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LESSONS:

Governance Reform Program

| country: Mongolia

An appropriate balance needs to be found between local government autonomy and public sector efficiency and accountability. In a number of aimags (provinces), there appears to be a significant overlap of activities betweenprovincial and subprovincial administrations. The implementation of the pilot program and the subsequent training initiatives at the aimag levels have demonstrated the need for consolidation of administrative and service-delivery functions at the subprovincial levels. While it is a complex issue, it needs to be addressed given the state of inter-governmental fiscal dependence. In particular, the number of sums (municipalities) and the activities that they perform need to be rationalized. This would have a favorable impact on reducing the overheads and operational costs involved in public sector administration. Further, the recent move on establishing regional development centers could facilitate the consolidation of administrative functions on the basis of regional or subregional cluster-type arrangements. ADB will provide technical assistance (TA) support to undertake a functional review of the need for and scope of such consolidation. It is essential that the government work with local governments to ensure that the reforms to the center-provincial relations that are under way now penetrate down to the subprovincial levels as well. Efforts in this area should be undertaken along with a careful monitoring of how contractual and subcontractual relations emerge at the provincial and subprovincial levels under the Public Sector Management and Finance Law (PSMFL).

Civil service reforms are critical to ensure sustainability of public sector reforms. It is essential that the government implement a wide-ranging civil service employment and wage reform program, aimed at arriving at an optimal sizeof the public sector labor force. Average civil service salaries at different levels are about 35-50% lower than average private sector compensation at comparable levels. The government embarked on a 4-year plan in 2000 to increase civil service wages by 25% every year. Given the serious budgetary implications, the government is carefully reviewing the increase proposed for 2003. In addition, Mongolia does not have a permanent, merit-based, or well-managed civil service. While a proper implementation of the provisions of the Public Sector Management and Finance Law (PSMFL) will bring about changes, the current practice of senior-level appointments and promotions being made on political or other affiliations is not conducive to the formation of a strong cadre of civil servants. There have been frequent changes of personnel in key positions, which partly has been a reason for the lack of real commitment across various levels of the government for public sector reforms. The measures introduced under the Governance Reform Program (GRP) will be sustained through ADB technical assistance (TA) support.

Process-oriented reforms can substitute for capacity constraints. The Governance Reform Program (GRP) has demonstrated that process and procedure-oriented reforms bring about clarity of purpose, help define objectives properly, set appropriate levels of expectations, and launch institutional changes to facilitate transition. While capacity is lacking in the Mongolian public sector, the measures introduced under the GRP have changed the way key institutions function. ADB’s sector interventions have demonstrated that there is no dearth of technical knowledge and skills in the Mongolian public sector. However, the challenge is to improve public sector governance through the introduction of reforms at all levels and provide appropriate incentives to leverage the existing capacity.

Public sector reforms need to be sequenced properly. The Governance Reform Program (GRP) design did not allow for a proper sequencing of all the steps needed. First, capacity constraints were identified, but the medium-term cost implications of program implementation were not fully analyzed, vis-‘-vis the likely benefits or savings stemming from the adoption of all the reform measures. Given the significant capacity building needs, it is essential that the government coordinate all external funding agency activities effectively to channel grant funds to support training and information dissemination. ADB plans to steer its follow-up support in an integrated manner, by coordinating its interventions in public sector reforms with ongoing and proposed support in health, education and other sectors. Second, reservations on moving towards output-based budgeting were noted, but its applicability in certain sector ministries and agencies was not fully evaluated. It has to be recognized that a broad-based application of output-based budgeting across the entire spectrum could not be a realistic goal for future interventions. Third, a functional review of the public sector is a critical first step in introducing reforms. While this has been accomplished in part, it needs to be extended to cover all ministries and major public sector institutions prior tomoving further. This issue is currently being addressed through ADB TA.

Risks associated with the implementation of the Public Sector Management and Finance Law (PSMFL) should be managed well. There are underlying tensions that the PSMFL will recentralize authority and reduce provincial autonomy, given that Mongolia has had powerful sector ministries in the past. In particular, there are concerns that the reforms will demand an increase in accountability without any concomitant increase in authority or independence to achieve the desired objectives. There is little doubt that the budget constraints need to be hardened, which will need a streamlined top-down approachin policy formulation, planning, budgeting and execution. However, such discipline in public administration and financial management should strike a proper balance between accountability and responsibility.

Social impact should be monitored and managed well. Given the pilot nature of the reform measures adopted, there has been no discernible social impact as a result of Governance Reform Program (GRP) thus far, as anticipated during program design. While attempts to reduce fiscal deficits in a low growth environment are likely to have an adverse social impact,both health and education expenditures have grown by 20% in nominal terms and about 12% in real terms over 2000-2002. However, fuller implementation of the Public Sector Management and Finance Law (PSMFL) and the mainstreaming of reforms in various sectors may initially have a negative impact on the labor market and reduce access of the poor to social services. It is essential that adequate compensation measures are designed and implemented. ADB technical assistance (TA) support includes a component on monitoring the impact and designing such measures. ADB will also maintaincontinuous consultation with the government to ensure that sufficient budgetary allocations are made to cushion any adverse impact of the reforms. These efforts will also be coordinated with the World Bank’s proposed structural adjustment loan to support general reform measures under the government’s Poverty Reduction Strategy, currently being finalized.

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