the development process. Poor governance also
has a disproportionate impact on the poorer and weaker sectors of society.90
Implementing the first LTSF’s good governance agenda involved
developing a medium-term action plan for the period 2000–2004 (the
medium-term agenda and action plan). The medium-term agenda and action
plan was based on an assessment of ADB’s governance operations since the
governance policy was adopted in 1995.91
Drawing on the lessons learned from implementing projects with
governance objectives, the medium-term agenda and action plan sought to
include programs within DMCs, and regional initiatives among them, that
would focus on governance issues common to the region or to groups of
DMCs.92 The medium-term agenda and action plan recommended six major
governance activities:
• enhancing the quality of governance in DMCs,

• elevating good governance to the top level of the development
agenda in Asia and the Pacific,
• fighting corruption by establishing a zero-tolerance of corruption
and promoting the spread of good financial and other internal
control systems,
87
ADB. 2001. Moving the Poverty Reduction Agenda Forward In Asia and the Pacific: the Long-Term
Strategic Framework of the Asian Development Bank (2001–2015).
88
ADB. 2000. Promoting Good Governance: ADB’s Medium-Term Agenda and Action Plan.
89
2008–2020. p. i.
90
ADB. 2001. Moving the Poverty Reduction Agenda Forward In Asia and the Pacific: the Long-Term
Strategic Framework of the Asian Development Bank (2001–2015). p. 20.
91
92
Ibid., Appendix 3.
• coordinating the governance work of MDBs and other development

agencies,
• strengthening ADB’s governance capacity, and
• monitoring implementation of the medium-term agenda and
action plan.93
6. Medium-Term Strategy II (2006)
The MTS II (2006) has now been superseded, but is summarized here to show
its contribution to the evolution of ADB’s approach to governance. It sought
to enhance ADB’s relevance to achieving its mission of poverty reduction in
Asia and the Pacific by establishing strategic priorities that respond to the key
regional development challenges in reducing poverty.94
The MTS II recognized that weak governance and high levels of corruption
occur in many DMCs.95 Strengthening governance and reducing corruption
are essential to poverty reduction and enhancing ADB’s development impact.96
The strategy identified improving governance and preventing corruption as
one of its five strategic priorities.97
The MTS II also highlighted the importance of ADB being selective about
and maintaining its focus on key priorities. It proposed that ADB’s governance
interventions give priority to
• public financial management, including procurement and public

expenditure management; and
• the legal and regulatory framework and capacity development in
sectors and subsectors where ADB is active.98
The MTS II also supported ADB’s theme of harmonizing policies with other
MDBs and aligning MDB policies with those of DMCs (harmonization and
alignment). It suggested that ADB work closely with other MDBs to develop a
uniform framework for preventing and combating fraud and corruption.
93
Ibid., para. 88.
94
ADB. 2006. Medium-Term Strategy 2006–2008. para. 3.
95
Ibid., para. 13.
96
Ibid., para. 45.
97
Ibid., para. 3.
98
Ibid., para. 47.
Key Points for Project Counsel. Project counsel should know that
• the MTS II has been superseded,

1
• the MTS II provided further internal strategic support to ADB’s
policy directive to incorporate governance measures into
projects, and
• encouraged by MTS II, international processes of harmonization
and alignment will cause ADB’s governance and anticorruption
approach to be influenced by the approaches of other MDBs.
7. Review of the Implementation of Governance

and Anticorruption Policies (2006)
In February 2006, ADB completed a review of the governance and

anticorruption policies (the Review). The Review candidly discussed ADB’s
experience with implementing the governance and anticorruption policies and
the areas in which ADB needed to significantly improve its implementation
of these policies.99 The Review indicated that ADB
• has been successful in raising the profile of governance in the

region,100
• has achieved some success in dealing with fraud and corruption in
procurement,101 and
• has achieved some success in increasing awareness of the
anticorruption policy.102
However, the Review found there were various weaknesses associated

with ADB’s implementation of the governance policy, which included the
following:
99
ADB. 2006. Review of the Implementation of ADB’s Governance and Anticorruption Policies:
Findings and Recommendations.
100
Ibid., para. 124(iii).
101
Ibid., para. 138.
102
Ibid.
• ADB had not paid enough attention to adopting a multidimensional

approach to governance that would allow for local participation
and take into account the local circumstances;103
• institutional development and infrastructure investments had not
been effectively integrated into sector lending and development
projects;104
• ADB had made poor progress in assessing the impact of corruption
on DMCs’ ability to meet their development goals;105
• many project documents did not contain explicit arrangements for
implementation, supervision, and oversight of project activities;106
• the terms of reference for contracting local expertise did not often
specify how to prevent corruption;107 and
• the risk of corruption is particularly high when projects are
implemented through stand-alone mechanisms such as project
management units that report to specially created steering
committees that operate outside official structures.108
The Review also found that ADB’s mechanisms for checking corruption
are significantly deficient, moreover that:
• financial due diligence is not adequately reported in about 20% of

reports and recommendations of the President (RRPs);109
• the project administrative instructions (PAIs) do not give clear
guidance on how project review missions could provide valuable
opportunities for looking into corruption issues;110
• project staff have insufficient time to thoroughly evaluate bid
documents and bids for the award of contracts before giving a
“no-objection clearance” to a DMC;111
103
ADB. 2006. Improving Governance and Fighting Corruption: Implementing the Governance and
Anticorruption Policies of ADB. para. 65(i).
104
Ibid., para. 65(vii).
105
Ibid., para. 66.
106
Ibid., para. 46.
107
Ibid., para. 46.
108
Ibid., para. 47.
109
Ibid., citing ADB. 2005. 2004 Financial Diligence Retrospective Report, prepared by ADB’s Public
Management, Governance and Participation Division. That report found that 17% of all RRPs
evaluated and 20% of public sector RRPs failed to adequately address financial due diligence.
110
ADB. 2006. Review of the Implementation of ADB’s Governance and Anticorruption Policies:
Findings and Recommendations. para. 84.
111
Ibid., para. 84.
ADB conducted three regional seminars on anticorruption in 2006 and 2007 to increase awareness and understanding
of potential fraud and corruption in ADB-financed activities. This photo shows the seminar conducted in Indonesia in
November 2007.
• annual audited financial statements are prepared for all projects

but yield very few allegations of corruption;112
• financial statements are often presented late, do not contain
enough detail about disbursement flows, and are regarded as
being of variable quality and excessively qualified;113
• procurement-related audits carried out in partnership with country
audit institutions can increase ownership of audit findings and
build local capacity; and
• the quality of an audit rests entirely on the integrity of a project’s
internal monitoring arrangements.114
112
Ibid., para. 85. Over the last 6 years, the statements have led to an average of fewer than two
investigations a year by the Auditor General Integrity Division (OAI).
113
Ibid., para. 86. ADB needs to ensure that statements are prepared to international standards and
accept that greater use of private audit firms may be necessary.
114
Ibid.
The Review concluded that ADB must focus its lending and nonlending
activities in governance areas in which (i) DMCs’ demand is the greatest,115
(ii) DMCs have plans or commit to develop plans to improve their performance,
and (iii) ADB has sufficient staff with appropriate skills and can provide the
right external experts.116 It also concluded that ADB should renew its corporate
commitment to its anticorruption agenda.117
Key Points for Project Counsel. To design specific project measures that
avoid or minimize governance deficiencies that the Review identified had
existed in previous ADB projects, project counsel should know that
• the Board of Directors had been concerned that the MTS II lacked
strategic direction on governance issues and placed considerable
importance on the Review’s findings on governance indicating
the need for further action;
• project teams need to adopt a multidimensional approach to
governance that allows for local participation and circumstances;
• the design of physical infrastructure, like roads and railways,
needs to be integrated with sector policy and sector governance,
including the development of relevant sector institutions, such
as sector regulatory bodies;
• project documents including RRPs and financing agreements
should contain explicit arrangements for implementing,
supervising, and overseeing project activities;
• contracts for local expertise should specify anticorruption measures;
• the process for conducting financial due diligence should be
adequately covered in RRPs; and
• internal monitoring arrangements should clearly specify which
party will act as monitor, and how the monitoring will be
carried out, documented, and reported.
115
Ibid., para. 147.
116
Ibid.
117
Ibid., para. 156.
8. Second Governance and Anticorruption Action Plan (2006)

(GACAP II)
1
GACAP II is designed to improve ADB’s implementation of the governance
and anticorruption policies in ADB’s most active sectors and subsectors.118 It
was developed at the request of the Board of Directors following discussions
on the Review. It emphasizes the core themes of public financial management,
procurement, and anticorruption.
GACAP II has four key result areas (KRAs). Each KRA relates to a set
of outcomes that are desired over the medium to long term to improve
implementation of the governance and anticorruption policies. Each outcome
has a specific set of actions and sub-actions that must be done to achieve it.
The four KRAs are to119
• improve country strategies and programming, midterm reviews

of country programming strategies, and annual country portfolio
review missions by identifying and managing the risks of poor
governance and institutions, and corruption;120
• strengthen projects and project design by including governance
and anticorruption components within them;
• strengthen program and project administration, and portfolio
management, by effectively managing program and project risks
and performance reporting; and
• improve organizational structures, build human resource capacity,
and provide access to expertise.
118
ADB. 2006. Second Governance and Anticorruption Action Plan. para. 4.
119
Ibid., para. 21.
120
Country strategies and programs (CSPs) were renamed in 2006 as country partnership strategies
(CPSs) following the proposals made by a working group that was tasked to review and propose
improvements in refining CSP and business processes. ADB. 2006. Further Enhancing Country
Strategy and Program and Business Processes.
Actions and sub-actions for each KRA focus on three areas:
• public financial management,

• procurement, and
• combating corruption.121
ADB continues to support GACAP II. In January 2007, the Board

approved a TA designed to support its implementation.122 The TA focuses on
• the development of methodologies and tools for public financial

management; and
• corruption risk assessments for country partnership strategies,
including subnational assessments, where relevant, and sector
governance, institutional, and corruption risk assessments.123
In May 2008, ADB issued the guidelines for implementing GACAP II (the
Guidelines) to guide ADB staff.124 The Guidelines describe the processs for
implementing GACAP II and the relevant requirements set out in the Country
Partnership Strategy (CPS) Guidelines.125 These CPS Guidelines had required
that before a CPS process, ADB conduct governance risk assessments and
prepare risk management plans for national and subnational government
systems and relevant sectors in which ADB is engaged (RAMPs) as part of
the CPS process itself. However, in 2009, the CPS Working Group tasked
with reviewing the relevance, effectiveness, and efficiency of the existing CPS
process recommended that thematic reviews (like RAMPs) be delinked from
the CPS preparation process.126 As a result, the preparation of RAMPs is now
delinked from the main CPS preparation. Although RAMPs are required to
be available in time to be included as an input to the CPS process, they need
121
ADB. 2006. Second Governance and Anticorruption Action Plan. para. 35.
122
ADB. 2006. Technical Assistance for the Governance and Capacity Development Initiative.
123
Ibid., para. 10.
124
ADB. 2008. Guidelines for Implementing ADB’s Second Governance and Anticorruption Action
Plan.
125
ADB. 2007 Country Partnership Strategy Guidelines. Manila.
126
The rationale for delinking RAMPs from the CPS process is found in par. 13 and Appendix 3 of the
Country Partnership Strategy Working Group Report, Country Partnership Strategy: Responding to
the New Aid Architecture (see also Streamlining Country Partnership Strategies, A Quick Guide,
available www.adb.org/Documents/Guidelines/CPS-Quick-Guide.pdf)
not be prepared as part of the CPS process itself.127 They are now considered
to be a stand-alone product which is to be prepared at the best time for
the DMC and other development partners to inform project preparation and 1
policy dialogue.
Because GACAP II does not emphasize the political economy or rule
of law aspects of governance, in order to consider and manage political
economy, institutional, and rule of law-related risks and issues in particular
projects it may be necessary to look beyond GACAP II’s recommendations.
These additional issues include access to administrative justice and access to
justice through the courts, as well as the link between good governance and
the rule of law.
• GACAP II’s second key result area (KRA) deals with strengthening
governance and anticorruption. Therefore, it is the most relevant
KRA for project counsel when advising project teams on dealing
with project-specific governance issues.
• GACAP II’s project-specific recommendations and guidance on
project design are set out in Table 1.1.
• GACAP II emphasizes public financial management, public
procurement, and anticorruption rather than the political
economy or rule of law aspects of governance.
• to determine and manage all of a project’s risks, it may be
necessary to look beyond GACAP II’s recommendations and
consider risks which may be managed by improving administrative
justice, justice through counts, and the rule of law.
9. Strategy 2020: The Long-Term Strategic Framework

of the Asian Development Bank, 2008–2020
On 5 May 2007, during ADB’s 40th annual meeting in Kyoto, Japan, ADB
announced that it was undertaking a review of the then-current LTSF. ADB
initiated an early review of its LTSF because of stated dynamic changes in
127
ADB. 2010. Country Partnership Strategy. Operations Manual. OM A2/OP. The OM requires the
RAMPs as as input to the CPS process. It does not make the delinking process express.
Table 1.1: GACAP II’s Project-Specific Recommendations

for Improving Governance and Anticorruption Measures
in Programs and Projects
Project Document Proposed Actions
Project Concept Notes • conduct a preliminary assessment of financial
management, procurement, and corruption risks
• confirm that the terms of reference for
conducting detailed risk assessments and
preparing financial management, procurement,
and corruption risk management plans have
been developed
• confirm that the skills set and person-months
needed to complete the work in accordance
with the terms of reference and during
the project preparation period have been
determined
Program and • include findings based on the governance,
Project Design institutional, and corruption risk assessments
conducted at the national, subnational, and
sector levels for country programming
• check that the project administration
requirements are based upon the project’s risk
assessments
Project Documentation • prepare a clear description of risks and risk
management and mitigation measures
Report and • report on the outcomes of the financial
Recommendation management, procurement, and corruption risk
of the President (RRP) assessment for the project and/or program
• discuss the specific measures to be taken in
project design to mitigate risks
• summarize the actions to be taken by the
borrower and/or recipient to mitigate the risks
during project implementation, and include in
RRP and financing agreements as covenants
• report on the further governance and
anticorruption measures that must be taken by
ADB during the project’s implementation
• provide a description of the human and
financial resource requirements necessary for
successful project administration
Source: ADB. 2006. Second Governance and Anticorruption Action Plan. Manila, pp. 5–8.
the region.128 These stated changes include the unprecedented high rates of
growth, global capital flows into Asia and the Pacific, the coexistence of high
rates of savings and the need for high rates of investment in Asia and the 1
Pacific, and significant adverse environmental implications associated with
the high rates of growth.129
On 8 April 2008, Strategy 2020 was launched replacing the LTSF as
ADB’s principal strategic document.130 Strategy 2020 reaffirms ADB’s support
for good governance and the building of development capacities. ADB also
commits to bring the four elements of good governance (accountability,
participation, predictability, and transparency) deeper into the mainstream of
its operations and activities.131
Under Strategy 2020, ADB intends to link its anticorruption efforts to
broader support for governance and improvement in the quality and capacities
of the public sector. Likewise, ADB plans to increase private sector investments
by improving governance, curtailing official corruption, and helping make
public institutions and organizations more capable.132
10. Integrity Principles and Guidelines (2010)
ADB and other MDBs met in Singapore in September 2006 and jointly
endorsed a set of principles and guidelines for use by MDBs when conducting
fraud and corruption investigations. ADB and the other MDBs also endorsed
a set of policies, rules, regulations, and privileges and immunities applicable
to fraudulent and corrupt practices.133
128
In June 2006, ADB convened an eminent persons group to provide ADB with insight on its
appropriate future strategic role in the region. The group completed its report in March 2007. The
report envisioned a dramatically transformed Asia by 2020. See: ADB. 2007. Toward a New Asian
Development Bank in a New Asia Report of the Eminent Persons Group to the President of the
Asian Development Bank.
129
ADB. 2007. Technical Assistance for the Review of ADB’s Long-Term Strategic Framework.
130
(2008–2020).
131
Ibid., para. 32.
132
Ibid., para. 33.
133
African Development Bank (AfDB), ADB, EBRD, European Investment Bank Group (EIBG),
International Monetary Fund (IMF), Inter-American Development Bank (IDB), and World Bank.
2006. International Financial Institutions Anti-Corruption Task Force.
In November 2006, ADB first adopted the integrity principles and

guidelines, which set out general principles to guide investigations into
fraudulent, corrupt, coercive, and collusive practices, and to define misconduct
(including abuse and conflicts of interest).134 They also outline the rights and
obligations of ADB (as an organization and in relation to its staff), procedural
guidelines, and sanctions. OAI is the designated investigative unit in ADB
for conducting investigations. Under the integrity principles and guidelines,
OAI must use its best efforts to encourage and protect whistle-blowers and
witnesses.
Likewise, OAI must protect the whistle-blowers’ and witnesses’
identities from unauthorized disclosure throughout and following an
investigation.135 In 2009, ADB issued an administrative order136 providing
operational procedures on whistle-blower and witness protection,
including the protections afforded to whistle-blowers and witnesses. The
order protects people reporting or providing information on a suspected
integrity violation or misconduct.137
On 28 May 2010, ADB approved updates to the Guidelines, including
references to (i) the administrative order on whistle-blower and witness
protection; (ii) the cross-debarment agreement amongst MDBs; (iii) related
harmonized sanctioning guidelines; and (iv) new internal procedures on
debarment and appeals.
• the integrity principles and guidelines establish guidelines for

ADB’s investigation procedures, which must be followed in
cases of fraud and corruption, and may need to be explained
to DMCs, but are not directly related to project design;
• understanding how ADB deals with cases of fraud and corruption,
will enable them to highlight the need for anticorruption and
good governance features in project design; and
• they can obtain further information on the integrity principles
and guidelines on ADB’s website at the frequently asked
questions on anticorruption and integrity page.138
134
ADB. 2006. Integrity Principles and Guidelines.
135
Ibid., p. 5.
136
ADB. 2009. Administrative Order No. 2.10: Whistleblower and Witness Protection.
137
Ibid.
11. Capacity Development Medium-Term Framework

and Action Plan (2007)
1
ADB considers capacity development to be important for improving
development effectiveness (Poverty Reduction Strategy) and a key driver of
change (Strategy 2020). It is intimately connected with good governance. In
2005, capacity development became a thematic priority in ADB’s lending and
TA operations. In 2007, a capacity development action plan was prepared
to set out ADB’s approach to integrating capacity development in ADB
operations and in DMCs’ partnership strategies.
ADB follows the OECD definition of capacity as “the ability of people,
organizations and society as a whole to manage their affairs successfully.”
ADB’s operational appoach to capacity development is outlined within ADB’s
capacity framework which has the three dimensions listed below.138
• Institutional context. ADB considers the institutional context to

include strategic planning and implementation, subnational and
local governance, anticorruption systems, participation of civil
society, and institutions for poverty reduction. Strengthening
these institutional dimensions allows capacity development at
sector, organization, and project levels.
• Organizational capacity. ADB considers an organization’s capacity
to deliver its mandate and objectives to depend upon leadership,
and its ability to mobilize and manage resources to plan,
implement, monitor, learn, and manage change. Organizations
are key vehicles for ADB’s capacity development interventions.
• Networking and partnerships. ADB recognizes that various
government, private sector, and civil sociey organizations need
to act in partnership to achieve development objectives and
outcomes. The networking/partnership dimension frames this.
138
ADB. 2007. Integrating Capacity Development into Country Programs and Operations: Medium-
Term Framework and Action Plan. Available at www.adb.org/Documents/Policies/Integrating
-Capacity-Development/Integrating-Capacity-Development-2007.pdf
12. Procurement Guidelines (2010)
The procurement guidelines set out the policies governing the procurement
of goods, works, and services (other than consultant services) for projects
that are financed in whole or in part by an ADB loan, an ADB grant, or
ADB administered funds, and also contain a detailed list of the effects of
fraud and corruption on the procurement process.139 ADB reviews the
borrower’s procurement procedures, documents, bid evaluations, award
recommendations, and contracts to ensure that the procurement process
is conducted in accordance with agreed procedures.140 The procurement
process is guided by five general principles:141
• the goods, or works being procured must come from ADB’s

DMCs;142
• economy and efficiency are needed to implement the project,
including for the procurement process;
• all eligible bidders should be given the same information and the
same equal opportunity in the procurement process;
• ADB has an interest in encouraging the development of domestic
contracting and manufacturing industries in the country of the
borrowing DMC; and
• it is important for the procurement process to be transparent.
If procurement is not carried out as agreed, the procurement guidelines

require ADB to declare misprocurement.143 The procurement guidelines are
not crystal clear on the consequences of misprocurement. Therefore, ADB has
some discretion in choosing from among the following options, and it may
cancel that portion of the financing allocated to the goods and works that
have been misprocured,
139
ADB. 2010. Procurement Guidelines. para. 1.1. In March 2010, ADB’s Board of Directors approved
amendments to the Procurement Guidelines that expand the basis for declaring a firm or individual
ineligible, including by allowing harmonization of sanction or “debarment decisions amongst
MDBs.” ADB. 2010. Anticorruption Policy: Harmonization of Debarments. As a result of these
amendments, the earlier 2007 Procurement Guidelines was updated and reprinted in April 2010
to reflect these changes. See also pp. 18–19.
140
Ibid., para. 1.11.
141
Ibid., para. 1.2.
142
Ibid., para. 2.11; and, Article 14(ix) of the Charter. There is an exception for procurements that are
(i) approved by a two-third majority of the Board of Directors; or (ii) for special funds resources,
in which case payments are limited to goods or works produced in, or supplied by, the developed
member countries that have contributed to such resources, and all DMCs.
143
Ibid., para. 1.12.
• allow rebidding for the goods and works, or

• exercise other remedies under the financing agreement (such as
suspension).144 1
For example, ADB declared misprocurement where an executing agency
did not want to award a contract to a winning bidder despite its technical and
financial qualifications. The executing agency alleged that the winning bidder
had performed poorly in previous contracts.
The winning bidder claimed that the allegation was untrue and ADB
obtained confirmation about the adequacy of the winning bidder’s prior
performance. The winning bidder also agreed to replace allegedly faulty
equipment that it had delivered to the executing agency on the basis that
it was not admitting to any breach of contract or wrongdoing. Despite this,
the executing agency insisted on rebidding for the contract. As a result, ADB
declared misprocurement on the basis that the executing agency failed to
award the contract to the winning bidder. ADB cancelled that portion of the
financing allocated to the procurement.
144
Ibid.
ADB may also declare misprocurement after it awards a “no objection”

if it finds that the “no objection” was issued on the basis of incomplete,
inaccurate, or misleading information; or that the terms and conditions of the
contract were substantially modified without its approval.145
13. Guidelines on the Use of Consultants by ADB

and Its Borrowers (2010)
The guidelines on the use of consultants by ADB and its borrowers (consulting
guidelines) define the policies and procedures for selecting, contracting with,
and monitoring consultants who are engaged for loan, grant, and TA projects
that are financed in whole or in part by ADB loans, grants, or administered
funds.146 The consulting guidelines also contain a detailed list of the effects of
fraud and corruption in respect of consultants.147
Those consultants that are engaged with loan or grant-financed funds
are normally selected, engaged, and supervised by the borrower. In contrast,
those consultants that are engaged with TA grant-financed funds are selected,
engaged, and supervised by ADB.148 ADB is guided by several principles when
engaging consultants:149
• high-quality services are needed,

• economy and efficiency are needed,
• all qualified consultants have an opportunity to compete in
providing services financed by ADB,
• the development and use of national consultants from DMCs is
encouraged,
• transparency in the selection process is needed, and
• anticorruption and ethics measures need increasing focus.
145
Ibid.
146
ADB. 2010. Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers.
para. 1.1.
147
In March 2010, ADB’s Board of Directors had approved amendments to the Guidelines on the
Use of Consultants that expanded the basis for declaring a firm or individual ineligible, including
by allowing harmonization of sanction or “debarment decisions amongst MDBs.” ADB. 2010.
Anticorruption Policy: Harmonization of Debarments. As a result of these amendments, the earlier
2007 Guidelines on the Use of Consultants was updated and reprinted in April 2010 to reflect
these changes. See also pp. 18–19.
148
Ibid., para. 1.3.
149
Ibid.
Like the procurement guidelines, the consulting guidelines indicate that if

recruitment is not carried out as agreed, ADB must declare misprocurement,
resulting in three potential consequences:150 1
• any financing allocated to the misprocured consulting services is
normally cancelled,
• the request for consultancy proposals may be reissued, or
• other remedies under the relevant agreement (such as suspension)
may be exercised.151
ADB may also declare misprocurement of the selected consulting services

after its issuance of a “no objection” notice if it concludes that the “no
objection” was issued on the basis of incomplete, inaccurate or misleading
information, or that the terms and conditions of the contract had been
substantially modified without ADB’s approval.152
150
Ibid., para. 1.18.
151
Ibid.
152
Ibid.
Overall Review Guide 1

Project counsel should know that
• they must work with other ADB departments to address the risks
of weak governance and corruption in ADB-financed projects: the
Charter, Article 14 (xi), page 11;
• a project should be designed to raise governance quality: see the
discussion on the governance policy at pages 14–16;
• a project should reflect accountability, transparency, participation,
and predictability: see the discussion on the governance and
anticorruption policies at pages 14–19;
• they must adopt the harmonized definitions of corrupt, fraudulent,
coercive, and collusive practices under the anticorruption policy, the
procurement guidelines, and consultancy services guidelines: see the
discussion regarding the anticorruption policy at pages 16–19;
• ADB’s investments must be limited to companies that can
demonstrate the capacity to establish and maintain sound corporate
governance structures and practices: see the discussion on the
private sector development strategy at pages 19–23;
• ADB’s strategic framework for poverty reduction provides an
overarching foundation for including good governance measures
in projects: see the discussion regarding the enhanced poverty
reduction strategy at pages 23–24;
• there are still weaknesses in the implementation of the governance
policy: see the review of the implementation of governance and
anticorruption policies at pages 27–30;
• they must explain to the project leaders the project-specific
recommendations identified in the Governance and Anticoruuption
Action Plan II (GACAP II): see the discussion regarding GACAP II at
pages 31–34;
• strengthening projects and project design by including governance
and anticorruption components is one of the four Key Results
Areas under GACAP II: see the discussion regarding GACAP II at
pages 31–34;
• improving and mainstreaming governance in the public and private
sectors is integral to ADB’s new long-term strategic agenda: see
Strategy 2020, discussed at pages 34–35;
• a project must comply with the integrity principles and guidelines,
procurement guidelines, and consultants’ guidelines: see discussions
at pages 35–40; and
• capacity development is important for development effectiveness
and ADB has a framework and action plan operationalizing it in
projects, see discussion at page 37.
CHAPTER 2
International Law and Multilateral

Initiatives on Governance and
Anticorruption
A. Overview
This chapter provides an overview of international law and multilateral

initiatives relating to good governance and anticorruption. It discusses
international conventions, regional initiatives for Asia and the Pacific, the
policies of other multilateral development banks (MDBs), and the work of the
Organisation for Economic Co-operation and Development (OECD).
This chapter is relevant to project counsel because it sets out the current
status of international law and multilateral actions on governance and
anticorruption. Project counsel may refer to these laws, initiatives, and actions
on governance and anticorruption when explaining the need for project-
specific anticorruption and governance measures to an ADB borrower, or
recipient.
B. International Law
1. Introduction
Several international agreements and soft law instruments recognize

the importance of good governance as a part of achieving their goals.
For example, in Agenda 21, adopted at the 1992 United Nations (UN)
Conference on Environment and Development in Rio de Janeiro, Brazil,
world leaders recognized the need for improved governance in formulating
an effective strategy for tackling the problems of poverty, development, and
environment.153
153
UN Department of Economic and Social Development. 2004. Agenda 21. Chapter 3: Combating
Poverty. para. 3.2.
Eight years later, at the Millennium Summit in September 2000,

world leaders adopted the UN Millennium Declaration, which stressed the
importance of good governance in eliminating poverty.154
At the 2002 World Summit on Sustainable Development (WSSD) in
Johannesburg, South Africa, world leaders undertook to strengthen and
improve governance at all levels for the effective implementation of Agenda 21,
the Millennium Development Goals, and the Plan of Implementation of the
Summit.155 The Plan of Implementation of the WSSD expressly recognized
that good governance within each country and at the international level is
essential for sustainable development.156
Former US President Bill Clinton addresses the United Nations (UN) Security Council during the Millennium Summit 07
in September 2000, UN, New York.
Two international agreements are explicitly directed toward preventing

corruption. The OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions (OECD Anti-Bribery Convention),
adopted on 21 November 1997, came first. It contributed to the impetus
leading toward adoption of the UN Convention against Corruption (2003)
(UNCAC).
154
UN. 2000. General Assembly Resolution 55/2: United Nations Millennium Declaration. para. 13.
155
UN Department of Economic and Social Development. 2004. Johannesburg Declaration on
Sustainable Development.
156
UN Department of Economic and Social Development. 2005. Plan of Implementation of the World
Summit on Sustainable Development.
International Law and Multilateral Initiatives on Governance and Anticorruption 45
2. OECD Anti-Bribery Convention (1997)
The OECD Convention on Combating Bribery of Foreign Public Officials

in International Business Transactions157 (Anti-Bribery Convention) was
established by OECD member countries and five nonmember countries:
Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic. As of December
2009, 38 countries have become parties to the Anti-Bribery Convention. The
OECD Working Group on Bribery oversees the implementation of the OECD
Anti-Bribery Convention. It is comprised of representatives of each of the
other 38 parties.158
2
Article 1 of the OECD Anti-Bribery Convention requires each party to
take such measures as may be necessary to establish that it is

a criminal offence under its law for any person intentionally
to offer, promise or give any undue pecuniary or other
advantage, whether directly or through intermediaries, to a
foreign public official, for that official or for a third party, in
order that the official act or refrain from acting in relation
to the performance of official duties, in order to obtain or
retain business or other improper advantage in the conduct
of international business.159
Likewise, by signing the OECD Anti-Bribery Convention, parties agree to

provide prompt international legal assistance for investigating and prosecuting
foreign bribery.160 Finally, bribery of a foreign public official is “deemed to be
included as an extraditable offence under the laws of the parties and the
extradition treaties between them.”161
157
OECD. 1997. Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions
158
The members of the Working Group on Bribery in International Business Transactions are Argentina,
Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, the Republic of
Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak
Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the
United States. For more details on the Working Group see: www.oecd.org/infobycountry/0,3380,
en_2649_34859_1_1_1_1_1,00.html
159
Transactions.
160
Ibid., Article 9.
161
Ibid., Article 10.
Ministerial meeting of the Organisation for Economic Co-operation and Development.
The OECD Anti-Bribery Convention also has an important monitoring

process. Through a peer review mechanism, a Working Group, established under
the OECD Anti-Bribery Convention, evaluates each party’s implementation
and enforcement of anti-bribery laws and each country takes an active role in
evaluating other parties.162
Details of the parties’ implementation of the OECD Anti-Bribery
Convention can be found in its annual report.163
Key Point for Project Counsel. Project counsel should know that the OECD
Anti-Bribery Convention:164
• exists and forms the foundation for many donor member

countries approach to anticorruption and bribery;
• informs the OECD’s work in anticorruption and bribery, including
the ADB/OECD Anti-Corruption Initiative; and
• provided initial impetus for the United Nations Convention
Against Corruption (UNCAC).
162
Ibid., Article 12.
163
OECD. 2008. Annual Report 2007.
164
Transactions. Article 10.
3. The United Nations Convention Against Corruption

(UNCAC) (2003)
The UN General Assembly adopted the UNCAC on 31 October 2003 in

New York.165 Considered as the first truly global anticorruption convention,166
the UNCAC prioritizes the prevention, detection, and sanctioning of corruption.
Under the UNCAC, parties commit to developing and implementing (or
maintaining) effective, coordinated anticorruption policies.
The parties agree that their anticorruption policies need to promote the
participation of society and reflect the principles of the rule of law, proper
2
management of public affairs and public property, integrity, transparency, and
accountability. Specifically, the parties commit to adopting the legislative and
other measures necessary to make bribery of national public officials, foreign
public officials, and officials of public international organizations criminal
offences under national law.167
Parties need to cooperate in relation to anticorruption and bribery and
are encouraged to do so.168 Among other things, parties must not allow
expenses that constitute bribes to be tax deductible.169 The UNCAC also states
that each party may adopt more strict or severe measures than those provided
for under the UNCAC.170 Thus, the UNCAC may be seen as the minimum level
of commitment for its parties.
Twenty-two DMCs have signed the UNCAC (Table 2.1). As of 30 April
2010, 16 of these 19 countries have ratified the UNCAC, indicating their
commitment to implementing the convention within their territory. In
addition, 10 more DMCs acceded or became parties to the UNCAC after it
entered into force: Bangladesh, Cambodia, Fiji Islands, Georgia, Kazakhstan,
the Maldives, Palau, Tajikistan, Turkmenistan, and Uzbekistan.171 All donor
countries to ADB have signed the UNCAC.172
165
UN. 2003. General Assembly Resolution 58/4: United Nations Convention Against Corruption.
166
Transparency International. 2005. First global convention against corruption to come into force.
167
UN. 2003. General Assembly Resolution 58/4: United Nations Convention Against Corruption.
Articles 15 and 16.
168
Ibid., Article 46.
169
Ibid., Article 12.
170
Ibid., Article 65. para. 2.
171
When a state accedes to a UN convention or treaty, it accepts the offer or the opportunity to
become a party to a treaty that has already been negotiated and signed by other states. Acceding
to a convention or treaty has the same legal effect as ratifying the treat or convention. Accession
usually occurs after the treaty has entered into force, see: http://untreaty.un.org/English/guide.
asp#accession
172
Available: www.unodc.org/unodc/en/treaties/CAC/signatories.html
Table 2.1: DMC Signatory and Ratifying Countries to the

United Nations Convention against Corruption
Afghanistan* Lao PDR* Papua New Guinea*
Armenia* Malaysia* Philippines*
Azerbaijan* Mongolia* Republic of Korea*
Bhutan Myanmar Singapore
People’s Republic of China* Nepal Sri Lanka*
India Pakistan* Thailand
Indonesia* Timor-Leste*
Kyrgyz Republic* Viet Nam*
* DMC = developing member countries that have ratified the UNCAC, Lao PDR = Lao People’s
Democratic Republic.
Source: Table formulated from the list of signatories and parties to the UNCAC as of 30 April 2010.
Available: www.unodc.org/unodc/en/treaties/CAC/signatories.html
Key Points for Project Counsel. Project counsel should
• know of the UNCAC’s existence; and

• check whether a borrower, recipient, or beneficiary has ratified
the UNCAC and whether they have enacted legislation that
adopts the principles of the UNCAC into national laws.
C. Multilateral Harmonization Initiatives
On 18 February 2006, leaders of seven international financial institutions

(IFIs) gathered in Washington, DC and collectively recognized the importance
of a unified and coordinated approach in combating corruption.173 The
leaders agreed upon broad policies and practices to address the internal and
external problems of corruption. They recognized the need to standardize
their respective definitions of corruption, improve the consistency of their
investigative rules and procedures, strengthen information sharing, and
ensure that their respective compliance and enforcement actions were
supported by each other’s institution.174
173
Parties from the following banks met: AfDB, ADB, EBRD, EIBG, IMF, IDB, and World Bank. The
results of the meeting are contained in: ADB. 2006. Update on Cooperation among Multilateral
Development Banks.
174
ADB. 2006. Update on Cooperation among Multilateral Development Banks.
As a result of the meeting, the participating MDBs and IFIs established

the Joint IFI Anti-Corruption Task Force, which reports bimonthly on progress
made to develop a uniform framework for preventing and combating fraud
and corruption.
At their next meeting in Rome in July 2006, the IFI heads pushed for the
harmonization of capacity development and developed a synthesis paper for
the High Level Forum in Paris.175
An ADB Anticorruption and Governance Action Plan Development Retreat in 2006.
The Joint IFI Anti-Corruption Task Force presented its report during the
September 2006 meeting of the IFIs, during which the IFI heads adopted a
uniform framework for preventing and combating fraud and corruption. In
the framework, they recommended that a harmonized strategy to combat
corruption should contain the following elements:176
• definitions of fraudulent and corrupt practices,

• principles and guidelines for investigations,
175
Ibid.
176
AfDB, ADB, EBRD, EIBG, IMF, IDB, and World Bank. 2006. International Financial Institutions Anti-
Corruption Task Force.
• exchange of information,
• integrity due diligence,
• mutual recognition of enforcement actions, and
• support for anticorruption efforts of member countries.
As a result of the Joint IFI Anticorruption Task Force’s recommendations,

ADB adopted the following definitions:
• Corrupt practice is the offering, giving, receiving, or soliciting,

directly or indirectly, anything of value to influence improperly the
actions of another party.
• Fraudulent practice is any act or omission, including a
misrepresentation, that knowingly or recklessly misleads, or
attempts to mislead, a party to obtain a financial or other benefit
or to avoid an obligation.
• Coercive practice is impairing or harming, or threatening to impair
or harm, directly or indirectly, any party or the property of the
party to influence improperly the actions of a party.
• Collusive practice is an arrangement between two or more parties
designed to achieve an improper purpose, including influencing
improperly the actions of another party.177
The International Finance Corporation (IFC), Multilateral Investment

Guarantee Agency (MIGA), and the European Bank for Reconstruction
and Development (EBRD) have reinterpreted these agreed definitions and
have crafted their own interpretation in their Guidance Notes. This point is
discussed below.
ADB has also defined the following terms for its use related to
investigations:
• Conflict of interest is any situation in which a party has interests

that could improperly influence its performance of official duties
or responsibilities, contractual obligations, or compliance with
applicable laws and regulations.178
177
ADB. 2006. Anticorruption Policy: Harmonized Definitions of Corrupt and Fraudulent Practices.
178
ADB. 2006. Integrity Principles and Guidelines. para 50.
• Obstructive practice is deliberately destroying or falsifying,

altering or concealing information or evidence material to a loan
investigation.179
• Abuse means theft, waste, or improper use of ADB assets in ADB-
financed or -supported activity, either committed intentionally or
through reckless disregard.180
• Integrity violation is any act which violates ADB’s anticorruption
policy and includes, abuse, coercion, collusion, conflict of interest,
corruption, and fraud, as defined herein.181
2
Key Points for Project Counsel. Project counsel should know that as a
result of ADB harmonizing its definitions relating to corrupt and fraudulent
practices with other IFIs and MDBs,
• ADB’s governance and anticorruption approach will be

influenced by other IFIs and MDBs, and
• the approaches to governance and anticorruption taken by
other IFIs and MDBs are relevant to ADB.
D. Multilateral Development Bank Policies and Procedures

1. General
Because of the donor aid harmonization processes discussed above, ADB’s

governance and anticorruption approach will be influenced by the approach
taken by other IFIs. Thus, their approaches to governance and anticorruption
are relevant to ADB.
2. World Bank Group
a. Governance
The World Bank Group (WBG) first adopted a definition of governance in

1992.182 It defined governance as “the manner in which power is exercised
179
Ibid.
180
ADB. 2009. Administrive Order No. 2.10: Whistleblower and Witness Protection.
181
Ibid.
182
World Bank. 1992. Governance and Development.
in the management of a country’s economic and social resources for

development.”183 As outlined in the introduction, this is the same definition
that ADB adopted in its governance policy in 1995.
Its original definition must be understood in the context of how the
World Bank analyzed the concept of governance. The WBG distinguished
between the political and economic dimensions of governance. In a 1991
paper,184 Ibrahim Shihata, then the World Bank’s general counsel, identified
aspects of governance that were beyond the World Bank’s mandate.185
Mr. Shihata noted that the World Bank might, however, address governance
to the extent that it was relevant to the success of a World Bank project or
program.186 Thus, the aspects of governance that were considered consistent
with the World Bank’s mandate included civil service reform, legal reform,
accountability for public funds, and budget discipline.187 ADB followed similar
reasoning when adopting its governance policy.
The World Bank has subsequently further considered the empirical links
between the success of a project or program and governance and human
rights, and these links were found to be greater than originally understood.188
In January 2006, then General Counsel, Roberto Danino, noted that the
World Bank should consider human rights under its mandate as well—thus
suggesting a considerable broadening to the originally understood concept—
based upon empirical evidence.189
183
Kaufmann, D., and K. Aart. 2008. Governance Indicators: Where Are We, Where Should We Be
Going? World Bank Research Observer. 23(1). Spring, p. 4. This article cited: World Bank. 1992.
Governance and Development.
184
Shihata, I. 1991. The World Bank and “Governance” Issues in its Borrowing Members. In Shihata,I.,
ed. The World Bank in a Changing World: Selected Essays and Lectures. pp. 53–96.
185
Shihata, I. 1991. Determination of the Standard of Value of the Bank’s Capital—A Legal Analysis.
In Shihata, I., ed. The World Bank in a Changing World: Selected Essays and Lectures. pp. 81–84.
Mr. Shihata noted that: (i) the World Bank should not be influenced by the “political character” of
the member; (ii) the World Bank should not interfere in the domestic or foreign partisan politics of
any member; (iii) the World Bank, as coordinator of foreign assistance for a given country, should
not act on behalf of donor countries in influencing the recipient country’s political orientation or
behavior; (iv) the World Bank should not allow political factors or events to influence its decisions,
unless they have direct and obvious economic effects relevant to its work; and (v) World Bank
staff should not build their assessment on the possible reaction of any particular Bank member or
members to their analysis.
186
Shihata, I., ed. The World Bank in a Changing World: Selected Essays and Lectures. p. 87.
187
Ibid., pp. 88–92.
188
Kaufmann, D. 2004. Human Rights and Governance: The Empirical Challenge. See also Kaufmann,
D. 2006. Human Rights, Governance and Development: An Empirical Perspective. Development
Outreach.
189
Danino, R. 2006. Legal Opinion on Human Rights and the Work of the World Bank.
The World Bank’s definition of governance has now been updated. In

March 2007, the Boards of Directors of the five international institutions190
that make up the WBG approved a governance and anticorruption strategy
(GAC) for the WBG.191 Under the strategy, governance is defined as
the manner in which public officials and public institutions

acquire and exercise the authority to provide public goods and
services, including the delivery of basic services, infrastructure,
and a sound investment climate.192
2
The World Bank’s definition of governance would include the manner in which the authority to acquire and implement
infrastructure projects is exercised. For example, the Pasig River Rehabilitation Commission has the authority to oversee
all rehabilitation efforts for the Pasig River Program including transforming riverbank easements into public parks and
constructing ferry stations for the Pasig River Ferry.
190
The World Bank Group consists of five organizations: (i) the International Bank for Reconstruction
and Development (IBRD), (ii) the International Development Association (IDA), (iii) the International
Finance Corporation (IFC), (iv) the Multilateral Investment Guarantee Agency (MIGA), and (v) the
International Centre for the Settlement of Investment Disputes (ICSID).
191
World Bank. 2007. Strengthening World Bank Group Engagement on Governance and Anticorruption.
192
Ibid., Annex E. p. 67.
The WBG plans to increase its engagement in governance and

anticorruption in its country work, group operations, and global
partnerships.193
b. Anticorruption194
The World Bank adopted its first anticorruption strategy in September 1997.195
Under the strategy, the World Bank sought to help partner countries reduce
corruption, bring anticorruption measures into the mainstream of World
Bank work, prevent fraud and corruption in World Bank projects, and support
international efforts to combat corruption.196
In 2000, the World Bank released the public sector governance strategy,
which recognized that corruption was an outcome of a poorly functioning
governance system.197 In the GAC, the World Bank affirmed that fighting
corruption is important to achieving its mission to reduce poverty and
therefore corruption-fighting efforts must be strengthened.
Within the WBG is the Integrity Vice Presidency (Department of
Institutional Integrity [INT]).198 This department implements the WBG’s
anticorruption strategies, and investigates allegations of corruption regarding
the WBG operations and potential staff misconduct. It also reports to the
WBG president on its activities. Additionally, each institution within the WBG
has an evaluation officer who makes interim recommendations.
In 2006, the Guidelines On Preventing and Combating Fraud and
Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants
were issued. The guidelines “set out the general principles, requirements and
sanctions applicable to persons and entities which receive, are responsible for
the deposit or transfer of, or take or influence decisions regarding the use of”
193
World Bank. 2007. Implementation Plan for Strengthening World Bank Group Engagement on
Governance and Anticorruption.
194
Prior documents such as the anticorruption strategy just refer to the World Bank, instead of the
World Bank Group.
195
World Bank. 1997. Helping Countries Combat Corruption: The Role of the World Bank.
196
Ibid., p. 3.
197
World Bank. 2007. Strengthening World Bank Group Engagement on Governance and Anticorruption.
Annex A. p. 38. Cited in World Bank. 2000. Reforming Public Institutions and Strengthening
Governance: A World Bank Strategy.
198
See: http://go.worldbank.org/036LY1EJJ0
the proceeds of financing from the International Bank for Reconstruction and
Development (IBRD) or the International Development Association (IDA).199
In 2007, the WBG also approved the voluntary disclosure program. This
program seeks to prevent and deter corruption from occurring in World
Bank projects and contracts. The program provides incentives to firms, other
entities, and individuals working under World Bank projects or contracts to
end corrupt behavior and comply with World Bank rules and guidelines.200
Also in 2007, the World Bank established an independent review
panel, the Volcker Panel, headed by former Federal Reserve Chairman
Paul Volcker, to review INT’s work.201 In September 2007, the Volcker
2
Panel recommended, among other things, that the WBG establish a
small, external advisory oversight board to protect the independence and
strengthen the accountability of INT.202 It also recommended the creation
of an internal consulting unit within INT that could work collaboratively
with operations units,203 and that all investigations into staff misconduct
(not including investigations into significant fraud or corruption) be
handled by units outside of INT.204 Moreover, it urged the WBG to work
with other multilateral institutions in developing, defining, and following
“best practices” in protecting institutional integrity and investigating
corruption.205
In January 2008, the World Bank announced that it would fully implement
the recommendations of the Volcker Panel.206 This included its intention to
establish an independent advisory board,207 responsible for advising INT, the
World Bank president, and World Bank Audit Committee; and reporting
on the World Bank’s progress with implementing the Volcker Panel’s major
199
World Bank. 2006. Guidelines On Preventing and Combating Fraud and Corruption in Projects
Financed by IBRD Loans and IDA Credits and Grants. para. 1.
200
The voluntary disclosure program is not open to bank staff or firms, entities, or individuals under
active investigation by the World Bank. For more details on the voluntary disclosure program, see
http://go.worldbank.org/3JOFMN95S0
201
The other members of the panel are Gustavo Gaviria; John Githongo; Ben W. Heineman, Jr.; Walter
Van Gerven; and Sir John Vereker.
202
Volcker, P.; G. Gaviria; J. Githongo; B.W. Heineman, Jr.; W. Van Gerven; and J. Vereker. 2007.
Independent Panel Review of the World Bank Group Department of Institutional Integrity. p. 15.
203
Ibid., p. 17.
204
Ibid., p. 31.
205
Ibid., p. 40.
206
World Bank. 2008. Implementing the Recommendations of the Independent Panel Review of the
World Bank Group’s Department of Institutional Integrity (INT).
207
Ibid., p. 5.
The World Bank accepted and implemented all recommendations of the Volcker Panel.
recommendations relating to INT. The members of the advisory board were

appointed in September 2008.208
As of July 2009, the World Bank has implemented all the recommendations
of the Volcker Panel.209 The World Bank has established a Preventative Services
Unit in INT to provide fraud and corruption risk assessment and mitigation
advice, training, research, and support to client anticorruption functions.210
It also created a task force to develop protocol for transferring all internal
investigation cases not involving significant fraud and corruption to the newly
appointed Chief Ethics Officer.211 In connection with the recommendation to
continuously liaise with other multilateral institutions as a means to measure
208
Those appointed were former Australian Treasurer Peter Costello, former US diplomat and scholar
Chester Crocker, former Philippine Ombudsman Simeon Marcelo, and Swiss Jurist Mark Pieth. See:
World Bank. 2009. Status of Recommendations from Volcker Independent Review of INT. Issue
Briefs.
209
World Bank. 2009. Status of Recommendations from Volcker Independent Review of INT. Issue
Briefs; Department of Institutional Integrity. 2009. Fiscal Year 2008 Annual Integrity Report:
Protecting Development’s Potential.
210
World Bank. 2008. Implementing the Recommendations of the Independent Panel Review of the
World Bank Group’s Department of Institutional Integrity (INT). p. 7.
211
Ibid., p. 27.
INT’s performance, a new performance metric had been proposed in July

2008.212 The Chief Ethics Officer was appointed and cases were transferred
to the Office of Ethics and Business Conduct.213
The GAC also applies to IFC and MIGA (the private sector arms of the
WBG), which coordinate with INT in implementing GAC. In 2006, MIGA issued
a set of procedures detailing how it would respond to allegations of corrupt,
fraudulent, collusive, coercive, or obstructive practices; or the violation of the
terms and conditions of the WBG’s voluntary disclosure program.214
Recall that Part C of this Chapter discussed the MDBs’ interpretations
of the definitions of corrupt, fraudulent, coercive, collusive, and obstructive
2
practices. In 2006, IFC and MIGA issued interpretative guidelines to “clarify”
the meaning of these terms.215
216
• the World Bank undertook a significant reorganization of its

internal arrangements for investigating fraud and corruption
with the recommendations consistent of the Volcker Panel,216
• this reorganization has served as a precedent for other MDBs,
• IFC and MIGA have issued interpretative guidelines “clarifying”
the meaning of the harmonized definitions that the MDBs
adopted in 2006 to the extent they apply them, and
• project counsel working or cofinancing with IFC or MIGA
should pay close attention to these interpretations and any
possible differences.
212
See World Bank. 2009. Status of Recommendations from Volcker Independent Review of INT. Issue
Briefs.
213
Ibid.
214
MIGA. 2006. MIGA Sanctions Procedures.
215
MIGA. 2006. Definitions and Interpretive Guidelines; IFC. 2006. Definitions and Interpretive
Guidelines.
216
In October 2009, the High Level Commission on Modernization of the World Bank Group
Governance issued its report, Repowering the World Bank for the 21st Century. The report stated
the that WBG’s governance arrangements needed reconsideration. Most recommendations
concern strengthening internal institutional weaknesses to meet the global challenges of the
21st century, rather than recommendations concerning governance of the World Bank’s member
countries. Once recommendation is to strengthen management accountability to conduct a
second internal evaluation of the Institutional Integrity Vice-Presidency (INT) within 2 years to
ensure that the recommendations of the Volcker Panel have been fully and properly implemented
and are producing the results intended by the Panel.
3. Inter-American Development Bank
a. Governance
The Inter-American Development Bank (IDB) first adopted a governance

approach in 1996 by emphasizing the need for strong institutions in its Frame
of Reference for Bank Action in Programs for Modernization of the State and
Strengthening of Civil Society.217 Under this strategy, IDB works to modernize
governments and strengthen civil society by focusing on nine general
principles: (i) comprehensiveness, (ii) transparency, (iii) competition, (iv) social
equity, (v) efficiency, (vi) effectiveness, (vii) participation, (viii) subsidiarity, and
(ix) gender equity.
In 2003, IDB adopted a new strategy that focuses on the following areas
of action: (i) democratic system; (ii) rule of law and justice reform; (iii) state,
market, and society; and (iv) public management.218
b. Anticorruption
IDB adopted its current framework for addressing corruption internally and
within its member countries in 2001.219 The framework has three elements:
• staff act with high integrity and IDB commits to this goal through
its internal policies and procedures;
• operations are free of fraud and corruption and executed in a
controlled environment; and
• programs that help strengthen good governance, enforce the
rule of law and combat corruption in IDB’s developing member
countries are supported.220
IDB’s Office of Institutional Integrity (OII) is responsible for investigating

allegations of fraud and corruption occurring in activities financed by the
IDB Group.221
217
IDB. 1996. Frame of Reference for Bank Action in Programs for Modernization of the State and
Strengthening of Civil Society.
218
IDB. 2003. Modernization of the State: Strategy Document.
219
IDB. 2001. Strengthening a Systemic Framework Against Corruption for the Inter-American
Development Bank.
220
Ibid., para 1.9.
221
IDB. 2008. Office of Institutional Integrity. Annual Report 2007.
In 2008, an IDB team led by Dick Thornburgh released a report on the

review of IDB’s anticorruption framework.222 The review recommended,
among other things, moving OII’s reporting line under the Office of the
President to a separate position as an Executive Advisory Office.223 Although
the new arrangement preserves OII’s structure and functions and its direct
reporting line to the President, the review expects the realignment to make
OII more visible.
The Thornburgh review also dealt with the modification of the
jurisdiction of the Sanctions Committee. It suggested that allegations of fraud
and corruption in private sector contracts and those directly funded by IDB 2
also be included within its jurisdiction.224 This modification seeks to address
a disparity wherein allegations of fraud and corruption in these areas are
considered to fall under the jurisdiction of the Oversight Committee on Fraud
and Corruption (OCFC).225 The Thornburgh review also recommended OCFC
to concentrate on policy direction, development, and oversight.226
Key Point for Project Counsel. Project counsel should know that
IDB’s internal rearrangements following the Thornburgh Review bring
IDB into line with the approach taken by the World Bank following the
Volcker review.
4. African Development Bank
a. Governance
The African Development Bank (AfDB) adopted its good governance policy
in 1999227 and first approved its implementing guidelines in 2001.228 The
good governance policy recognizes that good governance plays an integral
222
Thornburgh, D., J.S. de Noriega, R.L. Gainer, and C.H. Walker. 2008. Report Concerning the
Anti-Corruption Framework of The Inter-American Development Bank. 21 November.
223
Ibid., p. 73.
224
Ibid., p. 88.
225
Ibid., p. 89. OCFC was established in 2001 “to coordinate responses to all allegations of fraud and
corruption in connection with Bank activities or operations, to oversee any resulting investigations,
and to assure appropriate dispositions” (Thornburgh et al 2008, 8).
226
Ibid., p. 67.
227
AfDB. 2000. African Development Bank Group Policy on Good Governance.
228
AfDB. 2001. Operational Guidelines for Bank Group Policy on Good Governance (2001).
part in sustainable development, poverty reduction, and ensuring ongoing

development effectiveness.229
AfDB prepares country governance profiles that serve as diagnostic
tools for identifying the strengths and weaknesses of governance systems
in its developing members. It uses its investigations to help develop and
implement its governance programs.
b. Anticorruption
AfDB identifies combating corruption as one of the five key elements for
good governance under its good governance policy and its 2004 guidelines
on preventing and combating fraud and corruption.230
AfDB adopted a four-point anticorruption strategy that focuses on
preventing corruption, mainstreaming corruption issues in its activities,
helping regional member countries that request assistance, and participating
in multilateral anticorruption initiatives.231 To carry out this strategy, AfDB
created an Integrity and Anti-Corruption Division (IACD) in November 2005.
IACD is a part of AfDB’s Office of the Auditor General and investigates
allegations of fraud, corruption, and misconduct. IACD’s mandate requires
it to play a preventive role in pursuing AfDB’s anticorruption-related work. In
such capacity, it conducts fraud and corruption awareness-raising activities
and publicity as well as outreach and other training efforts.232 In line with
its integrity and anticorruption work, AfDB formed an independent Advisory
Committee on Corruption and Fraud comprised of senior management
which is tasked to “advise the President on final investigation findings and
recommendations on corruption and fraudulent practices reported by the
Auditor General to the President.”233
In 2007, AfDB issued its whistle-blowing and complaints-handling policy.
The policy seeks to (i) allow concerns relating to fraud, corruption, or any
other misconduct to be raised; and (ii) ensure persons disclosing information
that they will be protected from retaliation.234
229
For more details on AfDB’s work on governance, see www.afdb.org/en/topics-sectors/sectors/
economic-financial-governance/
230
The policy is called Bank Group Policy on Good Governance, adopted in 1999.
231
For more details on AfDB’s work on integrity and anticorruption, see www.afdb.org/en/about-us/
structure/auditor-generals-office-oagl/integrity-and-anti-corruption
232
AfDB. 2008. Integrity and Anticorruption 2007-2008 Report.
233
Advisory Committee on Corruption and Fraud (ACCF).
234
AfDB. 2007. Whistle Blowing and Complaints Handling Policy.
The whistle-blowing and complaints-handling policy encourages

AfDB staff and firms or individuals involved in AfDB projects to volunteer
information on any fraud, corruption, or misconduct of which they have
knowledge or in which they participated. People who voluntarily disclose such
information will have reduced sanctions applied against them.235 The policy
also protects whistle-blowers (including individuals, firms, or AfDB staff) from
any direct or indirect discrimination, reprisal, harassment, or vengeance that is
recommended, threatened, or taken by reason of the disclosure.236 Remedies
are available to a whistle-blower if the provisions are not followed.237
2
5. European Bank for Reconstruction and Development
a. Governance
The European Bank for Reconstruction and Development (EBRD) is the only
MDB with a charter that explicitly considers political concerns.238 The charter
acknowledges that the process of achieving democracy, the rule of law, and
economic growth are interlinked, each of which encompass broader concerns
of public sector government and multistakeholder governance.239 Hence,
EBRD does not have a separate overarching governance policy. Additional
governance concerns at EBRD more specifically focus on corporate governance
as EBRD’s significant focus is on private sector activity.
In 1997, EBRD issued its guiding principles for corporate governance
and good business practices.240 Under the guidelines, EBRD recognizes
that the core of corporate governance is understanding clearly, and being
235
Ibid., para. 8.1.
236
A whistle-blower is “any person or party who conveys or is proven to be about to convey a
concern, allegation or any information indicating that Fraud, Corruption or any other Misconduct
is occurring or has occurred in the Bank or in a Bank Project; with knowledge or good faith belief
that the concern, allegation or information is true.” AfDB. 2007. Whistle Blowing and Complaints
Handling Policy. para 5.1.
237
The remedies include (i) reinstatement; (ii) back benefits and pay; (iii) compensatory damages;
(iv) adjudication expenses; (v) transfer to another part of the bank; and (vi) intangible benefits,
including public recognition of the vindication of the whistle-blower, and in appropriate
circumstances public recognition of the contributions of the whistle-blower to the AfDB. See:
AfDB. 2007. Whistle Blowing and Complaints Handling Policy. para 6.
238
EBRD. 1991. Basic Documents of the European Bank for Reconstruction and Development.
Article 1.
239
EBRD. 1991. Political Aspects of the Mandate of the European Development Bank for Reconstruction
and Development.
240
EBRD. 1997. Sound Business Standards and Corporate Practices: A Set of Guidelines.
Pres. Kuroda emphasized the importance of strong, well-governed institutions in leading the way toward more
effective regional cooperation at the ADB 2010 Annual Meeting in Tashkent.
satisfied with, the manner in which shareholders can oversee management’s

performance and participate in important decisions.241
EBRD indicates that it promotes high corporate governance standards in
the companies in which it has taken an equity stake through the appointment
of nominee directors.242 These nominee directors must act in the best interests
241
The guidelines also note that sound principles of corporate governance include (i) setting out
in legal form in the company charter the roles and responsibilities of management bodies and
shareholders; (ii) the existence of a transparent shareholding structure with disclosure of the voting
rules and of the beneficial ownership of major blocks of shares; (iii) respect for the right of minority
shareholders to be protected against share dilution; (iv) procedures for the protection of the
integrity of the shareholders’ registry; (v) systematic and open communication with shareholders
through the provision of properly audited accounts, information about the progress of the
company, and explanations of the major decisions taken by management in the form of an Annual
Operational and Financial Review included in the Annual Report; (vi) providing shareholders with
adequate information on matters to be decided by them; and (vii) clearly established and well-
understood division of authority between the various governing bodies of the company. EBRD.
1997. Sound Business Standards and Corporate Practices: A Set of Guidelines. p. 3.
242
EBRD. 2007. Anti-corruption Report Update. p. 5.
of the company and provide advice and expertise on corporate governance

matters.
b. Anticorruption
Beginning in 1999, EBRD conducted corruption assessments and surveys in

countries undergoing transition.243 It has used the results of these assessments
to engage with governments on how to address corruption issues. EBRD also
supports the UNCAC and was part of the Joint IFI Anti-Corruption Task Force
in 2006. 2
To govern its internal operations, EBRD adopted measures designed to
avoid corrupt or fraudulent practices or involvement in money laundering
or terrorist financing schemes. The Office of the Chief Compliance Officer
(OCCO) is responsible for promoting good governance and for ensuring that
the highest standards of integrity are applied throughout all of the activities
of the EBRD.244
To facilitate the reporting and identification of corruption and other
instances of misconduct, EBRD implemented a whistle-blowing protection
scheme to protect whistle-blowers from “pressure, retaliation, or reprisal”
including throughout any disciplinary and appeal process.245
EBRD also issued definitions and guidelines for private sector operations
to clarify the meaning of the terms corrupt practices, fraudulent practices,
coercive practices, and collusive practices in the context of EBRD’s activities in
private sector projects.246
In 2006, EBRD first published its anticorruption report, summarizing
its anticorruption efforts for 2005 and 2006, and anticorruption work and
initiatives since 1991.247
243
Ibid., pp. 6–7.
244
Ibid., p. 9.
245
EBRD defines a whistle-blower as “any employee who, in good faith, promptly reports instances of
suspected misconduct to the Chief Compliance Officer.” EBRD. 2008. Whistleblower Protection at
the EBRD.
246
EBRD. 2008. Fraud and Corruption—Definitions and Guidelines for Private Sector Operations.
247
See full details at www.ebrd.com/about/integrity/report.pdf for the 2006 report and www.ebrd
.com/about/integrity/report07.pdf for the 2007 report. See also www.ebrd.com/about/integrity/
index.htm
Key Point for Project Counsel. EBRD’s definitions and guidelines contain
clarifications to the meanings of the harmonized definitions that the
multilateral development banks adopted in 2006 that are similar to those
made by IFC and MIGA. Project counsel working and cofinancing with
EBRD should pay close attention to these guidelines and any possible
differences in any documentation they may lead to.
E. International Organizations
1. United Nations Development Programme
a. Governance
In January 1997, the United Nations Development Programme (UNDP)

explicitly confirmed governance as a programming objective with the
publication of its governance policy: Governance for Sustainable Human
Development. UNDP defined governance as:
“the exercise of economic, political, and administrative

authority to manage a country’s affairs at all levels and the
means by which states promote social cohesion, integration,
and ensure the well-being of their populations.”248
UNDP explains that this definition of governance covers how power is

distributed and how public resources are managed. UNDP also indicates that
governance embraces the organizations that shape governments and policies
and “the mechanisms, processes, and institutions, through which citizens and
groups articulate their interests, exercise their legal rights, meet their obligations,
and resolve their differences.”249
In implementing governance, UNDP’s governance program focuses on
• governing institutions (legislatures, legal and judicial systems, and

electoral and human rights bodies);
• public and private sector management (institutions that manage
economic transactions and social resources);
248
UNDP. 1997. Governance for Sustainable Human Development.
249
Ibid.
• decentralization (distribution of the financial and administrative

processes of decision making and management of public programs
at central, regional, and local levels);
• civil society organizations (groups and individuals that are involved
in the public policy-making process; groups and individuals that
participate in the political, economic, and social affairs of the
state); and
• governance in special circumstances (countries in transition; and
countries experiencing severe political, economic, or social crises).250
2
UNDP also recognizes that democratic governance can play a vital role
in achieving the Millennium Development Goals. Hence, UNDP prioritizes
programs that promote democratic governance, and in 2007 UNDP
allocated 41% of its overall expenditure to such programs.251 In 2007,
UNDP expenditures in democratic governance amounted to $1.29 billion.252
Launch of the report, A Future within Reach: Reshaping Institutions in a Region of Disparities to Meet the Millennium
Development Goals in Asia and the Pacific, 7 September 2005. The report is a tripartite initiative of UNESCAP, UNDP,
and ADB.
250
UNDP. Undated. UNDP and Governance: Experiences and Lessons Learned. Lessons-Learned Series
No. 1.
251
UNDP Democratic Governance Group. 2007. Annual Report 2007.
252
Ibid.
UNDP’s core services to support national processes of democratic transitions

focus on
• policy advice and technical support;

• strengthening capacity of institutions and individuals;
• advocacy, communications, and public information;
• promoting and brokering dialogue; and
• knowledge networking and sharing of good practices.253
b. Anticorruption
In 1998, UNDP issued a corporate policy on fighting corruption to improve

governance.254 The policy highlighted the importance of addressing corruption
as a development phenomenon and defined corruption as:
”the misuse of public power, office or authority for private

benefit—through bribery, extortion, influence peddling,
nepotism, fraud, speed money or embezzlement.”255
It observed that although corruption is often considered a sin of public

servants and government, it also prevails in the private sector.
In 2004, UNDP published a practice note on anticorruption, which
provided a framework of UNDP’s approaches and interventions on
accountability, transparency and integrity, and anticorruption.256
2. Organisation for Economic Co-operation and Development
a. Governance
The OECD is an international organization comprised of 30 developed

countries.257 The OECD’s mission is to help governments achieve sustainable
253
UNDP. 2005. About the Democratic Governance Practice.
254
UNDP. 1998. Fighting Corruption to Improve Governance.
255
Ibid., Part 1, p. 6.
256
UNDP. 2004. Anti-corruption: Practice Note. para. 2.
257
The OECD’s member countries are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, the Republic of Korea,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
economic growth and employment and improve standards of living in

member countries while maintaining financial stability. The OECD defines
governance as “the exercise of political, economic and administrative
authority necessary to manage a nation’s affairs.”258
The OECD carries out its governance-related work through its Network
on Governance (GOVNET). GOVNET is a network of development practitioners
from bilateral and multilateral cooperation agencies and experts from partner
countries that aims to
• improve the effectiveness of donor assistance in support of

2
democratic governance; and
• give members a policy forum for exchanging experiences and
lessons, identifying and disseminating good practice, and
developing pro-poor policy and analytical tools.259
b. Anticorruption
The OECD Anti-Bribery Convention260 gives a good example of the OECD’s

intensive work on anticorruption. It is the OECD’s position that of all of
the different types of government activity, public procurement is the most
vulnerable to corruption; this is more so than the operation of utilities,
collection of taxation, or functioning of the judiciary. The OECD has produced
three important knowledge products:
• A Methodology for Assessment of National Procurement

Systems (Version 4). This publication sets out Benchmarking and
Assessment Tools for Public Procurement Systems in developing
countries.261
• Integrity in Public Procurement: Good Practice from A to Z.262 This
publication provides a comparative overview of practices that are
258
OECD. 2007. Glossary of Statistical Terms: Governance.
259
OECD. 2008. Inside the DAC: A Guide to the OECD Development Assistance Committee
2007–2008. p. 26.
260
Transactions.
261
OECD. 2006. Methodology for Assessment of National Procurement Systems (Version 4).
262
OECD. 2007. Integrity in Public Procurement: Good Practice from A to Z.
meant to enhance integrity, from needs assessment to contract

management.
• A checklist for enhancing integrity in public procurement.263
The checklist sets out 10 key recommendations for developing
an adequate policy framework for enhancing integrity in public
procurement. It also discusses how to implement the policy
framework at various stages in the public procurement cycle.
F. Regional Initiatives
1. ADB/OECD Anti-Corruption Action Plan for Asia and the Pacific
In 1999, ADB, the OECD, and a group of countries in Asia and the Pacific
jointly launched the ADB/OECD Anti-Corruption Initiative for Asia–Pacific
(the Initiative).264 The participants under the Initiative also developed the
Anti-Corruption Plan for Asia and the Pacific (the action plan) within the
framework of the Initiative.265
By 31 December 2009, 28 countries in Asia and the Pacific, 25 of which
are ADB DMCs, committed to combat corruption by endorsing the action
plan.266 The action plan adopts a holistic approach to combating corruption
and has three pillars:
• developing effective and transparent systems for public service,

• strengthening anti-bribery actions and promoting integrity in
business operations, and
• supporting active public involvement.
263
OECD. 2008. Enhancing Integrity in Public Procurement: A Checklist.
264
ADB and OECD. 2001. Anti-Corruption Action Plan for Asia and the Pacific. ADB/OECD
Anti-Corruption Initiative for Asia and the Pacific: Combating Corruption in the New Millennium.
265
Ibid.
266
The 28 countries were: Australia; Bangladesh; Bhutan; Cambodia; the People’s Republic of China; the
Cook Islands; the Fiji Islands; Hong Kong, China; India; Indonesia; Japan; Kazakhstan; the Republic of
Korea; the Kyrgyz Republic; Macau, China; Malaysia; Mongolia; Nepal; Pakistan; Palau; Papua New
Guinea; the Philippines; Samoa; Singapore; Sri Lanka; Thailand; Vanuatu; and Viet Nam.
The action plan’s two core principles for implementation are to
• establish a mechanism to promote and assess overall reform

progress, and
• provide specific and practical assistance to participating governments
on key reform issues.267
The action plan is implemented by a
• representative from a participating party who must have the 2

authority, staff, and resources to oversee fulfillment of the action
plan’s policy objectives for their government; and
• regional steering group composed of the participating parties’
representatives and national experts who review the participating
parties’ progress. The group meets regularly.268
Since 2007, ADB and the OECD has been publishing an annual report
describing achievements and challenges in the fight against corruption in Asia
and the Pacific. It also describes regional good practices for anticorruption efforts
and contains accounts of different countries’ various legal and institutional
reforms that promote better governance.269 Project counsel looking for up to
date information can refer to the annual report and the newsletter. 270
The Initiative celebrated its 10th anniversary in 2009. Under the Initiative,
the parties have conducted in depth reviews of mutual legal assistance,
extradition and recovering the proceeds of corruption;271 and bribery in public
procurement; and have held regional symposiums on these initiatives.272
At its 12th meeting in Singapore in November 2008, the Steering Group
decided to conduct an independent review of the Initiative to assess its
267
ADB and OECD. 2001. Anti-Corruption Action Plan for Asia and the Pacific. ADB/OECD
Anti-Corruption Initiative for Asia and the Pacific: Combating Corruption in the New Millennium.
p. 6.
268
Ibid., p. 7.
269
The last report was published in 2008. ADB and OECD. ADB/OECD Anti-corruption Initiative 2008
Annual Report.
270
www.oecd.org/corruption/asiapacific
271
ADB and OECD. 2007. Mutual Legal Assistance, Extradition and Recovery of Proceeds of Corruption
in Asia and the Pacific: Frameworks and Practices in 27 Asian and Pacific Jurisdictions: Thematic
Review—Final Report.
272
ADB and OECD. 2008. Fighting Bribery in Public Procurement in Asia and the Pacific: Proceedings
of the 7th Regional Seminar on Making International Anti-Corruption Standards Operational.
impact and to determine its future direction. The review’s final report was
published in November 2009. It confirmed that members believe the Initiative
is successfully helping members to reduce corruption mainly through a peer-
learning process in an informal environment, however, it suggested several
improvements.273 A working group is currently assisting the Steering Group
consider how to implement the findings and recommendations and will
report on these during 2010.274
2. Asia–Pacific Economic Cooperation’s Anti-Corruption

and Transparency Experts Task Force
In 2003, leaders of the Asia–Pacific Economic Cooperation (APEC) placed

fighting corruption on their agenda and decided to form a task force to steer
APEC’s anticorruption activities.275
On 21 November 2004, APEC leaders endorsed the Santiago
Commitment to Fight Corruption and Ensure Transparency during the 16th
APEC ministerial meeting in Santiago, Chile. In the Santiago Commitment,
APEC leaders affirmed the importance of good governance, and transparent
legal regimes and systems in the fight against corruption.276
APEC leaders also recognized the important role of the UNCAC as the first
legally binding global instrument specifically targeting corruption. For that
reason, they decided to proceed to develop their plan within the UNCAC’s
framework. They agreed to promote regional cooperation on extradition,
mutual legal assistance, and the recovery and return of proceeds of
corruption.277 In the course of the 16th APEC ministerial meeting, ministers
from Chile, the Republic of Korea, and the United States presented the APEC
Anti-Corruption and Transparency Course of Action,278 which led APEC leaders
to agree to take all appropriate steps to ratify (or accede to) and implement
the UNCAC. The ministers also agreed to develop effective actions to fight all
forms of bribery, and take account of the OECD Anti-Bribery Convention and
other relevant anticorruption conventions or initiatives.279
273
Garnett, H., and T. Kwok. Independent Review of the ADB/OECD Initiative—Final report.
274
www.oecd.org/document/25/0,3343,en_34982156_34982431_44084761_1_1_1_1,00.html
275
APEC. 2008. Anti-Corruption and Transparency Experts Task Force.
276
APEC. 2004. Santiago Commitment to Fight Corruption and Ensure Transparency.
277
APEC. 2004. APEC Course of Action on Fighting Corruption and Ensuring Transparency.
278
Ibid.
279
APEC. 2004. APEC Course of Action on Fighting Corruption and Ensuring Transparency.
In 2005, APEC established the anti-corruption and transparency expert

task force (ACT). ACT is made up of law enforcement officials from APEC
member economies.280 Its main activities include the implementation of the
• United Nations Convention Against Corruption,281

• Santiago Commitment to Fight Corruption and Ensure Transparency,
and
• APEC Anticorruption and Transparency Course of Action.
In 2007, ACT endorsed the following:

2
• a code of conduct for business,282
• conduct principles for public officials,283
During the ADB/OECD Anti-Corruption Initiative’s 5th Steering Group Meeting in Manila on 5 July 2004.
280
APEC member economies are: Australia; Brunei Darussalam; Canada; Chile; the People’s Republic
of China; Hong Kong, China; Indonesia; Japan; the Republic of Korea; Malaysia; Mexico; New
Zealand; Papua New Guinea; Peru; the Philippines; the Russian Federation; Singapore; Taipei,China;
Thailand; the United States; and Viet Nam.
281
Transparency International. 2005. First global convention against corruption to come into force. In
Focus, 16 September.
282
APEC. 2007. Code of Conduct for Business.
283
APEC. 2007. Conduct Principles for Public Officials.
• complementary anticorruption principles for the public and private

sectors,284 and
• the 2007 Statement on Actions for Fighting Corruption through
Improved International Legal Cooperation.
Review Guide for Chapter 2

• Several international agreements and soft law instruments

have been adopted that highlight the importance that states,
including ADB DMCs, now formally give to good governance and
anticorruption as a part of achieving their goals.
• International donors recognize that a unified and coordinated
approach is needed to effectively influence and successfully combat
corruption.
• Because of the donor aid harmonization processes, ADB’s governance
and anticorruption approach will be influenced by the approach taken
by other IFIs, so their approaches to governance and anticorruption
are relevant to ADB.
284
APEC. 2007. Complementary Anti-corruption Principles for the Public and Private Sectors.
CHAPTER 3
Governance and Anticorruption Tools

A. Overview
Project counsel seeking to formulate specific governance and anticorruption

measures to be incorporated into a project should be familiar with the country
and local governance context.
This chapter directs project counsel to additional corruption and
governance tools that may be used to understand the local governance
context. It contains information on three types of governance tools. These are
• governance risk assessments, and other sector, country, and global

governance assessments and rankings;
• anticorruption toolkits and national integrity system reports; and
• public procurement and governance tools.
Governance risk assessments and other sector, country, and global

governance assessments and rankings are relevant to project counsel because
they provide an overall perspective on a country. In Asian Development Fund
(ADF) countries, they are also relevant to project counsel because governance
is a factor affecting a country’s performance and its performance may
determine the allocation of its ADF funds.
Anticorruption toolkits and national integrity system reports may help a
project counsel assist a project team to formulate and develop anticorruption
measures for projects. If ADB has already conducted a country-level risk
assessment under the Second Governance and Anticorruption Action Plan
(GACAP II),285 these toolkits and report are likely to have already been used as
part of that process.
Public procurement and governance materials are also identified in this
chapter. The public procurement of goods, services, and works is usually
the largest component of expenditure in most loans and grants. It provides
significant occasion for opportunists to exploit weak governance with corrupt
and fraudulent practices and to siphon off large monetary amounts from
285
ADB. 2006. Second Governance and Anticorruption Action Plan (GACAP II). www.adb.org/
Documents/Policies/Governance/GACAP-II.pdf
contracts for goods, works, or services. Other nonmonetary ways to exploit

weak governance are also possible. Therefore, project teams should formulate
measures within the project design process to ensure good governance and
protect against corrupt practices.
B. Governance Tools
Available assessments include those set out below.
1. ADB Governance Risk Assessments
Since 2007, following ADB’s adoption of GACAP II, ADB staff must conduct
governance risk assessments as an input to a country partnership strategy
(CPS). Under GACAP II, country governance risk assessments must identify the
risks relating to corruption, procurement, and public financial management
within a country’s overall governance context and in the specific sectors in
which ADB is operating in that country (e.g., transport, water, and sanitation).
After risks are assessed, risk management plans must be prepared.
Governance and Anticorruption Tools 75
Governance risk assessments and risk management plans (RAMPs)

at country and sector levels are required to be available as an input to a
CPS. Operations departments typically take the lead. However, the Public
Management, Governance, and Participation Division (RSGP) of ADB’s
Regional and Sustainable Development Department provides support,
as does the Office of the General Counsel (OGC) in some cases. RSGP has
prepared an ADB risk assessment sourcebook with diagnostics to assist in
preparing governance risk assessments, which contain diagnostic tools,
and to be referred to in preparing any governance risk assessment.286 As
of December 2009, governance risk assessments have been prepared for
Afghanistan, Armenia, Cambodia, the People’s Republic of China, India, the
Lao People’s Democratic Republic, the Maldives, Mongolia, Pakistan, Samoa,
and Sri Lanka, Tajikistan (energy and roads), the Philippines (roads and
energy), and Viet Nam (education, energy, and transport), while reduced
scale RAMPs have been completed for the Cook Islands, the Federated States of
Micronesia, Kiribati, Palau, Timor-Leste, Tuvalu, and Vanuatu.287 The conduct 3
of country- and sector-level RAMPs is a continuing process, so project counsel
working on projects should check whether RAMPs have been prepared for the
relevant country and sector when they are working on a project.
Under GACAP II, country risk assessments have replaced country
governance assessments (CGAs), which were in place before 2007.288
• Governance risk assessments and risk management plans

(RAMPs) are required as an input to the CPS preparation process,
• RSGP currently has a regional technical assistance (TA) project
to support the preparation of governance risk assessments
under GACAP II,288 and
• operations departments will soon be required to find their
own resources to conduct such assessments to assist in the
preparation of RAMPs.
286
ADB. 2008. Sourcebook: Diagnostics to Assist Preparation of Governance Risk Assessments. Draft.
287
ADB. 2009. Progress on the Second Governance and Anticorruption Action Plan (GACAP II).
288
ADB. 2007. Technical Assistance for Governance and Capacity Development Initiative.
2. ADB Country Governance Assessments (pre-GACAP II)
RAMPs have now replaced CGAs. CGAs were prepared before GACAP II
began to require the preparation of country risk assessments. CGAs may
not contain the level of systematic analysis that country risk assessments
now require. However, if used with caution, existing CGAs may contain
useful information about a country’s governance context—particularly in
countries where RAMPs have not yet been conducted. ADB has conducted
governance assessments of the countries listed in Table 3.1.289
Table 3.1: ADB Country Governance Assessments

• Papua New Guinea • Tajikistan
• Viet Nam • People’s Republic of China
• Philippines • Cambodia
• Indonesia • Thailand
• Kyrgyz Republic • The Pacific
• Mongolia • Cambodia–Lao PDR–Thailand–
• Sri Lanka Viet Nam
Lao = People’s Democratic Republic.
Source: Authors.
As GACAP II no longer requires CGAs to be prepared, the practice is not

expected to continue. Project counsel referring to existing CGAs for guidance
should consider that these CGAs may provide helpful information but may
be outdated.
3. ADB Country Partnership Strategies and Country Assistance

Program Evaluations
Country partnership strategies (CPSs) and country assistance program

evaluations (CAPEs) prepared by operations departments and the
Independent Evaluation Department respectively, both include shorter
descriptions of the governance situation in particular countries. In some
countries, specific governance and anticorruption assessments have been
conducted as part of the development of the CAPE for the country. As of
July 2009, ADB has prepared CPSs for the countries listed in Table 3.2.
289
ADB. 2008. Country Governance Assessments.
Table 3.2: ADB Country Partneship Strategies

East Central Pacific South Southeast
Asia and West Asia Asia
Asia
• People’s • Afghanistan • Cook Islands • Bangladesh • Cambodia
Republic of (2009–2013) (2008–2012) (2006–2010) (2009–2012)
China • Armenia* (2010–2012)* • Bhutan • Indonesia*
(2008–2010) (2008–2010) • Fiji Islands (2006–2010) (2010–2012)
• Mongolia • Georgia** (2006–2008) • India • Lao People‘s
(2008–2010) (2008–2009) • Kiribati* (2009–2012) Democratic
(2009–2012) (2009–2011) (2010)* Republic
• Kyrgyz
Republic* • Maldives • Nepal (2007–2011)
(2009–2011) (2007–2011) (2010–2012) • Philippines*
• Tajikistan • Marshall • Sri Lanka (2010–2012)
(2010–2012) Islands, (2009–2011) • Thailand*
• Uzbekistan Republic of* (2010–2012)* (2009–2011)
3
(2006–2010) (2009–2011) • Viet Nam*
• Pakistan • Micronesia, (2009–2011)
(2009–2013) Federated
States of*
(2007–2009)
• Palau
(2009–2013)
• Papua New
Guinea
(2006–2010)
• Samoa
(2008–2012)
• Solomon
Islands
(2009–2011)
• Timor-Leste*
(2008–2010)
• Tonga*
(2010–2012)
• Tuvalu
(2010–2012)
• Vanuatu
(2010–2014)
* Country operation business plan, ** Interim operational strategy.
Source: Compiled by the authors.
ADB also prepared regional partnership strategies for the following

regions:290
• Central Asia Regional Economic Cooperation,

• Greater Mekong Subregion,
• South Asia, and
• the Pacific.
4. World Bank Country Policy and Institutional Assessment
The World Bank Country Policy and Institutional Assessment (CPIA) is a

tool that uses 16 criteria to assess and describe the quality of policies and
institutions in a country.291 The CPIA is an important tool that the World Bank
has used to assess which countries are eligible to receive grant resources from
the International Development Association. It groups the 16 criteria into four
clusters:
• economic management,
• structural policies,
• policies for social inclusion and/or equity, and
• public sector management and institutions.
The public sector management and institutions cluster is particularly

relevant to assessing governance. It examines
• property rights and rule-based governance;

• the quality of budgetary and financial management;
• the efficiency of revenue mobilization;
• the quality of public administration; and
• transparency, accountability, and corruption in the public sector.
Other multilateral development banks (MDBs) have adopted elements

of the CPIA for their own performance-based country-funding allocation
systems. For example, ADB uses the CPIA questionnaire as part of its annual
country performance assessments (CPA) and the African Development Bank
has based its own assessments on the World Bank’s CPIA.
290
ADB. 2007. Country Partnership Strategy.
291
World Bank. 2008. Country Policy and Institutional Assessment.
Key Point for Project Counsel. Project counsel should know that the
governance-related criteria contained in the World Bank’s CPIA are very
important because they form part of the basis for assessing a country’s
overall performance. In turn, the World Bank uses a country’s performance
as a basis to determine whether to allocate concessional grant resources to
that particular country.
5. ADB’s Performance-Based Allocation System
ADB’s performance-based allocation (PBA) policy for the ADF countries

resembles the World Bank’s CPIA system.292 ADB determines the amount of
ADF resource allocations for an ADF eligible country based upon its CPA.
The PBA policy was adopted in 2001 and revised in December
2004.293 It requires that a country’s allocation of ADF resources be linked
to its performance.294 Under the PBA policy, an annual CPA is conducted for 3
ADF countries. ADB determines the ADF resource allocations based upon
the CPA.
ADB harmonized its PBA policy with the CPIA of the World Bank’s
International Development Association and the African Development Bank.
From 2005, ADB conducted its annual CPAs using the World Bank’s CPIA
questionnaire.295
292
ADB. 2008. Performance-Based Allocation. See also ADB. 2008. Operations Manual. OM A3/BP:
Performance-Based Allocation of Asian Development Fund Resources.
293
ADB. 2004. Review of the Asian Development Bank’s Policy on the Performance-Based Allocation of
Asian Development Fund Resources.
294
Ibid.
295
Under the original policy adopted in 2001, governance is given 30% weight in measuring a
country’s performance. ADB. 2001. Policy on Performance-Based Allocation for Asian Development
Fund Resources.
• the performance-based allocation (PBA) policy exists and applies

to ADF eligible countries;
• an annual country performance assessment (CPA) is performed
to determine a country’s ADF resource allocation based upon
performance; and
• ADB places a great deal of weight on governance in drafting
the overall CPA rating—50% of a country’s overall performance
rating.
6. Worldwide Governance Indicators Series
The worldwide governance indicators series is an ongoing World Bank research

project that measures the quality of governance in more than 200 countries
and ranks them on an index based upon six dimensions of governance.296
These dimensions are
• voice and accountability,

• political stability and absence of violence,
• government effectiveness,
• regulatory quality,
• the rule of law, and
• the control of corruption.
The data is obtained from public sector, private sector, and nongovernment
organization respondents in more than 200 countries, including ADB’s
DMCs. Respondents are asked how they perceive the country in terms of the
six dimensions of governance. The worldwide governance indicators project
commenced in 2002, and is updated annually. In June 2009, the eighth
update was released and covers the period 1996–2008.297
296
World Bank. 2008. Governance Matters 2008: Worldwide Governance Indicators, 1996–2007.
297
World Bank. 2009. Governance Matters VIII: Aggregate and Individual Governance Indicators
1996–2008.
7. Other Governance Assessments
Other assessments are available that provide both quantitative and qualitative
data on governance.298 Most other assessments are country specific, although
the approach of the United Kingdom Overseas Development Institute (ODI)
toward governance is broader and includes several countries. Other important
governance assessments include
• the ODI’s world governance assessment,299

• the United Nations Development Programme’s (UNDP) Governance
Indicators Project,
• the Organisation for Economic Co-operation and Development’s
(OECD) Metagora Project,
• the United States Agency for International Development’s
democracy and governance assessment framework,
• the Netherlands’ strategic governance and corruption assessment, 3
• CGAs prepared by the Department for International Development
of the United Kingdom, and
• other initiatives developed by research institutions.
C. Anticorruption Tools
1. ADB’s Risk Assessment Sourcebook
ADB’s Risk Assessment Sourcebook has references to a range of diagnostic

tools on anticorruption, including the ADB/OECD Country Self Assessment
and the World Bank’s Value Chain methodology.300 Project counsel seeking
more information should refer to the Sourcebook.
298
Hyden, G., K. Mease, M. Foresti, and V. Fritz. 2008. Governance Assessments for Local
Stakeholders: What the World Governance Assessment Offers. (This document provides a good
summary of the different types of governance assessments.)
299
ODI. 2007. Governance Assessment: Overview of Governance Assessment Frameworks and Results
from the 2006 World Governance Assessment. (This document provides a comparison of each of
the governance assessments contained in this list.)
300
ADB. 2008. Sourcebook. Diagnostics to Assist Preparation of Governance Risk Assessments. Draft.
2. United Nations Anticorruption Toolkit
The United Nations Office on Drugs and Crime published the third edition of
its anticorruption toolkit in 2004.301 The toolkit contains a range of options
that countries may consider in developing their own anticorruption strategies.
3. ADB/OECD Anti-Corruption Initiative for Asia and the Pacific
In 2006, the ADB/OECD Anti-Corruption Initiative for Asia and the Pacific
(the Initiative) identified the need to strengthen mutual legal assistance and
extradition frameworks.302 The Initiative’s 27 members began an in-depth
thematic review on mutual legal assistance, extradition, and the recovery of
proceeds of corruption.303 The subsequent report (i) compiles the existing
frameworks and practices in Asia and the Pacific; (ii) highlights the strengths
and weaknesses of existing regulatory models, policies, and practices;
(iii) lists the recommended steps that policy makers may take to strengthen
existing frameworks; and (iv) outlines policy options to implement these
recommendations.
4. Transparency International National Integrity System Reports
Transparency International has integrity system reports available for the

countries listed in Table 3.3.
The full texts for East Asia, Pakistan, South Asia, Southeast Asia, and the
Pacific are available in Transparency International’s website,304 as well as for
Central and West Asia.305
301
United Nations Office on Drugs and Crime. 2004. The Global Programme Against Corruption: An
Anti-Corruption Toolkit.
302
ADB and OECD. 2007. Mutual Legal Assistance, Extradition and Recovery of Proceeds of
Corruption in Asia and the Pacific: Frameworks and Practices in 27 Asian and Pacific Jurisdictions:
Thematic Review-Final Report.
303
Except Bhutan, which became the Initiative’s 28th member in September 2007 after the review
began.
304
www.transparency.org/policy_research/nis/nis_reports_by_country/asia_pacific
305
www.transparency.org/policy_research/nis/nis_reports_by_country/europe_central_asia
Table 3.3: Transparency Internal Integrity System Reports

East Central and Pacific South Southeast
Asia* West Asia Asia Asia*
• People’s • Armenia • Pacific Region • South Asia • Cambodia
Republic of (2003) Overview Overview (2006)
China (2006) • Kazakhstan Report Report (2005) • Philippines
• Hong Kong, (2001) (2004) • Bangladesh (2006)
China (2006) • Mongolia • Cook Islands (2003) • Singapore
• Republic of (2001) (2004) • India (2003) (2006)
Korea (2006) • Fiji Islands
• Pakistan • Nepal (2001) • Thailand
(2003) (2001) (2006)
• Sri Lanka
• Kiribati (2003) • Viet Nam
(2004) (2006)
• Republic of
Marshall
Islands
(2004)
• Federated 3
States of
Micronesia
(2004)
• Nauru (2004)
• Palau (2004)
• Papua New
Guinea
(2003)
• Solomon
Islands
(2004)
• Tonga (2004)
• Tuvalu (2004)
* East Asia and Southeast Asia Overview Report (2006).
Source: www.transparency.org/policy_research/nis/nis_reports_by_country
5. Transparency International’s Toolkits
Transparency International has developed a number of anticorruption

measures specifically for the construction industry by working in close
collaboration with construction participants worldwide. In particular, it has
developed business tools, reports, actions, and information that can help
prevent corruption on construction projects, including306
• a Project Anti-Corruption System,

• an Anti-Corruption Training Manual,
• an Anti-Corruption Reports and Tools, and
• an Anti-Corruption Action Statement.
D. Tools on Procurement
1. ADB’s Risk Assessment Sourcebook
ADB’s Risk Assessment Sourcebook has references to a range of diagnostic

tools on public procurement, including the OECD/DAC Benchmarking and
Assessment Methodology for Public Procurement Systems and the World
Bank’s Country Procurement Assessment Report.307 Project counsel seeking
more information should refer to the Sourcebook.
2. OECD’s Checklist for Enhancing Integrity in Public Procurement
The OECD has developed a checklist for enhancing integrity in public

procurement. It prepared the survey after it completed an international survey
and consultation process in 2006. The checklist underscores the need for a
systemic approach to promoting good governance in public procurement.
This approach integrates effective policies and practices that have been
applied to the different stages of the procurement cycle.
The checklist is divided into two parts. The first part covers developing an
adequate policy framework for enhancing integrity in public procurement. It
covers (i) transparency; (ii) good management; (iii) preventing misconduct,
and compliance and monitoring; and (iv) accountability and control. It is the
OECD’s aim that by using the checklist, governments will consider
306
Transparency International. 2007. Preventing Corruption on Construction Projects.
307
ADB. 2008. Sourcebook. Diagnostics to Assist Preparation of Governance Risk Assessments. Draft.
• giving adequate transparency during procurement processes to

promote fair and equitable treatment for potential suppliers;
• maximizing transparency in competitive tendering and taking
precautions to enhance integrity;
• ensuring that public funds used for procurement are applied to
their intended purposes;
• ensuring that procurement officials meet high professional
standards of knowledge, skills, and integrity;
• establishing mechanisms to prevent integrity risks in public
procurement;
• encouraging close cooperation between government and the
private sector to maintain high standards of integrity, particularly
in contract management;
• providing specific mechanisms for monitoring public procurement,
and detecting and sanctioning misconduct;
• establishing clear chains of responsibility, together with effective 3
control mechanisms;
• handling complaints from potential suppliers in a fair and timely
manner; and
• empowering civil society organizations, the media, and the wider
public to scrutinize public procurement.308
The second part of the checklist contains recommendations on

implementing the policy framework during the
• pre-tendering process—the needs assessment, planning and

budgeting, definition of requirements, and choice of procedures;
• tendering process—the invitation to tender, evaluation, and
award; and
• post-tendering process—contract management, order, and
payment.309
308
OECD. 2008. Enhancing Integrity in Public Procurement: A Checklist.
309
Ibid., p. 30.
3. OECD’s Integrity in Public Procurement: Good Practice from A to Z
The OECD’s checklist must be used in conjunction with another OECD tool—
the Integrity in Public Procurement: Good Practice from A to Z published in
2007.310 This tool was a product of an international survey and symposium
where procurement experts and practitioners, audit, anticorruption and
competition specialists, representatives from the private sector, academia,
civil society, donor agencies, and international organizations identified and
reviewed good practices for enhancing integrity from the needs assessment
to contract management.
The good practices were identified in OECD countries as well as in Brazil,
Chile, United Arab Emirates, India, Pakistan, Romania, Slovenia, and South
Africa.
4. ADB/OECD Anti-Corruption Initiative for Asia and the Pacific’s

Fighting Bribery in Public Procurement in Asia and the Pacific
As discussed in Part F of Chapter 2, the Initiative conducted a regional

seminar on fighting bribery in public procurement in November 2007. The
presentations, analyses, and discussions among experts and participants who
attended the seminar are compiled in a publication released by the Initiative
in 2008.311
310
OECD. 2007. Integrity in Public Procurement: Good Practice from A to Z.
311
ADB and OECD. 2008. Fighting Bribery in Public Procurement in Asia and the Pacific: Proceedings
of the 7th Regional Seminar on Making International Anti-Corruption Standards Operational.
Governance and Anticorruption Measures in ADB Interventions 87
CHAPTER 4
Governance and Anticorruption

Measures in ADB Interventions
A. Overview
Project counsel should work with project teams to address governance and
corruption risks. There are a series of measures that they can adopt that
emphasize the transparency, participation, accountability, and predictability
required under the governance policy and the anticorruption policy.
This chapter describes measures to mitigate governance and anticorruption
risks in the design and implementation of ADB projects. The approach taken
in each intervention must be based on local conditions and circumstances. As
much as possible, assistance should be coursed through existing institutions
and support must be given to enhance the capacity of these institutions. New
institutions should be supported only if there is strong local ownership and a
strong rationale for doing so.
Section B of this chapter highlights examples of risks and indicators
of corruption. Section C discusses risk analysis and risk mapping. It seeks
to help project counsel understand how to identify and map governance
4
risks associated with different levels of risk and different stages of the ADB
project cycle. It also discusses governance and institutional assessments that
could help project counsel and their project teams undertake a preliminary
assessment of institutions and organizations with which they work. Section D
sets out specific practical options for project counsel to consider when helping
project teams design and formulate projects.
B. Risk Analysis and Institutional Assessments
1. Risk Analysis
In conjunction with the project team, project counsel should identify,

consider, and mitigate the common governance challenges and the avenues
for corruption, poor management, weak governance, and leakage that may
be present in a project.
Before identifying and mapping specific project risks, project teams
should conduct an analysis of general problems and constraints for the
project.312 This analysis will be part of the sector and subsector analysis. It
also forms the foundation for the project-based risk assessment.313 If country
and/or sector risk assessments and management plans (RAMPs) have been
conducted under the Second Governance and Anticorruption Action Plan
(GACAP II), then country and/or sector risks related to public financial
management, procurement, and anticorruption should have been identified.
However, there may be residual, political, economic, and rule-of-law risks at
these levels that need to be managed.
Project counsel must understand how and where risks may occur to
identify them. Risks exist in or arise in four domains as described in Figure 4.1:314
• project governance risks—operational risks, structural risks such

as the structure of the organization, technical risks, or procedural
risks;
• sector governance risks;
• developing member country’s (DMC) governance risks; and
• governance risks arising beyond or outside the DMC (i.e., caused
by other countries or regional or international forces).
Figure 4.1: Domains of Risk

Risks beyond
Risks beyond the
the DMC sector or project
Sector risks
Project-specific
Risk fields DMC Sector Project risks to the
program
DMC = developing member country.

Source: Adapted from Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology
to do Risk Assessments at the Program Level. Manila: ADB, p. 25.
312
Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology to do Risk
Assessments at the Program Level.
313
Ibid., para. 58.
314
Ibid., para. 70.
The governance risk mapping table in Appendix 1 sets out the governance
risks that are associated with each stage of the ADB project cycle, and provides
an example and an appropriate mitigation response to that example. Even
where risks are mitigated, some residual risk may remain.
Project counsel should get to know the potential risks and mitigating
responses in the governance risk mapping table and look for the potential risks
throughout the project cycle. Governance risks that are not fully mitigated
should be set out in the risk factors section of a report and recommendation
of the President (RRP).
2. Institutional Assessments
Institutional assessments (sometimes called capacity assessments, needs

assessments, or governance assessments) are intended to review fundamental
issues of governance. An institutional assessment aims to facilitate understanding
of the governance issues of an agency, entity, or organization in a particular
project.
A short checklist of questions is set out in Box 4.1 to help project counsel
assist project teams conduct a basic institutional assessment of an agency,
entity, or organization. By asking these questions the project team will identify
many important governance issues. Specifically, the questions are designed to
elicit more detailed information and understanding on various focus areas.
Most of the relevant questions should have been asked and answered
4
before a project counsel becomes involved in a project. The information
should be available from the existing project formulation material, or a
specific capacity needs assessment or institutional assessment. However, if
this work has not been done, project counsel should identify the governance
work that a project team needs to undertake while formulating the project or
implementing an aspect or component of it.
The answers to the questions and the information obtained should be
analyzed to identify
• risk areas, including the probability that the risk will occur and the
likely extent of negative impacts resulting from the risk;315
• ineffective controls and poor governance practices;
315
For more detailed guidance, see: ADB. 2010. Financial Management Assessment Guidelines.
Forthcoming. These Guidelines also contain a financial management assessment questionnaire.
• process indicators, measurements, and benchmarks; and

• areas where risk prevention or control procedures could enhance
operations, accountability, and transparency to improve project
and/or sector performance.
A more extensive version of this checklist is set out in Appendix 2. That

checklist is directed toward obtaining an overall understanding of the legal
environment, governance structure, and diversified operations of a high-level
organization, agency, or entity, as well as specific governance, fraud, and
corruption issues.
Governance risks that are not fully mitigated should be set out in the risk
factors section of a report and recommendation of the President.
Box 4.1: Institutional Assessment Short Checklist
• What is the legal or policy framework applying to the organization

or agency?
Consider the laws, rules, and regulations governing the organization
or agency; political, economic, sociocultural, and commercial
influences (if any) to which the organization or agency is exposed;
key relationships that the organization or agency has vis-à-vis other
organizations or agencies and the key stakeholders; and the public
relations policy or approach adopted by the organization or agency.
• What is the mission of the organization or agency?

Look into the history, purpose, strategic plan, and powers of the
organization or agency.
• What is the structure of the organization or agency? How does the

structure fulfill the mission of the organization or agency?
Examine the leadership and management structure, locations of
branches (if any), reporting requirements, and cultural environment
of the organization or agency.
• Where does the organization or agency get its funding from?

Consider government financing, private sector financing, and
potential conflicts of interest.
continued on next page

Box 4.1: continued
• What are the particular activities undertaken and services delivered

by the organization or agency?
Look at the planning, preparation of budgets, workflow
management, and manuals and guidance implemented (if any).
• How does the organization or agency use its resources?

Consider the recruitment procedures and personnel movement,
review of property and equipment owned or used by the
organization or agency, funds being received by the organization
or agency; data and information access and management, and
communications and other support services such as training.
• How does the organization or agency implement internal and

financial controls?
Examine the preparation of accounts, conduct of internal and
external audits as well as spot checks, cash handling, retention of
records, history of fraud and corruption, and procurement policies
and procedures.*
• Are there other issues or problematic areas in the organi za tion or

agency?
Assess the problematic areas in the organization or agency and 4
recommend steps for improvement.
* ADB. 2010. Financial Management Assessment Guidelines. Forthcoming. These Guidelines

also contain a financial management assessment questionnaire.
Source: Authors.
Key Points for Project Counsel. Project counsel should know the
following:
• any risk assessments and mitigation plans (RAMPs) conducted

under the Governance and Anticorruption Action Plan II
(GACAP II) at the country or sector level set the baseline for
considering project-level risks for public financial management,
procurement, and anticorruption;
• residual, institutional, political economy, and rule-of-law–related
risks may not be covered by a GACAP II RAMP assessment;
• the governance risk mapping table contains potential risks,
together with their potential mitigants, which project counsel
may use to predict possible risks throughout the project cycle;
and
• the short institutional assessment checklist can be used during
project due diligence to help identify governance risk control
measures.
C. Indicators of Corruption Risks in Projects
The procurement of goods, works, and services usually presents the largest
components of expenditure of ADB financing. The process of procurement
is particularly vulnerable to corrupt practices and poor governance and it “is
more prone to risks of malgovernance” than many other areas in which ADB
operates.316
316
Bhatta, G. 2008. Public Sector Governance and Risks: A Proposed Methodology to do Risk
Assessments at the Program Level. para. 31.
Key Points for Project Counsel. Project counsel should be alert to the
possibility of corruption by considering the following examples and
indicators of corruption:
Procurement of Goods and Works

• officials recommend or insist on engaging a particular agent or
consultant without a proper selection process, or they insist on
using certain local subcontractors or suppliers;
• the procurement process is subject to unexplained or unusual
delays;317
• contract awards are highly priced;
• sole source awards are unjustified or repeated;
• unqualified contractors are repeatedly selected;
• the borrower or executing agency (EA) attempts to reject the
lowest bidder on spurious grounds or on technicalities;318
• project officials live beyond their means;319
• a reputation or history of bid rigging exists in the DMC or in
that type of project;320
• bid specifications are too narrow or too vague;
• prequalification requirements are unreasonable;
• the time allowed for the submission of bids is unreasonably
short; 4
• bids are not properly advertised;
• unqualified contractors, or contractors who are not the lowest
bidder but still meet the specifications, are selected;
• the lowest bidder is selected and the contract award is
followed by a change order increasing the scope or price of
the contract;
317318319320 continued on next page
317
This occurs when “kickbacks” or commission amounts are negotiated, or ways are determined to
work around project controls.
318
Review the country governance context. For example, the World Bank cancelled several loans in
Cambodia in 2007, and hired an international procurement agent.
319
This is mitigated by other anticorruption measures such as lifestyle checks.
320
OECD. 2006. Methodology for Assessment of National Procurement Systems. Version 4.
Key Points... continued
• the EA grants an unjustified extension on an existing contract

instead of calling for new bids;
• the EA questionably disqualifies the winning bidder and calls
for new bids for the contract;
• bid prices drop when a new bidder enters (especially in localities
or provinces);
• apparent connections exist between the bidders (such as
common ownerships or directorships), shared fax numbers,
and common addresses on bidding documents;
• works are of poor quality and need frequent repairs, or a
consultant’s work product is poor or never used;
• the project repeatedly fails tests or inspections;
• tests are delayed by parties to the works or such parties insist
on choosing test sites for their works; and
• complaints from users or beneficiaries accumulate.
Consulting Services
• consultants proposed by the EA are connected to the project,
technical assistance (TA) project, or EA;
• consultant selection is based on factors other than merit;
• consultants proposed are those with whom the donor is
comfortable working, instead of those who are most competent
at handling a particular type of project; and
• preference is given to international consultants instead of a
local expert who may have better capabilities.
Project counsel should inform the Office of Anticorruption and Integrity

(OAI) if any of the indicators identified above are present in projects.
D. Governance and Anticorruption Project Design Measures
1. Designing “Sound Management” Systems
Project teams are in a better position to consider project-specific governance

and integrity strategies once risk mapping and/or an institutional assessment
has been conducted. Measures that promote good governance, that are 4
reflected in the design of the project and operate to prevent corruption at the
outset, should be preferred to those that work to detect or punish corruption
after the fact. Such measures instill systems for good project management,
limit opportunities for corruption through internal financial controls, and
generate disincentives for corruption. While many of these design measures
are seemingly common sense, they are sometimes overlooked, so it is helpful
to set them out. They are summarized in Table 4.1 and the details are discussed
in the remainder of this section.
a. Project Director
The project director is one of the most critical factors for ensuring good project
governance, limiting corruption, and securing the overall success of a project.
Not only do project directors need technical competence and management
ability, they must also be honest and have integrity. In more complex projects
Table 4.1: Governance and Anticorruption Design Measures

Measures Practical Options
Project director and Select based on their capacity, experience, and expertise in
project staff managing similar projects, and their demonstrated integrity and
commitment.
Financial Consider project’s financial management arrangements, and the
management and capacity, experience, and expertise of its accountants.a
accounting capacity
Financial controls Require two signatures for checks and accounts and that audits
of financial statements are conducted and submitted on time.b
Procurement Consider a project’s procurement arrangements, the specificity of
the procurement plan, and the capacity, experience and expertise
of its procurement officers, or in their absence, the appointment
of a procurement agent.a
Implementation Ensure that the arrangements, including internal monitoring
arrangements and supervision by a ministry and the executive agency, are
in accordance with a project performance monitoring and
evaluation system, and external supervision and monitoring by
an independent external consultant.
Dispute resolution Consider existence of independent (or at least quasi-independent)
mechanisms of administrative or judicial justice to resolve
complaints or disputes from beneficiaries.
a
For more detailed guidance see ADB. 2010. Financial Management Assessment Guidelines.
Forthcoming.
b
See, e.g., Organisation for Economic Co-operation and Development. 2006. Methodology
for Assessment of National Procurement Systems. Paris. Available: www.oecd.org/dataoecd/
1.36/37130136.pdf
Source: Authors.
and TA projects, leadership and decision-making abilities are vital for project
directors. Sometimes the timing of their appointment may be an issue.
In most cases, selecting a project director will not be an issue. However,
sometimes ministries desire arrangements such as part-time project directors,
co-appointments for ministry staff, and the like. These arrangements usually
lead to project implementation problems. Moreover, project directors
must not have conflicts of interest and while obvious, this issue arises not
infrequently. If there are any doubts about the position of project director or
any particular individual, project counsel should discuss with the project team,
which may need to discuss the issue further with the government or within ADB.
If a new project director is to be appointed, at the minimum, ADB should
try to ensure the relevant government and EA appoint a project director through
a competitive and transparent process using agreed selection criteria.
PROJECT DIRECTOR
Project counsel are also encouraged to consider including a covenant

in the financing agreement that the appointment of, or any changes to, the
project director is subject to ADB’s approval or consent. Such a covenant will
help protect against changes of a project director that may defeat sound
management. Part D (1) of Chapter 5 provides more information on the
appropriate covenant.
4
Key Point for Project Counsel. Project counsel should know that having
a good project director is critical to ensure good project governance,
limit corruption, and ensure project success.
b. Project Staff
Even a good project director will be at a disadvantage if project staff have

weak capacity. Project staff must be competent in their particular field
and have no conflict of interest. In many cases, the project office may
need additional training or support to get up to speed on certain issues.
In particular, EAs frequently need training on ADB’s procurement and
financial requirements. ADB’s consulting services and financial controllers
departments, respectively, can provide this training.
Project counsel are strongly encouraged to include a covenant in the
financing agreement that appointing new project staff or changing existing
project staff (particularly the project accountant or procurement officer) is

subject to ADB’s approval or consent, or that their appointment or alteration is
subject to other competency requirements. Such a covenant would help protect
against changes of project staff that may defeat sound management. Part D (1)
of Chapter 5 provides more information on the appropriate covenant.
• the effectiveness of project implementation and good governance

depends in large part on the capacity and commitment of the
project staff; and
• project design should include a covenant that reflects their
importance.
c. Financial Management and Accounting Capacity
Good financial practice supports sound management and good governance.321

It is fundamental that the project management office (PMO), and any
provincial or district PMOs, follow and maintain good accounting practices.
321
This Guide provides only an overview of the relevant issues. For further detailed guidance, see:
ADB. 2010. Financial Management Assessment Guidelines. Forthcoming. This contains a useful
financial risk assessment questionnaire.
In conjunction with the project team, project counsel should consider

whether the number and capacity of accountants allocated to the respective
PMO is sufficient to complete the required accounting and financial work in a
timely manner and on an efficient basis. The physical size or the financial cost
of a project is not always the determinant of financial management needs.
Some small, complex projects may require more staff because they also have
many invoices of small amounts.
The project team will also need to consider the adequacy of financial
management and internal controls such as who is authorized to write checks
and how standard bookkeeping is done, and whether controls are manual or
computerized. Project counsel may need to include covenants to achieve these
purposes. Part E (3) of Chapter 5 provides more information on this issue.
Project counsel should discuss any concern that the number of financial
staff is insufficient, or their competence is inadequate with, the project team.
The project team should consider whether the project’s accounting capacity
could be strengthened by providing (and ensuring funding for) additional
accountants, accounting clerks, or alternatively, conducting financial
management training for the existing staff. A covenant could be included to
this effect. Part D (2) of Chapter 5 provides more information on this issue.322
Key Points for Project Counsel. Project counsel should consider

4
• the adequacy and sufficiency of staff capacity,
• the adequacy and quality of financial management and internal
controls, and
• where necessary, Financial Management Assessment Guidelines322
of the Public Management, Governance and Participation Division
of the Regional and Sustainable Development Department, which
give detailed guidance.
d. Procurement
In Chapter 3, we saw that large supply contracts for goods, the procurement
of civil works, and the selection of consultants present prime opportunities for
322
For further detailed guidance, see: ADB. 2010. Financial Management Assessment Guidelines.
Forthcoming.
corrupt practices. Strengthening the institutional and management aspects

of the procurement of goods, works, and the selection of consultants can
mitigate the risk of corruption. Part D (3) of Chapter 5 also contains the
relevant covenants that can be used in loans to mitigate the risk of corruption.
Project counsel, in conjunction with the project team and the Central
Operations Services Office (COSO), need to consider the nature and extent of
procurement and consulting services required under a project. If procurement
requirements are extensive and the EA’s capacity is weak, the project team has
several options. The project team and government could agree to
• increase the number of procurement specialists or assisting clerks

in the Project Management Office (PMO),
• engage more consultants to assist conducting the procurement,
• engage a procurement agent to conduct the procurement, and/or
• provide for additional procurement training under the project. In
some cases the project team could enlist COSO to conduct the
training as it conducts routine procurement trainings.323
Project counsel should work with the project team and ADB’s consulting
services and procurement department to ensure that the procurement plan
contains clear requirements regarding thresholds and types of procurement.
It should also contain clear requirements on the strengthening of the EA’s
capacity.
A DMC may prefer to apply its national competitive bidding regime
to a project. In that case, project counsel should consider whether COSO
has assessed the DMC’s procurement laws and whether ADB has prepared
clarifications on any potential inconsistencies between ADB’s procurement
and consulting service requirements and the DMC’s procurement laws.324
323
See: http://coso.asiandevbank.org/modules/tinycontent4/index.php?id=6
324
Those DMCs with national competitive bidding annexes are Bangladesh, Cambodia, Indonesia,
the Kyrgyz Republic, Nepal, Sri Lanka, Pakistan, the People’s Republic of China, the Philippines,
and Tajikistan.
• procurement requirements and whether the EA’s capacity

needs to be supplemented;
• whether the DMCs’ procurement laws are adequate or need to 4
be supplemented; and
• whether procurement risks identified in any country or sector
governance risk assessment and risk management plan (RAMP)
have been managed in the project.
e. Supervision and Monitoring
Sound project management requires an effective system of monitoring,

evaluation, and supervision. A ministry or EA needs to adequately supervise
implementing agencies (IAs) and contractors in accordance with a project
performance monitoring and evaluation system.
The Project Performance Management System (PPMS) collects data
before the start of the project to establish baselines. It uses that baseline
data to measure and evaluate a project’s performance. Under the PPMS,
Cambodia Water Filtration project: Monitoring by executing agencies is an integral part of project management.
periodic reporting of the project’s progress is necessary. Establishing an

effective PPMS is not always straightforward and may need significant
expertise. If there is insufficient capacity within the ministry or EA itself,
consultants may need to be engaged to prepare the PPMS. The cost of
these consultants would need to be included in the project’s budget.325
Regular and random supervision and monitoring should be performed by
the EA. Independent external monitors may be required for some aspects of a
project. Performance auditors are a form of independent external monitoring
and they are discussed below.
If project management is conducted by district or provincial PMOs,
monitoring and reporting procedures need to be in place to ensure the quality
of the EA’s supervision and control over the district or provincial PMOs.
Key Points for Project Counsel. Project counsel needs to ensure that the
financing agreements
• contain requirements for monitoring, supervising, and establishing

a PPMS; and
• provide for external supervision and monitoring by independent
external consultants where monitoring by the EA is difficult.
325
ADB. 2006. Operations Manual. OMJI/BP: Project Performance Management System.
f. Financial Audits
The timely provision of audited accounts is fundamental for good governance.

It allows ADB to ensure that its finances are used only for the purposes
for which they were approved and with due attention to economy and
efficiency.326
A project’s accounts must be prepared in accordance with accounting
standards acceptable to ADB and independently audited. ADB prefers the
application of international standards (e.g., International Financial Reporting
Standards or International Standards on Auditing).327 However, ADB will
accept national standards where it considers the standards are reasonably
close to international standards.
The supreme audit institution of the DMC (i.e., its auditor general), or a
private sector auditor, may undertake the audit. The project team should be
satisfied that the auditor (either private or government) has the capacity to
conduct an audit in accordance with standards that are acceptable to ADB.
If the project team considers that the DMC’s auditor general does not
have the appropriate skills or cannot complete the audit within the time
required, the project team could additionally require the DMC’s government
to engage a private firm to conduct the audit. Alternatively, the project team
could suggest that a joint audit be conducted and it could be used as an
opportunity to provide on-the-job training to the DMC’s auditor general staff.
A supreme audit institution usually has constitutional guarantees of 4
independence in carrying out its obligation to conduct audits. Hence, project
counsel needs to be alert to the fact that a supreme audit institution is likely
to be separate from and independent of the government’s obligation.
ADB requires all audited project accounts to be delivered within 6 months
of the end of the fiscal year. There are two exceptions to this rule:
• where the EA has weak institutional capacity, in which case

audited project accounts can be submitted 9 months after the
end of the fiscal year in the early stages of project implementation
and subsequently reduced to 6 months over the course of project
implementation; and
326
This Guide provides an overview of the relevant issues. For further detailed guidance, see: ADB.
2010. Financial Management Assessment Guidelines. Forthcoming.
327
International Accounting Standards Board.
• if logistical considerations through decentralization are such that

they would impact the physical flow of information.328
However, these exceptions are rarely invoked and project counsel should
not agree to deviations from the 6-month rule without discussing it first with
their assistant general counsel (AGC) and/or the Controllers department.
If an EA claims that it cannot provide accounts within 6 months, project
counsel, in conjunction with the project team, should seek an explanation
from the EA. For example, in some ADB projects, the project has budgeted
for private sector financial auditors to audit accounts provided to ADB within
6 months of the end of the fiscal year.
ADB’s requirement for DMCs to provide audited accounts within
6 months of the end of the fiscal year arises because of donor consensus
on the harmonization of financial management requirements under the Paris
Declaration.329 The World Bank also requires audited accounts to be provided
within 6 months.330
Project counsel and the project team should also include a provision for
special, spot, and random financial audits in the project design where they
have particular concerns about an EA’s capacity to provide financial audits so
as to identify problems prior to the audit.
Key Point for Project Counsel. Project counsel should be alert to the
requirement that all audited project accounts must be delivered within
6 months of the end of the fiscal year within the two limited exceptions.
g. Performance Audits
Performance audits are special and random performance checks or audits that
are designed to ensure that funds will be used for their intended purpose.
They consider both the financial and the physical aspects of a project. They
are sometimes called value for money auditing.
328
ADB. 2008. Project Administration Instructions. PAI 5.09: Submission of Audited Project Accounts
and Financial Statements. para. 17.
329
OECD website. The Paris Declaration on Aid Effectiveness and the Accra Agenda for Action.
330
World Bank. 2007. Operational Manual. OP 10.02: Financial Management.
Performance audits do not check financial expenditure in isolation. The

audits examine the efficiency, economy, and effectiveness of undertakings or
organizations:
• efficiency is about getting the most or best output from available

resources,
• economy is about keeping the cost of a project low, and
• effectiveness is about achieving the project’s stipulated aims or
objectives.
Through performance audits, answers may be provided to issues such

as whether (i) the project activities have been performed in accordance with
sound administrative principles and good management policies; (ii) the
project meets the stipulated objectives; or (iii) the funds have been used for
the purposes for which they were granted, e.g., checking whether a road was
constructed to a particular quality or confirming that a bridge was actually
constructed.
The requirement to conduct performance audits in a particular project
is intended to enhance a project’s accountability. Performance audits may be
conducted quarterly, semiannually, or annually, and they should be conducted
by an independent and external auditor. Auditors will frequently be consulting
firms, such as PricewaterhouseCoopers, but performance audits may also be
conducted by nongovernment organizations (NGOs) or community-based 4
organizations.
For examples of projects where performance audits have been invoked
see: the Second Urban Primary Health Care Project in Bangladesh (2005);331
the Tsunami Affected Areas Rebuilding Project in Sri Lanka (2005);332 and the
Nanjing Qinhuai River Environmental Improvement Project in the People’s
Republic of China (2007).333
331
ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed
Loan and Asian Development Fund Grant to the People’s Republic of Bangladesh for the Second
Urban Primary Health Care Project.
332
ADB. 2005. Report and Recommendation of the President to the Board of Directors on Proposed
Loans and Grants to the Democratic Socialist Republic of Sri Lanka for the Tsunami-Affected Areas
Rebuilding Project and the North East Community Restoration and Development Project II.
333
ADB. 2007. Project Agreement between the Asian Development Bank and the Jiangsu Provincial
Government Nanjing Municipal Government for the Nanjing Qinhuai River Environmental
Improvement Project.
• performance audits can be used to ensure the funds are used

for their intended purpose;
• many supreme audit institutions do not have the capacity, and
some private sector auditors do not have the skills, to conduct
performance audits; and
• performance audits are sometimes a sensitive issue for DMC
governments and project counsel needs to carefully explain
the importance of performance auditing in ensuring project
outcomes and building quality projects to them.
h. Procurement Audits
OAI conducts project procurement–related audits (PPRAs). PPRAs are intended to

detect fraudulent and corrupt practices relating to procuring goods and services.
PPRAs are conducted to review a project’s procurement, financial management,
contract implementation, and project management practices.334 In 2008, OAI
initiated six PPRAs and completed four PPRAs jointly with the DMCs’ supreme
audit institutions.335 Because OAI can only ever conduct PPRA’s for a sample of
projects in any given year, project teams concerned about procurement risks
• suggest that the project team conduct spot procurement

reviews to ensure that the EA complies with ADB’s procurement
guidelines and consulting services guidelines;
• contact OAI to obtain sample checklists used for PPRAs in
conducting reviews of fraud and corruption, procurement,
internal controls, and EA capacity, which may be used by
project teams to conduct similar PPRAs; and
• consider whether a covenant regarding the need for annual
special procurement audits in projects, along the lines of OAI’s
PPRAs should be included.
334
In 2008, OAI completed the PPRAs in Afghanistan, the Kyrgyz Republic, Mongolia, and Viet Nam.
335
Wang, H.L., and A. Egloff. 2008. PPRA Debriefing and Experience Sharing with SAI.
in a project can adopt OAI’s checklist methodology and conduct their own
procurement audits for their project. OAI is willing to provide these sample
checklists.
i. Post Completion Audit
A special post completion audit to address governance, financial accountability,

and transparency is required under ADB’s disaster and emergency
assistance policy (2004).336 Such audits would usually be funded by the
relevant DMC government because after the DMC has completed the project
and the loan or grant account has been closed, another funding source for the
audit would be required. ADB includes a covenant into financing agreements
that indicates the government has this obligation.
2. Transparency
a. General
The governance policy explains that transparency means making information

available to all stakeholders and the general public, and having clear
government rules, regulations, and decisions.337 Project counsel should ensure
that appropriate measures are incorporated into a project to allow stakeholders
and the general public access to relevant project information and, where 4
possible, to increase the clarity of government regulations and processes.
b. Media for Information Disclosure
There are various ways in which a project team can ensure that information
is provided to the public and stakeholders to help the intended beneficiaries
access a project’s programs and assistance:
• Internet. The EA for a project can establish

an internet website that describes the project
or can link their existing EA website to a
description of the project. The website may
record the names of people or communities
336
ADB. 2004. Disaster and Emergency Assistance Policy.
337
ADB. 1995. Governance: Sound Development Management. p.11.
who have received assistance, or are targeted to receive assistance under

the project. The website should fully describe the project so that local
communities and civil society organizations (CSOs) can monitor whether
the project assistance reaches its intended beneficiaries. Allowing such
monitoring is in the interests of the EA, the borrower, ADB, and the
beneficiaries.
• Newspapers. The EA for a project can

publish information in local languages
through the relevant government or private
newspapers.
• Posters, leaflets, and display boards.

The EA for a project can publish information
concerning the project on posters, in
leaflets, or on display boards hung in
local offices. These more simple modes of
“publishing” information are effective in
more remote rural areas and other places
where people do not have easy access to
the internet or newspapers. Such modes
allow the information to be published in
a simple form and manner that can be
readily accessible to the intended project
beneficiaries.
• Radio. The EA for a project can publish

information on local radio. Radio is a
particularly effective way of reaching
people in remote rural areas and other
places where access to the internet or
newspapers is not easy.
• Television. The EA for a project can increase

a project’s transparency through the use
of television. Television is the leading form of mass media in many
jurisdictions. In ADB’s DMCs, television often reaches far more people
than the internet. Pre-taped television such as

videos, drama features, and advertisements
may be shown to raise awareness of
governance issues. Television was particularly
effective in the Cambodia land project.338 It
was also effective in the Sri Lanka Tsunami
Governance Project.339
• Music. The EA for a project can increase a

project’s transparency through the use of
music. Like television, music reaches large
numbers of people. In the Philippines, the
Office of the Ombudsman conducted an
anticorruption songwriting competition
and produced a CD of the songwriting
finalists that was widely distributed.340
• Street drama. Street drama shows are

an increasingly popular way of informing
members of a community about the needs
of good governance and giving them
an incentive to listen to what is said. The
EA for a project can increase a project’s 4
transparency in this way.
• Loudspeakers. The EA for a project can

increase a project’s transparency through
the use of loudspeakers affixed to cars.
This form of communication is often
used to communicate information to a
local community. It is an appropriate way
of quickly informing local communities
that do not have access to other forms of
communication.
338
ADB. 2005. Technical Assistance Completion Report on Implementation of Land Legislation in
Cambodia.
339
See Loan NO. 2167/2168(SRI): Tsunami-Affected Areas. Rebuilding Project and the NorthEast
Community Restoration and Development Project II, approved on 14 April 2005.
340
Flores, Helen. 2006. Gospel Rapper Tops for Anti-corruption Song Tilt. The Philippine Star.
c. Type of Information Disclosed
The information to be made public should, among other things:
• help ensure that the project funds are used properly and reach the
intended beneficiaries;
• address the rights of the affected people and beneficiaries;
• provide details of all relevant laws and regulations;
• disclose information on procurement packages; and
• provide details of the contract packages to be, or that have
been, procured with ADB’s assistance. For example, procurement
information could outline procurement contract awards, including
(i) information on the list of participating bidders; (ii) the winning
bidder’s name; (iii) the bidding procedures adopted by the winning
bidder; (iv) the amount awarded to the winning bidder; and
(v) the goods and/or services purchased, as well as their intended
and actual use.
d. Public Knowledge of the Law
A project can promote “legal literacy” and “legal empowerment” by facilitating

publication of project-related information and promoting awareness of
governance by the public and district officials. This leads to predictability
and hence better governance. ADB has implemented two regional technical
assistances that support this proposition.
The regional TA for Legal Literacy for Supporting Governance uncovered
very promising results.341 It suggested that improving legal literacy through
paralegals could reduce poverty and increase a citizen’s capacity to participate
in governance.342
The regional TA for Legal Empowerment for Woman and Disadvantaged
Groups sought, among other things, to address the need to collect more data
and evidentiary proof that illustrates the link between legal empowerment
for women and disadvantaged groups and poverty reduction and good
governance.343
341
ADB. 2005. Technical Assistance Completion Report on Legal Literacy for Supporting Governance.
342
ADB. 2001. Law and Policy Reform at the Asian Development Bank. p. 134, para. 31.
343
ADB. 2005. Technical Assistance for Legal Empowerment for Woman and Disadvantaged Groups.
para. 7.
ADB has done considerable work in legal empowerment and in its role in good governance and poverty reduction.
e. Identification Cards
In some projects, it may be relevant and appropriate to require that beneficiary

identification cards be issued at the earliest possible stage. Identity cards may
be project specific or may involve reissue of national identity cards as part
of restoring an individual’s legal identity. In large-scale resettlement projects,
identity cards or some other identification system are often issued to prevent
benefits from being conferred upon opportunistic persons who are not
originally from the project area and who come to an area once land values
have begun to escalate.
ADB has reissued identity cards in certain post-disaster emergency
projects. Issuing identity cards may also be useful in projects where it is
necessary to pinpoint the beneficiaries at the project’s outset. It also prevents
or limits persons from obtaining multiple or fictitious identities in places
where documentation for personal and business identities is not obtainable
or has been lost or destroyed. A project team could consider and budget for
a simplified procedure for obtaining new identity cards for individuals and
businesses, using the latest technology (e.g., iris recognition).
• a new identity system may facilitate governance and/or the

legal identity of an individual but must be tied to measures to
protect the privacy of individuals,
• an identity system should take into account the administrative
and technical capacity of the EA, and
• identity cards will not be appropriate in all projects and should
be discussed with the project leader and relevant assistant
general counsel and/or director.
4. Participation
a. General
Participation refers to the involvement of citizens and other stakeholders in

the development process. The principle assumes that people are at the heart
of development; they are not only the ultimate beneficiaries of development
but also its agents.344
To ensure that all stakeholders are included, a stakeholder analysis should
be undertaken. It may be extensive and conducted as part of the feasibility 4
work for a project, or more limited, depending upon the nature of the
project. It should consider and address laws that might discriminate against
certain classes or castes because such laws may prevent certain citizens from
participating in governance. At the very least, it should also identify all of the
relevant stakeholders and their needs, issues, and concerns through broad-
ranging discussions and interviews with those affected by and interested in
the project.
Therefore, during project processing the project counsel should help the
project team determine whether a satisfactory stakeholder analysis has been
conducted for a project of the relevant type. If it has not, project counsel
may need to assist or recommend that a stakeholder analysis be conducted.
344
ADB. 2005. Governance: Sound Development Management. p. 9.
Project counsel can obtain further guidance on stakeholder analysis from

ADB’s staff guide to consultation and participation.345
b. Local Stakeholders and Community Coordination Groups
Involving civil society organizations (CSOs),346 local communities, and other

local stakeholders in project preparation and implementation is vital. Their
involvement helps ensure that projects are appropriate and relevant. It can
also facilitate good governance. Past experience suggests that when local
stakeholders know more about a project, corruption is less likely.
CSO Involvement in Projects. CSOs can improve governance in projects in

the following ways:
• ADB or an EA may consult with CSOs to obtain local knowledge of

sources of corruption;
• CSOs can participate in local institutions and help to rebuild those
institutions;
• ADB or an EA can enlist CSOs for project and performance
monitoring; and
• CSOs and local representatives can be represented on the
provincial or district project coordination committees that approve
the selection of subprojects under sector loans.
CSO Governance. CSOs often act as whistle-blowers of corruption; many

cases that ADB investigates result from CSO tip-offs. Although CSOs frequently
guard against corruption in a project, when they are involved, project counsel
should be aware of the rare potential for CSOs to collude with government
officials. Project counsel can alleviate this problem by requiring CSOs to do
the following:
345
ADB. 2006. Strengthening Participation for Development Results: A Staff Guide to Consultation and
Participation.
346
CSOs is a broader term including nongovernment organizations (NGOs), labor unions, research
institutions, and foundations. ADB is moving toward use of this term instead of NGO as it is all
encompassing. For further information, see ADB. 2009. Civil Society Organization. Sourcebook.
A Staff Guide to Cooperation with Civil Society Organizations.
• publish information about their activities and use of funds,

• display this information on a website or at another public forum,
• ensure that all CSOs engaged under ADB projects are subject to
an audit, and
• ensure that CSOs tasked with project monitoring are independent
of those CSOs that are involved in service delivery.
ADB has published information on cooperating with NGOs and civil

society on its website.347
Key Points for Project Counsel. In conjunction with the project team,
project counsel should consider
• ensuring a project has had an extensive consultative and participatory

process for local stakeholders, CSOs, and NGOs in project or sub-
project selection, design, preparation, implementation, and
monitoring;
• taking steps to ensure the good governance of any CSOs and
NGOs involved in projects;
• ensuring community participation in the selection, preparation,
implementation, and monitoring of projects and subprojects; and
• budgeting for the cost of community participation in supervising 4
and monitoring subprojects in a project’s cost, where necessary.
c. Coordination among Development Partners
Coordination among development partners is very well recognized as a

principle.348 However, in practice it works better in some DMCs and some
sectors than others. Good coordination among development partners
simultaneously promotes good governance, limits corruption, ensures
effective delivery of project assistance, avoids duplication, and obtains
347
See www.adb.org/NGOs/default.asp; ADB. 2008. In Brief: ADB and Civil Society; ADB. In Brief:
Participatory Development.
348
Paris Declaration on Aid Effectiveness. 2005.
synergies. For example, if coordination is not effective, two donors may

provide finance for substantially the same project in overlapping areas,
allowing opportunistic individuals to take advantage of the duplication.
Usually, at least the first stages of donor coordination occur before
project counsel becomes involved in the processing of a project. However,
project counsel should confirm that the project team is confident that
ADB’s project is not duplicating the work of other projects. Moreover,
coordination among development partners needs to continue during
implementation, particularly in projects that are complicated, decentralized,
or where more than one donor is working in a particular area.
Even during the review of project documents, project counsel should
stress the importance of coordination.
Key Points for Project Counsel. Project counsel may suggest the following
coordination activities to the project leader:
• donor or sector coordination meetings at the national, regional,

and district levels, if these are not already occurring;
• regular (monthly or quarterly) meetings among all development
partners to disclose activities that they support or intend to
support;
• joint audits and project monitoring; and
• requiring all partners to share information on needs assessments.
5. Accountability
a. General
Accountability makes public officials answerable for government behavior,

subject to sanctions; and more responsive to the entities from which they
derive authority.349 In considering accountability mechanisms for the project,
349
project counsel should recognize that it is usually preferable to strengthen

existing and established institutions, rather than establish new mechanisms.
Creating new mechanisms normally entails greater costs, and conflict with
ADB’s approach of applying and strengthening country systems. New
mechanisms are appropriate where the project team decides a policy,
institutional, and regulatory reform program is appropriate.
Private individuals or public officials who either misappropriate funds
from donors or take advantage of, and benefit from, vulnerable people must
be sanctioned. Mechanisms to track and sanction such abuse of power need
to be in place. The government should agree to quickly sanction private
individuals, entities, or public officials who take or attempt to take advantage
of project funds.
However, securing government agreement to take such action depends
upon government leadership, as well as ensuring that the existing judicial and
administrative mechanisms are in place to detect and penalize corruption.
In many DMCs such mechanisms are in place and it requires a display of
leadership from the government to take such action. In other cases, ADB
may be able to assist by streamlining coordination among the judiciary and
anti-bribery institutions, ministries, or departments that detect, apprehend,
prosecute, and punish corruption offenders under law.
The extent to which additional project-based mechanisms may be required
depends upon the preexisting system of administrative and judicial justice, and
the nature and value of the project. Possibilities are described below. 4
b. Bribery and Anticorruption Institutions
The relevant government will often have an anti-bribery institution or

commission. It will operate within the DMC’s governance and regulatory
framework. While these anti-bribery institutions or commissions are likely
to be established under the DMC’s constitution or a statute, and so be
independent or quasi-independent, synergies or linkages may be possible
between the DMC’s anti-bribery institutions and the anticorruption efforts
of the project.
Key Point for Project Counsel. In conjunction with the project team, project
counsel could consider how to facilitate these synergies or linkages.
c. Complaint and Redress Mechanisms
A project ultimately seeks to serve its beneficiaries which are usually the
people within a DMC. However, during implementation individuals, groups,
and members of civil society may have complaints about the way in which
the project is being implemented. Complaints will not all involve corruption
or legal issues—many will involve administrative issues.
To deal with such complaints against the relevant ministry, EA, and/or the
project, complaint mechanisms may need to be strengthened or established.
Beyond establishing a system for receiving and resolving complaints, a
complaint mechanism provides complainants with an opportunity to voice
their individual complaints, problems, and conflicts to an appropriate body.
Complaints mechanisms may be administrative or judicial. They are not
the same as a complaints referral system, whereby complaints are received
and merely referred to the officer against whom the complaint was filed or
to the relevant department. Complaint mechanisms involve at least some
degree of quasi-independence from the particular department from which
the complaint was received.
Large and decentralized projects will need complaint mechanisms to be
available to all project affected people in what will sometimes be a very large
project area. Certain options are available to make a complaint mechanism

accessible:
• intensive and wide reaching publicity about the mechanism

throughout the entire project area, together with decentralized
collection of complaints;
• a “mobile” complaint mechanism; or
• decentralized offices of the complaint mechanism.
In conjunction with the project team, project counsel may need to

allocate budgetary resources to assist the government to establish a complaint
mechanism for the project or strengthen an existing mechanism.
Finally, project counsel should be aware that ADB’s Safeguard Policy
Statement (2009)350 requires grievance mechanisms to be established for
environment, resettlement, and indigenous peoples’ in projects, where those
safeguards are applicable. In some cases, it may be appropriate to establish
only one mechanism to deal with all project grievances, including safeguards.
In other cases, it will be preferable to have several grievance mechanisms.
The different complaint mechanisms, their bases of authorization and
operative tools are set out in Table 4.2 and these are described further below.
Table 4.2: Complaint and Redress Mechanisms

Type Basis of Authority Operative Tool
4
Administrative • executive • administrative consensus
• managerial • quasi-independent
fact-finding and
recommendation
Ombudsman • legal • quasi-independent

• constitutional fact-finding
• statutory • format recommendation
Community-Based • traditional • transparency

Resolution • consensus • problem solving
• consensus
Office of Anticorruption • managerial/advisory • quasi-independent

and Integrity fact-finding
• format recommendation
Source: Authors.
350
ADB. 2009. Safeguard Policy Statement. Policy Paper.
Administrative Review. Complaint mechanisms can be established for

projects in existing or newly created ministries delivering ADB assistance.
Complaints under an administrative mechanism should improve the ability
of individuals or communities with complaints to access justice. To provide
quasi-independence, such complaint mechanisms need to be located outside
the PMO and report to the secretary or minister of a ministry.351
Some DMCs have already established administrative complaint
mechanisms under the ministry dealing with public administration, or under
the line ministry. To deal with additional project-based complaints, such
mechanisms may require strengthening and this could be done under a
project.352
Whatever the type of complaint mechanism, a project could ensure that
project beneficiaries and stakeholders are aware of this avenue of complaint
submission and redress by
• requiring information and publication of such information in the

project area, and/or
• supporting CSOs and/or NGOs to do so or to assist with
complaints.
Many ADB projects have required administrative complaint mechanisms

to be established.353
Ombudsman. A real or “classic” ombudsman’s office is established under

a country’s constitution or by statute. “Ombudsman” is a term that has
acquired many meanings. It has been used to describe internal grievance
mechanisms for organizations, agencies, and ministries. These types of
pseudo ombudsman perform functions that are more akin to the complaint
mechanism for administrative review described above.
351
See Grant 0002-INO(SF): Earthquake and Tsunami Emergency Support Project, approved on
29 April 2005.
352
Loan No. 2096-SRI(SF): Secondary Education Modernization Project II, approved on 7 December
2004.
353
Loan and Asian Development Fund Grant to the People’s Republic of Bangladesh for the Second
Urban Primary Health Care Project; ADB. 2005. Report and Recommendation of the President to
the Board of Directors on Proposed Grants to the Republic of Indonesia for the Earthquake and
Tsunami Emergency Support Project and Contribution to the Multidonor Trust Fund.
A real ombudsman is given statutory powers of investigation and decision

making that an administrative complaint mechanism or “organizational
ombudsman” would not have.
Establishing a real ombudsman would be a lengthy process. It would
involve extensive discussion with the government and would require
determining the ombudsman’s relevant statutory powers. It could only be
considered in a DMC strongly committed to a reform program as part of an
overall governance reform program.
However, it may be possible for a project or program to supplement the
resources of an existing classic, organizational, or agency ombudsman’s office
with a more limited approach. By doing so, the system of complaint and
dispute resolution for a particular project could be improved. If the project
is to provide such resources, the project design would need to incorporate a
component or subcomponent on building the capacity of such institutions.
Multistakeholder Grievance Process. A multistakeholder process could

also be used to resolve disputes that cannot be readily dealt with under the
other complaint mechanisms described above. For example, a committee
or a dispute resolution panel may comprise representatives of different
stakeholders, as required. Such representatives could be drawn from CSOs,
NGOs, the private sector, the government, and/or development partners.
Mediation. Some DMCs have adopted mediation systems under law as 4

a mechanism for dispute resolution. Such systems operate on a problem-
solving basis. However, they are not particularly strong on resolving public–
individual complaints, which usually allege an abuse of power by a public
official. Mediation is more effective where private–private disputes are
expected in a project.
Community-Based Resolution. Existing community-based customary

dispute resolution mechanisms may be strengthened to resolve disputes
relating to property rights or other private matters.
ADB’s Office of Anticorruption and Integrity (OAI). As well as the

national systems for grievances and conflicts discussed above, project
counsel should know to refer all complaints and conflicts relating to corrupt
or fraudulent practices to OAI. ADB has published information on referring
matters to the OAI on its website (www.adb.org/Anticorruption/unit.asp).
d. Government Record-Keeping Systems
Government record keeping in ADB’s DMCs includes both sophisticated

automated systems and traditional manual record-keeping systems of old
dusty files that may not be stored according to any particular system.
Manual record-keeping systems are easier to manipulate and therefore
provide more opportunity for corrupt practices and poor governance.
Computer automation may limit the extent to which the system can be
manipulated for false claims for assistance and increases the extent to which
project affected people and beneficiaries can claim public accountability
for administration of records. Improving such record-keeping systems can
increase the reliability and predictability of access to such information.
However, automating record-keeping systems may be too extensive
(and expensive) a project for the capacities of existing staff within a ministry.
Replacing a manual system may not necessarily improve a government record-
keeping system if personnel do not understand it and therefore decline to use
it, if technical difficulties prevent its constant use, or if only a few personnel
know how to use it, and are thus able to take opportunities to manipulate it.
In conjunction with the project team, project counsel, during project
design, could consider ways to
• improve manual systems of record keeping and documentation

delivery,
• establish an appropriate manual or computer automated
management information system for the project office(s), and/or
• have computer automated manual systems of information
storage.
6. Predictability
a. General
Predictability refers to (i) the existence of a system of laws, regulations, and

policies that regulate society, and (ii) the fair and consistent application of
the system of laws, regulations, and policies. The importance of predictability
cannot be overstated since without it the orderly existence of citizens
and institutions would be impossible.354 Furthermore, a consistent legal

environment in a country is vital for development.
b. Legal System and Infrastructure
Quasi-judicial mechanisms only work effectively in the shadow of the formal

legal system. The potential for project counsel to influence a project’s design
in a way that impacts a country’s legal infrastructure and legal system more
broadly is likely to be limited in any given project.
However, project counsel need to be aware that the success of any
administrative accountability mechanisms, such as those referred to in
Section 5 (Accountability), is likely to be influenced by the overall quality of a
legal system and the extent that the rule of law exists and prevails.
c. Training Workshops for Judges, Magistrates,

and Law Enforcement Officers
A project may result in the introduction of new legislation or regulations. In

such circumstances, project counsel could consider working with the project
team to build into the project’s design, the ability to provide training to
judges, magistrates, and law or administrative enforcement officers on the
effect of the new legislation or regulations.
4
d. Administrative System and Infrastructure
The effectiveness of the preexisting system of public administration will

enhance or detract from the effectiveness of any particular set of governance
measures.
354
ADB. 2005. Governance: Sound Development Management. p.10.
Overall Review Guide for Chapter 4

• different risks are associated with each stage of the ADB project
cycle, what these risks are, and how to mitigate them: see the Risk
Analysis section on pages 87–89;
• the governance risks and issues of an agency, entity, or organization
in a particular project may be identified and better understood
by arranging an institutional assessment: see the Institutional
Assessments section on pages 89–92;
• the general checklist of questions involved in a basic institutional
assessment is a helpful tool: see the checklist on pages 90–91;
• public procurement creates many opportunities for corrupt
practices and poor governance: see Indicators of Corruption Risks
section on pages 92–94;
• they should have regard to the “warning bells” of corruption:
see Indicators of Corruption Risks section on pages 93–94;
and
• there are a number of project-specific governance and integrity
strategies and measures that are designed to reduce the risk
of corruption and poor governance in projects and project
counsel can help project teams reduce such risks by knowing
what these measures and strategies are: see the Governance
and Anticorruption Project Design measures section on pages
95–123.
CHAPTER 5
Public Sector Covenants

A. Overview
Chapter 5 sets out sample covenants for many of the issues discussed in
Chapter 4. As explained in other parts of this Guide, governance risk profiles of
different projects will differ by country, sector, and project. Hence appropriate
covenants will also differ on these bases. Thus, these covenants are only
illustrative. Before including them in a memorandum of understanding or a
financing agreement, project counsel should
• discuss the covenants and their rationale with the project leader,
• be prepared to explain their rationale to the relevant government,
and
• discuss the covenants with their assistant general counsel, where
necessary.
Many governments will only be able to comply with the governance and
anticorruption covenants if they are integrated into a project design and given
a specific budget allocation. Project counsel will need to discuss this with the
project team and project leader.
B. Governance Policy
The Second Governance and Anticorruption Action Plan (GACAP II)

recommends that reports and recommendations of the President (RRPs)
list project-specific governance measures. Increasingly, RRPs include a table
or appendix with these measures. The following are general covenants to
incorporate more detailed measures in a table or matrix in the RRP, or some
other document, by reference.
1. Standard Governance Statement
Section [•] Further to the [Borrower’s]355 commitment to good governance,

the [Borrower] shall adopt the measures set forth in the Governance and
Anticorruption Approach,356 and paragraphs [•] of this Schedule [•].
C. Anticorruption Policy
The following covenants on the anticorruption policy should be included in

all financing agreements, although the covenant may need to be adjusted to
suit the country and project.
1. Standard Covenant: General Contracts
Section [•] (a) The [Borrower] shall comply with [, and shall cause the [Project
Executing Agency]357 to comply with,] ADB’s Anticorruption Policy (1998, as
amended to date). The [Borrower] [and the Project Executing Agency]:
(i) acknowledge[s] ADB’s right to investigate, directly or through its

agents, any alleged Corrupt Practices, Fraudulent Practices, Coercive
Practices, or Collusive Practices relating to the Project; and
(ii) agree[s] to cooperate fully with any such investigation and to
extend all necessary assistance, including providing access to all
relevant books and records, as may be necessary for the satisfactory
completion of any such investigation.
2. Definitions
The following definitions can be included in the definitions section of the

relevant agreement if considered necessary:
355
Replace all references to Borrower with Recipient or Beneficiary if the transaction so requires.
356
The reference to “Governance and Anticorruption Approach” allows project counsel to incorporate
by reference a project-specific action plan that prescribes measures to be taken in the specific
project. The term “Governance and Anticorruption Approach” should be defined.
357
Insert the name of the executing agency (EA) and/or implementing agency (IA) and change all
references as the project so requires.
Public Sector Covenants 127
(i) Corrupt Practice means the offering, giving, receiving, or soliciting,

directly or indirectly, of anything of value to influence improperly
the actions of another party.
(ii) Fraudulent Practice means any act or omission, including a
misrepresentation, that knowingly or recklessly misleads, or
attempts to mislead, a party to obtain a financial or other benefit
or to avoid an obligation.
(iii) Coercive Practice means impairing or harming, or threatening to
impair or harm, directly or indirectly, any party or the property of
the party, to influence improperly the actions of a party.
(iv) Collusive Practice means an arrangement between two or more
parties designed to achieve an improper purpose, including
influencing improperly the actions of another party.358
3. Standard Covenant: ADB-Financed Contracts
Section [•] (b) Without limiting the generality of Section [•] (a), the
[Borrower] shall:
(i) ensure that the Project Executing Agency conducts periodic

monitoring inspections on all contractors’ activities related to fund
withdrawals and settlements; and
(ii) ensure that [and shall cause the Project Executing Agency to ensure
that] all contracts financed by ADB in connection with the Project
include provisions specifying the right of ADB to audit and examine
the records and accounts of [the Project Executing Agency and] all
contractors, suppliers, consultants and other service providers as
they relate to the Project.
358
ADB. 2006. Anticorruption Policy: Harmonized Definitions of Corrupt and Fraudulent Practices.
• The covenants in the foregoing paragraphs should be modified

if the obligations of the executing agency (EA) or implementing
agency (IA) are not contained in the relevant financing
agreement,359 but are principally contained in a schedule to
the project agreement. In such case, the relevant financing
agreement needs to contain such obligations as they relate to
the borrower, and the project agreement needs to contain such
obligations as they relate to the EA and/or IA, as appropriate.
• Many financing agreements now include a provision requiring
any procurement bidding documents to contain references to
or extracts from the relevant provisions of ADB’s anticorruption
policy. An example of such covenant is reflected in Section [•] (b)
above. The standard bidding documents already contain relevant
provisions from ADB’s anticorruption policy. Thus covenant
Section [•] (b) would be legally necessary only where national
competitive bidding is used or where there are no standard
bidding documents for the particular procurement contract.
• All financing agreements should refer to such ADB rights under
the anticorruption policy. This reference should be included
to improve implementation and compliance. Establishing this
contractual obligation in the financing agreements reminds
ADB and the EA of this obligation. ADB staff will later check
compliance before ADB’s procurement committee approves
any particular procurement package.
D. Governance as “Sound Management” Design Features359
1. Project Director and Staffing
The covenants in the following paragraphs should be considered for all

financing agreements:
359
It is appropriate to refer to a “loan” or “grant” instead of a “financing agreement,” subject to the
nature of the document.
a. Covenant Establishing Project Office Requirements and Staff Retention

Requirements
Section [•] The [Borrower] shall ensure that
(i) a project management office (PMO)360 is established within

the [Project Executing Agency], which shall oversee day-to-day
operations of the Project, including in particular procurement,
planning, budgeting, accounting, monitoring and coordinating
with district and local offices of the beneficiaries; and
(ii) the staff engaged in the PMO of the Project will be [engaged] [and
retained] in the PMO, subject to their satisfactory performance.
b. Covenant Identifying Project Staffing Requirements and ADB’s Rights
Section [•] The [Borrower] shall also ensure that the PMO is managed and
operated by a Project director with qualifications and expertise in [insert
necessary expertise], and is supported by an adequate number of competent
full-time personnel, including an administrator, a finance manager and
accountant, an engineering and civil works professional, a procurement
officer, and a monitoring and evaluation officer. The [Borrower] shall [consult
with]/[seek the approval of] ADB concerning any changes to staffing at the
PMO.
c. Covenant Requiring Consideration of Vacancies to Maximize Good

Governance and Minimize the Opportunities for Leakage
Section [•] The [Borrower] shall review the vacancy levels in various
government service posts and the staffing needs for the implementation of
the Project, including [describe the types of officers]. The [Borrower] shall take 5
all steps necessary within its control to fill any vacant positions and ensure
that such service posts are adequately staffed by competent and qualified
personnel.
360
Project counsel may refer to “project management unit” or another term as requested by the
project team.
2. Financial Management and Accounting Capacity
a. Covenant Requiring the Borrower to Appoint, Train, and Budget

for Financial and Accounting Staff
Section [•] (a) The [Borrower] shall ensure that
(i) an adequate number of competent financial and accounting staff

are appointed for the Project;
(ii) the Project director and all PMO financial and accounting staff:
(A) have adequate experience and expertise in the applicable
accounting standards; and (B) receive training on ADB’s Loan
Disbursement Handbook, prior to the Effective Date; and
(iii) it allocates sufficient counterpart budget for staff training, if
necessary, as determined in consultation with ADB.
Section [•] (b) The [Borrower] shall ensure that the [Project Executing
Agency] [or other holder of a [second/third] generation imprest account
for the Project] shall establish and maintain Project accounts and records of
Project progress and expenditures to facilitate the identification of income
and expenditures related to the Project.
3. Procurement
a. Covenant Appointing, Training, and Budgeting for Procurement Staff
Section [•] (a) The [Borrower] shall ensure that the Project director and
all relevant PMO procurement staff have adequate experience and receive
training on: (i) the Procurement Guidelines, (ii) the Consulting Guidelines,
and (iii) [Borrower’s] procurement and consulting requirements prior to the
Effective Date. The [Borrower] shall allocate sufficient counterpart budget for
such training, if necessary, as determined in consultation with ADB.
b. Covenant Preventing Project Staff from Being Part of Borrower’s

Procurement Evaluation Committees
Section [•] (a) The [Project director] and the PMO staff shall not be eligible
to be members of any [Borrower] procurement committee evaluating bids for
procurement contracts under the Project.
E. Project Design Features: Supervision and Monitoring
1. Project Performance Monitoring Systems
Section [•] (a) No later than [insert date], the [Borrower] shall cause the
[Project Executing Agency] to develop or update a Project Performance
Monitoring System (PPMS) acceptable to ADB.
Section [•] (b) The [Borrower] shall cause the [Project Executing Agency] to
develop the PPMS by: (i) conducting surveys to establish a baseline-data at the
start of Project implementation; (ii) proposing the key indicators for evaluating
the Project’s performance; and (iii) including baseline performance monitoring,
systematic Project performance monitoring, and benefits monitoring and
evaluation, in each case in consultation with and in a form acceptable to ADB.
Section [•] (c) To evaluate the Project benefits, the [Borrower] shall cause the
[Project Executing Agency] to conduct surveys comparing the baseline and
checking the performance indicators: (i) by the time of the Project midterm
review; (ii) by the time of Project completion; and (iii) within 6 months of
Project completion.
Key Points for Project Counsel
• The PPMS is a key governance measure and tool because it

establishes the benchmarks and indicators from which to
monitor and measure whether the project’s resources have
been used for the purposes for which they were intended. The
PPMS is not always understood in this way as a governance
measure and may not be given sufficient importance. 5
• The project team may need to engage consultants to develop
a sufficient and effective PPMS system if the capacity of the
EA is weak. If so, a separate budget line-item may need to be
allocated for PPMS consultants.
• Each PPMS is different. A PPMS is established for a project in
accordance with its specific needs. Thus, the project team, the

EA or consultants must collect project-specific baseline data,

develop indicators, and monitor and evaluate them separately
for each project. Moreover, different components of a project
require the collection of different sets of data.
• Qualitative indicators will need to be developed for components of
a project that involve capacity building or the provision of services
(e.g., financial or legal services). Qualitative indicators are often
very difficult to develop because they seek to measure intangibles.
For example, they may seek to measure the extent that training
increased the knowledge of EA staff about ADB’s accounting
procedures. Individual response surveys are one way of measuring
this but are subjective and will vary among respondents.
2. Government Monitoring of Project
a. Covenant on Reporting
Section [•] The [Borrower] shall cause [the] [each respective] [Project Executing
Agency] to submit [quarterly] monitoring reports to [ADB] [the National
Committee and Provincial Committee] in relation to Project implementation.
Key Point for Project Counsel. ADB receives periodic reports from
the developing member country (DMC) and project EA. However, to
encourage government-based monitoring of the work of the project EA,
a project team may also have the borrower or the EA send monitoring
reports to various national or project based entities.
b. Covenant on Periodic and Random Compliance Monitoring
Section [•] The [Borrower] shall also cause each [Project Executing Agency]
to conduct periodic and random compliance monitoring of the Project to
determine if the Project funds have been used effectively and efficiently to
implement the Project, achieve its objectives and outcomes, and satisfy its
performance indicators.
Key Point for Project Counsel. Periodic and random compliance

monitoring is also sometimes described as a “spot audit.” However, some
DMCs and EAs object to the term “audit,” but may not object to the terms
“check,” “review,” or “compliance monitoring.” The covenant can be
drafted to achieve the same effect either way.
3. Standard Covenants on Financial Management and Audit
Standard covenants on financial audits are included in the loan/grant

regulations and model documents.
a. Financial Management: Accounting and Auditing
Section [•] (a) The [Borrower] [shall cause the Project Executing Agency to]
[and the Project Executing Agency] shall ensure that proper accounts and
records shall be maintained and audited in time to adequately identify the use
of Loan proceeds in accordance with this [Loan Agreement] [and the Project
Agreement].
Section [•] (b) The Borrower shall ensure that within [3] months of the
Effective Date, the [Borrower] shall cause the [Project Executing Agency] to
(i) establish internal accounting and financial control system in

accordance with [national/international] accounting standards to
ensure the (A) regular monitoring of expenditures and all financial
transactions, and (B) safe custody of all assets financed under the
Project, including all Project facilities;
(ii) establish an independent and autonomous internal audit
department; and
5
(iii) adopt computerized financial and management information
systems to ensure efficient, effective, and accountable financial
and information management:
in each case in a form and manner acceptable to ADB.

b. Engage Private Financial Auditors to Accelerate Timing

of Submission of Accounts
Section [•] (a) The [Borrower] shall ensure that private sector auditors are
engaged to conduct financial audits and, in accordance with Section [•],361
provide audited financial statements to ADB within 6 months from the audit
date.
Section [•] (b) If there are discrepancies between such audited financial
statements submitted to ADB and the audited accounts subsequently
prepared by the Borrower’s auditor general, the Borrower shall notify ADB
of such fact and shall consult and discuss the actions necessary to resolve or
reconcile such discrepancy.362
• The model loan documents provide standard language

requiring borrowers to provide audited accounts to ADB within
6 months. They also require the borrower’s auditors to be
acceptable to ADB.
• At loan negotiations, borrowers often ask ADB to consider
their respective auditor general an auditor “acceptable to ADB”
for the purposes of the financing agreements. The request
is made because in most DMCs, the DMC’s national auditor
general has a constitutional obligation to audit the accounts
of all government agencies and government-owned entities.
ADB routinely accepts such a request from a borrower, subject
to retaining its general discretion to request additional auditors
if the government auditors ever become unacceptable to
ADB. This request and ADB’s response is included in the loan
negotiation minutes.
• A borrower’s audited accounts need to be provided to ADB
within 6 months of the end of the fiscal year. As discussed
in Chapter 4, ADB will only rarely consider exceptions to this
general rule.362
361
This should refer to the section that establishes the obligation to provide audited accounts.
362
and Financial Statements. para. 17.

• If a DMC’s national auditor general cannot comply with the
6-month requirement and the case does not fall within
one of the few exceptions to the general rule,363 ADB could
propose that the borrower engage private sector auditors to
provide ADB with audited accounts within 6 months. In such
case, ADB would rely on the private sector auditors report,
although the national auditor general would conduct and
deliver its separate audit report in a longer time period (e.g.,
9 months, or 12 months, or 15 months). The national auditor
general’s audit report would become relevant to ADB if there
was any discrepancy between public and private accounts
that would need to be reviewed by ADB and reconciled in
conjunction with the borrower.
• If a project EA supervises several IAs, ADB should require
the project EA to conduct monitoring and periodic spot and
random checks of the IAs’ activities.
c. Covenant on Spot and Random Financial Checks and Audits363
Section [•] (a) The [Borrower] shall allow and assist ADB to conduct spot
and random checks on
(i) the flow of funds through each imprest account [and each second-
generation imprest account and each third-generation imprest
account], and the use of such imprest accounts for the Project in
accordance with this [Financing Agreement];
(ii) work in progress under the Project; and
(iii) Project implementation.
5
4. Performance Audits and Value for Money Auditing
Section [•] (a) The [Borrower] shall engage, and shall cause [each] [Project
Executing Agency] to engage [private sector performance auditors,] [civil
society organizations (CSOs),] [or] [nongovernment organizations (NGOs)]364
to conduct semiannual performance audits during Project implementation.
363
and Financial Statements.
364
The Borrower can be offered a choice of entity to conduct the performance audit or the financing
agreement could specify the entity.
Section [•] (b) The [Borrower] shall ensure that performance audits shall be
conducted during subproject implementation as part of the overall Project
audit.
OR
Section [•] (a) The [Borrower] shall ensure that the financial audits and
performance audits under the annual Project audit are conducted by the
auditors appointed in accordance with the [Borrower’s] [Audit Law].365
Section [•] (b) The [Borrower] shall ensure that performance audits will be
conducted during subproject implementation as part of the overall Project
audit.
• The rationale for performance auditing is to ensure that ADB

finance is used for its intended purpose. Performance audits
may become desirable to a central DMC government that
makes subloans to provinces or parastatals because they also
provide assurance to the central government that the province/
parastatal is using funds for their intended purpose.
• In DMCs like Mongolia, performance audits are required by law
but are not yet thoroughly implemented and enforced. In such
cases, project teams should consider the second example of
Section [•] (a).
• Performance auditors may come from financial auditing firms,
certain NGOs, or a mandated government department.
• The borrower or project EA may be reluctant to endorse
performance audits because they are not familiar with the
concept or it is not yet standard in their jurisdiction. Project
counsel together with the project team can explain the rationale
for performance audits to the borrower.
365
A specific reference to the correct law should be made.
5. Completion Audits: Standard Post-Disaster Covenant
Section [•] Within 3 months of Project completion, the [Borrower] shall

cause a special independent post-completion audit to be conducted in
accordance with ADB’s Disaster and Emergency Assistance Policy (2004) to
determine compliance with ADB’s governance, transparency, and financial
accountability covenants and/or policies. The [Borrower] shall bear the
expenses for such audit.
• Completion audits are required only for emergency loans and

grants. However, a completion audit may also be appropriate in
other situations to have a complete assessment on expenditure
for the entire project.
• The borrower must agree to finance the completion audit
and this agreement must be documented in the financing
agreement. The reason is that the completion audit must be
conducted after completion, which is after the loan account
has been closed.
6. Transparency
Information Disclosure
a. Covenants Requiring Disclosure on the Project Website, in Newspapers,

and on Radio
Section [•] (a) The [Borrower] shall take steps to ensure that the [Project
5
Executing Agency] ensures (i) two-way communication, transparency,
and participation between and among itself and the Project beneficiaries;
(ii) accountability; and (iii) zero tolerance for corruption.
Section [•] (b) The [Borrower] shall
(i) provide the public with information on the Project, its intended
beneficiaries, and use of funds (A) on a Project website, (B) in
government newspapers, (C) in a readily accessible place in the

Project area, (D) on public radio, and (E) on television; and
(ii) ensure that the information described in Section [•] (b) (i) is
published in [insert description of local languages], and includes
(A) audited financial statements; (B) the tracking of procurement
contract awards, including the amount of the award; (C) basic
information on the processes adopted; and (D) the list of goods or
services purchased and their use.
OR
Section [•] (b) The Borrower shall
(i) publicly disclose information concerning how the funds are being
used for the intended beneficiaries in accordance with applicable
procedures; and
(ii) establish a Project website that contains audited financial
statements and tracks procurement contract awards, by providing
information on, among other things, the (A) list of participating
bidders, (B) name of the winning bidder, (C) basic details on the
bidding procedures adopted, (D) amount of the contract awarded,
and (E) list of goods and/or services purchased and their intended
and actual use.
The [Borrower] shall ensure that
(1.) National and provincial newspapers in [insert name of local

languages] and English will carry such details on a regular basis
at intervals of not more than 30 days; and
(2.) TV and radio broadcasts made in [insert description of local
languages] at national and provincial levels, giving the same
details.
7. Identification
a. Covenant Requiring Borrowers to Issue Identity Cards
Section [•] The [Borrower] shall (a) issue or reissue identity cards to affected
people and businesses, and (b) ensure that no person shall be allowed to
obtain Project assistance without such identity card.
b. Covenant Regarding Replacement of Identity Cards
Section [•] (a) The [Borrower] shall conduct (i) awareness activities in local
communities on the importance of national identity cards (NICs), and (ii) an
intensive NIC issuance campaign in conjunction with the [insert name of
the DMC’s Registration Authority] and [insert relevant local bodies, where
appropriate].
Section [•] (b) The [Borrower] shall ensure that under the NIC issuance
campaign:
(i) mobile NIC units go to affected areas and issue NICs;

(ii) mobile NIC units have cameras and processing equipment,
and any other material necessary to issue NICs;
(iii) [Insert description of appropriate local leaders] attest the
accuracy of the information provided by villagers;
(iv) the staff of the mobile unit include at least 1 woman; and
(v) female villagers have opportunities to obtain NICs.
c. Covenant Requiring Identification Required for Benefits
Section [•] The [Borrower] and the [Project Executing Agency] shall ensure 5
that any cash assistance or housing assistance provided to beneficiaries under
the Project is only provided when adequate identification is given by such
beneficiaries to ensure that they are people affected by the Project.
8. Participation
a. Local Stakeholders and Community Coordination Groups
1. Covenant Including Stakeholders In Project Design
Section [•] The [Borrower] shall ensure, or shall cause [each] [Project
Executing Agency] to ensure, that CSOs, NGOs, beneficiaries, and potentially
affected persons are involved in selecting, designing, implementing, and
monitoring the [Sub]Project.
b. Coordination Among Donors, International Organizations,

Governments, Stakeholders, and Other Development Partners
1. Covenant to Establish a Donor Coordination Committee
Section [•] The [Borrower] shall cause the [Project Executing Agency] to
establish [a] donor coordination committee[s] [at the central level] and [at
the provincial level] and [at the local level] that include[s] representatives of all
public and private donors, including NGOs, operating in the [insert the name
of the sector] sector. The donor coordination committee will
(a) meet no less than once every 2 months to discuss measures

on preventing the duplication of assistance in the [insert the
name of the sector] sector; and
(b) ensure that donors coordinate their activities to ensure
smooth and uniform implementation of the Project and other
activities in the [insert description of sector] sector and prevent
overlap.
Key Point for Project Counsel. This covenant will frequently be needed
to facilitate donor coordination in the particular sector. Where the
project is decentralized, donor coordination may also be required at
the provincial and local levels to facilitate uniform implementation.
Frequently, even where donors coordinate effectively at the central
level, more coordination will be needed among donors at the provincial
and local levels. The project EA should always lead such coordination
committees to facilitate ownership.
9. Accountability
a. Ensuring Administrative Accountability and Corruption Sanctioning
1. Guiding Statement
Section [•] (a) In furtherance of the [Borrower’s] commitment to good

governance, the [Borrower] and ADB will adopt a policy of zero tolerance for
corruption in relation to the assistance provided under the Project, including
the adoption of measures set forth in the Governance and Anticorruption
Approach, and paragraphs [•] of this Schedule [•].
Section [•] (b) The [Borrower] shall take measures to immediately sanction
private individuals, entities, or public officials who actually, or attempt to,
take advantage of donor funds or [insert relevant circumstances]. These
measures must include initiating investigations through the [define or state
the government body empowered to hear/conduct investigations into bribery
and anticorruption, such as the “Anti-Bribery and Corruption Commission”].
Key Point for Project Counsel. This covenant is a broad general statement
directed at raising awareness of the government and the EA, and linking
their general commitment to more detailed measures.
b. Bribery and Anticorruption Institutions
1. Covenant Requiring Strengthening of Corruption Institution
Section [•] The [Borrower] shall strengthen [insert name and Act of
establishment of anti-bribery and corruption commission or equivalent] 5
to investigate, prosecute, and address potential corruption or irregularities
related to the Project.
Key Point for Project Counsel. This covenant should be inserted only
if ADB assistance forms part of a holistic program of support for
governance, including support to the relevant anticorruption institution.
If so, additional project-specific covenants are likely to be needed to
support the entire program.
c. Complaint Investigation and Resolution Mechanisms
1. Internal Executing Agency Complaint Mechanisms
Section [•] (a) Within [insert appropriate time period, which is often
3 months] months from the Effective Date, the [Borrower] shall cause the
[Project Executing Agency] to establish a complaint investigation and
resolution mechanism within the [Project Executing Agency].
Section [•] (b) The complaint investigation and resolution mechanism will
be responsible for
(i) reviewing and addressing complaints in relation to the Project

from end-users, beneficiaries, and other stakeholders of the
Project, howsoever arising;
(ii) establishing the threshold criteria and procedures for handling
and addressing such complaints, subject to ADB’s approval;
and
(iii) giving notice to the public of such mechanism’s existence,
function, and powers, which may include publishing
the mechanism’s procedures on the Project website, in
newspapers, and by other effective means of dissemination.
Section [•] (c) The complaint investigation and resolution mechanism must
be staffed by full-time professional staff of the [Project Executing Agency]
who shall report directly to [the Minister and/or Secretary].
2. Decentralized Dispute Resolution
Section [•] The [Borrower] shall establish a decentralized provincial system of

public grievance review and alternative dispute resolution in the Project area,
staffed by independent persons.
3. Legal Assistance
Section [•] The [Borrower] shall provide legal assistance for accessing legal
entitlements, including access to documents or dispute resolution, to affected
people to help them access their legal entitlement [define legal entitlements].
Section [•] The [Borrower] shall establish a decentralized mechanism for

affected people to resolve private disputes and/or obtain review of grievances
against public officials, such as:
(a) mediation boards;

(b) an ombudsman, or extending the jurisdiction of the existing
ombudsman; and/or
(c) strengthening the [Insert name of the relevant anti-bribery
and anticorruption body or commission].
Key Point for Project Counsel. These covenants should be included in

financing agreements when the project design includes an adequately
funded and adequately designed component on legal assistance.
5
CHAPTER 6
Specific Cases of Governance

and Anticorruption
A. General
ADB supports projects in a range of sectors. The broad governance issues

that apply to all of the sectors within which ADB works are common, but
particular governance issues may be sector specific. The governance issues
of commercial entities and public entities can also differ. This chapter covers
ADB’s policy and/or approach to several important specific cases of governance
and anticorruption. These include:
• Corporate Governance
• Governance and the Regulation of Public Utilities—Water and
Energy
• Social Sectors—Health and Education
• Decentralization
• Disasters and Emergencies
• Anti-Money Laundering (AML)
• Environmental and Natural Resource Governance
• Climate Change Governance
B. Corporate Governance
1. What is Corporate Governance?
Corporate governance is the manner in which a corporation, company, or

similar entity is managed, directed, and controlled. Understanding an entity’s
corporate governance involves understanding the internal policies, rules, and
processes that prescribe the way staff interact with each other and the outside
world. These include its articles of association and bylaws and its internal
office manual and staff rules.
It also involves understanding the laws, regulations, policies, and

standards that set the external framework for an entity’s management,
direction, and control. This process is also affected by the relationship that an
entity’s principal stakeholders (including its shareholders, management, and
directors) have with other stakeholders, such as employees and the members
of the community in which it operates.
ADB’s Board of Governors meet at the 43rd Annual Meeting in Tashkent where Pres. Kuroda reported the strengthening
of ADB’s anticorruption initiatives and the commencing of the review of ADB’s Accountability Mechanism and Public
Communications Policy.
2. What Are the Issues and Risks Involved?
The key issue of corporate governance is the relationship between a principal

and its agent—best known as the “principal–agent problem.” The problem
involves answering how it is possible to get corporate directors and managers,
as the agents of the entity, to act in the best interests of the corporation and
its owners or shareholders, as the principals of the entity. Because the agents
have more information regarding the day-to-day actions of the entity, they
can use this information to their advantage at the expense of the company
and its owners.
Specific Cases of Governance and Anticorruption 147
a. Internal
The following are examples of poor corporate governance, or circumstances

that will lead to poor corporate governance:
• the corporate strategic direction is not in the interests of the

owners/shareholders;
• incumbent directors and senior management:
nominate weak candidates for future positions;
receive excessive remuneration; and
do not declare conflicts of interests or related-party transactions;
• internal control systems:
do not minimize excessive, unwarranted risk-taking;
for finance, accounting, and audit are insufficient or
inadequate to ensure good financial management; and
for management information do not provide adequate data
on operational performance.
One key example of the principal–agent problem arose recently in the

wake of the 2008–2009 global financial crisis. Company directors continued to
receive extremely high salary packages even where companies had performed
very poorly. The payment of these large packages emphasized the broader
corporate governance issue of whether paying extremely high remuneration
actually results in attracting top-quality management and incentivizing them to
perform in the company’s best interest, or principally benefits only the directors
themselves. Another high profile example of poor corporate governance
occurred during the 1997–1998 Asian financial crisis, where reckless lending
in Thailand was exacerbated by the high concentration of ownership and
control of several publicly listed companies by only a few related parties and
the inadequate protection of minority shareholders’ interests.
Other corporate governance issues arise when family conglomerates
hold shares and/or deal with other supposedly separate corporate entities
that are run by the same directors and managers. They may also arise when
directors, managers, or “related company” subsidiaries assume other positions
that present conflicts of interest. For example, directors or officers may seize
corporate opportunities properly belonging to the corporation, or may fail 6
to divest themselves of shares in another corporation that is engaged in a
competing venture, threatening shareholder trust in them.
Internal controls (e.g., an entity’s articles of association, by-laws, and

shareholder agreement) must clearly establish the powers and responsibilities
of corporate directors, senior executives, and officers. Internal controls and
contractual arrangements become even more important when developing
member countries (DMCs) lack sufficient external controls.
Internal controls encompass specific arrangements for Board procedures,
including the establishment of Board committees to provide detailed working
information for the entire Board and checks and balances on the work of senior
executives, management, and the Board chair. Best international practice on
corporate governance would commonly recommend the following Board
committees or some combination thereof:
• a Strategic Operations Committee,

• an Internal Controls and Risk Management Committee,
• an Audit Committee,
• a Corporate Governance Committee,
• a Nominations Committee, and
• a Remunerations Committee.
b. External
Fundamental internal corporate governance issues and risks such as those

described in the preceding section, arise when the external legal and policy
environment is weak or absent, particularly where (i) competition laws are
absent and corporate monopolies can abuse market power, (ii) security or
collateral is insufficient in financial transactions, and security laws are weak
or nonexistent and (iii) corporate rehabilitation and insolvency laws are
weak or nonexistent.
To avoid or at least minimize internal and external corporate governance
risks, governments impose external controls. For example, the relevant
national company law will usually prescribe a broad framework establishing
the parameters of an entity’s powers and duties of directors, senior executives,
and officers. External controls such as commercial law and national and
international accounting standards will supplement corporate law. However,
some DMCs do not always have external controls adequate to impose
competition laws, security laws, and insolvency laws.
3. What Do ADB Policies Say About Corporate Governance?
ADB recognizes that corporate governance is a vital component of public

enterprise reform. To be effective, ADB interventions must address the internal
governance of private corporations, the broader regulatory framework (as
it pertains to the private sector and state-owned enterprises), the policy
framework to ensure competition and contestability, and the responsibility of
firms as good corporate citizens (including implications for pursuing sound
environmental policies).366
ADB’s private sector development strategy recognizes that good corporate
governance, or the lack thereof, plays a role in the larger poverty reduction
agenda. The Asian crisis demonstrated how the systemic failure of corporate
governance affected the region’s poor. Thus, the private sector development
strategy underscores the need to address the root causes of poor corporate
governance, including weak commercial law, poor accounting and auditing
standards and systems, a failure to recognize conflicts of interest, and an
unwillingness to recognize the rights of minority shareholders.367
4. How Does ADB Promote Good Corporate Governance?
ADB sets out the ways to promote good corporate governance under the
private sector development strategy. More specifically, ADB seeks to promote
good corporate governance by funding technical assistance (TA) projects that
focus on (i) reviewing DMCs’ commercial laws and regulations; (ii) formulating
credible accounting and auditing standards and corporate disclosure
rules; (iii) establishing sound environmental, labor, and social standards;
(iv) establishing corporate regulations that protect minority shareholder rights;
(v) establishing effective bankruptcy and foreclosure regimes; and (vi) training
corporate directors on their duties and responsibilities and on how they can
effectively balance the interests of shareholders’ and other stakeholders.368
366
para. 41.
ADB. 2000. Private Sector Development Strategy. p. 20.
6
367
368
Ibid.
ADB also works closely with regulators, state-owned enterprises,

and private businesses.369 In 2004, ADB partnered with Hermes Pensions
Management Limited to draft a set of 10 principles promoting corporate
governance for business enterprises.370 These core principles seek to (i) help
enterprises in designing and implementing their own corporate governance
guidelines by benchmarking their practices against the principles; (ii) assist
domestic and institutional investors, fund managers, and ADB in implementing
corporate governance in investment enterprises; and (iii) help governments
design corporate governance regulations.371 The principles are:
• Principle 1: Performance Orientation—enhance all shareholders’

economic value by using resources efficiently.
• Principle 2: Nomination and Compensation Committees—infuse
a company with quality leaders and set a compensation policy
through independent committees.
• Principle 3: Disclosure—establish accounting and disclosures
standards and systems that are timely and adequate.
• Principle 4: Audit Committee—establish an independent and
competent committee and a suitable system of internal control
and risk management.
• Principle 5: Code of Conduct—adopt a written code of business
conduct and ensure that companies abide by the code as well as
all applicable laws.
• Principle 6: Conflicts of Interest—ensure that directors act in
the best interest of the company and that errant directors are
sanctioned accordingly.
369
For more details on ADB’s loans, TA projects, and country-specific examples of good governance
practices, see ADB. 2009. Corporate Regulatory Frameworks; and, Bestani. R. 2004. An Asian
Perspective on Corporate Governance. Keynote speech.
370
ADB and Hermes Pensions Management Limited. 2004. Corporate Governance Principles for
Business Enterprises. See also Boyle, C., and N. Page, eds. 2004. Global Corporate Governance
Guide, 2004: Best Practice in the Boardroom.
371
ADB and Hermes Pensions Management Limited. 2004. Corporate Governance Principles for
Business Enterprises.
• Principle 7: Environmental and Social Commitment—recognize

and effectively deal with concerns involving the interrelationship
among corporate objectives, social development, and
environmental protection.
• Principle 8: Conduct of the Board of Directors—ensure that
directors are qualified, committed, trained, suitably compensated,
informed, proactive, and diligent.
• Principle 9: Responsibilities of Investors—communicate with
institutional investors, general partners, and fund managers, and
ensure protection of shareholder rights.
• Principle 10: The Role of Directors in Turnaround Situations—avoid
preferential treatment of creditors, or trade when the company is
insolvent.
ADB also promotes good corporate governance by supporting financial

sector development in its DMCs. ADB interventions in financial sector
development are based on, and reinforce, how a strengthened private sector
fits into the larger poverty reduction agenda. These interventions include
loans and TA projects that among other things seek to (i) strengthen legal and
regulatory frameworks for banking and small and medium-sized enterprises;
and (ii) strengthen the basic foundations of the corporate and financial sector
through improvements in governance, transparency, and accountability.372
• the 10 Corporate Governance Principles in projects involving

state-owned or other nonsovereign entities, and whether a
particular project has addressed them; and
• the Indicative Checklist of Corporate Governance Issues and
Risks in a particular project (Box 6.1).
372
For ADB’s interventions addressing financial sector governance, see ADB’s Financial Sector Toolkit.
Available: www.adb.org/documents/others/OGC-Toolkits/Financial-Sector/
6
Box 6.1: Indicative Checklist of Corporate Governance

Issues and Risks in a Project
• Does the project design consider and reflect the 10 “Corporate

Governance Principles for Business Enterprises”?
• What are the shareholders’ powers, and what are their
responsibilities to each other? Are there adequate protections for
minority investors?
• Are there prohibitions against non-arm’s-length transactions? What
procurement rules apply to related companies and intercompany
group sales and transfers?
• How are the powers and responsibilities, duties, and functions
of the company’s directors and executive officers set out in its
incorporation documents and articles of association? Are they clear
and are all relevant items included?
• How does the company prescribe internal operational procedures?
Does the company have an operations manual or an equivalent
document that details the company’s organization, staff terms
of reference, financial procedures, and procedures for day-to-day
operations? Is it clear?
• What is the system of financial control? Is there a company
accounting and auditing standard? Does it comply with
internationally accepted accounting and auditing standards?
• What are the criteria for selecting directors and executive officers,
and hiring management personnel? Are these criteria clear and
transparent?
• What are the company’s rules on conflicts of interest for directors,
management, and staff? Does the company clearly define when
something is a conflict of interest, and publish guidelines on how
to deal with conflicts of interest situations? Does the company have
a code of ethics or code of professional responsibility?
• Who appoints the directors and hires and fires managers and
employees? Does the company have clear and transparent criteria
for establishing compensation, performance bonuses, and other
benefits for officers and employees?
Source: Authors.
C. Governance and the Regulation of Public Utilities—

Water and Energy
1. What Governance Issues Concern Water and Energy Utilities?
Governance issues that arise in supplying water and energy to consumers

must be considered at two broad, yet interrelated, levels: (i) governance
of particular public or private water or electricity utility companies, and
(ii) “regulatory governance.” They are described as follows:
• Water and energy utility governance. The types of governance

issues that arise in relation to public or private water or electricity
utility companies are principally corporate governance issues. The
issues, risks, and strategies in connection with these utility companies
are broadly the same as the corporate governance issues, risks, and
strategies set out in Part B (above). However, financial, operational,
and technical issues arise frequently in connection with water and
energy utilities. For example, staff members employed by water and
energy utilities in some DMCs have been known to illegally connect
people to the water or electricity supply network for a bribe, meaning
that those connections do not pay for their electricity or water. This
clearly results in revenue losses for the utility.
• Regulatory governance of water and energy utility industries.

Regulatory governance involves the wider framework of governance
within which governments or public agencies regulate water or
energy utilities.373 In part, it involves the processes, institutions, and
relationships through which the various stakeholder interests are
balanced and relationships are mediated.
In contrast to regulatory governance, “regulatory substance”

refers to the subject matter of utility regulation, using mechanisms
such as tariffs, licenses, and technical standards to provide utility
6
373
ADB. 2007. Regional Technical Assistance Report: Enhancing Effective Regulation of Water and
Energy Infrastructure and Utility Services.
services.374 The link between regulatory governance and regulatory

substance is that regulatory substance is the outcome of a process
of good regulatory governance—regulatory substance is the end,
while regulatory governance is the means to achieving that end.
Regulation of water or electricity utilities seeks to balance the

interests of investors, consumers, and the public. Investors aim to
achieve a reasonable rate of return on their capital investment and
receive sufficient incentives for expansion and new investments.
Consumers focus on receiving an adequate, safe, and affordable
supply of utilities. The public interest serves the public at large. It is in
the public interest to avoid irreversible damage to the environment,
expand water supply or energy access to unconnected citizens (e.g.,
the poor), and ensure that taxpayer dollars are spent wisely.
Durable pipes are essential in water supply delivery. Nonrevenue water and leakages are some of the governance
challenges water utilities face.
374
ADB. 2007. Regional Technical Assistance on Enhancing Effective Regulation of Water and Energy
Infrastructure and Utility Services.
In short, governments and/or utility regulatory agencies seek

to provide a framework for the management of corporate
governance of water and energy utilities through regulation. The
process by which the regulation itself works is called “regulatory
governance.” The endpoint of which is good regulatory substance.
The endpoint of good corporate governance and the regulation of
water and energy utilities is good water and sector outcomes.375
Water and energy utilities have traditionally been publicly owned monopolies.
Beginning in the 1990s, public monopolies came to be viewed as inefficient and
ineffective at providing these services because of underpricing and overpricing
of tariffs (tariffs failed to reflect the costs of providing the service, leading to
insufficient funds available for investments, but in many cases, citizens were
required to pay high prices for substandard services); insufficient funds to
invest in maintenance and expanding public access to the utility network; poor
operating and financial performance; corruption and political interference; and
large subsidies and government debt.
Historically, the relevant water or energy ministry has the overall
responsibility for setting policy in the sector, operating and managing the
utility, and regulating or governing its operations. Also in the 1990s, donor
institutions came to view this blending of functions as presenting conflicts of
interest and not conducive to efficient and effective governance of the water
and energy sectors.
Consequently, reformers and policy advocates prescribed a standard
model for reform. This model involved separating the three sector functions by
mandating them to different authorities or entities to improve sector governance
and often, although not always, introducing private sector participation into
the operation and management of the utility. The three functions are:
• sector policy—the relevant water or energy ministry,

• operation and management of the utility—a separate (private)
legal entity, and
375
Brown, A.C., J. Stern, and B. Tenenbaum with D. Gencer. 2006. Handbook for Evaluating
Infrastructure Regulatory Systems.
6
• regulation of the utility—an independent public regulatory agency

or commission.
The standard model appears different in the power sector compared to

the water sector. In the power sector, the standard model involves separating
the generation, transmission, distribution, and market segments of the
industry; selling the generation and market segment parts that are amenable
to competition to many private firms; establishing independent regulators;
and allowing competition to operate in competitive markets. In the water
sector, where regulatory reform through competition has been introduced,
it has taken the form of inviting competitive tender for the opportunity
to supply water services to certain areas, sometimes with an autonomous
regulator, regulating those areas.
Although reformers instituted variations of this reform model, in many
cases they did not result in improved efficiency, effectiveness, and good
governance. More recently, reformers have realized that the effectiveness of
any such reforms is context and country-dependent.376 The standard model
may not be necessary, and it may not be sufficient or possible to achieve
improvements in governance.
One reason for the patchwork success of reform programs is that they
do not necessarily remove some of the chief governance risks involved in the
utility sectors. Sometimes reform programs actually accentuate such risks.
A chief governance risk involved in all regulation is “capture.” Water
and energy regulation is no exception. Capture is the exploitation of the
regulatory mechanism by politicians, regulated entities, or select groups to the
disadvantage of the public at large. Capture occurs in two ways: regulatory
capture and political capture.
376
Kirkpatrick, C., and D. Parker. 2004. Infrastructure Regulation: Models for Developing Asia. ADB
Institute Discussion Paper No. 6; Stern, J., and J. Cubbin. 2005. Regulatory Effectiveness: The
Impact of Regulation and Regulatory Governance Arrangements on Electricity Industry Outcomes.
World Bank Policy Research Working Paper 3536.
• Regulatory capture occurs when particular interest groups or

the regulated industry itself gains control of the regulatory process
or achieves bias in their favor.377
• Political capture occurs when individual politicians, the government,
or the ruling elite control the regulatory process and distort its
objectives to pursue political ends or their own self-interest.378
Some staff of ministries and regulatory agencies in DMCs have also

sometimes pointed to a third form of capture—”consultant capture” whereby
consultants engaged by bilateral and multilateral agencies assert or impose
Western precepts of regulation, that are not adequately sensitized or modified
for local context.
A second significant governance risk involved in energy and water
regulation in DMCs is that the numbers of staff within the ministry or
regulatory agency are insufficient to perform the task, and/or the staff do not
have the right technical skills to do the work.
Regulating energy and water utilities is complex and involves
sophisticated economic and engineering calculations and decisions,
including tariffs. There are often not enough people, or not enough
people with the right skill set, to perform an adequate job of regulating
the utility. This risk incidentally increases the risk of capture and increases
the chance that more typical governance problems (such as conflicts of
interest and corruption) will arise.
3. What Do ADB’s Policies Say About Governance for Water

and Energy Supply?
ADB views providing access to infrastructure and utility services as key to

DMCs reducing poverty and increasing economic growth. Poor infrastructure
leads to increased energy consumption, which has detrimental environmental
effects. The absence of well-planned infrastructure systems also discourages
private investment.379 Thus, infrastructure and utility services reform and
regulation is relevant to ADB because it is relevant to its DMCs.
377
Kirkpatrick, C., and D. Parker. 2004. Infrastructure Regulation: Models for Developing Asia. ADB
378
Institute Discussion Paper No. 6.
Ibid.
6
379
ADB. 2008. Strategy 2020: Long-Term Strategic Framework of the Asian Development Bank
2008–2020.
In Strategy 2020, ADB identified infrastructure development as one

of its five core specializations because an infrastructure deficit constrains
growth and access to social services in many DMCs. ADB’s investment in
infrastructure projects includes constructing physical infrastructure and
improving the delivery of infrastructure services by promoting institutional
and policy reforms that enhance operation efficiency and sustainability.380
In 2007, ADB released a study on its infrastructure operations in Asia and
the Pacific. It concluded that infrastructure and utility services are a priority
for ADB interventions in DMCs.381 In relation to governance, the study found
that improving the operating efficiency and quality of infrastructure and utility
services was also an important objective in governance activities. Thus, ADB’s
development plans for DMCs prioritize infrastructure and utility services,
recognizing that inadequate infrastructure constrains growth, international
competitiveness, and poverty reduction efforts.
The recurring theme throughout ADB’s policies is that the role of
government should shift from owner and producer to facilitator and
regulator of water and energy supply services. To this end, regulatory reforms
must precede sector-specific mechanisms such as privatization, contracting
out, and private–public partnerships.382 Government must ensure efficient
markets level the playing field for all participants.383 Governments must strive
to avoid or curtail corruption because that action encourages people to avoid
good and bad regulations.384 Accountability, participation, predictability,
and transparency form dimensions of good governance and must be given
priority.385
ADB’s private sector development strategy recognizes that private sector
development can affect poverty.386 However, ADB observes that private
investment in infrastructure projects needs proper regulation to relieve
pressure on public budgets and therefore enable governments to redirect
more resources to social spending. Thus, it also recognizes the importance of
governance and regulation in these sectors.
380
Ibid.
381
Sharan, D., B.N. Lohani, M. Kawai, and R. Nag. 2007. ADB’s Infrastructure Operations: Responding
to Client Needs.
382
ADB. 2004. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy.
383
384
ADB. 1998. Anticorruption Policy.
385
386
These policies are relevant to water and energy supply because such
utilities rely on good infrastructure development and good governance. The
relevant sector policies are described below.
a. Water Policy
ADB’s water policy recognizes that “the finite nature of water requires
ADB to promote the governance of its conservation and management to
the highest possible standards.”387 The policy recognizes that the elements
of accountability, participation, predictability, and transparency are also
important in water governance strategies.388 In relation to accountability, it
considers that DMCs’ legal and regulatory systems must ensure that water
service providers and resource managers are subject to legal accountability
controls to different levels in different countries. Water allocation must
consider high value uses, and social and environmental externalities.
Regarding participation, the policy recognizes the importance of
ensuring public, private, community, and nongovernment organization (NGO)
stakeholder participation in water planning. With respect to “predictability” in
water governance, the policy explains that it depends upon fair and consistent
application of laws, regulations, and policies to regulate water sector activities.
To ensure effective transparency in water governance, governments and private
providers must provide the general public with timely information about water
policies and projects, and also provide clear information on government rules,
regulations, and decisions on water. The water policy requires ADB to work
toward establishing appropriate standards of predictability and transparency
in water projects in accordance with its anticorruption policy,389 and to work
with governments in changing their roles and adopting improved regulatory
functions. Moreover the policy promotes building the capacity and knowledge
of different water sector stakeholders.390
387
388
ADB. 2001. Water For All: The Water Policy of the Asian Development Bank. para. 55.
Ibid.
6
389
Ibid.
390
Ibid., paras. 56 and 57.
b. Energy Policy
ADB’s 2009 energy policy aims to help DMCs “provide reliable, adequate
and affordable energy for inclusive growth in a socially, economically, and
environmentally sustainable way.”391 The energy policy “emphasize[s] energy
efficiency and renewable energy; access to energy for all; and energy sector
reforms, capacity building, and governance.”392 Moreover, it specifically
acknowledges the relevance of accountability, participation, predictability,
and transparency to the energy sector.393 It requires ADB to emphasize energy
sector reforms, building capacity, and governance to increase investment and
efficient use of resources.394
Under the energy policy, ADB is also directed to encourage private sector
participation (and public–private partnerships) as a means of enhancing
energy sector efficiency through competition, and increasing the available
resources for investment, but not as the end point for the reform process.395
ADB is to place greater emphasis on a country’s context and phasing the
sequence of reforms. Moreover, ADB is directed to support the appropriate
division of regulatory responsibilities among policy, regulatory, and
operational roles within a particular national context, and across different
levels of government. ADB is also to promote the regulation of natural
monopolies and regulation to support competition in the energy sector,
where appropriate within the country’s context.396 ADB seeks to promote
greater transparency in procurement and improvements in corporate and
financial management.397
391
ADB. 2009. Energy Policy. para. 14. The current energy policy reflects consistent themes in this
sector. ADB’s energy policy (1995) advocated power sector reforms that promote competition,
private sector participation, and independent and transparent power regulation. It also encourages
reforms that integrate the planning of resources, manage the demand for power, minimize
environmental impacts, and promote sustainability through energy efficiency and renewable
energy. See ADB. 1995. The Bank’s Policy Initiatives for the Energy Sector. In 2000, ADB confirmed
that then existing energy policy framework was sound and that it would continue to support
energy sector investments and assist in their implementation, placing emphasis on supply- and
demand-side efficiency improvements, environmental protection, and regional trade. ADB. 2000.
Energy 2000: Review of the Energy Policy.
392
ADB. 2009. Energy Policy. para. 14.
393
Ibid., para. 46.
394
Ibid., para. 15(iv).
395
Ibid.
396
Ibid., para. 46.
397
Ibid.
In 2008, ADB endorsed the Extractive Industry Transparency Initiative

(EITI) and became a supporting organization. By endorsing EITI, ADB
encourages its DMCs to ensure that natural resource wealth translates into
equitable economic growth, and that the process of creating the necessary
transparency and accountability frameworks to facilitate this goal must
respect the sovereignty of countries and existing contracts and laws.398
In relation to energy from the transport sector, ADB is also directed to
support cleaner modes of transport, invest in modernizing public transport
systems, and encourage transport and communication connectivity within
and among DMCs.399
4. How Can ADB Promote Good Governance for Public Water

and Energy Supply Services?
Good governance strategies for public water and energy supply services must
achieve the right mix of regulating the market effectively and efficiently and
promoting competition among service providers. This mix will depend upon
the degree to which competition has been introduced into the relevant sector
market (if any), and the model by which it has been introduced. Good regulatory
substance flows from an appropriate framework for effective regulatory
governance. The four general models for governing and/or regulating water and
energy utilities and promoting a price and quality mix are described below:
• Government regulation—the water or energy ministry prepares

policy and makes regulation. However, some argue that when
government makes regulation and operates a state-owned utility,
there is no “real” regulation of the utility service, rather what
is involved is governance of the sector because ownership is in
government hands.400
• Independent regulation—a separate legally, managerially, and
fiscally autonomous public legal entity has the authority to make
regulations.
398
399
ADB. 2008. Extractive Industries Transparency Initiative.
ADB. 2009. Energy Policy.
6
400
Infrastructure Regulatory Systems. p. 19.
• Regulation by contract—a contract between the government

or the utility provider and/or a private sector entity contains all key
aspects of regulation.
• Hybrid regulation—elements of independent regulation and
regulation by contract are combined, or independent regulation
is introduced together with contracted technical experts or other
alternative measures.
As described above (see Part C, sections 2 and 3), reformers have

tried to separate the sector functions of policy, operations, and economic
regulation. Thus, they have tried to encourage shifts from models of
government regulation to models of independent regulation, regulation by
contract, or hybrid regulation. Policy analysts and reformers have achieved
some consensus on the core elements of effective regulatory governance for
independent regulation.401 These are described below.402 However, reformers
seeking to improve any model of regulation could usefully consider these core
elements of effective regulatory governance to provide an effective regulatory
framework in other arenas. They include
• Clear objectives and roles.403 The objective of regulation

must be clear, whether it is set out in government regulation, a
contract, or regulation made by an independent agency. A clear
list of objectives facilitates accountability and enables monitoring
of performance over time.
The roles of the regulatory department or independent agency,

or the roles and responsibilities set out in a regulatory contract
must be clear. Moreover, if an autonomous regulatory agency
exists, its authorizing legislation must clearly distinguish between
401
Infrastructure Regulatory Systems; Kirkpatrick, C., and D. Parker. 2004. Infrastructure Regulation:
Models for Developing Asia. ADB Institute Discussion Paper No. 6; Stern, J., and J. Cubbin. 2005.
Regulatory Effectiveness: The Impact of Regulation and Regulatory Governance Arrangements on
Electricity Industry Outcomes. World Bank Policy Research Working Paper 3536.
402
Note that many commentators include more elements of effective governance than these six.
However, for the purposes of this Guide, consistent with the government policy and ADB’s prior
work, these six elements will be treated as the key elements.
403
Clear objectives and roles could also be considered as part of the principle of autonomy or the
principle of predictability, however, it is of sufficient importance to treat it distinctly.
its mandate to regulate, and the policy responsibilities retained

within the ministry. Overlapping responsibilities create confusion.
Similarly, in federal systems, or DMCs with multilevel government,

the authority of the ministry or the regulator over these different
levels must be clearly articulated. When roles are clearly described
result with greater coherence and less room for confusion or
incidental political interference.404
• Autonomy. Regulation should be conducted within a sphere of

relative autonomy with at least sufficient independence from political
interference to allow a regulator to perform its role in a manner that
satisfies the regulatory objectives.405 Until recently, “independence”
has been considered the holy grail of regulatory governance.
However, regulatory reformers now realize the practical difficulties of
achieving complete independence and that it may not be necessary
or possible in some DMCs so long as a regulatory agency has a degree
of autonomy and this autonomy allows it to operate with credibility.
To whatever extent regulation is developed, its designers must

have sufficient autonomy and independence from political or
private sector regulatory capture to establish a credible system of
regulation. A regulatory system that clearly defines the powers
and duties of a regulator, ensures its financial security, and allows
its operational and managerial autonomy for staffing decisions
will be in a better position to have an autonomous regulator.
• Participation. Participation in the regulatory process requires that

all parties affected by regulation on a regulatory decision, including
government, regulated industry, consumers, and unconnected
citizens, have the opportunity to influence the regulation or decision
before the regulator decides. Participation may take different forms
such as formal consultations, formal or informal hearings, and
surveys. Participation can improve the quality of regulatory decisions
National Economic Research Associates. 1998. Governance and Regulatory Regimes for
6
404
Private Sector Infrastructure Development—Final Report.

405
Ibid.
and secure more widespread stakeholder support, particularly when

the issues involve sensitive issues like tariff increases.406
• Accountability. Accountability requires the regulator, or those

who made the regulatory contract, to answer questions and
be subject to sanctions for performing its/their obligations and
responsibilities with respect to its/their regulatory mandate and
tasks. This makes the regulator answerable to government,
investors, consumers, and citizens, and is potentially subject to
sanctions for failing to properly perform.
• Predictability. Predictability means that laws, rules, policies,

and any regulatory contract are applied fairly and consistently.
Predictability is important in ensuring that risks can be rationally
measured, transaction costs lowered, and arbitrariness minimized.
Predictability assures regulated firms that the “rules of the game”
will not unexpectedly change, either by changing the legal and
regulatory framework or through major policy changes, but needs
to be balanced against the regulatory need for flexibility to adapt to
new circumstance.
• Transparency. Transparency refers to both the ability to access

information surrounding that process and also refers to the clarity
of information, laws, rules, regulation, and decisions. Transparency
of regulatory decisions and the regulatory decision-making process
is needed to ensure participation, accountability, and predictability.
It achieves this result when regulated firms, government, and
citizens know the bases for the regulators’ decisions or the bases
upon which regulatory contracts have been made.
• Integrity. Integrity of the regulatory system is dependent upon

whether the system is structurally sound and unimpaired as well
as on the personal integrity of individuals that comprise that
system. An individual’s personal integrity depends upon the
extent that the individual adheres to principles of honesty and
406
Ibid.
sincerity. Better employment conditions such as paying sufficient

salaries to regulators to support themselves and their families at
a reasonable level without any other source of income, bolsters
integrity of the regulator. The enactment and strict enforcement
of laws that prohibit bribery, conflict of interest and preferential
treatment, undue disclosure of financial interest, and unlawful use
of information are of utmost importance to promote integrity, deter
corruption, and demonstrate a strong rule of law.407
• Capacity. Capacity refers to the ability of people, organizations,

and society as a whole to manage their affairs successfully.
Individuals and organizations need the capacity to implement
regulation to achieve the other governance elements of an
effective regulatory system.
Key Points for Project Counsel. When working on an energy or water

sector project and considering governance, project counsel may find it
useful to
• work with the project team to ask and answer the questions
listed in Box 6.2; and
• consult additional resources on governance and anticorruption
in the energy and water sectors.407
407
The following resources are excellent supplements on governance in the electricity and water
sector and should be consulted. They can be found on-line. ADB. 2009. Guidance Note on
Electricity Sector Risk Assessment; ADB. 2009. Guidance Note on Urban Water Supply Sector
Risk Assessment; World Bank. 2009. Deterring Corruption and Improving Governance in the
Electricity Sector: A Sourcebook; Halpern, J., C. Kenny, E. Dickson, D. Ehrhardt, and C. Oliver. 2008.
Deterring Corruption and Improving Governance in the Urban Water Supply and Sanitation Sector:
A Sourcebook.
6
Box 6.2: Indicative Checklist of

Governance Issues for Energy and Water Projects
Clear Roles and Objectives

• Is there primary legislation and does it clearly define the regulator’s
functions and duties?
• If not, where are these functions and duties formally published?
Are they published in legal instruments, contractors’ documents
and/or other documents?
• Does the legislation establish unambiguously which entity is
responsible for what regulatory functions? If not, how do the
various parties involved in regulation identify their responsibilities?
• Does the regulator have any responsibility for commercial activities?
Autonomy
• What is the relationship between the regulatory body and the
government (e.g., a separate division of a ministry, a body
independent of any ministries, a body independent of government)?
• What is the process for appointing and dismissing members of the
regulatory body?
• How is the regulatory body financed? Who must approve the
funding?
Participation
• Does the regulator formally involve regulated firms, other industry
firms, consumers, and others in major decisions or the proposed
approach for making major decisions? Are consultation responses
made public in any form?
• Does the regulator comment publicly on points made in
consultation responses, and how (if at all) these have affected the
final decision?
• What other ways are industry participants (including firms and
consumers) are involved in regulatory decision making and
processes?
Accountability
• Is there a formal mechanism for regulated firms (or other parties)
to challenge regulatory decisions? If so, how does it work? Has it
been used?
• Is there also a legal right of redress from regulatory decisions?

Box 6.2: continued
• Do firms or other parties comment (or even challenge) decisions

through informal channels such as direct representations to
ministers, or through the media?
• To whom does the regulatory body report and to whom is it
accountable—government, parliament, or courts?
Transparency
• Are major regulatory documents such as the concession agreement
or licenses made public?
• Does the regulator publish major decisions or advice?
• Does the regulator publish the reasoning behind major decisions
and orders? If not, why?
• Are consumer bills and invoices in a readily understandable format?
Predictability
• How easily can the regulatory functions and duties be changed and
what is involved?
• How easily can key regulator documents (e.g., licenses,
authorizations, franchise contracts) be changed and what is
involved?
• To what extent are regulatory principles formally defined?
• Have the regulator’s decisions demonstrated a consistent approach?
• To what extent are regulatory arrangements in the sector part of a
coherent approach?
Integrity
• Do the individuals leading and managing the regulatory system
have reputations for honesty and sincerity?
• Is the utility regulatory system regarded as corrupt or captured?
Capacity
• Are the individuals leading and managing the regulatory system
known for being skilled managers and leaders?
• What are the human and financial resources available for the
regulatory body and are they enough to gather information needed
to conduct its mandate?
• Do the staff of the regulatory body have the right skill mix and
competence for performing the regulatory body’s mandate?
Source: This has been modified from: National Economic Research Associates. 1998. Governance
and Regulatory Regimes for Private Sector Infrastructure Development. Manila: ADB, Annex 1.
Available: www.adb.org/Documents/Reports/Consultant/31610-REG/31610-REG-TACR.pdf
6
D. Social Sectors—Health and Education
The education and health sectors each have very different substantive
objectives, all the more so in the context of different DMCs. The education
sector broadly seeks to provide universal education to all school-age children
to support an educated and skilled workforce. The health sector broadly
seeks to provide universal and affordable health care to all members of the
population, and promote, in particular, the health of vulnerable groups
such as the poor, women, and indigenous peoples. The issue of providing
the poorer segments of society with access to good quality and safe
pharmaceuticals is also important, and is thus included as a vital part of a
government’s health program. However, poor governance and corruption
of both education and public health delivery systems can jeopardize the
proper implementation of social programs.408
Universal education for all is one of the United Nations’ Millennium Development Goals.
408
Campos, J.E. 2007. A Practical Approach to Combating Corruption: A Value Chain Methodology.
Governance Brief Issue 16.
Because education and health sectors are social services, many of the
governance issues that arise are similar. These issues may include
• setting clear priorities to ensure the most efficient use of resources;

• mobilizing resources for public health/education;
• building administrative or managerial capacity;
• experimenting with innovative approaches to or new technologies
for health and/or education;
• providing public goods such as research, health and education,
and regulation;
• collaborating between the public and private health and education
sectors;409
• distributing fees, salaries, and scholarships to health professionals
and/or teachers;
• making timely disbursement of funds to educational and/or
medical institutions;
• making timely distribution of educational and/or medical equipment
and materials;
• ensuring good financial management;
• ensuring commitments or bonded time for training or trips within
country or overseas for health professionals or teachers;
• establishing complaint mechanisms for beneficiaries; and
• ensuring transparent flow of funds.
The overriding risk confronting both public health delivery systems and the
education system is that poor governance and corruption present risks to proper
implementation of social programs, defeating their overriding objectives.410
2. What Do ADB’s Education and Health Policies Say

About Governance?
ADB’s education policy recognizes the important role education plays in

introducing members of a society to the system of government and the
concept of governance though the school curriculum.411 The education
policy also emphasizes that children’s participation in classroom committees
6
409
ADB. 1999. Policy for the Health Sector. p. xi.
410
Campos, J.E. 2007. A Practical Approach to Combating Corruption: A Value Chain Methodology.
Governance Brief Issue 16.
411
ADB. 2003. Education Policy. Appendix 1, para. 5.
and school government forms a foundation for future participation in

government.412 Promoting good governance requires facilitating access to
information and knowledge because this is the basis of decision making
and concerted action.413 Thus, ADB recognizes governance as one of the
six subsidiary priorities that must be addressed to achieve the key priorities
of poverty reduction, enhancement of the status of women, and economic
growth as its key priorities.414
ADB’s policy in the health sector recognizes that improved health services
have a positive impact on its objectives to promote economic growth, reduce
poverty, improve the status of women, and support human development.415
Additionally, improvements in the health sector are intimately linked with
those in the education sector. Healthy children learn better, and therefore
benefit more from investments in education.416 Good health also increases
workers’ productivity.
ADB’s health policy also stresses the importance of strengthening the
monitoring and evaluation aspects of health investments through the project
performance management system and improving the management capacity
of health ministries so they can better provide services.417 Thus, the health
policy implicitly embeds ADB’s priorities for the health sector within ADB’s
broader framework for promoting good governance.
3. How Does ADB Promote Good Governance

in Education and Health?
Promoting good governance in the health and education sectors will involve
building the capacity of health and education ministries at all levels—central,
provincial, city, municipality, and village. It also may involve supporting
organizational restructuring or involving the private sector in the delivery
of social services in some manner. Ensuring and strengthening community
participation in the management of hospitals, health clinics, and/or schools
412
Ibid.
413
Ibid.
414
The other subsidiary priorities are: (i) increasing equity, access, and retention, especially for the poor,
women, and other marginalized groups; (ii) improving quality of education; (iii) mobilizing resources
for sustainable education delivery, in particular facilitating the role of the private sector, while
protecting access by the poor to affordable basic education;(iv) strengthening collaboration with
partners and beneficiaries; and (v) emphasizing more experimentation with, and dissemination
of innovative strategies and technologies. ADB. 2003. Our Framework: Policies and Strategies—
Education. para 43.
415
ADB. 1999. Policy for the Health Sector. p. 57.
416
Ibid., p. 58.
417
Ibid., pp. 66 and 69.
can improve accountability and transparency. However, careful assessment,

evaluation, and implementation of reforms in the legal and policy frameworks
must be undertaken to facilitate education sector reforms.
ADB has tailored specific design features to improve project management
and promote good governance in several health and education projects. The
mechanisms used in these projects can be used as precedents or examples.
Examples include:
• introducing e-governance to the education system, including the

design and piloting of an education management information
system (EMIS) to improve school administration in institutions,
districts, zones, and ministries;418
• modernizing the curriculum and strengthening a ministry of
education's capacity to conduct monitoring and evaluation activities;
• establishing administrative grievance mechanisms for those within
the school system;419
• introducing the Knowledge Society project in Sri Lanka, which
supports the development of a central mechanism for policy
dialogue among educators to improve coordination and
partnerships among them and training providers;420
• integrating a step-by-step process for the executing agency
and the project management unit to ensure good governance
including performance auditing, a grievance mechanism, and
financial controls in the Second Urban Primary Health Care Project
in Bangladesh;421 and
• including a Governance and Accountability Action Plan (GAAP)
that aims to ensure minimum enabling conditions for good
governance in schools and education in the Education Sector
Program in Nepal.422
418
Loan to the Democratic Socialist Republic of Sri Lanka for the Secondary Education Modernization
Project II.
419
Ibid.
420
ADB. 2007. Report and Recommendation of the President to the Board of Directors on the
Proposed Loan and Asian Development Fund Grant to the Democratic Socialist Republic of Sri Lanka
421
for the Education for Knowledge Society Project.
ADB. 2005. Report and Recommendation of the President to the Board of Directors on the 6
Proposed Loan and Asian Development Fund Grant to the People’s Republic of Bangladesh for the
Second Urban Primary Health Care Project.
422
ADB. 2009. Report and Recommendation of the President to the Board of Directors on the
Proposed Asian Development Fund Grant and Loan for Subprogram III to the Government of
Nepal for the Education Sector Program. Manila.
Key Points for Project Counsel. Project counsel working on an education

or health sector project may find it useful to consider the following
governance issues with the project team:
• to ask and answer the questions listed in Box 6.3; and

• address the key generic issues listed above.
Box 6.3: Indicative Checklist of Governance Issues

for Health and Education Sectors
• Are there clear sector priorities to ensure the most efficient use of
resources?
• How are resources mobilized for the sector?
• How is administrative and/or managerial capacity strengthened?
• Are there innovative approaches to or new technologies for health
and/or education?
• Is there a need to encourage collaboration between the public and
private health and/or education sectors?
• What regulatory safeguards or guidelines have been established to
ensure that private sector profit motives do override the provision of
social services?
• How are fees, salaries, and scholarships distributed to teachers and
health professionals?
• What is done to ensure the timely disbursement of funds to
educational and medical institutions?
• What is done to ensure timely distribution of educational or medical
equipment and materials?
• What systems are in place to ensure good financial management
and internal controls?
• Is there a commitment or bonded time requirement for overseas or
in-country training or trips for health professionals or teachers?
• Is there an administrative complaint mechanism for intended
beneficiaries of the health and education systems?
• What is done to ensure transparent flow of funds?
Source: Authors.
E. Decentralization
1. What Is Decentralization?
Decentralization is a broad term that includes several other related terms that
also describe forms of decentralization (i.e., devolution, deconcentration, and
delegation).
Decentralization occurs when a higher tier of government (usually the
central tier) transfers certain powers and responsibilities to deliver public
services and goods to lower tiers (usually provincial and district levels). The
degree of power and responsibility that is transferred may vary and results
in three notable forms of decentralization: devolution, deconcentration, and
delegation.
• Devolution is the most extensive form of decentralization.

Devolution describes the process of a higher tier of government
completely passing power and responsibility to the lowest tier.
That lowest tier of government then becomes independently
responsible for delivering a set of public goods or services and
imposing the fees and taxes required to finance the delivery of
such goods or services.
• Deconcentration occurs when the lower tier of government acts

as agent for the higher tier in delivering goods and services. The
lower tier may not have authority over the scope or quality of local
services and how they are provided.
• Delegation involves the lower government tiers being responsible

for delivering certain public services under the supervision of the
higher tier.
Many of ADB’s DMCs have embarked on a process of decentralizing the

functions of government. Decentralization is often pursued as policy reaction
to the poor delivery of public goods and services under a system of centralized
government. For example, the public demanded decentralization during the
post-Suharto era in Indonesia, partially in response to overtly centralized 6
control under Suharto.
Central governments may also use decentralization as a political strategy

for responding to demands from subnational governments seeking separation
of their subnational state or province from the entire country. Examples of
this trigger for decentralization existed in the civil conflicts in Indonesia and
Sri Lanka. In Indonesia, separatist demands made by the Province of Aceh
resulted in the central government statutorily authorizing a level of provincial
autonomy for Aceh. In Sri Lanka, the reason for the decentralization process
that resulted in the 13th amendment to the constitution was partially a
response by the central government to separatist demands by Tamils in the
north and east.
Successfully pursuing decentralization strategies requires understanding the

trade-off between benefits and risks. Arguments putting forth the benefits of
decentralization suggest that it leads to
• Enhanced accountability. Decentralization of power brings

service providers and politicians closer to the citizens that are the
end users of public services, making it easier to empower citizens
and enhance their voice. Any accountability framework must
have these factors to operate effectively. In particular, it needs
mechanisms that will provide citizens with the right to
receive relevant information and adequate explanation for
certain decisions, and
impose sanctions if such decisions are deemed inappropriate
or the information about them is considered inadequate.
• Increased transparency. Under decentralization, citizens typically

have greater access to information (formally and informally)
on activities and programs promoted and supported by their
leaders. Dissemination of information should also be cheaper and
accomplished more efficiently at a local level. By increasing the
public’s access to information, citizens will have better prospects
for objectively assessing whether authorities have improved public
services and politicians have delivered on campaign promises.
• Greater local participation. When power and resources are

delegated to a level of government that is more familiar and more
easily influenced, citizens have greater opportunities to participate
in the delivery of services. Communities are likely to have greater
opportunities to participate in and finance the delivery of certain
services under the supervision of or in collaboration with the local
government. For example, local government ordinances in Pakistan
allow public–private partnership in the delivery of municipal
services, which come under the control of subdistrict government.
Some of these supposed benefits of decentralization may not materialize

when various risks crystallize. These decentralization risks include
• State capture at the local level. Lower levels of government

are generally more susceptible to state capture (i.e., individuals,
groups, or firms in the public or private sectors who seek to influence
the formulation of rules and regulations to their advantage
through illicit and nontransparent actions). State capture is more
likely to be a risk in an area where highly concentrated interest
groups dominate the market for political influence and political
competition is weak.
The growing susceptibility of local governments to capture results

from
weak institutions (such as the local judiciary and legislature)
that are normally expected to provide adequate checks and
balances, and
less-experienced media and civil society organizations being
expected to represent the public interest in a local setting.
• Intergovernmental tensions. The decentralization process is

usually driven by political decision. However, the bureaucracy tasked
with implementing the transfer of powers and responsibilities may
not be entirely enthusiastic about implementing the decentralization
process.
6
The central government’s and the administration’s reluctance to

transfer powers and responsibilities and to allocate financial and
staff resources can detract from successful implementation of
decentralization on the ground. The powers and responsibilities
passed down to the lower tier of government are often not as
exhaustive as those mandated under the relevant legislation. Central
governments and bureaucracies may justify limiting the devolution
of power to lower tier governments based upon capacity constraints
at the lower levels.
• Capacity constraints. A government’s capacity to act stems

from the experience and expertise of its members, together with
its cumulative knowledge, financial and capital resources, and
implementation systems. Among the different tiers of government,
the local tier often has the least capacity to execute public policies.
Thus, at the initial stage of decentralization, local governments
may not be ready to assume their new powers and responsibilities
or formulate policy.
• Matching policy issues with decision-making tiers. The

particular policy issues for implementation must match the policy
considerations of the government tier tasked with implementing
them. For example, a local government may have the incentives
to allow pollution from a particular industry where its effects are
felt primarily in a neighboring district, while a provincial or central
government will not have those same incentives and instead will
have a broader geographic and substantive mandate to protect a
wider public interest.
3. What Does ADB Policy Say About Decentralization?
ADB recognizes that the party best placed to determine whether a country
should undertake decentralization is the country itself. ADB further recognizes
that the country would make such decisions, taking into account the legal
and political landscape, degree of economic growth, and government
priorities.423 ADB prefers that end-users of loan proceeds bear the loan-related
obligations.424 However, ADB allows governments to determine whether
devolving functions to smaller administrative units is the best mechanism
for achieving this. When a DMC chooses to decentralize, ADB will help by
analyzing which characteristics of decentralization sustain the market and
which enhance economic performance.425
4. How Does ADB Promote Effective Decentralization?
To promote effective decentralization, it is important for project counsel

to understand its benefits and risks. Even where a project is not primarily
concerned with achieving decentralization, if it is operating within
an environment where decentralization is occurring, project counsel
should encourage project teams to consider how to use the benefits of
decentralization and how to mitigate against its associated risks, if possible.
Key Point for Project Counsel. In responding to decentralization risks,

project counsel should seek to ensure that a project design incorporates
measures such as those described in Box 6.4.
Effective decentralization also requires certain other arrangements to be

put in place, such as
• Clear roles and responsibilities between different tiers of

government. Lack of clarity will sidetrack decentralization reform.
In many DMCs, the basic legislation mandating decentralization may
have been enacted and may provide clear guidance on the different
powers and responsibilities of the different tiers of government.
However, legislation requires implementing rules. Typically, such
rules should be issued by the tier of government that is required to
devolve its power and responsibility to a lower tier (i.e., the central
423
424
Ibid.
425
Ibid.
6
level of government). There are often delays in issuing such rules

or regulations. Thus, this stage carries the greatest risk that the
decentralization process will be sidetracked.
• A clear fiscal mechanism that provides each government

tier with adequate finance. The local government must be
able to adjust its budget to adequately respond to community
Box 6.4: Measures to Improve Governance

in Decentralization Projects
• Enhance the accountability framework. If an accountability

framework already exists within a country’s decentralization structure,
project counsel should assist the project team to properly integrate
it into the project design. If such mechanisms do not exist, project
teams may seek to incorporate them into the project’s design.
• Enhance transparency. Allow citizen access to pertinent project-
related information.
• Encourage local community participation. One concrete
example of such mechanism would be a service delivery agency
adopting a client charter. A client charter could outline the
standard of service that the agency would deliver and the complaint
mechanisms available to the citizen (as the end-user) if those
standards of service are not met.
• Avoid state capture at the local level. When designing a project,
understand and attempt to avoid the potential for “capture.”
Enhancing the role and capacity of civil society could mitigate some
of this risk.
• Resolve or reduce intergovernmental tensions. Strike a balance
between the necessity to align project design with the decentralization
framework and the need to consider practical reality. Supervisory
roles may be needed within the higher tier of government until the
lower tier is ready to assume more responsibility.
• Increase capacity to undertake activities. When preparing
a project in a decentralized governance setting, include capacity
building of the relevant level of government to undertake
decentralized powers and responsibilities as one of the required
activities.
• Match policy issues with decision-making tiers. Certain
decisions are best made at particular tiers of government.
Source: Authors.
preferences for the quantity and quality of public services. Effective

fiscal mechanisms will ensure
a clear allocation of revenue among the different government
tiers,
a certain degree of autonomy for the different government
tiers to exercise their authority, and
an efficient revenue administration system.
• A proper and adequate way of managing human resources.

The decentralization process often requires the transfer of a
significant number of staff from one tier of government to the
other. Transferring staff among different government agencies
or tiers can be disruptive. It is important that the lower tier of
government is able to
allocate staff to work in the different functional areas,
attract and retain qualified individuals,
have flexibility in managing financial resources for staffing,
and
hold staff accountable for their performance
These challenges are not insignificant.426
• understand the discussed preliminary guidance on how to

maximize project results within a decentralized governance
setting discussed in this section, and
• work in conjunction with the project team to seek guidance
from additional resources as needed.426
426
The following resources provide additional helpful material. Rohdewohld, R. 2006. Managing
Decentralization: Interministerial Bodies, Policy Coordination, and the Role of Development
Aid Agencies. Governance Brief Issue No. 15; Subbarao, D., and R. White. 2005. East Asia
6
Decentralizes. In World Bank. East Asia Decentralizes: Making Local Government Work. See also:
World Bank. 2009. Decentralization in South Asia.
F. Disasters and Emergencies
1. How Does ADB Define a Disaster or Emergency?
ADB’s disaster and emergency policy defines a disaster as
a sudden, calamitous event that seriously disrupts the

functioning of a community or society, causing widespread
human, material, economic, or environmental losses that
exceed the community’s or society’s ability to cope using
its own resources.427
People make their way through flooded streets in Pasig City, Philippines, after tropical storm Ketsana dropped the
heaviest rain recorded in more than 40 years.
Natural disasters include events such as earthquakes; tidal waves;

hurricanes; cyclones; volcanic eruptions; floods; droughts; epidemics;
technological or industrial accidents, including explosions, oil spills, nuclear
reactor failures, or chemical mishaps; and conflict situations, including
regional conflicts, national or civil wars, or widespread community violence.
427
ADB. 2004. Disaster and Emergency Assistance Policy; ADB. 2004. Operations Manual. OM D7/
BP: Disaster and Emergency Assistance.
Post-conflict countries are those emerging from violent, protracted

conflict. An emergency occurs following a disaster, “when unforeseen
circumstances require immediate action, and local capacity is insufficient to
address and manage traumatic events.”428 An emergency may result in deaths,
injuries, displacement of people, disease, disability, food insecurity, damage
or loss of infrastructure, weakened or destroyed public administration, and
reduced public safety and security.
2. What Governance Issues and Risks Are Involved?
The four key elements of governance—transparency, accountability,

participation, and predictability—are crucial during the rehabilitation
and reconstruction that follows a natural or man-made disaster. They are
particularly important because a DMC often receives considerable foreign
financial and in-kind assistance after a disaster or other emergency.
The immediate response and the slower rehabilitation process always
involve the DMC allocating financial and in-kind resources and large
expenditures for rebuilding. Many of the DMCs in which ADB works already
have stressed institutions with a weakened capacity for achieving outcomes.
The influx of financial and in-kind resources adds further stress on these
institutions. If the four key elements of governance are not present in
the DMC, the additional financial and in-kind aid can be siphoned off by
corrupt individuals, or misused through poor project management and poor
governance. Ultimately, there is a risk that resources intended for rehabilitation
and rebuilding may not be used for their planned purpose.
3. What Does ADB’s Emergency and Disaster Policy Say About

Governance Issues?
Together with the governance policy, the disaster and emergency assistance
policy provides the framework for ADB’s response when communities have
been affected by a natural disaster or a conflict.429 The policy requires the
elements of transparency, accountability, and participation to be applied in
any emergency assistance project.
6
428
ADB. 2004. Disaster and Emergency Assistance Policy.
429
Ibid.
This policy also emphasizes that post-disaster reconstruction initiatives

should aim to strengthen and rebuild institutions and protect vulnerable
persons. In particular, the disaster and emergency assistance policy specifically
requires a project completion audit.430
Thus, the disaster and emergency assistance policy affirms the relevance
of the governance policy for disasters, although it leaves staff the flexibility of
determining how to achieve its purposes.
4. How Does ADB Promote Good Governance in Emergency

and Disaster Situations?
ADB promotes good governance in disaster and emergency situations

by designing measures to reduce the additional stress on DMC’s existing
institutional service delivery mechanisms, and by increasing oversight of
the institutions designed to respond to provide relief to beneficiaries and to
reconstruct institutions, infrastructure and services.
Demands for rehabilitation and reconstruction in a DMC affected by a
natural or man-made disaster will be urgent. However, one of the lessons
learned from past disasters is that ADB’s response must be quick but well
considered. A balance must be struck between processing ADB’s assistance
quickly and spending enough time formulating and designing the project to
ensure that the purposes of rehabilitation, reconstruction, and rebuilding are
ultimately satisfied.
Projects that are rapidly designed risk having delays in implementation,
especially when problems arise due to incomplete design. Such projects
then need redesigning to facilitate implementation. Thus, an emergency
or disaster response project that does not sufficiently focus on governance
and anticorruption issues risks subsequent delays that may eliminate any
advantage gained by an initial quick response.
There are several emergency response projects for which ADB has
tailored design features to improve project management and promote good
430
Ibid., para. 108.
governance.431 Good examples of such projects are the tsunami response

projects for Indonesia, the Maldives, and Sri Lanka.432 Information on tsunami
assistance, fund administration, and procurement was published on internet
websites and in local newspapers to promote transparency. In Sri Lanka,
the tsunami project ensured widespread participation from members of the
project, civil society, and NGOs in selecting and approving subprojects for
implementation thus ensuring a participatory process.433 More specifically,
the measures set out in Chapter 5 of this Guide were originally designed for
emergency projects, and should be considered in new emergency projects.
Further, the disaster and emergency assistance policy requires additional
supervision and monitoring within disaster and emergency projects. To satisfy
this requirement, the Sri Lanka tsunami project subjected personnel and
community members to regular and random monitoring. The project was also
subjected to special and random financial and performance audits.434 Each of
the four tsunami projects incorporated grievance mechanisms for tsunami
affected persons. The Pakistan Earthquake Emergency Project followed a
design similar to the Sri Lanka project and included similar components,
including a grievance mechanism.435
431
Asian Development Fund Grant to Solomon Islands: Emergency Assistance Project; ADB. 2005.
Report and Recommendation of the President to the Board of Directors on a Proposed Grant and
Loan to the Republic of the Maldives for the Tsunami Emergency Assistance Project; ADB. 2005.
Report and Recommendation of the President to the Board of Directors on a Proposed Loan and
Technical Assistance Grant to the Cook Islands for the Cyclone Emergency Assistance Project.
432
Loans and Grants to the Democratic Socialist Republic of Sri Lanka for the Tsunami-Affected Areas
Rebuilding Project and the North East Community Restoration and Development Project II.
433
Ibid., Appendix 8, para. 10.
434
Ibid., Appendix 8, para. 6.
6
435
Loan, Pakistan Earthquake Fund Grant, and Technical Assistance Grant Islamic Republic of
Pakistan: Earthquake Emergency Assistance Project.
Key Points for Project Counsel. Project counsel working on disaster and
emergency projects should
• consider the project specific features in Chapter 5 of this guide,

which were originally designed specifically for disaster and
emergency projects; and
• review prior disaster and emergency projects to obtain
illustrative guidance on project specific design features.436
G. Anti-Money Laundering 436
1. What is Money Laundering?
Money laundering is action taken to process the proceeds of crime so as

to disguise their illegal nature or origin.437 Criminals launder money for two
reasons: (i) to separate the funds from the crimes that generated them,
thereby seeking to avoid criminal prosecution; and (ii) to protect the funds
from seizure and confiscation by law enforcement authorities. Criminals
usually launder money in three stages, identified as
• placement—the criminal introduces the proceeds of the crime

into the financial system;
• layering—the criminal uses a series of transactions that convert

or transfer the funds to other locations and financial institutions,
including offshore financial centers; and
436
The following projects are examples. ADB. 2007. Report and Recommendation of the President
to the Board of Directors on a Proposed Asian Development Fund Grant to Solomon Islands:
Emergency Assistance Project; ADB. 2005. Report and Recommendation of the President to the
Board of Directors on a Proposed Grant and Loan to the Republic of the Maldives for the Tsunami
Emergency Assistance Project; ADB. 2005. Report and Recommendation of the President to the
Board of Directors on a Proposed Loan and Technical Assistance Grant to the Cook Islands for the
Cyclone Emergency Assistance Project; ADB. 2007. Report and Recommendation of the President
to the Board of Directors on Proposed Loans and Grants to the Democratic Socialist Republic
of Sri Lanka for the Tsunami-Affected Areas Rebuilding Project and the North East Community
Restoration and Development Project II; and, ADB. 2005. Report and Recommendation of the
President to the Board of Directors on Proposed Loan, Pakistan Earthquake Fund Grant, and
Technical Assistance Grant Islamic Republic of Pakistan: Earthquake Emergency Assistance Project.
437
ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and
the Financing of Terrorism. para. 5.
• integration—the funds reenter the legitimate economy as clean

money.438
Once the money has been laundered, the criminal may then invest freely
in real estate, buy luxury assets, or enter into new business ventures.439
Financing terrorism is related to money laundering. The term “financing
terrorism” is self-explanatory. It occurs when secret and fictitious bank
accounts are used to fund terrorist activities, and when the pervasive network
of financial foundations for terrorists use seemingly legitimate business
enterprises, charities, religious groups, trusts, educational and research
institutes, political groups, and individuals.
Terrorism is typically financed either with laundered money or legitimate
funds.440 The distinction between the sources of the funds is important. Under
most national anti-money laundering (AML) laws, terrorism financed with the
proceeds of crime qualifies as money laundering and financing terrorism.
However, terrorism financed with legitimate funds that are channeled
through seemingly genuine “fronts” is harder to restrict, particularly where
many legal systems do not impose sufficiently strict rules requiring adequate
transparency, accounting, and auditing on transactions.
Money laundering and financing terrorism pose a significant threat to

international markets and security, and hinder economic development.
According to some, the amount of money laundered each year totals
3%–5% of the global gross domestic product, or about $2.17 trillion–
$3.61 trillion.441 To stem this significant flow of funds related to crime and
terrorism, government authorities must understand the extent of money
438
the Financing of Terrorism. p. 2.
439
Ibid.
440
Ibid., paras. 11 and 12.
441
United States Department of State, Bureau of International Narcotics and Law Enforcement
Affairs, 2008. International Narcotics Control Strategy Report, Volume II, March. See also Lal, D.
6
2008. Endangering the War on Terror by the War on Drugs. World Economic. Vol. 9, No. 3,
July–September.
laundering and financing terrorism, and adapt to new vulnerabilities,

such as the use of mobile phones to transfer funds and gamble online.442
Money laundering undermines financial sector governance.443 The
normal way money is laundered involves “depositing funds into banks and
then arranging wire transfers of those funds to other financial institutions,
often in foreign jurisdictions.”444 Money launderers are constantly developing
new techniques, including
the use of Internet gambling and other Internet “services”;

on-line banking; trusts, international business companies,
shell companies, and other noncorporate vehicles,
using local proxies to shield the true beneficial owners;
“gatekeepers” such as lawyers, accountants, financial
consultants, and securities and insurance professionals;
new payment technologies such as electronic purses and
Smartcards; trade and false invoicing for the supply of
goods and services; real estate; vehicles; and gold and
other precious metals.”445
3. What Does ADB’s Anti-Money-Laundering Policy Say?
ADB’s AML policy, approved on 1 April 2003, contains four major components:
(i) assist DMCs in establishing and implementing legal and institutional regimes,
(ii) increase collaboration with other international and development partners,
(iii) strengthen internal controls, and (iv) upgrade ADB staff capacity.446
4. How Does ADB Promote Anti-Money-Laundering?
The best approach to take in protecting against the risk of money laundering
will depend upon the type of project or loan. Project-specific design measures
aimed at promoting checks and balances are important in mitigating against
this risk. Good measures include financial and performance audits, review
442
the Financing of Terrorism. para. 9.
443
Ibid., para. 60.
444
Ibid., para. 7.
445
Ibid., para. 9.
446
the Financing of Terrorism.
missions, imprest account monitoring, and procurement controls. Together

with these project controls, ADB also has internal controls to determine the
identity of contractors (such as corporate registration checks) and to ensure
that funds are sent to the correct bank accounts.
For public sector grants and loans, the project team must determine whether
such checks and balances are likely to prevent (or at least limit) corruption,
fraud, and stealing. Assuming they are, project counsel will not need to include
specific provisions covering AML measures. In short, specific AML provisions are
unnecessary in public sector grants and loans that already contain provisions
covering corruption, fraud, and stealing because those measures will mitigate
against the risk of money laundering. Thus, public sector loan and grant projects
generally do not contain covenants requiring specific AML measures.
For loans or grants involving on-lending and relending, the situation is
similar. Project counsel should carefully conduct due diligence on such projects
to ensure they contain multilevel internal institutional controls. Loans or grants
to development banks should require that the bank comply with national
regulations that relate to AML. Such regulations will cover “know your client”
procedures that must be followed before bank accounts are opened. They will
also require banks to report large cash transactions or suspicious transactions
to the regulator.
ADB requires similar internal controls in technical assistance projects.
ADB generally does not trace the use of funds under program loans.
However, all financial sector program loans should incorporate mechanisms
to establish or enhance an existing AML regime. They should also provide
technical assistance to effect the necessary reforms.
Programs that have required such measures include program loans in
Indonesia, the Lao People’s Democratic Republic, Sri Lanka, and Viet Nam.
ADB has also provided technical assistance for AML to several countries
including Indonesia, Mongolia, the People’s Republic of China, the Philippines,
Thailand, and various countries in the Pacific.447448
Key Point for Project Counsel. Project counsel should refer to the Office
of the General Counsel’s (OGC) AML toolkit for further information.448
6
447
Ibid.
448
ADB. 2009. Anti-Money Laundering Toolkit.
H. Environmental and Natural Resource Governance
1. What is Environmental Governance? What is Natural Resource

Governance?
Environmental governance includes state, private sector, and civil society

action at the local, provincial, national, and international or global levels
to formulate policy, or establish laws, regulations, or other informal
standards to affect or change the behavior of actors and individuals to
achieve environmentally sustainable outcomes for society. It is a subset of
all governance and includes the elements of predictability, accountability,
participation, and transparency.
Natural resource governance (and climate change governance discussed
in Section I below) are a subset of environmental governance. Natural
resource governance relates more specifically to environmental governance
that is concerned with natural resources such as forests, fisheries, land,
extractive materials and minerals, and biodiversity.
Environmental and natural resource governance, including forest

governance, is frequently a sensitive issue in DMCs. Many people in positions
of power—including those in politics, the military, and the police—often
have a significant stake in illegal or unsustainable projects. Consequently,
DMCs frequently face much pressure not to reform governance in these
sectors. In such circumstances, project specific design features that promote
sound governance become critical.
a. Environmental governance
The issues and risks involved in environmental governance relate to the

nature of environmental policies, laws and institutions in a particular DMC.
Environmental policies, laws and institutions have been strengthened in
most countries since the advent of the environmental movement in the
early 1970s. However, the extent of environmental change in Asia and the
Pacific over the past 10 to 20 years has been dramatic and presents many
environmental challenges that have not been sufficiently addressed in those
early policy and regulatory frameworks or existing ones.
Independent loggers measure the trunk of a felled tree in Panama’s El Filo del Tallo Preserve in the Darien Forest on
the border with Colombia to estimate how much wood the tree will yield. The Government of Panama has launched
a campaign against illegal tree cutting, but lacks the resources to enforce the program. The Panamanian forest service
reports that indiscriminate and illegal logging is threatening one of Central America’s largest forests.
Many DMCs have accepted international obligations under new or

changed international environmental and climate law that need to be
appropriately reflected in national legislation. Moreover, many DMCs have
adopted new environmental policies and laws and yet have not been able
to translate these broad framework policies and laws into implementing
rules and regulations at the national, provincial and local levels. Even
where DMCs have appropriate policy, legal and regulatory frameworks,
effective enforcement and compliance continues to pose challenges. These
challenges are brought about by:
• often weak political commitment;

• low levels of institutional capacity (which may occur as a result of
lack of skills, lack of financial resources, or insufficient numbers of
staff); and
• inadequate budget allocations and inappropriate financial 6
mechanisms.
Moreover, DMC environmental ministries and agencies often do not

hold a strong position within their respective governments, and coordination
amongst other relevant sector ministries such as forestry, mining, land use,
fisheries, and energy, is often inadequate. In this regard, many DMCs have
decentralized the responsibility for implementing environmental laws and
regulations to local governments. Local governments often have different
incentives, and less capacity for implementing environmental mandates, and
so often-times the local setting provides a very weak link for implementing
environmental policy and law.
The unclear roles and mandates of government agencies, the lack of
transparency, and the limited active involvement of civil society, including
the media also contribute to the problem. Further, institutions and agencies
involved in environmental compliance and enforcement, such as the police,
prosecutors, and the judiciary, do not always have direct environmental
mandates, and hence weak capacity exacerbates problems of environmental
compliance here too.
b. Natural resource governance
The issues and risks involved in natural resource governance are in many ways
a subset of the broader issues of environmental governance. Natural resource
governance is connected with ADB’s work in land use and land tenure,
agriculture, forestry, environment, biodiversity and climate change, but would
also include issues relating to mining and fisheries.
Forest governance is a significant and important issue of natural resource
governance for many of ADB’s DMCs.449 From 1990 to 2005, the rate of
forest decline was estimated at 13 million hectares per year.450 Southeast Asia
experienced the largest decline, an annual net loss that exceeded 2.76 million
hectares per year or 1.3% of the region’s forest area. This decline has barely
improved from the net loss of 2.79 million hectares per year or 1.2% of the
region’s forest area from 1990 to 2000.451 Illegal logging is the major cause
of this forest loss and degradation.
449
Although ADB’s direct work in forestry has declined, it is relevant to ADB’s work because of the
relationship between forests and other sectors such as agriculture and environment. Moreover,
ADB expects a cautious re-engagement in the forestry sector as a result of its anticipated work on
reduced emissions from deforestation and degradation (REDD) Projects under any new post-Kyoto
international climate change regime.
450
Food and Agriculture Organization (FAO). 2006. Global Forest Resources Assessment 2005:
Progress Towards Sustainable Forest Management. p. 19.
451
FAO. 2007. State of the World’s Forests. p. 15. See also Stibig, H.-J., F. Stolle, R. Dennis, and
C. Feldkotter. 2007. Forest Cover Change in Southeast Asia: The Regional Pattern.
Many DMCs lose large amounts of potential revenue from deforestation

through taxes and fees that are not paid due to illegal logging: land concessions
that have been granted in weak regulatory and enforcement contexts for
amounts that do not amount to the true value of the land resource; and
unsustainable land management and use. In other DMCs, forests are only
valued for their other potential uses—particularly for agricultural production
such as palm oil plantations. Forest governance and corruption problems may
arise particularly in relation to decentralization, where the interests of central
governments to sustainably manage and use land may differ from the interests
of provincial and local governments, which seek to exploit forests.
In view of the important financial, economic, and environmental issues
surrounding forest governance, several governments, NGOs, donor agencies
(led by the United States Agency for International Development [USAID]
and the World Bank), and members of the private sector met in 2001 and
drafted the Forest Law Enforcement and Governance initiative.452 The initiative
addresses the urgent need to combat the root causes of deforestation and
forest degradation. The World Bank subsequently applied the initiative in
other regions of the world. In 2004, the World Bank established a multidonor
trust fund supporting the ministerial processes and actions taken pursuant
to the initiative. The World Bank also facilitated bilateral memoranda of
understanding between Indonesia and developed countries.453
In the years ahead, the following five natural resource governance issues
are likely to pose serious threats:
• legal and institutional frameworks are weak as is law enforcement

and compliance;
• many DMCs have ineffective systems of land allocation and
demarcation, leading to disputes over property and concessions;
• global problems impinge on domestic issues of food insecurity
exacerbating food insecurity and increasing the likelihood that
habitats will be converted to use for unsustainable production;
• foreign direct investment into natural resource sectors may
continue to increase without adequate controls which will worsen
environmental and social problems;
• natural resource sectors will need to adapt to a changing global
climate, including changed patterns of drought and rainfall, 6
452
World Bank. 2009. Forest Law Enforcement and Governance (FLEG)—East Asia & Pacific.
453
Ibid.
which will radically affect existing natural and man-made

habitats; and
• regional cooperation is likely to increase the demand for agricultural
products, creating more pressure to convert forest areas into
plantations, whether or not concessions are granted legally.
3. What do ADB’s Environmental and Natural Resource Policies

Say About Governance?
Strategy 2020 indicates that ADB will seek to “strengthen[..] the legal,
regulatory, and enforcement capacities of public institutions in regard to
environmental considerations.”454 As of end February 2010, ADB is preparing
an environmental strategy that will contain a strategic operational agenda
for implementing this and other environmental governance aspects of
ADB’s operations. Project counsel will need to consider these environmental
governance aspects of the environmental strategy once it has been
approved.455
In relation to natural resources, ADB’s forest policy covers important
governance issues relating to the forest sector and incidentally covers the
associated natural resource sectors. The forest policy promotes appropriate
policy and regulatory frameworks as well as institutional strengthening, such
as increasing the capacity of forest law enforcement officials.456 For example,
ADB encourages the creation of (i) land use policies, (ii) zoning policies and
regulations including distinguishing forest land from agricultural land, and
(iii) strengthening mechanisms to ensure that adequate forest cover is retained
in DMCs.457
ADB also promotes land tenure policies that empower sustainable
management by forest dwelling and forest dependent communities and
454
2008–2020. p 14.
455
Until the effective date of Safeguard Policy Statement which occurred on 20 January 2010, ADB’s
policies were contained in the Environmental Policy (2002). Thereafter, they will be contained in
the environment strategy that is not finalized as of 31 May 2010. ADB retired its fisheries policies,
following a 2006 special evaluation study conducted by ADB’s then operations evaluation
department. One reason it was considered unsuccessful was because it had not adequately
accounted for governance dimensions. ADB. 2006. Special Evaluation Study on the Fisheries Study
of the Asian Development Bank.
456
ADB. 1995. The Bank’s Policy on Forestry. For other natural resource related policies, see ADB’s
fisheries policy (www.adb.org/Documents/Policies/Fisheries/fisheries.pdf) and agricultural
resource policy (www.adb.org/documents/policies/agriculture-natural-resources/agri-natural-
resourcespdf).
457
ADB. 1995. The Bank’s Policy on Forestry. p. 12.
concessionaires.458 Moreover, consistent with ADB’s governance policy,

the forest policy actively promotes early public consultation among all
stakeholders, including forest dwelling and forest dependent communities,
and concessionaires, in policy formulation and implementation.459
ADB works toward strengthening the capacity of institutions in the
natural resource and forest sector. ADB has recognized that in some DMCs,
weak enforcement and the lack of enforcement capacity has hampered
efforts to protect forests and natural resources.460 Thus, ADB supports DMCs
in adopting appropriate legislation and strengthening forest regulation and
enforcement agencies.461
In 2008, ADB endorsed the Extractive Industries Transparency Initiative
(EITI) and became a supporting organization. By endorsing EITI, ADB
encourages its DMCs to ensure that natural resource wealth translates into
equitable economic growth, and that the process of creating the necessary
transparency and accountability frameworks to facilitate this goal must
respect the sovereignty of countries and existing contracts and laws.462
4. How Does ADB Promote Good Environmental

and Natural Resource Governance?
ADB’s overarching support for enhancing environmental governance can

occur partially through providing support for the institutions, policies,
and legal and regulatory frameworks that establish the basis for good
environmental governance.
Any sector specific environmental governance needs to be grounded in
ADB’s governance policy and anticorruption policy, hence it needs to promote
(i) accountability, (ii) transparency, (iii) participation, and (iv) predictability, and
also support Strategy 2020. Box 6.5 sets out an indicative list of questions
that will help project counsel identify these sector specific governance issues,
and hence promote their inclusion within project design. Box 6.6 also includes
indicative questions that focus on the natural resource sector. In answering
these questions, project counsel will be able to consider governance issues
that assist the project team to formulate measures to address in project design.
458
459
Ibid., p. 13.
Ibid., p. 14.
6
460
Ibid., p. 18–19.
461
Ibid., p. 19.
462
ADB. 2008. Extractive Industries Transparency Initiative.
Key Point for Project Counsel. Project counsel should consider the
indicative lists of questions in Box 6.5 for environmental governance issues
and Box 6.6 for natural resource governance issues where appropriate.
Box 6.5: Indicative Checklist of Some Relevant Issues

in Environmental Governance
Predictability
• Is there support to government agencies and sectors to integrate
and address environmental and climate change considerations at
all level of development?
• Are environmental considerations mainstreamed within integrated
national and sector development plans, policies, laws, and
regulations, and systems for enforcement and compliance?
• Is there assistance for DMCs to reflect new or changed international
environmental and climate law in national legislation and/or
translate broad framework policies and laws into implementing
rules and regulations at the national, provincial, and local levels?
• Is there support to achieve efficient implementation and compliance
with environmental policy and law, particularly at local levels by
legal reforms that strengthen accountability for local resource
management?
• Are policy and market failures corrected to improve incentives for
sound environmental management and sustainable energy goals?
• Have environmental and climate change concerns and objectives
been integrated into national and sector economic development
policies, plans, strategies and regulations?
• How are environmental monitoring, compliance and enforcement
capacities being strengthened?
• How is ADB promoting better mainstreaming of environmental
sustainability considerations for project planning, project design
standards, assessment and approval processes?
• Is there a national action plan to promote and strengthen country
safeguard systems and implementation capacity?
• Is there safeguard and environmental training where needed?
Accountability
• Are the roles and responsibilities of environmental ministries and
agencies, sector ministries and agencies, and provincial and local
authorities clear?

Box 6.5: continued
• What is the role of other agencies involved in environmental

compliance and enforcement, such as the police, prosecutors,
and the judiciary, and do they understand their environmental
obligations?
Participation
• What is the private sector’s role in environmental governance of
the project?
• Is there a role for voluntary environmental standards, corporate
social responsibility initiatives, and certification schemes, in addition
to appropriate policy and legal frameworks?
• What is the actual role of NGOs and civil society organizations
(CSOs) in environmental governance of the project?
• Are their environment champions and watchdogs, and media,
within civil society who can drive a more proactive environmental
governance approach? If so, how can they be involved in the
project?
Transparency
• How else can ADB assist the DMC with measures that improve
the quantity and quality of environmental information available to
experts, government, the private sector, members of the public, and
particularly people affected by environmental decisions?
Source: Authors.
6
Box 6.6: Indicative Checklist of Some Relevant Issues

for Natural Resources Governance
• Is there corruption and/or weak governance in environmental,

natural resource, energy, or agriculture ministries, agencies, or local
governments that is likely to impact the project?
• Is there corruption and weak governance in environmental, natural
resource, energy, or agriculture markets that is likely to impact on
the project?
• Do the relevant ministries or agencies have clear roles and
responsibilities with respect to the project? If not, can this be
clarified under ADB’s financing agreement?
• What effects do perverse incentives, subsidies and taxes have on the
natural resource, energy, and agriculture sectors?
• Over the project’s life, is the project area vulnerable to increased
disaster and emergencies as a result of environmental degradation
or climate change? Thus, is there a need for increased transparency,
accountability, and other emergency governance measures?
• Is it possible to phase in or sequence environmental and natural
resource governance steps over several years even if it is difficult to
introduce quickly?
• Where land is allocated under concessions, whether used for forest
production or agriculture, is it possible to conduct a concession
review and assessment to ensure that concessions are issued in
accordance with government planning, zoning, environmental
and other legislation, and subject to applicable environmental
conditions?
• If so, can a detailed database be developed that clearly identifies the
concessionaire and the location and size of the concession, and that
allows users to post information on a public website?
• Is it possible to publish information concerning land concessions in
the local language at local markets and on the project internet site?
• Is it possible to publish information regarding regulatory licenses or
concessions?
• Is any of this information already collated by the provincial
governments and fed through to the relevant natural resource
ministry?
• Does the relevant natural resource ministry record the commercial
terms and conditions of individual land concessions and monitor
the concessionaire’s compliance with and administration of the
terms of the concession? If not, can the project help?
Source: Authors.
I. Climate Change Governance
1. What is Climate Change Governance?
Climate change is the change in the earth’s average temperate resulting from
increases in global greenhouse emissions caused by human activity. Although
there is broad scientific consensus that the earth’s average temperature will
increase overall, the extent of temperature changes in localized geographic
regions may vary.463
Climate change is expected to result in a range of impacts including
an increase in extreme weather events and natural disasters such as storms,
monsoons, hurricanes, and flooding and an increase in the severity of those
events. Sea levels will rise. Glaciers are melting and will continue to melt.
Coastal cities such as Bangkok, Jakarta, Manila, Mumbai, and Shanghai will
be particularly affected. Within Asia, agriculture productivity will decline, likely
resulting in food and freshwater shortages. Many thousands of people may
be forced to leave their homes, particularly in Bangladesh, the Maldives, and
the Pacific.
Climate change governance involves environmental governance directed
to the issues of climate change. On the one hand, it may be considered a
subset of environmental governance. Yet, on the other hand, because
climate change has the potential to worsen almost every other environmental
challenge we are facing today, it also may be considered as embracing almost
all of the challenges of environmental governance.
Because events caused by climate change will place increased stressors on a

government’s ability to govern, provide public services, and protect its people,
climate change is likely to exacerbate the effects of preexisting factors and
conditions that lead to governance risks. Thus, practitioners from climate
change and governance communities increasingly consider that a link exists
between climate change and governance issues.464
463
ADB. 2008. Climate Change ADB Programs: Strengthening Mitigation and Adaptation in Asia and
6
the Pacific. pp. 6–7.
464
13th International Anti-Corruption Conference. 2008. Plenary 3: Climate Change and Corruption.
A farmer waits for rain on his drought-hit paddy field in Morigoan, Assam, India.
Increased global greenhouse emissions (which will ultimately lead to

increases in the global mean temperature) are, among other things, related to
corruption and weak management in government.465 For example, increased
illegal logging and corruption leading to deforestation and forest degradation
in some DMCs is directly linked to climate change.466
Increased greenhouse gas emissions are also linked to governance issues
through development financing; national development strategies; energy
policies; agriculture policies, subsidies, and taxes in both sectors; public
financial management and the rule of law; the delivery of public services, and
increased emergencies and disasters resulting from climate change.467
“Climate change governance” is a new term, not yet a new discipline,
but not really a new idea. The large volume of literature published on
465
ADB. 2008. Climate Change ADB Programs: Strengthening Mitigation and Adaptation in Asia and
the Pacific.
466
Ibid.
467
Ibid.
environmental governance and the related issues could be usefully applied to

issues of climate governance.468
3. What Do ADB Policies and Strategies Say?
In Strategy 2020, ADB affirmed its commitment to the issues of climate

change, environment, and governance. Under Strategy 2020, ADB has a
climate change program that seeks to bring into the mainstream the core
climate change issues of adaptation, mitigation, and forest and land use.
It also requires ADB to reduce its carbon footprint.469 Climate governance
issues would fall within the broader strategy and governance and
anticorruption policy. In April 2010, ADB approved its overarching strategic
priorities for climate change in a paper called Addressing Climate Change
in Asia and the Pacific: Priorities for Action. It records the widespread
acknowledgment of the “enormous amount of policy, governance, and
institutional work” needed to mainstream national climate change mitigation
actions and adaptation action programs, into concrete actions. It also
acknowledges that supporting DMC requests for assistance in strengthening
policies, governance, and capacity in relation to climate change fits well with
ADB’s role and should be a priority action area. ADB proposes increasing
interventions in these areas.
4. How Does ADB Promote Good Climate Governance?
ADB has an increasing portfolio of projects that aim to help DMCs mitigate
or adapt to the effects of climate change. In those projects, project counsel
should consider the link between climate change and governance, and, if
appropriate, seek to work with the project team to incorporate relevant
governance measures into the project.
468
See Foa, R. 2009. Social and Governance Dimensions of Climate Change: Implications for Policy.
World Bank Policy Research Working Paper No. WPS 4939; Najam, A., M. Papa, and N. Taiyab.
2006. Global Environmental Governance: A Reform Agenda; Badenoch, N. 2002. Transboundary
Environmental Governance: Principles and Practice in Mainland Southeast Asia.
6
469
2008–2020. p. 14.
• consider ADB’s Strategic Priorities for Climate Change when

they are adopted in 2010; and
• review the checklist of environmental governance issues in Box
6.5 to determine if any are relevant, and consider the indicative
list of climate change governance issues set out in Box 6.7.
Box 6.7: Checklist of Relevant Issues

in Climate Change Governance
• Is there a national and subnational climate change mitigation and

adaptation plan and policies and sector road map?
• How can climate risk management be mainstreamed into the
project’s design planning, assessment, and approval processes?
• Is there a need to assess and address possible economic and social
impacts of climate change, including implications for migration,
human health, and gender equality in the project?
• What other project-related risks and issues might be exacerbated by
climate change?
• Is there corruption and/or weak governance in natural resource,
energy, or agriculture markets that is likely to impact on the project?
• What effects do perverse incentives, subsidies and taxes have on the
natural resource, energy, and agriculture sectors?
• How effective are market-based climate mitigation schemes (such
as emissions-permitting schemes) in overtly corrupt sectors within
DMCs? What is their effect on the market given such corruption and
weak governance?
• Over the project’s life, is the project area vulnerable to increased
disasters and emergencies as a result of climate change? Is there a
need for increased transparency, accountability, and other disaster
and emergency governance measures?
Source: Authors.
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APPENDIX 1
Governance Risk Mapping Table
Cost to the Project,
Risks (Unwanted Country, and/or
Activity Practices) Personal Gain Examples Mitigation Measures
I. Pre-Project Milestones: Initial Assessment and Decision to Respond
CPS • Government, civil society, • Project priority areas may • Government may identify high • Maintain the integrity of the
preparation private sector, and serve the interests of specific disbursement sectors such as process by identifying and
process external funding groups or individuals rather road rebuilding rather than less avoiding conflicts of interest
agencies (stakeholders) than the best interests of the tangible service sectors like health, for persons and entities
may improperly influence poor. education, and governance. involved.
persons involved in the • Stakeholders may advance • Donor identifies least resistance
CPS preparation process by their overall political influence areas to intervene (e.g.,
advocating for priority areas within the society or their infrastructure development which
that serve their personal position under the project. may allow corruption rather than
interests. utility service policy reform which
• Decision makers may abuse
their authority to gain seeks to reduce corruption).
or maintain influence or
resources, or gain financially
from any ensuing project.
Concept paper • Stakeholders may improperly • Projects are undertaken that • Key stakeholders ensure that a • Maintain the integrity of the
preparation influence individuals involved serve personal interests rather project is skewed in favor of their process by identifying and
process in concept paper preparation than the best interests of the own competencies. avoiding conflicts of interest
by seeking to design projects poor. for persons involved.

Appendix 1 continued

that serve their personal • Stakeholders may advance
interests. their overall political
influence within the society
or their position under the
project.
• Decision makers may abuse
their authority to gain
or maintain influence or
resources, or gain financially
from the project.
II. Loan and Project Processing and Approval

Forming a • Ministers, secretaries, EA, or • Improper influence results • Project team engineer accepts • EA and/or IA should prepare
project team IA officials may improperly in an incorrect resource and a kickback to engage a less a plan of human resource
and finding influence the formation of skills mix for the project. competent candidate in favor of a needs that takes into account
suitable a project team by including more competent one. the types of skills needed by
personnel government personnel personnel over the short,
without the right skills mix medium, and long terms to
for the purpose of allowing ensure that personnel are
them to gain personally from matched with work needs.
the project.
• Project team (or part of the • Project team prefers particular- • Fact-finding missions should
project team) is inclined to known consultants over more conduct basic due diligence
collude with, or otherwise qualified unknown consultants at to check that EA and/or IA
226 Governance and Anticorruption in Project Design: Office of General Counsel Guide
serve the interests of, specific lower cost. officials involved in the

groups or individuals rather • Donor or EA and/or IA prefers to project have no direct or
than focusing on delivering engage friends or relatives instead indirect personal interest in
results that are in the best of those who are most competent. the project and, where they
interests of the project and do have a personal interest,
its beneficiaries. request their replacement.
• EA and/or IA should confirm
measures in the fact-finding
or appraisal memorandum of
understanding.
PPTA • Ministers, secretaries, EA, • Stakeholders may advance • Secretary of public highways • Fact-finding missions should
preparation and/or IA officials may their overall political persuades the project feasibility conduct basic due diligence
and PPTA and improperly influence officers, influence within the society design consultants to build roads to check that EA and/or
PPN approval personnel, and consultants or their position in the in the local area and electoral IA officials involved in the
tasked to prepare and project. constituency of the minister of project have no direct or
approve PPTAs and PPNs. • Decision makers may abuse public highways. indirect personal interest in
their authority to gain or the project and request their
maintain influence or replacement if they do.
resources, or gain financially • EA and/or IA should confirm
from any ensuing project. this in the fact-finding or
appraisal memorandum of
understanding.
Recruitment of • EA or IA conducts an unfair • Groups or individuals may • An individual consultant is the second • Stringent application of the
consultants consultant bidding and/or benefit financially (from cousin of the additional secretary Guidelines on the Use of
selection process. bribes), socially, or politically overseeing the project from the EAs Consultants.a
Appendix 1 227
a ADB. 2007. Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers. Manila. Available: www.adb.org/documents/guidelines/consulting/Guidelines-Consultants.pdf


(from favors) by recruiting and/or consulting firms that have • Identify EA and/or IA
consultants who are not the links to the EA officials (including officials who have links to
best qualified and lowest family and friends). consultants or an interest in
cost. • The chief executive officer of consulting firms (such as a
the project company IA selects shareholding).
a consulting firm in which they
previously held a position as partner.
• Budgeting for the cost of consultancy
services is not tailored to the specific
project and additional padded
amounts are given to consultants or
used and applied by the EA.
Project design • EA and/or IA officials may • Rather than serving the • Changing the location of a road • Check that EA and/or IA
inflate the project’s needs best interests of the poor, project to avoid passing through the officials have no direct or
or otherwise improperly the project may serve the home of a person connected to the indirect personal interest in
influence the shape, size, or interests of specific groups government. the project.
location of the project. or individuals by making • Changing the location of a road • Assess the vulnerability of
• Other stakeholders (notably financial or other gains, project to ensure the road passes the EA and/or IA to being
government officials) may or gaining or maintaining near an individual’s property to influenced by external
exert pressure on the EA influence or res ources. increase the value of that property. parties.
and/or IA regarding project • Inflating the project’s costs to take • Vigorously assess acurracy of
design. them beyond the threshold size proposed project budgets.
of national budgeting and qualify
it for donor assistance to provide

opportunities for further corruption.

Due diligence, • Stakeholders may improperly • Stakeholders gain from • Concealing or failing to report an • Maintain the integrity of
appraisal, influence officers and favorable findings by encumbrance on a property. the appraisal and risk
and risk personnel to make inaccurate securing direct or indirect • Omitting questionable transfers of management review by
management findings, appraisals, and assistance resulting from the property in a due diligence report. identifying and avoiding
review reviews that are favorable to project, at the expense of any conflicts of interest for
• Failing to highlight negative aspects
stakeholders. ADB and intended project persons involved.
of the project in reports due to fear
beneficiaries.
of losing the project funding or
having stringent monitoring and
evaluation criteria imposed.
• Omitting risks for which the proponents
of the project cannot provide
acceptable solutions (e.g., in the likely
event of an outbreak of conflict, or likely
sale of a special purpose company or
part of a business).
Loan and • Stakeholders may • Terms and conditions are • Terms and conditions are loosely • Protect against the
grant improperly influence officers included in loans and grants drafted to ensure they comply with occurrence of conflicts of
negotiations and personnel during that serve the interests of project rules during implementation interests by checking
negotiations. specific groups or individuals but otherwise lack clarity, so do not - that EA and/or IA officials
rather than the best interests facilitate an effective project. or bank personnel do not
of ADB and intended project • Reluctance of the parties to go back have any direct or indirect
beneficiaries. to project design if serious problems personal interest in the
are encountered at the negotiation project, and/or
stage. - what links or relationships
Appendix 1 229

• Excessive use of “boiler plate” clauses exist between EA and/or
without appropriate contextual IA officials and personnel.
amendments. • Assess the vulnerability of
the EA and/or IA to being
influenced by external parties.
Consideration • Stakeholders may improperly • Terms and conditions are • Insufficient consultation with other • Protect against the
and approval persuade officers and included in loans or grants stakeholders in finalizing the project occurrence of conflicts of
of RRPs and personnel to consider or that serve the interests of preparation and design. interests by checking
loan and grant endorse RRPs and loan specific groups or individuals - that EA and/or IA officials
documents documents. rather than the best interests or bank personnel do
of ADB and intended not have any direct or
beneficiaries. indirect personal interest
in the project, and/or
- what links or
relationships exist
between EA and/or IA
officials and personnel.
• Assess the vulnerability of
the EA and/or IA to being
influenced by external parties.
III. Working with Local Organizations (In Addition to All of the Risks Listed in the Other Tables that Equally Apply to Implementing Local Organizations)
Choosing EAs • Stakeholders may improperly • Politicians and individuals • Heads or officials of EAs may choose • Monitor the EA and IA
and IAs influence which EAs and/ other than intended IAs headed by and/or composed selection processes and
or IAs are selected for the beneficiaries gain financially of relatives or friends, or IAs with inquire into any attempt to
project. from the project. no proven track record or of poor engage a specific EA or IA or
reputation. to change the chosen EA or IA.

• Governments are reluctant to • Check that the officials of
work with organizations that have the chosen EA or IA have
reputation as human rights lobbyists. no conflict of interest in
the project by undertaking
reference checks and requiring
financial and tax disclosures.
• Funds could be diverted to • Politicians and individuals • The accountant in a project unit of • Check the EA’s capacity to
serve the interests of specific other than intended an education project transfers funds implement and oversee the
groups or individuals. beneficiaries gain financially from the project imprest account project by reviewing their prior
from the project. to their own account and the EA experience; have discussions
and the project unit have little other with donors, development
capacity and are unable to detect the partners, and government;
fraud. and review government or
donor audit reports.
• Define which ministry and/or
directorate or government unit to
which the EA and/or IA reports.
• Visit the EA’s and/or IA’s
premises and meet their officials.
• Concentration of • Specific individuals or groups • EA and/or IA officers may hold all • Review and assess the EA’s
responsibilities and/or powers rather than the project’s key responsibilities during the project and/or IA’s organizational
with a few individuals may intended beneficiaries may implementation process (from the chart and have them establish
allow those people to engage benefit, financially or procurement process to reviewing a clear human resources
in irregular practices that serve otherwise. the contract execution), strategy.
Appendix 1 231


the interest of specific enabling them to easily act in • Assess the vulnerability of
individuals or groups rather favor of specific bidders and gain the EA and/or IA to being
than the project’s intended kickbacks. influenced by external parties
beneficiaries. • Secretary of the line ministry may (such as senior government
serve as the project director officials or politicians).
allowing him to appoint friends and • Include covenant specifiying
family to the project. staffing requirements.
IV. Procurement and Logistics Risks

Procurement • Inclusion of an unqualified • Specific groups or individuals • Short-listing unqualified bidders by • Check consistency of bidding
of goods and supplier in a tender list. may benefit, financially or either endorsing false information requirements.
services otherwise, from the submitted by them, or modifying • Review documentation
engagement of contractors the bidding requirements to related to the procurement
delivering substandard or specifically allow them to submit a process, including
uncompetitive goods or bid.
- expressions of interest
services. • Listing bidders’ qualifications in a and tenders, and
way that fits the description of a
- minutes of preselection
preselected entity.
and/or selection
committee meetings.
• Check for conflicts of interest
affecting EA and/or IA officials.

• EAs and/or IAs give undue • Specific groups or individuals • Predetermining the winning bidders • Review documentation
preference to certain tender may benefit, financially or before placing the advertisement— related to the procurement
offers and suppliers. otherwise, from the other bidders threatening or forcing process, including
engagement of contractors to withdraw their bid or submit an - expressions of interest
delivering substandard or uncompetitive bid. and tenders, and
uncompetitive goods or
- minutes of preselection
services.
and/or selection
committee meetings.
• Check for conflicts of
interests affecting EA and/or
IA officials.
• Review the internal
organization structure of
the EA and/or IA to check
for the concentration of
responsibilities on specific
individuals.
• EAs and contractors request • Contractor and/or EA benefit • Labor and equipment costs for • Check basis for price
excessive price increases. from inflated prices at building rural roads and water increases.
expense of government and supply treatment increases by 150% • Cover only pre-agreed costs
intended beneficiaries. even after supplementary finance and require government to
has already been provided to cover finance escalations.
prior cost increases.
Appendix 1 233

Warehousing, • Improper use of project • Project assets are used to • Assets are diverted from their • Check the physical existence
fleet, and asset assets by EA and/or IA benefit specific individuals intended use, such as project cars and presence of project
control officials because they or groups rather than for being used by government or EA assets in the project area,
divert stock, vehicles, parts, the project and intended and/or IA officials for personal use such as the car, fleet, and
and fuel, and use them beneficiaries. or for general government work computer equipment.
personally. unrelated to the project. • Assess the vulnerability of
• Fuel allotted for project vehicles the EA and/or IA to being
is consumed by EA’s and/or IA’s influenced by external
personal vehicles. parties.
• Fleet and equipment management
is considered a “mundane
administrative issue” meaning
that the head of the EA is vested
with total control over this issue
and has discretion to use the fleet
and/or equipment for purposes that
are only loosely connected to the
project.
• Official project vehicles or
equipment are provided to part-
time project personnel.
Supply • Acceptance and use of out- • Suppliers gain at the expense • In exchange for kickbacks, EA or •
of-date supplies or supplies of the project and its IA officials may accept delivery of
that are substandard. beneficiaries. medical supplies that are either
out of date or do not comply with
quality standards.
Use of • Unauthorized use or • Suppliers or users gain at the • Selling ADB-financed medical
equipment and diversion. expense of the project and its supplies on local markets.
supplies beneficiaries.


V. Targeting and Registration Risks
Targeting and • Illegitimate inclusion or • Project benefits are granted • People are identified as project • Check for any conflicts of
registration exclusion of individuals or to persons who are not beneficiaries even though they do interest affecting the EA
groups on beneficiary lists. supposed to gain from the not satisfy the project criteria. and/or IA officials.
project. • One person within the EA holds • Check who holds real
• Authorities gain political all responsibility for giving benefits responsibility and power
influence. (such as micro-loans, micro- within EA and/or IA.
insurance, or small grants) requiring • Depending on the nature of
insufficient checks and balances the project, check the list of
from other staff. beneficiaries.
• Extended family members living
outside of the project area are listed
as project beneficiaries, meanwhile
there are inadequate lists of
beneficiaries living within the project
area.
• Stakeholders, officers, and • Intended beneficiaries are • A government-owned construction • Check for conflicts of interest
personnel give preference not treated equally and do company may be given preference affecting EA and/or IA
to individual or groups of not receive an equitable because some of the services officials.
beneficiaries because of share of project benefits. are bundled together with those • Check who holds real
bias, social obligations, or • Authorities gain political services that the company is bound responsibility and power
coercion, or bribes. influence. under law to provide, yet the within the EA and/or IA.
company is not qualified or not
• Monitor and audit lists of
competitive regarding all services.
beneficiaries and benefits
• Houses are reconstructed for some received.
members of a community and not
Appendix 1 235
others in an emergency project,

because bribes are paid.


• Stakeholders within the • The project benefits persons • Stakeholders may pad the number • Review beneficiaries’
community manipulate who are not supposed to of actual beneficiaries to increase approval process.
beneficiary lists. gain from the project. the amount of assistance. • Conduct spot checks and
• Stakeholders gain political • Village-level officials may falsely audits.
influence. certify that persons are eligible
for project assistance despite not
meeting eligible criteria.
VI. Implementation and Distribution Risks
Compliance • Public approval and • Suppliers and authorities • The EA and/or IA accepts poor • Physically inspect materials
with local regulatory authorities and gain at the expense of the quality bitumen for a road from and services provided.
regulations supervising engineers extort project and its beneficiaries. a contractor and bribes one • Review the selection and
companies and contractors independent engineer to certify it as engagement process and
to provide approvals for satisfactory. check for favoritism from the
legitimate and shoddy work. • Local officials are bribed to speed EA and/or IA.
up local construction approvals and
leave project personnel vulnerable
to illegal payments.
Construction • Contractors supply and use • Suppliers gain at the expense • Delivering substandard equipment • Physically inspect materials
substandard materials to of the project and its and services with the consent of and the construction process.
save costs and appropriate beneficiaries. EA and/or IA officials who receive • Review the selection and
funds for personal use. kickbacks. engagement process and
• Inadequate adherence to • Substandard housing or check for favoritism from the
construction standards. infrastructure is constructed. EA and/or IA.

• Substandard workmanship.

Distributions • Those involved in the • The project benefits persons • In a microfinance project, an IA • Check for conflicts of interest
distribution divert assistance who are not supposed to official personally collects loan among persons involved in
for private gain. gain from the project. installments that were intended for the distribution of project
• Authorities gain political distribution to loan beneficiaries. benefits.
influence. • A minister in charge of an EA’s • Check who holds real
constituency receives priority responsibility and power
treatment in project within the EA and/or IA.
implementation. • Other mitigation measures
• EA or IA staff sell project relief are subject to the nature of
goods for a fee rather than the project.
distributing them for free.
• EAs and/or IAs and other • Stakeholders gain political • EA and/or IA officials or employees • Check for conflicts of interest
persons responsible for influence in their community take bribes to distribute more than among persons involved in
distribution extort with those intended as the allocated volume of goods to a the distribution of project
beneficiaries in return for beneficiaries. specific district at the expense of a assets.
their assistance. nearby district. • Check who holds real
• Local politicians may use project responsibility and power
funds to satisfy their own political within EA and/or IA.
agendas, including benefiting from • Conduct meetings and
free publicity under the guise of interviews with the project’s
appearing at project-related events. ultimate beneficiaries.
• Other mitigation measures
are subject to the nature of
the project.
Appendix 1 237


Fees and • EAs and/or IAs or other • EAs and/or IAs gain • Police and local government officials • Take strong measures against
charges for officials charge fees for personally at the expense of charge a toll to use a new road. staff including dismissal.
usage goods or services to be beneficiaries. • Staff of a water utility charge up to • Cross-check physical data on
provided for free or to be $1,000 equivalent to make illegal connections.
billed separately. water connections.
Post • Local authorities impose • Local authorities gain • Local authorities tax disaster relief • Check for conflicts of interest
distribution taxes on the receipt of political influence. goods despite their clear status among persons involved in
project goods without any • EA or IA staff declare in writing the distribution.
legal basis. report that all project goods were • Check who holds real
distributed when not all were responsibility and power
distributed. within the EA and/or IA.
• Other mitigation measures
are subject to the nature of
the project.
VII. Monitoring, Reporting, and Evaluation Risks

Project visits • False or exaggerated • Persons benefit or suffer • The numbers of beneficiaries can be • Check who holds real
and writing reporting by project officers because of actions resulting padded. responsibility and power
internal reports and personnel. from false or exaggerated • Large amounts of spending at the within EA and/or IA.
reports. end of the financial year can occur • Conduct as many field visits
when the EA and/or IA is trying to as possible.
meet its disbursement targets—this • Other mitigation measures
can result in the EA or IA funding are subject to the nature of
activities on an ad hoc basis rather the project.
than funding activities that are
directly connected to the project,

and money can be siphoned off.


Auditing • Favorable reports hide • Persons benefit or suffer • Paying or giving gifts to the auditor • Check the general
financial problems. because of actions resulting to approve financial advances that consistency of the financial
from a poor audit. have not been substantiated with information provided.
receipts or to ignore irregularities • Verify financial data provided
in the accounting or financial against external documents
statements. (bank statements, external
• Auditors with limited capacity may confirmation) and
limit audits to assessing quantitative nonfinancial information
outputs rather than holistically (physical inventory).
assessing whether money was used
for its intended purpose.
VIII. Finance, Administration, and Human Resources Risks
Fund transfers • Diversion of funds being paid • Persons responsible for • Funds from imprest accounts were • Request and review
to the borrowers, EAs, or IAs. diverting funds gain an used for non project related expenses. disbursements and/or cash
advantage or benefit. flow statements where
applicable.
Recruitment of • Coercion to select certain • Persons responsible for • Hiring an accountant or a private • Check for personal links
personnel people for jobs. coercion gain political or auditor who is a relative or close among the EA and/or IA
other capital and unqualified friend of an EA and/or IA official officials.
personnel gain employment or personnel member to exercise • Check for EA and/or IA
opportunities. “control” over how audits are officials with relations to
conducted and how financial senior government officials
statements are drafted. or politicians.
Appendix 1 239


Payment of • Payroll frauds (e.g., ghost • Persons “perpetrating fraud • Keeping terminated employees • Reconcile payroll statements
wages and employees or personnel gain funds. on the payroll and collecting their with the list of employees.
salaries being paid more than their salaries. • Review the EA’s and/or IA’s
authorized salary). • Padding the actual cost of wages. list of employees and assess
• Making hidden payments in the whether it is consistent with
form of fuel, entertainment, and the EA’s and/or IA’s structure
allowances. and organization and the
nature of the project.
Reimbursement • False or exaggerated • Persons seek to be • Using receipts for personal • Stringently apply the
reporting of reimbursable reimbursed for more money purchases in liquidating supposed reimbursement guidelines.
accounts and/or expenses. than they actually spent. official purchases.
• Tampering with and using tampered
official receipts or sales invoices.
CPS = country partnership strategy; EA = executing agency; IA = implementing agency; NGO = nongovernment organization; OAI = Integrity Division, Office of the Auditor
General; PPN = project preparatory note; PPTA = project preparatory technical assistance; RRP = report and recommendation of the President; stakeholders = government, civil
society, private sector, and external funding agencies.
Source: Modified and supplemented from Overseas Development Institute and Management Accounting for NGOs. 2006. Mapping the Risks of Corruption in Humanitarian
Action. Overseas Development Institute. Available: www.odi.org.uk/hpg/papers/TIU4.pdf; and, ADB. 2005. Technical Assistance to Bangladesh for Supporting Good Governance.
Manila. Available: www.adb.org/Documents/TARs/BAN/tar-ban-4140.pdf
APPENDIX 2
Governance Risk Assessment
Checklist
A. General
The Governance Risk Assessment Checklist described below (the Governance

Checklist) provides an extensive indicative list of questions to assist with the
assessment of governance risks surrounding any particular organization or
agency. Not all of the questions listed in the Governance Checklist will be
relevant for every organization or agency. However, these provide questions
that can be used to facilitate obtaining detailed information in a variety of
circumstances.
Most of the time a governance risk assessment will have been conducted
during project preparation, prior to a project counsel’s involvement. However,
the Governance Checklist can be used to supplement or cross-check existing
information if necessary.
B. Analysis of Results
The results of the information gathering exercise should be analyzed. In

conducting the analysis, project teams identify the following:
• risk areas, including the relative extent and likelihood of occurrence

of events with negative impact;
• ineffective controls and poor governance practices;
• process indicators, measurements, and benchmarks; and
• areas where risk prevention or control improvement procedures
could enhance operations, accountability, and transparency.
The clearest way to present the results is often in table format, clearly
showing the finding, potential consequences, and recommended response.
C. The Checklist
1. Legal Framework
a. Legislative
• What laws, rules, and regulations govern the organization or

agency? Identify
the legislation creating the organization or agency and include

any additional government or presidential directives and
orders that have been made in relation to the organization
or agency,
any other external rules and regulations directly affecting the
organization or agency or its work, and
any legislation that the organization or agency is responsible
for administering.
• What internal rules and regulations exist within the organization

or agency?
• Has the legislative and regulatory framework been regularly
updated or consolidated?
• Are all relevant personnel aware of the legislative and regulatory
framework? How?
b. Political
• What political influence is there on the organization or agency

(i.e., personnel appointments, policy, directives, and approvals)?
c. Economic
• What economic factors most affect the organization or agency?
d. Social and Cultural
• What are the principal social, cultural, and religious influences on

the organization or agency?
Appendix 2 243
e. Commercial
• Does the organization or agency compete with or subcontract

service delivery to commercial organizations?
• Are there other commercial pressures on the organization or
agency?
f. Changes and Challenges
• What changes or challenges does the organization or agency face

in the short, medium, and long terms?
g. Relationships with Other Agencies
• What other government, semi-government, or nongovernment

agencies (NGOs) does the organization or agency deal with?
Consider the following:
What is the basis of the relationship of the agencies?

What is the nature of the interrelationship in each case?
In what respects is the organization or agency dependent
upon the performance of those other agencies?
h. Stakeholders
• Does the organization or agency have an external focus on the

needs of service users and stakeholders, reflecting diverse views in
decision making, producing greater ownership among stakeholders,
and maintaining the organization’s or agency’s clear purpose.
• Who are the key stakeholders?
• Does the organization or agency work in partnership with
stakeholders? Ask the following questions:
Is there a client or customer focus?

Do stakeholders feel involved?
Is there equitable treatment of stakeholders?
• Are stakeholders made aware of their rights and service standards?

How?
• What communication channels exist with stakeholders?
• Are policies (such as investigation and prosecution policies)
communicated to stakeholders?
• Are fees and charges that are imposed on stakeholders prominently
displayed at all of the organization’s or agency’s offices?
i. Public Relations
• Is the organization or agency open, providing easy access to

information to all?
• Do policies account for regional stakeholders, the illiterate, clients
who speak other languages, etc.?
• Does the organization or agency encourage feedback or input
from personnel and stakeholders? How?
• Is there a public relations, media, and/or complaints officer?
• Is the public relations, media, and/or complaints officer aware
of the Asian Development Bank’s (ADB) Integrity Principles and
Guidelines, and the role of the Office of Anticorruption and
Integrity (OAI)?
• Is there an effective complaints procedure? Ask the following
questions:
What records are kept?

Are complaints analyzed to assess effectiveness and service
delivery?
Is action taken to redesign procedures?
• Is the procedure for handling complaints adequately communicated

to personnel and stakeholders?
• Does the procedure require that all complaints relating to
corrupt, fraudulent, collusive, or coercive practices are referred
to OAI?
• Are personnel adequately trained in handling complaints?
Appendix 2 245
2. Mission
Does the organization or agency have a mission statement that is clearly

communicated to personnel and stakeholders? Is there an appropriate
strategic plan through which the organization or agency implements its
mission?
a. History
• What is the brief history and development of the organization or

agency?
b. Purpose and Function
• Is there a mission statement identifying the purpose of the organization

or agency?
• Is the mission statement made available to personnel and
stakeholders? How?
c. Strategic Plan
• Is there a long-term strategic plan? If so, obtain the most recent

copy. What information is contained in the plan? Does it set out
the organization’s or agency’s
mission,
plan,
priorities,
indicators,
budget, and
other relevant factors?
• Does the strategic plan conform to the mission statement?

• Does the strategic plan consider local issues?
• Is there local input to the strategic plan?
• Is the strategic plan realistic and based upon achievable outcomes?
• Does the strategic plan consider resource availability (i.e., skills and
support services)?
• Is the strategic plan zero-based (i.e., are resources required to

fulfill outcomes)?
• Are specific officers responsible for specific outcomes?
• Were the assumptions upon which the strategic plan is based
published in advance?
• Are risks identified, such as the effect of changes in assumptions?
• Does the strategic plan consider expected future events?
• Are plans discussed widely before publication?
• Is the strategic plan formally approved? Who gives the approval?
• Is the strategic plan made available to stakeholders?
• Are outcomes compared to the strategic plan?
• Are variations to the strategic plan identified promptly?
d. Powers
• What powers does the organization or agency have? Does it have

power to
grant licenses,
provide benefits,
commence or drop actions,
authorize expenditure, and/or
undertake regulatory functions?
e. Weaknesses
• Has management identified any weaknesses in the organization

or agency?
• Does management have a plan to minimize or eliminate these
weaknesses?
f. Independence
• To what extent is the organization or agency independent of

government?
• Is the organization or agency funded in whole or part by the
government?
• Are any of the organization’s or agency’s board members or senior
management appointed by a minister of the government?
Appendix 2 247
g. Integrity
• How is the integrity of the organization or agency viewed by

internal and external parties?
h. Professionalism
• Does the organization promote professional conduct of its

personnel (skills, conduct, leadership, etc.)?
g. Alternatives
• Would an alternative structure provide a more effective means of

meeting the objectives of the organization or agency? For example,
would the organization or agency perform better if it
merged with another existing organization or agency,

privatized,
split into smaller units, or
used a commercial organization to undertake some of its
functions?
3. Structure
Is the organization or agency appropriately structured to fulfill its mission

and are there clear lines of accountability and responsibility?
a. Leadership
• Does the organization or agency have an effective leadership

that establishes a vision; generates clarity about strategy and
objectives, roles, and responsibilities; and fosters high standards
of behavior?
• Do the leaders promote high ethical standards?
• Do the leaders regularly communicate openly and honestly?
• Do the leaders base decisions on public policy principles?
• Do the leaders take action against those who breach rules and
regulations?
• Do the leaders protect personnel who report wrongdoing?

• Do the personnel and stakeholders have confidence in the
organization’s or agency’s leadership?
• Is leadership training given to senior managers on induction or
promotion?
b. Locations
• How many branches, offices, or agencies are there?

• Why has this structure been selected?
• Are there surplus branches or duplicated activities?
• Does this structure meet the clients’ needs?
c. Management
• How many management layers are there?

• Is the structure balanced (i.e., are managers able to manage their
subordinates)?
• Is there any overlap or duplication in the management structure?
• Is the management structure flexible?
• Are there clear and short reporting lines between managers?
• Is there a clear demarcation of responsibility between
managers?
• Are policy, support, and control functions demarcated?
• Is each functional area clearly defined and are there clearly defined
policies and/or rules regulating the relationship between and
responsibilities owed to other functional areas?
• Is management’s discretion clearly delineated and exclusions
identified?
• What is the scheme of delegation? For example
Are monetary values placed on delegation limits?

To what extent can regional offices make decisions?
• Are junior and middle managers adequately informed of decisions

by senior management?
• Are decision-making powers delegated to front line managers as
far as possible?
Appendix 2 249
d. Accountability
• Is a specifically identified officer made accountable for key

requirements? Is there an officer who is responsible for
budget preparation,
accounts preparation,
maintenance of internal controls, and
compliance with laws and regulations?
• What is the officer’s seniority level?
e. Reporting
• Is there a clear timetable for submitting reports? Are reports

prepared on time?
• Is unnecessary data excluded from reports?
• Is there a policy of marking files confidential or using ”exempt
information” provisions?
f. Culture
• Is the organization’s culture based on openness and honesty,

where decisions and behaviors can be challenged and there is
clear accountability?
• What is the culture of the organization or agency (internal and
external perceptions)?
• Does management promote a particular culture?
4. Activities and Service Delivery
Does the organization or agency implement its objectives in an effective

and efficient manner?
a. Processes
• What are the principal service delivery mechanisms? Consider the

following:
Are the service delivery mechanisms flexible and responsive?

Does the organization or agency initiate service delivery, and
how does it identify and rank needs (e.g., repairs)?
b. Resources
• What resources are required to deliver the organization’s or

agency’s services?
• Are there resource shortages in any areas (skills, technology,
equipment, and/or funding)?
• What steps has the organization or agency taken to remedy the
shortage?
c. Short-Term Planning
• Is there a short-term or operational plan? How often is it prepared

and updated? Obtain a copy of the plan.
• Is the plan a short-term implementation of long-term strategy?
• Does the plan consider local issues?
• Is there local input into the plan?
• Is the plan realistic and based upon achievable outcomes?
• Does the plan identify risks?
• Does the plan take resource availability into account (i.e., skills and
support services)?
• Is the plan zero-based (i.e., are resources required to fulfill
outcomes)?
• Are specific officers responsible for specific outcomes?
• Were the assumptions on which the plan was based published in
advance?
• Is the plan formally approved? Who approved the plan?
• Was the plan discussed widely before publication?
• Are outcomes compared to the plan?
• Are variations of the plan identified promptly?
d. Budgeting
• Are short- and long-term budgets prepared? Obtain a copy of the

budget(s).
Appendix 2 251
• Are budgets linked to long- and short-term strategic plans?

• Are there separate capital and development budgets, including
over the long and short terms?
• When is the budget prepared or amended and what is the timing
of the preparation and approval process?
• Who plans the budget? Is it the central government or the
organization or agency?
• Is the budget formally approved? Who approved the plan?
• Is the budget zero-based (i.e., are resources required to fulfill
outcomes) or top–down?
• Is the budget flexible within vote codes (i.e., can funds be
redistributed within the organization or agency)? What approval
is required?
• Are individual budget holders identified? What discretion do they
have in spending over their budget?
• Does the system consider surpluses or shortfall?
• Are outcomes compared to plan?
• Are variations identified promptly?
• Do revenue budgets consider issues related to capital (depreciation,
interest, and repairs)?
• How are donor funds accounted for?
• Is there an unofficial budget?
e. Workflow Management
• Are all jobs documented at initiation and dated? Is a receipt given

if appropriate?
• How is work allocated? Are deadlines set?
• Is there workflow planning, forecasting, and/or scheduling? Are
peaks and troughs in workflow identified?
• Is there an operations manual? When was it last updated?
• Do personnel work in teams? Are the teams activity-based or
functional?
• Do operations personnel have regular contact with clients
regarding work progress or problems?
• How is workflow monitored (time, resources used, activities,
outputs, and timeliness)? In particular, are
key stages and decisions identified, and

bottlenecks and backlogs measured?
• How is workflow reported (i.e., with statistics, or are problems

listed)? Is reporting complete, accurate, and timely? In particular,
What documents are used?

Are productivity and efficiency measured and compared?
Is there a proactive approach to forms design and information
collection?
Are defects and failures reported?
Is downtime reported?
Are developments and efficiencies reported?
Is feedback encouraged?
Is comparison made of service delivery times to identify
potential queue jumping?
• Are there quality control mechanisms?

• Are forms carefully designed? That is,
Are they clear?

Are they comprehensive?
Do they identify key issues?
Are they proactive in detecting potential errors of frauds?
Are they redesigned in light of experience?
• Is there a job acceptance or rejection policy?

• Is there a health and safety policy? Is there a health and safety
officer?
• Are there particular work practice issues (i.e., stress, overwork, and
night shifts)?
f. Performance Indicators
• Are performance indicators or workflow measurement indicators

identified?
• Are key indicators isolated?
• Are performance measures used? When? How?
• How are efficiency and effectiveness measured?
Appendix 2 253
• Is performance benchmarked to internal, national, or international

standards?
g. Technology
• What technologies are used?

• Are proprietary technologies protected?
• What developments in technology are required and/or forecast?
• How does the organization or agency respond to technology
requirements?
h. Manuals and Guidance
• Are there adequate policy and procedure manuals, guidance

statements, and policies? View the documents and question:
Are they comprehensive and clear (are all major areas

covered)?
Are they available .to all relevant personnel?
Have they been updated regularly?
• Is there an accessible library and/or knowledge base system to

support technical issues?
• Are there standards and/or quality control requirements?
5. Resources
How does the organization or agency identify the resources necessary

for implementing its objectives; obtain, use, and protect its resources;
and measure the effectiveness of its resource use?
a. Human Resources
• Review the recruitment procedures—methods; sources; education

requirements; selection criteria (curriculum vitae, interview, and/or
test); qualifications; induction; probation; and costs.
Are the recruitment policies and procedures transparent? Are

the recruitment procedures fair and equitable?
• Are there guidelines on the use of temporary personnel and

contractors?
• Is there a job description for each position (indicating qualifications,
skills, tasks, and responsibilities)? Are there contracts of
employment?
• Does each officer have a career plan?
• Are personnel made aware of their specific role, responsibilities,
delegations (in writing), and reporting lines?
• Does each member of personnel hold a single position?
• Is there a personnel manual?
• Is there a code of conduct for all managers and personnel? Is
the code of conduct communicated to all personnel upon their
induction and made available thereafter?
• What skills are required and how are the required skills identified
and obtained? Are there internal and external training options
offered to personnel so that they can obtain the needed skills?
• Is a regular training needs analysis conducted?
• Does each personnel member have a clear training plan? Is the
training plan recorded and does each personnel member have
ready access to the training plan?
• Is personnel performance measured or assessed? How often? What
method is used to measure or assess personnel performance?
• Is personnel performance measured using clear, objective, and
quantifiable measures? Ask the following:
How frequently is personnel performance reviewed?

What measures are used to review personnel performance—
results, training, targets, experience, etc.?
Who assesses a personnel member’s performance—a line
manager, someone from the human relations department, or a
performance review committee?
Is there a procedure for reviewing performance assessments?
Does the performance assessment affect the personnel
member’s career?
• What is the remuneration policy?

• How does the remuneration policy compare to other agencies and
private firms?
• Is promotion based on merit? If so, ask the following questions:
Appendix 2 255
Is there political influence?

Is there cronyism or favoritism?
Are there any other undue preferences?
Are promotion opportunities widely publicized?
• Are there adequate promotion prospects?

• Are there bonus and/or reward schemes? Are the bonuses and/or
rewards linked to clearly defined personnel performance measures
that each personnel member can work toward achieving?
• Are there benefit schemes (subsidized housing, medical, food,
allowances, etc.) and do they provide adequate incentives for
strong performance? Are they independent or part of the terms
of engagement?
• Is there a pension scheme? In particular,
Can a personnel member’s pension benefits be reduced

(i) in the event of a misdemeanor, (ii) in the event of gross
fraud or corruption, (iii) at all?
How does the scheme compare to the private sector’s
schemes?
• Can personnel choose their work location and apply for

transfers?
• Are personnel located in appropriate places that meet the clients’
needs? Also ask:
Are personnel reluctant to be based in regions or the head

office?
How does the organization or agency manage personnel
concerns about work locations?
• Does the organization or agency actively promote high standards

of ethical behavior? In particular,
Is there a statement of ethical standards or principles?
Is the statement of ethical standards or principles
communicated to, understood by, and applied to personnel?
Is the statement of ethical standards or principles regularly
updated?
How are the ethical standards monitored?

How can an individual report a potential conflict of interest or
obtain advice on ethical issues?
Are there up-to-date registers of gifts, personnel declaration
of conflicts, etc.?
What disciplinary procedures are in place for noncompliance
or breaches of the code of ethics?
• What is the disciplinary scheme? Ask if the disciplinary scheme
is understood by all personnel,

requires that decisive action be taken in the event of
breaches,
requires an investigation into the alleged behavior by an
independent third party,
puts into place confidentiality measures that apply throughout
the course of the investigation, and
provides an appeals process?
• Is there an internal or external grievance mechanism?

• What ability do managers have to discipline personnel or terminate
their employment?
• What are the termination and retirement policies?
• Is time or attendance recorded? If so, is this matched to workload?
How is absenteeism identified?
• What is the level of personnel morale? What is the level of
personnel turnover?
• How many posts are unfilled?
• Is there a system to identify “ghost” employees?
• Are there opportunities for job rotation which would allow fraud
to be detected?
• How is human resource data recorded and stored? What reports
are produced?
• How does the organization or agency deal with health and safety
issues? How does it deal with injured personnel?
b. Property and Equipment
• Review the following categories of plant and equipment owned or

used by the organization and make assessments about its features:
Appendix 2 257
Buildings—age, locations, and condition;

Plant—age, adequacy, and preventative maintenance;
Office equipment—adequacy, age, preventative
maintenance, and condition i.e., new or used;
Vehicles—adequacy, and maintenance;
Information technology (IT)—age, network, downtime,
availability, use, disaster plan, preventative maintenance, and
security; and
Other—items such as physical protection equipment and
weapons. Ask the following in relation to physical protection
equipment:
(i) Are the assets properly recorded and secured?

(ii) Are physical checks performed of the assets?
(iii) Are surplus assets identified?
(iv) What additional equipment is needed?
(v) What is the acquisition policy?
(vi) Is adequate capital available for buying new equipment?
How is it obtained?
c. Funding
• How is the organization or agency funded?

• Are there delays in receiving funds?
• Are there unofficial funds, trust accounts, off-balance-sheet donor
funding?
d. Data and Knowledge Base
• Is there a library accessible to all personnel? In particular,
Are all relevant external materials collected and available?

Are internal materials disseminated?
Are press cuttings collected?
Is internet access available?
Are case studies and other experience recorded for future
reference?
• How is information archived? Are archive facilities adequate

(secure, protected, and recorded, etc.)?
• Does the organization or agency recognize the value of data?
• Is data and intellectual property protected from damage and
theft?
• What information systems exist? Is there an information techno logy
group and an information technology manual?
• How is information shared within the organization or agency?
e. Communications
• Does the organization or agency have access to adequate

communications facilities such as
telephone,
mobile phones,
radio communications,
fax,
internet, and
courier services?
f. Support Services
• How do the following training facilities and methods operate:
Where are the training locations?

Who are the trainers? What is their professional standard and
what training have they undertaken?
What training facilities are available. What is the quality of the
available facilities and equipment?
How many personnel have undergone training?
Does the training curriculum match the organization’s or
agency’s needs?
Does the organization or agency run training on a continuous
basis?
What planning for training is undertaken?
Are any joint training sessions conducted with other
organizations or agencies?
Appendix 2 259
How is training conducted—by lecture, discussion, case

studies, seminar, homework, on the job training, using
mentors, and/or using coaching?
Is training evaluated?
What qualifications are awarded at the end of the training?
• Is there a security team? How does the security team function?

• Is there an administration team? How does the administration
team function?
• Are there other support services such as technical or laboratory
services?
6. Internal and Financial Controls
Accountability should be supported by systems and processes such as

risk management, financial management, performance measurement,
and internal financial controls. These systems and processes should be
robust and produce reliable and timely information to enable better
decisions about what needs to be done to achieve the organization’s or
agency’s objectives.
• Who is responsible for establishing an internal control system?

• Is there an internal audit department? If there is,
To what extent is the internal audit department independent—

what are its reporting lines, does it operate independently,
and what is its scope?
Are there sufficient personnel working in the internal audit
department with adequate skills, grades, and experience?
Are the internal audit department’s reports objective?
Does the internal audit department use modern techniques,
such as system based auditing, and risk analysis?
Are international standards applied?
Are reports followed up and acted upon?
• Is there an internal fraud and/or corruption investigation unit?

• Is there a policy on reporting fraud or corruption to the police or
to the relevant anticorruption commission?
• Based on existing structures, policies, and procedures, is there a

way to ensure that events of fraud and/or corruption are brought
to the attention of OAI?
• Are accounts prepared on a cash or accrual basis? Query whether
a balance sheet is prepared, or

an annual report is produced? If so, find out when is it
produced and obtain the latest copy of it.
• What major procurement does the organization or agency

undertake? When undertaking a procurement process.
Are there clear procurement policies and procedures?

Are there policies for the disposal of assets?
Is there an independent tender unit?
Do contractors agree to comply with a business ethics policy?
Are contractors subject to penalties for breaches of contract
and the procurement policy?
• Is there a risk management plan?

• Is there a whistle-blowing or confidential reporting system? Under
the system,
Are there rewards for reporting?

Are whistle-blowers offered any protections?
• Is there a regular comparison of actual results to budgeted targets?

• Are reports adequate, complete, accurate, and timely?
• Are best value principles used to ensure effectiveness, efficiency,
and economy?
• What billing procedures are in place to ensure completeness of
income? Are
all financial and nonfinancial transactions captured at the

source, and
adequate independent reconciliations of the books
conducted prior to an audit?
Appendix 2 261
• Are procedures in place to ensure that payment is made only for

goods and services that have been supplied?
How are suspect, unusual, or irregular transactions

identified?
• Are there established procedures or complaints mechanisms

that provide for clients to report a transaction that has not been
conducted properly?
• Are there clear rules requiring the retention of records? For how
long must records be retained?
• Are there penalties for failing to record transactions, delaying
recording transactions, and altering or deleting records? Do the
organization’s or agency’s systems
identify which persons entered into what transactions, and

make it clear who is responsible for entering specific data?
• Is there adequate segregation of duties among personnel to avoid

conflicts of interest?
• Are there clear guidelines regarding the claiming of expenses and
allowances?
• What is the organization’s or agency’s history of fraud and
corruption? What are the types, areas, and amounts of fraud and
corruption, and the organization’s or agency’s response to the
fraud and corruption?
• Are there statistics on the types and volumes of transactions?
• What steps are taken to identify fraud or error? Does the
organization or agency undertake any data matching of
public records,
internal records, or
records from other agencies?
• Are account balances regularly reconciled against independent

and reliable records or confirmed by direct communication (by
persons independent of relevant record keeping), particularly for
bank statements,
creditors statements,
debtors’ confirmation letters,

bank deposit confirmations, and
assets held by third parties?
• Are spot checks carried out to detect and protect against fraudulent
activities and inefficient processes such as
ghost employees remaining on the payroll,

fictitious invoices or organizations,
untimely completion of records,
personnel absenteeism,
cash shortages,
misuse of resources,
stock shortages,
equipment shortages,
procurement noncompliance,
account balances not being reconciled (i.e., by checking
against bank statements), and
suspense account balances not being cleared?
• What is the level of cash handling (income and expenditure)?

Ask the following:
Is there a register of cash locations?

Are personnel adequately trained in cash handling?
Can the level of cash be reduced?
Is there adequate segregation of duties?
Is there regular rotation of personnel?
• How often are external audits undertaken? If they have been

conducted, ask
Are the auditors reliable?

Have there been special audits?
Who obtains the audit reports and resolution of points?
• Are all important meetings between the organization or agency and

their clients attended by at least two agency personnel to prevent
fraud (i.e., when certificates are supplied or approvals given)?
Appendix 2 263
• Depending upon the nature of the organization or agency, it

may be necessary to examine other specific areas in more detail,
including the following:
stores and stock control,

purchasing,
contracting,
payments,
receipts,
payroll,
cash handling,
lending, and
grants and/or claims.
7. Other Issues
When conducting interviews or developing questionnaires or surveys, it

may be beneficial to ask respondents the following general questions.
• What do you think are the most problematic areas in the

organization or agency?
• What are the organization’s or agency’s greatest strengths?
• What key steps do you think the organization or agency can take
to improve its functioning?
• What do you perceive as being the key financial and service delivery
risks in your area?

priorities. Governance is a key issue and a driver of change that cuts
across these strategic priorities. To successfully employ these strategic

priorities, ADB staff need to understand the particular governance and
anticorruption issues and risks related to each strategic priority. They must
also be able to incorporate measures into ADB projects that promote good
governance and prevent corruption. This Governance Guide seeks to equip
project counsel with the knowledge to assist project teams in integrating
governance and anticorruption measures into ADB projects and across
ADB’s core priorities.
About the Asian Development Bank
ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to
help its developing member countries substantially reduce poverty and
improve the quality of life of their people. Despite the region’s many
successes, it remains home to two-thirds of the world’s poor: 1.8 billion
people who live on less than $2 a day, with 903 million struggling on less
than $1.25 a day. ADB is committed to reducing poverty through inclusive
economic growth, environmentally sustainable growth, and regional
integration.
Based in Manila, ADB is owned by 67 members, including 48 from the
region. Its main instruments for helping its developing member countries
are policy dialogue, loans, equity investments, guarantees, grants, and
technical assistance.

www.adb.org
ISBN: 978-971-561-872-4
Publication Stock No. TIM090586 Printed in the Philippines

Governance Anti Corruption Project Design

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Governance and Anticorruption in Project Design

Inclusive economic growth, environmentally sustainable growth, and

Governance and Anticorruption in Project Design

About the Asian Development Bank

Asian Development Bank

All rights reserved. Published 2010.

Asian Development Bank.

ADB encourages printing or copying information exclusively for personal and

Asian Development Bank

For orders, contact

Chapter 1: ADB’s Governance and Anticorruption 11

Chapter 2: International Law 43

Chapter 4: Governance and Anticorruption 87

Chapter 5: Public Sector Covenants 125

Chapter 6: Specific Cases of Governance 145

ACT – anticorruption and transparency expert task force

OAI – Office of Anticorruption and Integrity

B. How to Use this Governance Guide

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

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

C. ADB Policies and Strategies

Under the long-term strategic framework 2008–2020 (Strategy 2020)

D. Multilateral Initiatives on Governance and Anticorruption

In addition to ADB’s internal policies and procedures, project counsel should

E. Tools Available to Project Counsel

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

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

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

ADB Country Partnership Strategies (CPSs) and ADB Country Assistance

ADB’s Performance-Based Allocation (PBA) Policy. This system resembles

World Bank Governance Indicators. These measure the quality of

Other Governance Assessments. Various other assessments that provide

ADB’s Risk Assessment Sourcebook. The sourcebook refers to several

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

Transparency International National Integrity System Reports. These

Transparency International’s Toolkits. These are business tools, reports,

ADB’s Sourcebook: Diagnostics to Assist Preparation of Governance Risk

The OECD’s Checklist for Enhancing Integrity in Public Procurement. This

ADB/OECD Anti-Corruption Initiative’s Fighting Bribery in Public

• a risk map—producing a risk map helps project teams identify

G. Project-Specific Governance and Anticorruption Measures

Specific cases of governance and anticorruption include:

Project counsel can help project teams design project-specific governance

• incorporate features that instill good management, limit the

and procedures to tackle them on a systematic sector and programmatic

A. The Governance and Anticorruption Agenda in Context

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

Governance is directly linked to the MDGs because achieving the MDGs

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

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

B. Meanings of Governance and Corruption

1. Governance and Good Governance

manner in which power is exercised in the management of a country’s

• accountability—public sector management, public enterprise

Different institutions adopt different formal definitions of governance.

• the Organisation for Economic Co-operation and Development

C. Governance and Corruption Risks

Box 1.1: Common Governance and Corruption-Related Risks

• A stakeholder tries to influence the location of an infrastructure

D. Structure of the Guide

The Governance Guide is structured as follows:

• Chapter 1 provides an overview of ADB’s internal policy and strategy

ADB’s Governance and Anticorruption

accountability—public sector management, public enterprise