ASIAN DEVELOPMENT BANK Operations Evaluation Department

COUNTRY ASSISTANCE PROGRAM EVALUATION FOR MONGOLIA

In this electronic file, the report is followed by Managements response and the Board of Directors Development Effectiveness Committee (DEC) Chairs summary of a discussion of the report by DEC.

Evaluation Study

Reference Number: CAP: MON 2008-33 Country Assistance Program Evaluation September 2008

Mongolia: From Transition to Takeoff

Operations Evaluation Department

CURRENCY EQUIVALENTS (as of 30 April 2008) Currency Unit MNT1.00 $1.00 = = togrog (MNT) $0.000858 MNT1,166

ABBREVIATIONS ADB ADF ASDP BOM CAPE CAREC COS CPS CSP CSPU EA EGSPRS EIRR ESDP FGP FRC FSPL GDP GRP HSDP ICT IMF JFICT JFPR MDG MFDR MNRM MOH MSE MSWL NGO PCR PHC PPA PPP PRC PRS PSMFL PSOD SCC SSSDP TA Asian Development Bank Asian Development Fund Agriculture Sector Development Program Bank of Mongolia country assistance program evaluation Central Asia Regional Economic Cooperation country operational strategy country partnership strategy country strategy and program country strategy and program update executing agency Economic Growth Support and Poverty Reduction Strategy economic internal rate of return Education Sector Development Program family group practice Financial Regulatory Commission Financial Sector Program Loan gross domestic product Governance Reform Program Health Sector Development Program information and communication technology International Monetary Fund Japan Fund for Information and Communication Technology Japan Fund for Poverty Reduction Millennium Development Goal managing for development results Mongolia Resident Mission Ministry of Health Mongolia Stock Exchange Ministry of Social Welfare and Labor nongovernment organization project/program completion report primary health care poverty partnership agreement public-private partnership Peoples Republic of China poverty reduction strategy Public Sector Management and Finance Law Private Sector Operations Department savings and credit cooperative Social Security Sector Development Program technical assistance

NOTES (i) (ii) The fiscal year (FY) of the Government and its agencies ends on 31 December. In this report, "$" refers to US dollars.

Key Words adb, asian development bank, country assistance program evaluation, country partnership strategy, country strategy and programs, development effectiveness, education sector, financial sector, governance, health sector, infrastructure, loans, mongolia, operations evaluation, program performance, sector assessment, technical assistance, transition economy, transport sector, urban development

Director

R. Adhikari, Operations Evaluation Division 1 and Officer-in-Charge, Operations Evaluation Division 2, Operations Evaluation Department (OED) C. Kim, Senior Evaluation Specialist, Operations Evaluation Division 2, OED J. Bayley, Evaluation Specialist, Operations Evaluation Division 1, OED M. Gatti, Senior Evaluation Specialist, Operations Evaluation Division 2, OED N. Singru, Evaluation Specialist, Operations Evaluation Division 2, OED J. Tubadeza, Senior Evaluation Officer, Office of the Director General, OED J. Dimayuga, Evaluation Officer, Operations Evaluation Division 2, OED R. Perez, Senior Operations Evaluation Assistant, Operations Evaluation Division 2, OED Operations Evaluation Department, CE-18

Team leader Team members

: :

CONTENTS Page EXECUTIVE SUMMARY MAP I. INTRODUCTION A. Objectives and Scope of the Country Assistance Program Evaluation B. Methodology and Approach C. The 2002 Country Assistance Program Evaluation: Key Findings D. Organization of the Report DEVELOPMENT CONTEXT AND GOVERNMENT PRIORITIES A. The Evolving Political, Economic, and Social Setting B. The Governments Development Priorities and Key Strategies ASIAN DEVELOPMENT BANKS COUNTRY STRATEGY A. The Evolution of ADBs Country Strategies and Assistance Program B. Strategic Positioning C. ADBs Contribution to Development Results D. ADBs Institutional Performance PROGRAM IMPLEMENTATION A. Program Delivery Performance B. Portfolio Management C. Factors Affecting Implementation SECTORAL RESULTS ACHIEVED AND PERFORMANCE DETERMINANTS A. ADBs Contribution to Outputs, Outcomes, and Impacts, by Key Sector B. The Programs Contribution to Outcomes and Impacts, by Thematic Area C. ADBs Added Value D. Performance Determinants OVERALL PERFORMANCE ASSESSMENT AND RATING KEY FINDINGS, LESSONS, AND RECOMMENDATIONS A. Key Findings B. Lessons C. Recommendations i ix 1 1 1 1 2 2 3 5 6 6 8 11 13 15 15 17 19 20 20 32 35 35 35 36 36 38 40

II.

III.

IV.

V.

VI. VII.

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations were observed in preparing this report. The fieldwork and preparation of this report were undertaken by C. Kim, mission leader; and J. Dimayuga, evaluation officer. S. Tabor was the international consultant. Sector inputs were provided by a group of OED staff: M. Gatti on urban development, N. Singru on the transport sector, J. Tubadeza on social sectors, S. Bayley and P. Robertson on governance. Director General (DG), OED recused himself from review and approval of this report due to his previous involvement in the country operations as DG, East Asia and East and Central Asia Departments, and delegated approval to Director, OED1. To the knowledge of the management of OED, the people preparing, reviewing, and approving this report have no conflict of interest.

APPENDIXES 1. 2. 3. 4. 5. 6. 7. Evaluation Methodology, Approach, and Ratings Mongolia Key Indicators ADBs Lending and Nonlending Assistance Programs Governments Strategic Directions and ADBs Country Operational Strategies for Mongolia Portfolio Performance of Lending Program Sector Performance Assessment Summary ADB Client Responsiveness Survey 43 48 53 60 68 71 107

SUPPLEMENTARY APPENDIX (available on request) A. Performance Assessments of ADB Assistance in the Transport, Finance, Urban Development, Education, Health and Social Protection Sectors

Attachment:

Management Response DEC Chair Summary

EXECUTIVE SUMMARY This country assistance program evaluation (CAPE) assesses the performance of Asian Development Bank (ADB) country strategies and assistance programs for Mongolia during 1997 2007. It updates the findings of the CAPE prepared in 2002 and aims to identify key lessons and recommendations to provide inputs to the preparation of a new country partnership strategy (CPS) for Mongolia and facilitate its implementation. The 2002 CAPE. The 2002 CAPE recommended that (i) the strategic planning process provide strategic guidance to operations; (ii) the necessary economic, sector, and thematic work and poverty analysis be undertaken prior to country strategy formulation; (iii) an emphasis of both poverty reduction and private sector development be retained; (iv) an integrated perspective on public sector financial management be retained; and (v) monitoring and evaluation be incorporated as part of an integrated approach to public resource management. The subsequent country strategy and program for 20062008 took the CAPE recommendations on board by strengthening analytic inputs into the country strategy, sharpening strategic priorities, continuing to focus on both poverty reduction and private sector development, providing follow-up support in public sector management, and fostering results-based approaches to project and program monitoring. Country Context. In the late 1990s, the Mongolian economy was reeling from the dislocations arising from the loss of traditional trade, investment, and assistance ties with the nations of the former Soviet Union, as well as from the Asian financial crisis. Output was falling, the larger enterprises and banks were distressed, and poverty was worsening at an alarming rate. Solid progress had been made in the first generation of reforms in the transition to a market economy, but the much-anticipated gains in efficiency and private investment had yet to materialize. Since 2003, the boom in the mining sector has fuelled economic growth at rates of 6 10%, doubling the per capita gross domestic product to some $1,490 in 2007 and turning the fiscal balance to a surplus. The incidence of poverty has gradually declined. While economic growth performance has been impressive and prospects are positive, there are many challenges and risks as the country has moved from transition to rapid growth. Mongolia is landlocked and sparsely populated and suffers from a harsh climate, chronic rural poverty, urban pollution, and limited institutional and human capacity. Critical development constraints on sustainable economic growth and poverty reduction include infrastructure bottlenecks, limited regulatory framework for private sector participation, inefficient financial intermediation, relatively weak public sector management capacity, a small domestic market, and a narrow economic base. On the opportunities side, the country is resource-rich and located next to large rapidly growing economies. A. Performance Assessment

ADBs Strategic Positioning. ADBs strategic positioning was rated as substantial, having been responsive and well aligned with the priorities of the Government of Mongolia (the Government) and ADB policy strategies. ADBs country strategies have evolved from a focus on supporting the transition to a market economy in the latter half of the 1990s to poverty reduction during the past decade. Assistance was provided to deepen market-oriented reform, help stabilize and then broaden financial markets, develop commercial agriculture, improve services in secondary towns and cities, and restructure social services while ensuring that the poor would have access to quality services. Transport infrastructure development aimed to enhance connectivity and build regional and global market links. Special emphasis was placed on building

ii the institutional foundations for managing a market economy through assistance for reforms in public sector management and governance. The CSP for 20062008, as the first results-based country strategy for Mongolia, aimed to sharpen ADBs focus on key sectors and on the enabling environment for private sector development to contribute to economic diversification and employment generation. ADBs Contribution to Development Results. The development results of ADBs assistance as a whole have been considerable, particularly through its support for market-oriented policy reform, social sector development, economic corridor development, capacity building for public sector governance, government systems for procurement, project management, and a number of other aspects of public sector planning and financial management. Important accomplishments include ADBs contribution to restoring fiscal stability and enhanced budget control; improving transport connectivity, the efficiency of district heating in Ulaanbaatar, and access to essential municipal services in the secondary cities; transforming a mono-bank system into a competitive banking sector and introducing a housing mortgage market; restoring primary education enrollment rates; and introducing a network of primary health care providers, social insurance, and a multi-tier pension system. Portfolio Performance. Over the CAPE period, ADB approved $361.2 million in 24 loans and one grant in the public sector, $16.1 million in two private sector projects, and $36.1 million in 69 technical assistance grants. Project completion reports have rated completed projects positively, while independent post-evaluation reports paint a mixed picture. Post-evaluations were conducted on 14 operations at project completion between 1997 and 2007. Of these, eight were rated as successful or better, and six were rated as partly successful. Underlying factors that explain successful portfolio performance include (i) strong government ownership of marketoriented reform, (ii) alignment of ADB assistance with the Governments evolving transition and poverty-reduction agenda, (iii) shared commitment and ownership from the design stage through implementation, (iv) participatory project design and implementation, (v) the responsiveness of the executing agency, (vi) competent project management, (vii) strong social demand for improvements in social and economic services, and (viii) the establishment in 2001 of the Mongolia Resident Mission. Portfolio performance began to deteriorate once the focus of the assistance portfolio shifted from fast-disbursing program loans in the 1990s to investment projects in recent years, with long start-up delays being a particular problem. Other portfolio management problems included delays in the course of implementation, significant departures from project scope, and frequent extensions in loan completion. Added Value. ADB added value over and above the financing provided in numerous areas. The use of program lending to support reform in public sector governance and social protection and the introduction of a sector development program in education was new to ADB at the time, and the approach adopted for reforming the health sector was fresh. ADB policy dialogue and its strategy of staying the course when reforms ran into opposition helped to maintain forward momentum, even if reforms ultimately did not occur in the time frame initially envisaged. ADBs role as an honest broker in the Central Asia Regional Economic Cooperation (CAREC) has allowed Mongolia to negotiate on equal terms with much larger neighboring economies and to build the trust and confidence required to tackle problems regionally. While fostering aid coordination has been difficult, ADB has stayed the course, and there are encouraging signs that support to the education sector is beginning to evolve into a platform for a more harmonized sector-wide approach to assistance. TopDown Assessment. ADB assistance strategy and performance as a whole combining ADBs strategic positioning, contribution to development results, and response and

iii performancewere assessed as successful with room for improvement. Key factors were that ADB assistance was (i) well aligned to country requirements and government strategies; (ii) delivered through a program marked by the innovative use of a variety of new assistance instruments and a strong measure of nonlending support; (iii) increasingly responsive to client needs; and has made important contributions to the transition process, social development, fiscal stability, and economic recovery. The topdown assessment would have been more positive were it not for a lack of strategic focus and sector selectivity, steady deterioration in portfolio performance, a weak contribution to capacity building, limited delegation to the resident mission, and relatively poor results monitoring framework and track record in donor coordination. BottomUp Assessment. ADBs assistance in key sectors, when aggregated, is assessed as successful because assistance was relevant or better to the needs of all sectors, the impact of sector support was substantial, and program benefits were assessed as likely to be sustained. The effectiveness and efficiency of the assistance program were mixed, with some sectors performing fairly well and others performing below expectations. Performance was strong in the education, banking, transport, urban, and agriculture sectors, where ADB was at the forefront of key sector policy and institutional reform efforts, and where ADB-assisted reforms and investments were implemented in a timely manner. Support to education contributed to the consolidation of the primary school system and to steady improvement in the quality and relevance of basic educational services during a period of severe economic decline. Assistance to the financial sector has helped the country overcome the adverse effects of the Asian financial crisis, develop financial institutions and markets, and introduce a mortgage market. ADB assistance to transport contributed to restoring civil aviation services, establishing a northsouth transport corridor, and improvements in trade facilitation procedures. In the urban sector, ADB support has extended the lifespan and efficiency of Ulaanbaatars district heating system and provided access to essential municipal services in 13 secondary towns and cities. Support to agriculture contributed to improving agriculture policy and legal basis, restructuring and privatizing the Agriculture Bank, training farmers on farming skills, and promoting financing to herders and farmers for farming and agribusinesses. Conversely, program performance in health, social protection and law, economic management, and public policy sectors was more modest and, in some cases, suffered from insufficient diagnosis, overambitious project designs, and flagging political support for policy and institutional reforms. Overall Assessment. The overall rating for ADB assistance during the CAPE period is successful, derived by combining the topdown and bottomup ratings and weighting them equally. While performance was rated as successful, there is scope for improvement and a need for an innovative approach to ADB assistance in the next CPS for Mongolia, taking into account the countrys critical development constraints and ADBs corporate goals and strategy. B. Key Findings

From Program Lending to Investment Operations. By 2002, as the financial system stabilized and started to recover, the emphasis of ADB support shifted from program lending to investment projects. Asian Development Fund (ADF) allocations to Mongolia gradually declined from $60 million to $70 million annually for most of 1990s to around $25 million in recent years, resulting in projects that were both smaller in size and more difficult to implement efficiently. Portfolio management became increasingly difficult, with start-up and initial implementation delays and project extensions of several years. From ADF Loans to Grant ADF. Since 2003, strong rates of economic growth have resumed, and in 2007 the budget recorded its third consecutive year of surpluses. Starting in

iv 2007, ADF assistance was provided in the form of 100% grants following the ADF donor decision, though by then Mongolias public debt situation had substantially improved. In retrospect, the program converted to an all-grant basis several years too late and it may have sent the wrong signals about the creditworthiness to the Government. Commitment to Transition and Poverty Reduction Paid Off. ADBs assistance played an important role in facilitating Mongolias transition and in developing market-related institutions. ADB has made important contributions to establishing the policy setting and institutional framework for a market economy, primarily in the main sectors of support, and by helping the Government restore fiscal stability and better control over the budget process. ADBs main contribution to poverty reduction was indirect, achieved through support for establishing a market economy, restoring fiscal stability, enhancing Mongolias connections to regional and global markets, and fostering growth and employment led by the private sector. Directly targeted interventions to augment human resources, enhance living conditions, provide better access to services, and assist poor farmers in western Mongolia have contributed to making the growth process more inclusive and helping to improve social indicators. Country Assistance Paid Off in Several Sectors. In terms of nationwide impacts, ADBs success has been in the transport, education, banking, and urban sectors. In these sectors there was strong government ownership, follow through on major sector policy reforms, a judicious use of lending and nonlending assistance, and, over time, increasing coordination of external assistance. Private Sector Development. Overall, ADBs private sector participation remains limited because Mongolia currently lacks well-defined legislative and regulatory frameworks necessary for it. Public-private partnership was selected as one of the key priorities in the National Development Strategy that was passed by the Parliament in February 2008. At the same time, a private sector development strategy was also formulated for the first time since the transition. The strategy aims to increase productivity and flexibility, promoting private sector development in regions and building all types of public-private partnerships through improving the legal environment, arbitration, logistics, and consultation mechanisms. ADB also strives to support government in developing these frameworks. ADBs support for private sector development has been realized through assistance that enhanced connectivity, improved the soundness of financial markets, augmented urban utilities and services, and improved agricultural productivity. Rapid growth in trade, visitor arrivals, inward investment, and the number of small and medium-sized enterprises demonstrate that returns on assistance in these areas are high. ADB private sector operations provided support for two small financial sector operations that mainly helped to introduce ADBs private sector operations to Mongolia. Support in this area has largely been sector specific, limiting opportunities for cross sector synergies and complementarity between public and private sector operations. Efforts are being made, however, to support privatization in the civil aviation sector, introduce new modes of public-private partnership and to draw on both public and private sector support for reforms in the financial sector and to encourage power exports. Platform for Regional Cooperation Established. As the economy opened and economic stability was restored, trade and investment relations between Mongolia and its large neighboring economies have come to play greater roles in economic development. Assistance under the CAREC program initiated in 1997 has already paid off in terms of attracting investment in trade facilitation and developing the western transport corridor that is part of the Asian Highway network. More importantly, trust and confidence have been built, and Mongolia now has a wellestablished forum for benchmarking practices and negotiating with its neighbors. There are

v potential benefits for Mongolia and its neighboring countries from fostering cross-border and regional cooperation. Cross-border export opportunities for Mongolia include power and livestockbased products. Results-Orientation and Monitoring. A results-based approach was introduced by the last CSP. However, results monitoring encountered practical difficulties. There was also lack of full awareness and institutional capacity within the client government in this regard. A more focused results framework with monitorable quantitative indicators would have been useful. C. Lessons

Overly Sophisticated Governance Reform. ADB assistance was not successful in every instance, and lessons can be learned from areas of program performance that did not fully meet expectations. From 1999 to 2002, ADB support for public sector governance aimed to restore fiscal stability and enhance budgetary control, and was successful. Thereafter, support focused on public administration reforms, output-based budgeting, and accrual accounting under the 2002 Public Sector Management and Finance Law. Because of the very advanced nature of this law and the lack of capacity to implement these reforms in Mongolia, progress has been mixed. The key lesson for ADB is the need to launch such efforts only after carefully assessing the feasibility of major governance reforms and the level of institutional capacity needed to implement them, as well as securing the cooperation and support of development partners. The Rush to Law. ADB provided assistance to help the Government introduce many new laws. These were often drafted under considerable time pressure and drew on international best practices. Once new laws were adopted, ADB then provided support to help build the institutions that would put them in place. In some instances this was successful, but many others left institutions with large capacity gaps and a highly fragmented technical assistance effort that substituted for a number of these gaps in the short term and relied excessively on training officials to build capacity. In retrospect, a more systematic approach to capacity development, pilot-testing institutional innovations, and developing new laws within the Mongolian legal tradition could have been more effective. ADB Became Overstretched. There is some evidence that ADB became overstretched during the CAPE period. As ADF levels declined and the assistance emphasis shifted from program loans to investment operations, the size of the average loan project fell. The number and size of advisory technical assistance grants fell even more sharply. Pilot Japan Fund for Poverty Reduction projects were added on. ADBs resources became stretched over a large number of regions, subsectors, institutions, and themes, blurring strategic focus and steadily increasing transaction costs. Within its sectors of operation, some strategic focus was obtained with the country strategy and program for 20062008, but new initiatives in energy and the environment added to the complexity of the program in 2007 and 2008. The shift from a heavy emphasis on program lending in the 1980s and early 1990s to investment operations in the past decade was associated with a marked deterioration in portfolio performance, manifested primarily in substantial project start-up and initial implementation delays. Investment Efficiency Considerations. The imperative of supporting a rapid transition from central planning to a market economy to cope with the fallout from the Asian financial crisis and reverse the long decline in economic performance meant that many operations were launched on the basis of a sector needs assessment and strategy, rather than on a thorough assessment of the long-term economic viability of the services created. For instance, district heating, urban water, sewerage, and sanitation services were rehabilitated before a tariff structure

vi was put in place to sustain them. Major sections of the northsouth highway were constructed before there was sufficient financial and institutional capacity for maintaining it and ensuring that goods and people could flow quickly over borders. New schools and health posts were developed in remote rural areas while communities were rapidly migrating to urban centers. In an effort to be as responsive as possible, ADB assistance was designed and delivered sector by sector, and projects were spread nationwide, limiting scope for cross-sector synergies or regional economies of scale. In retrospect, more attention to long-term public investment efficiency would have boosted long-term program returns and served to help discipline the process of public sector investment planning. Urban Versus Rural Development. Mongolia has witnessed rapid demographic change. It is estimated that nearly half of the nations population live in the capital city. Other regions have suffered substantial population declines. Large inflows of remittances have contributed to increased rural-to-urban migration, and this is expected to continue in the years to come. Should rural-to-urban migration trends continue, the vast bulk of the population could reside in the capital city in a decade. Rapid rural-to-urban migration without adequate urban planning or the provision of social services and infrastructure to meet demographic changes has placed a gradually more onerous burden on the capital city and its peri-urban areas. While remaining actively engaged in supporting rural poverty reduction, ADB could have given more consideration to helping Ulaanbaatar prepare for the expected influx of migrants. A focus on developing Ulaanbaatar and selected secondary cities would enable ADB to improve project efficiencies and foster greater cross-project synergies. Donor Coordination. ADB has had some success in leveraging its limited resources to mobilize funding from other development partners, particularly in education. It has had substantially less success in fostering harmonized assistance approaches; building country systems to lead sector development; collaborating in portfolio management, sector analysis, or country strategy development; or partnering effectively to build institutional capacity in critical areas. In the long run, building the country systems so that the Government can utilize external resources more effectively will require deeper cooperation among the countrys development assistance partners. Results Monitoring. Results monitoring of program delivery and portfolio and related contribution to the countrys development results should be adequately pursued. D. Recommendations

Sector-level recommendations are presented in sector assessment summaries in the main text and appendixes. The following are recommendations in key areas for consideration by ADB Management in formulating the new CPS and related programs and their implementation. Key recommendations in a narrative form are presented at the end of the main text.

vii

Key Recommendations
1. Reorient the role of the Asian Development Bank (ADB) to support Mongolia in the countrys changing development context by (i) gradually shifting from serving primarily as a source of concessionary finance toward becoming a source of new knowledge and catalytic financing; (ii) building country capacity for sound public sector financial management, investment planning, results monitoring, and debt management, possibly using umbrella technical assistance modality; (iii) supporting the design and implementation of further policy reforms and institutional capacity development; and (iv) supporting the protection of the countrys renewable natural resource base and environment. 2. Strengthen strategic focus and sector selectivity in ADB operations by (i) focusing on a small number of key subsectors where ADB has good prospects for assisting the Government to improve policy and institutions, while providing catalytic financing for large strategic investments, and utilizing small grant sources for innovative pilot projects; (ii) strategically focusing assistance in those sectors and thematic areas that address constraints on the countrys sustained economic development, including the problem of rural-to-urban migration and structural change, which are consistent with ADBs corporate goals and strategy and where ADB has a relatively long track record; and (iii) strengthening policy dialogue and donor coordination support in those sectors in which ADB has been involved but long-standing policy deficiencies continue to hamper program performance. 3. Support further private sector development and improve complementarity between the public and private sectors by (i) helping the Government establish a public utilities tariff and regulatory regime conducive to fostering the public-private partnership necessary to help meet Mongolias economic infrastructure requirements; (ii) providing support for vocational and higher education to empower the nations youth with the skills required to compete in the marketplace; and (iii) providing support for further developing financial markets and long-term financing instruments for more accessible and affordable sources of finance that meet varied needs. 4. Foster regional cooperation by (i) supporting the transport corridors building, including support for trade facilitation; (ii) using catalytic and risk-minimizing assistance to support private sector participation that has a regional orientation and can accelerate development in the Gobi region while fostering investment in sectors other than mining; (iii) exploring subregional cooperation in capital market development; and (iv) facilitating policy dialogue for promoting cross-border and regional cooperation. 5. (i) (ii) (iii) Improve portfolio performance and client responsiveness by supervising projects intensively, particularly during the start-up phase; building institutional capacity to implement projects and monitor results in partnership with the Government; simplifying project and program design and ensuring that project time frames and implementation schedules are realistic and results indicators are monitorable; (iv) working with other partners to build country systems and implement sector-wide approaches, streamline project implementation, undertake joint review missions, and improve results-oriented monitoring and evaluation systems; and (v) strengthening the resident mission by delegating necessary responsibilities and resources for project administration and increasing its participation in project development and policy dialogue with the Government and development partners in addition to country programming and results monitoring.

Ramesh B. Adhikari Director, Operations Evaluation Division 1 and Officer-in-Charge, Operations Evaluation Division 2, Operations Evaluations Department

96o00'E

111 o00'E

R U S S I A N

F E D E R A T I O N

MONGOLIA

FROM TRANSITION TO TAKEOFF

(as implemented)
Hanh

50o00'N Ulaanbayshint Tsengel Dayan

50o00'N

UVS
Nogoonnuur

Ulaangom
Naranbulag Olgiy Tudevtey Tes Tsagaan-Uul

Hatgal

HOVSGOL Moron BULGAN Suhbaatar

Altanbulag Ereentsav

BAYANOLGIY

Olgiy

Selenge Hutag-Ondor Erdenet

SELENGE Darhan DARHAN-UUL

Bayan-Uul

DORNOD Bulgan ARHANGAY

Tsahir Hishig Ondor Battsengel

Havirga

Hovd
Manhan Dariv

ZAVHAN

ORHONSumber ULAANBAATAR ULAANBAATAR Lun Zuunmod TOV

Nalayh Maanit

HENTIY
Batnorov

Choybalsan

Uliastay

Baganuur

HOVD
Yarant Uyench

Tsetserleg
Tayshir Harhorin

Ondorhaan

Monhhaan

Tamsagbulag Matad

GOVISUMBER Choyr Mandalgovi DUNDGOVI Saynshand Baruun-Urt

Erdenetsagaan Bichigt

Altay
Togrog

Bayanhongor
Buutsagaan Nariynteel

Arvayheer

GOVI-ALTAY BAYANHONGOR

SUHBAATAR

OVORHANGAY

Burgastay

Tsogt-Ovoo

DORNOGOVI
Zamyn-Uud

Dalanzadgad
42o00'N

OMNOGOVI

Bayan-Ovoo Gashuun Suhayt

42o00'N

National Capital Provincial Capital

N
0 50 100 150 200 250 Kilometers

City/Town

PEOPLE'S REPUBLIC OF CHINA

Main Road Provincial Road Railway River Provincial Boundary International Boundary Boundaries are not necessarily authoritative.

08-1985 JF

96o00'E

111 o00'E

I. A.

INTRODUCTION

Objectives and Scope of the Country Assistance Program Evaluation

1. This country assistance program evaluation (CAPE) assesses the performance of the country strategies and assistance programs of the Asian Development Bank (ADB) for Mongolia during 19972007. The objective of this evaluation is to identify key lessons and recommendations to provide inputs to the preparation of a new country partnership strategy (CPS) and program for Mongolia and facilitate its implementation. 2. This is the second CAPE for Mongolia, extending the findings of the 2002 CAPE1 with a focus on those sectors and thematic areas in which ADB played a significant role. The CAPE looks at how the recommendations of the previous CAPE have been incorporated in ADBs assistance strategy and program of support. B. Methodology and Approach

3. Methodology. The preparation of the CAPE report followed ADB guidelines.2 It combines a topdown assessment of ADB performance as a whole with a bottomup assessment of ADB performance in key sectors. The topdown assessment reviews the development context, the Governments strategies, and ADBs strategies and their implementation. Then it assesses performance in terms of ADBs strategic positioning, overall contribution to development results, and performance as a development partner. The bottomup assessment examines the performance of lending and other assistance in key sectors by assessing its relevance, effectiveness, efficiency, impact, and sustainability. The performance assessment sheds lights on the factors determining assistance performance. Then, viewed through the prism of current challenges and opportunities, a series of lessons and operational recommendations are presented. A more detailed discussion of the CAPE evaluation framework is presented in Appendix 1. Country socioeconomic data are presented in Appendix 2 and ADBs country operation data in Appendix 3. 4. Approach. The CAPE draws on a wide set of information sources including both primary and secondary data, a literature review, a perception survey of key informants, project site visits, and detailed stakeholder consultations. It builds on the findings of the 2002 Mongolia CAPE, past project and technical assistance (TA) evaluations, and the results of special evaluation studies and sector assessments by ADBs Operations Evaluation Department. Assessment of ADB sector assistance was undertaken by the CAPE team for the following sectors: finance, transport, social, urban development, agriculture, and governance. To encourage participation, the preliminary findings and recommendations of the CAPE have been shared with the ADB country team and the Government. Sector assessments have been distributed and discussed separately with the ADB country team and the relevant government agencies. C. The 2002 Country Assistance Program Evaluation: Key Findings

5. The first CAPE for Mongolia covered the period 19912001, a decade in which the Mongolian economy lurched from crisis to crisis and living standards registered a protracted decline. When Mongolia joined ADB in 1991, its economy was in crisis and the country was undergoing significant changes on many fronts at once. ADB supported Mongolias transition
1 2

ADB. 2002. Country Assistance Program Evaluation in Mongolia. Manila. ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Report. Manila. Available at www.adb.org/Documents/Guidelines/Country-Assistance-Program/guide-preparation-0206.pdf.

2 process with loans worth $505 million approved between 1991 and 2001 for 25 projects in agriculture, education, energy, finance, health, industry, telecommunications, transport, and urban development. An additional $49 million was approved for TA grants in the same sectors and in support of governance reforms. The CAPE focused on four themes: capacity building, policy reforms, economic diversification, and financial system reform. 6. The 2002 CAPE found that capacity building was supported in all areas of operation but mostly focused on inputs and was equated with training and the provision of consulting services. The fragmented approach did not promote overall public sector resource management. Policy reform assistance was all encompassing in the context of transition and development. With program lending support, changes in price and trade policies and privatization laid the foundation for private sector development. However, policy matrixes were overloaded, and policy-based lending to agriculture and industry was only partly successful. Economic reorientation and diversification were explicit goals and pursued by project loans for the rehabilitation and diversification of infrastructure. These were successful, to a limited degree, in improving technical performance and commercializing and corporatizing infrastructure services. The fourth transition themefinancial sector transformationhad an overwhelming agenda. The lack of a sector strategy in the first half of the 1990s was rectified when the first financial sector program was formulated in 1996. The second followed in 2000. The CAPE recommended that (i) the strategic planning process provide strategic guidance to operations; (ii) the necessary economic, sector, and thematic work, and poverty analysis be undertaken prior to country strategy formulation; (iii) an emphasis on both poverty reduction and private sector development be retained; (iv) an integrated perspective on public sector financial management be retained; and (v) monitoring and evaluation be incorporated as part of an integrated approach to public resource management. 7. ADBs country strategy and program (CSP) for Mongolia for 20062008 3 took these findings and recommendations on board by strengthening analytic inputs into the country strategy, sharpening strategic priorities, continuing to focus on both poverty reduction and private sector development, and fostering results-based approaches to project and program monitoring. Public resource management was retained as an integrated priority, with support provided from a second-phase program loan for a governance reform program and associated TA. D. Organization of the Report

8. The report is divided into seven chapters, including this introduction. Chapter II presents Mongolias development context and Government priorities over the past decade. Chapter III discusses the evolution of ADBs country strategies and program and their performance. Chapter IV covers the implementation of ADBs assistance program, portfolio management, and related issues. Chapter V covers ADBs contribution to development results in the sectors in which assistance was provided and assesses performance at the sector level. Chapter VI summarizes overall performance combining topdown and bottomup ratings. Finally, chapter VII provides key findings, lessons, and recommendations. II. DEVELOPMENT CONTEXT AND GOVERNMENT PRIORITIES

9. Mongolias development setting has evolved rapidly during the past 2 decades. External assistance must anticipate and be responsive to changes in the political, economic, and social setting. This chapter discusses key features of the development context, including the evolution of

ADB. 2005. Mongolia Country Strategy and Program. Manila.

3 the Governments economic development priorities during the CAPE period. Further details are presented in Appendix 4. A. The Evolving Political, Economic, and Social Setting

10. Mongolia, a landlocked nation between the Peoples Republic of China (PRC) and the Russian Federation, is one of the worlds most sparsely populated, with 1.7 people per square kilometer. It has a population of 2.6 million, with more than a million residing in the densely populated capital city, Ulaanbaatar.4 The rest are spread over vast rural expanses three times the size of France. Major demographic shifts are resulting from rising urbanization, 5 increasing internal migration, and migration out of the country, with close to 250,000 Mongolians estimated to reside abroad. 11. Economic activity is centered around nomadic livestock raising and mining. Mongolias extensive mineral deposits include copper, coal, molybdenum, tungsten, and gold. The economy collapsed in 1991 and 1992 after Soviet aid, which had accounted for nearly 30% of the gross domestic product (GDP), abruptly ceased. Mongolias GDP fell sharply from nearly $1,800 per capita prior to the 1990s to as low as $330 per capita in 1995. The domestic market is small, with aggregate 2007 GDP equivalent to $3.9 billion at current prices. 12. Starting in 1991, Mongolia underwent a rapid transition from a Soviet-style planned economy to a market economy. The Government undertook major reforms in the areas of price liberalization, privatization, agriculture, industry, and banking, as well as toward creating marketbased institutions. A parliamentary democracy was established, and the legal system was reformed to support the private sector and protect citizens rights. Steady progress in economic and political reform has contributed to substantial changes in the structure of the economy and patterns of external trade. Mongolia joined the World Trade Organization in 1997 and has become one of the most open economies in Asia. 13. Unlike in some other formerly socialist countries, Mongolias transition was relatively free of social or political unrest. This was despite periods of pronounced political instability, including eight Cabinet changes from 1996 to 2007. Despite this instability, both of Mongolias main political parties support a market-oriented economy and democratic polity. Over time, political leaders have become aware of the need to promote good governance. Following civil unrest in April 2006, Parliament passed a number of new laws imposing windfall taxes on copper and gold revenues, regulating mineral extraction, and strengthening anticorruption measures. 14. From 1999 to 2001, the economy suffered a sharp decline due to the Asian financial crisis and a series of natural disasters. Since 2003, high rates of economic growth have resumed, and the incidence of poverty has gradually declined. The GDP has grown by 610% per annum since 2003, causing a doubling of per capita GDP from $582 in 2003 to $1,489 in 2007. Supported by strong growth, the budget recorded in 2007 its third consecutive year of surpluses. The mining sectors contribution to revenues has sharply increased, thanks in part to a fivefold increase since 2001 in the global price of copper and a threefold increase in the global price of gold. Public debt has been slashed from 85% of the GDP in 2003 to 39% in 2007. Foreign direct investment and the overall balance of payments remain strong, allowing international currency reserves to quadruple from 2003 to $1.0 billion in 2007, or roughly 6 months of import cover. Inflation, which had moderated from triple-digit levels in the early 1990s, has picked up from 6% at end-2006 to
4 5

Estimates of the population of Ulaanbaatar ranged from 1 million to 1.4 million in 2007. Some 40,00050,000 people migrate to Ulaanbaatar annually.

4 15% at end-2007, and 21% in March 2008 driven by rising food prices, an expansionary monetary policy, large increases in civil service wages (49% in 2007) and social welfare spending (90%), and rising import prices. 15. According to the International Monetary Fund (IMF) country report of July 2008, there are some signs of overheating in the economy. The Governments wage bill, transfers, and capital expenditures have increased rapidly, and the growth of private credit and the money supply have been especially high since 2003. Average civil service salaries reached MNT300,000 per month ($246) in 2007, which was 420% higher than the 2003 average. The minimum pension reached MNT81,000 per month ($66), which was 280% higher than in 2004. Despite a rapid increase in public sector wages in recent years, the gap between private and public sector wages continues to widen, especially for higher skills. Domestic credit grew by 67% in 2007, due largely to growth in lending for private mortgages, and contributed to a 57% increase in the broad money supply. 16. The structure of the economy has changed substantially over the past decade. As a share of the GDP, agriculture declined from 36% in 1997 to 21% in 2007, while the mining share increased substantially from 12% in 1997 to 30% in 2007. Livestock continues to be the main source of income for 40% of the labor force, though it produces less than 15% of the GDP. The services sector has grown at a rate of 89% per annum since 2000, with strong growth in trade, telecommunications, and banking. Both directly and indirectly, tourism now contributes some 10% of the GDP. In 2007, Mongolia recorded 451,000 tourist arrivals, an increase of 350% over 2000. More detailed economic and social data are presented in Appendix 2. 17. In 2006, Mongolia registered a positive trade balance for the first time, and total trade turnover has reached approximately $4.1 billion per annum. With nearly 250,000 people working abroad, remittances are estimated to exceed $200 million per annum. They are an important source of income, especially for low- and middle-income groups. 18. Despite solid growth, about 830,000 people are estimated to be poor. Poverty manifests itself in rising incidences of child labor, alcoholism, domestic violence, sexually transmitted diseases, tuberculosis, homelessness, trafficking in women and children, and suicide. Women are significantly more likely to suffer income poverty than men. Inequality is severe between the urban and rural areas, especially in the western part of the country. 19. There has, however, been steady progress in poverty reduction (Table 1). The national poverty incidence fell from 36.1% in 1998 to 32.2% in 2006.6 The maternal mortality rate fell from 158 per 100,000 live births in 1998 to 93 in 2005, while the infant (below 1 year) mortality rate fell from 64 per 1,000 births in 1998 to 21 in 2005. Literacy is nearly universal, and primary and secondary school gross enrollment is over 90% of the required cohort. In contrast to other parts of developing Asia, malnutrition levels remain low, at 6% of the under-5 population, and income became more equitably distributed between 2002 and 2006. Reflecting steady progress in poverty reduction, the United Nations Development Programme human development index for Mongolia gradually improved from 0.65 in 1998 to 0.70 in 2006, ranking Mongolia 114th out of 177 countries in 2006. In terms of Millennium Development Goals (MDG) (Appendix 2), those relating to income poverty and hunger, primary education, and environment are at risk of not being achieved.

Poverty levels would be substantially lower if the full effects of government transfer payments, informal sector earnings, and remittances were reflected in household expenditure estimates.

5 Table 1: Income Poverty in Mongolia in 2002 and 2006 Income Poverty as Percentage of Population 1. National average 2. Urban 3. Rural 4. Ulaanbaatar 2002 36.1 30.3 43.4 27.3 2006 32.2 27.9 37.0 20.4

Source: Government of Mongolia. 2007. National Development Strategy. Ulaanbaatar.

20. Mongolia faces a range of daunting development challenges. 7 While economic growth performance has been impressive and prospects are positive, there are many challenges and risks as the country has moved from transition to rapid growth. Mongolia is landlocked and sparsely populated and suffers a harsh climate ranging from -40 centigrade (C) to +40C, chronic rural poverty, urban pollution, and limited institutional and human capacity. Critical development constraints on sustainable economic growth and poverty reduction include infrastructure bottlenecks, limited regulatory framework for private sector participation, inefficient financial intermediation, relatively weak public sector management capacity, a small domestic market, and a narrow economic base. On the opportunities side, the country is resource-rich and located next to large rapidly growing economies. B. The Governments Development Priorities and Key Strategies

21. Despite frequent regime changes, the Government has been steadfast in its support of transition from a centrally planned to a market economy. The pace and breadth of the transition was, however, dictated by circumstances, the institutional and social feasibility of reforms, and the prevailing political situation. By 1997 and 1998, first generation transition-to-market reforms were relatively advanced when the economy was hit by the Asian financial crisis, which caused enterprises to fail and distressed the banking system. The Governments strategic focus then aimed to stabilize the macroeconomy, and the Second Enhanced Structural Adjustment Facility of the IMF served to coordinate the Governments efforts to tighten financial policies, reform the banking sector, reduce taxes, launch large-scale privatization, strengthen property rights, and restructure the educational system. 22. By 2000, the economy had begun to stabilize, and the Government turned to stimulating private sector-led growth and fostering human resource development. The Government action program of 20002004 signaled the Governments intention to deepen economic reform, improve the provision of social services and income distribution, and promote good governance. A number of reform measures were launched, including the Good Governance for Human Security Program and the Privatization Program. The Government passed the Employment Law and Energy Law and amended the Banking Law. The number of government ministries was reduced from 16 to 9 and a civil service reform program was launched. 23. Poverty reduction became a more central goal of economic policy and was fully integrated with macroeconomic policies as the Government adopted the poverty partnership agreement with ADB of 2000, the Interim Poverty Reduction Strategy (PRS), and the full PRS of 2003, called the
7

The World Bank. 2007. Mongolia Sources of Growth: Country Economic Memorandum. Washington, DC. Elena Ianchovichina and Sudarshan Goopta, November 2007. Growth Diagnostics for a Resource-Rich Transition Economy: The Case of Mongolia, The World Bank, Washington, DC. The World Bank. June 2007. Foundation for Sustainable Development Rethinking the Delivery of Infrastructure Services in Mongolia, Public Private Infrastructure Advisory Facility, Washington, DC.

6 Economic Growth Support and Poverty Reduction Strategy (EGSPRS). The EGSPRS included a range of long-term poverty reduction goals and targets, near-term policy measures, and near- and medium-term priorities, including deepening reforms to ensure macroeconomic stability; improving the health of the banking sector; supporting extractive, agro-processing, and export-oriented industries; fostering tourism and information and technology development; regional development; infrastructure expansion; and mainstreaming gender dimensions in poverty interventions to promote gender equality. It envisaged a shift away from reducing poverty with income transfers to an approach based on inclusive growth and sustainable human development. 24. Building on the EGSPRS, the Government adopted a national action plan for 20042008. The action plan continued to emphasize private sector-led economic growth but with a greater emphasis on regional development and fostering knowledge-based industries. It aimed to improve living standards, reduce disparities between rural and urban areas, and foster human resource development. Special emphasis was accorded to improving governance by strengthening the institutional capacity and accountability of the public service, expanding civil service participation in decision making, enhancing transparency, and fostering the rule of law. Providing access to high-quality health care, basic education, urban services, and housing remain priorities on Mongolias development agenda. 25. In February 2008, the Government launched its long-term National Development Strategy, consistent with achieving the MDGs, for the period through 2020. Two components are particularly prominent in the Governments long-term strategy: (i) higher, stable, private sector-led growth to improve living standards and reduce income disparities and (ii) social development to improve income opportunities, the quality of public services, and access to them by the poor. The strategy envisions as key to growth further enterprise privatization, the enhanced development of the nations mineral endowment, small and medium-sized enterprise promotion, infrastructure development, and legal and institutional reforms. It enumerates a series of financial sector development priorities to support more rapid and inclusive private sector-led growth. Towards its social goals, it targets education and private sector growth to generate employment and raise incomes. Also highlighted is improved access to health care (particularly maternal and child health services and primary health care), schooling, urban services, and housing. III. ASIAN DEVELOPMENT BANKS COUNTRY STRATEGY

26. Looked at from the perspective of the country assistance program as a whole, did ADB assistance pay off? Chapter III includes an assessment of the overall countrywide outcomes and impact of ADBs country strategies and assistance programs. Performance is assessed against the degree to which ADB assistance was well positioned and made a significant contribution to development results and ADB was a responsive assistance partner. The topdown performance assessment of ADBs program is presented in this chapter, and a topdown performance rating derived from this is presented in chapter VI. A. The Evolution of ADBs Country Strategies and Assistance Program

27. ADBs country strategies have evolved from a focus on transition to the market in the latter half of the 1990s to poverty reduction during the past decade (Appendix 4). The 1991 interim country operational strategy8 and the 1994 country operational strategy9 focused on restructuring the economy, and its main strategic objective was to facilitate Mongolias transition to a market
8 9

ADB. 1991. Mongolia Interim Country Operational Strategy Study. Manila. ADB. 1994. Mongolia Country Operational Strategy Study. Manila.

7 economy by (i) creating an enabling environment for a competitive market economy, (ii) developing the necessary human resources and skills, and (iii) providing the needed infrastructure. In addition to program lending to support the transition, public sector investments focused primarily on infrastructure, which was in line with the Governments Public Investment Program for 19931996. 28. In 1999, a poverty partnership agreement (PPA) was concluded with the Government. Under the PPA, ADBs operations from 2000 to 2005 would be geared toward generating economic growth, with poverty reduction as the overarching strategic objective. It signaled ADBs support for (i) better governance to boost economic productivity, (ii) economic diversification, (iii) expanding demand for skilled labor, (iv) structural reform to remove barriers to private sector growth, and (v) a medium-term reduction in the fiscal burden on the private sector. 29. The country operational strategy for 2000200210 built on the PPA and aimed to foster economic growth and poverty reduction by emphasizing employment and income generation led by the private sector. Although the country operational strategy argued that the transition to a market economy was largely complete, it continued to support efforts to develop market-oriented institutions and build the human resource base required to manage a market economy. It replaced support for infrastructure investments with a focus on governance reforms. Assistance to financial and capital market institutions, industrial and agricultural businesses, and tourism, as well as to reorient the public sector, was designed to address barriers to private sector development and economic diversification. Poverty concerns were to be addressed by generating employment, maintaining human development achievements, and strengthening the reform of social protection. 30. Annual CSP updates (CSPU) were prepared in the years 2001 to 2005. These included a brief review of the development situation, CSP implementation, portfolio management, and the forward program. While confirming the relevance of ADBs 2000 country operational strategy, transport was reintroduced as a strategy priority in 2002 and as the centerpiece of ADBs support for fostering regional cooperation and economic integration. 31. The CSP for 20062008, released in August 2005, was the countrys first results-based CSP. This CSP focused on providing support to the Governments poverty reduction strategy with two main pillars: broad-based growth and inclusive social development. The pillar of broad-based growth was designed to contribute to agricultural and associated growth, improve productivity in key industries, open economic opportunities in rural areas, and widen the export base. The pillar of inclusive social development aimed to contribute to expanding economic opportunities; raising and stabilizing incomes; reducing unemployment; and improving education, health, and living conditions among the poor. Governance and gender concerns were to be mainstreamed into operations. The 3-year strategy envisioned Asian Development Fund (ADF) support of $85 million (about $28 million each year) with an additional $40 million in regional cooperation support for the 3-year period. Priorities for ADB intervention included agriculture, transport, education, health, urban development, and public sector management. 32. The CSPU for 2007200911 declared that projects would be designed in a way that would enhance accountability, catalyze private investments, and contribute to improved environmental management. New environment and power sector initiatives were introduced. While these aimed to improve alignment with ADBs Second Medium-Term Strategy, they undercut efforts made in the CSP for 20062008 to strengthen focus and selectivity.
10 11

ADB. 1999. Mongolia Country Operational Strategy Study. Manila. ADB. 2006. Mongolia Country Strategy and Program Update. Manila.

33. The country operations business plan for 2008201012 announced that ADF assistance to Mongolia was to be provided in the form of 100% grants in 2007 and 2008. Given a 20% volume discount, this meant a reduction in the 2-year indicative ADF lending pipeline to $47 million. By 2007, Mongolias public debt situation had substantially improved, and converting the program to an all-grant basis was several years too late. Coming in 2007, it sent inappropriate signals about ADBs understanding of the nations borrowing capacity. In the business plan for 20082010, projects in transport and urban development were consolidated into single operations, and sectororiented assistance in health, education, and the environment were advanced to complement resources available from other sources. The business plan envisioned ordinary capital resources financing for projects that were likely to generate substantial revenue streams, while putting more emphasis on ADBs private sector operations. B. Strategic Positioning

34. Program Relevance and Alignment. ADBs strategies and programs have been well aligned with national needs and the Governments strategic priorities. ADB has demonstrated flexibility and responsiveness over time, as its strategic and programmatic priorities have shifted from emergency response and policy reform supporting transition in the 1990s to poverty reduction through support for good economic governance, market-oriented agricultural development, and improved urban habitats and access to essential social services. While donor coordination has been weak, ADB has been at the forefront of encouraging harmonized approaches to the use of external assistance, particularly in education. 35. The earlier country operational strategy of 1994 reflected the need to further pursue market transition, and ADB responded appropriately with program lending support for health and public sector governance, as well as investment support focused on improving heating efficiency in Ulaanbaatar and basic services in provincial towns. As befitting the largest multilateral donor, ADB provided substantial and wide-ranging advisory TA to build capacity for planning and policy making in agriculture, health, energy, and housing, together with support aimed at modernizing the public service through civil service reform, procurement, project accounting, public expenditure management, decentralization, administration, and development planning. 36. The 2000 country operational strategy recognized the fragility of the financial system and identified the need to improve governance of the public sector to underpin the institutions needed to manage a market economy. Simultaneously, in recognition of mounting poverty, the country strategy focused more on spreading the benefits of growth and making social services more accessible to the poor. A second financial sector program loan and support for rural and housing finance were provided to help improve the depth and soundness of the distressed domestic banking sector. Program lending was extended in 2000 to foster reform in agriculture and establish the institutional framework for a social security system (established in 2001), while continuity was maintained with follow-up, sector-oriented investment and reform programs in education (2002), health (2003), and governance (2003 and 2005). This was complemented by ADB investment project support for land registration and a second transport operation aiming to improve transport links with neighboring countries. Follow-up advisory assistance in training accounting and auditing professionals, public administration and financial management, regional planning, renewable energy development, procurement management, and road development aimed to institutionalize the capacity to put new policies into effect and to reorient key government agencies.
12

ADB. 2007. Mongolia Country Operations Business Plan. Manila.

9 37. The 20002002 country operational strategy signaled ADBs exit from large-scale infrastructure investment in the power sector on the assumption that other donors or the private sector would fill the investment gap. This has not happened, and the lack of new investment has reduced and restricted energy services, with individuals resorting to coal for heating, with low efficiency and without proper pollution control. Meanwhile, as power demand rises rapidly along with incomes, new generation capacity has yet to be planned. It appears that ADBs withdrawal from the energy sector before an enabling environment for private investment had been put in place has contributed to deterioration in energy services. 38. The 2002 CAPE recommended that (i) the strategic planning process provide strategic guidance to operations; (ii) the necessary economic, sector, and thematic work and poverty analysis be undertaken prior to country strategy formulation; (iii) an emphasis on both poverty reduction and private sector development be retained; (iv) an integrated perspective on public sector financial management be retained; and (v) monitoring and evaluation be incorporated as part of an integrated approach to public resource management. The subsequent CSP for 2006 2008 took the CAPE recommendations on board by strengthening analytic inputs into the country strategy, sharpening strategic priorities, continuing to focus on both poverty reduction and private sector development, providing follow-up support in public sector management, and fostering results-based approaches to project and program monitoring. 39. With the exception of the premature withdrawal from the energy sector, ADBs positioning in key sectors was broadly appropriate and, with the significant exception of assistance in public sector governance, supported by analytic work. Total official development assistance disbursements to Mongolia ranged from $220 million to $260 million per annum, with ADB contributing approximately one fifth of total external assistance. In transport, ADB was the lead external agency, and one of its early TA grants supported the preparation of the Mongolia Road Master Plan. The master plan was used by the Government as a platform to coordinate external assistance to the sector. ADB has also been assisting the Government in preparing a transport sector master plan and sector strategy. ADB TA grants covered all strategic areas for policy dialogue and capacity building, especially during the years of accelerated transition and economic crisis. In the financial sector, while IMF and the World Bank took the lead on banking sector reform, with ADB playing an important supportive role, ADB led in supporting financial sector reforms and deepening the financial sector. In the areas of fiscal reform and public sector budgeting, quite different reform strategies were pursued simultaneously by ADB, World Bank, and IMF, limiting progress. 40. Selectivity and Sector Focus. In the mid-1990s, ADB was Mongolias largest donor. This, and the fact that the transition required interventions in many areas simultaneously, meant a widely dispersed external assistance effort across sectors, organizations, and regions of the country. While the CSP for 20062008 recognized a need for greater selectivity and focus, ADB has essentially remained active in the same number of sectors and has, moreover, signaled its desire to expand its involvement in infrastructure and finance (also through private sector operations) and the environment. Many small projects have been developed in the past 3 years. While important in their own right, they carry relatively high transaction costs and require that a disproportionate share of assistance resources be allocated to project administration. Looking ahead, limited ADF resources may make it difficult for ADB to play a lead role in harmonized assistance efforts and to maintain the knowledge base necessary to serve as an effective partner in many different aspects of an increasingly sophisticated economy. Preparing a CPS for Mongolia in 2008 would provide ADB with an opportunity to sharpen its sector focus and foster harmonized responses to key development challenges and binding constraints on further economic growth. In doing this, ADB would need a set of criteria for strategic sector selection

10 (e.g., continuity, internal and external demand, possibility of mobilizing resources from other development partners and private sector, subregional regional cooperation, private sector development and environment sustainability). 41. Partnerships. Mongolia has received just under $3.0 billion in official development assistance since 1991. Over half has gone to balance of payments, transport, and energy. The volume of aid from a number of key donors has declined over time, and the share of the GDP occupied by aid has fallen from a high average of 19% between 1997 and 2001 to an average of 15% between 2004 and 2006. Though crucial to providing broad-based support for the transition, external assistance has been less effective in addressing poverty reduction and inclusive growth. Until 2003, aid lacked a strategic framework and remained largely uncoordinated, with an unclear distribution of roles. Since November 2003, the Government has established seven technical working groups to foster harmonization, of which three are co-chaired by ADB. For education and health, ADB co-chairs with the Japan International Cooperation Agency. In 2008, the Government re-established the high-level, official development assistance coordinating committee, which has identified the need to (i) orient external assistance more toward results to better track aid outcomes, (ii) improve consultant quality, and (iii) shift emphasis toward improving sector policy and know-how and away from constructing new assets. 42. With the exception of the education sector, where an ADB-assisted master plan and an annual implementation plan are used to coordinate donor assistance, efforts to harmonize external assistance have been undertaken largely task by task. ADB has undertaken joint work with other partners to support the preparation of the EGSPRS and the 2020 national development strategy. It has shared country-based analytic work on education, transport, and health through donor working groups and has shared regional analytic work on energy, trade, and transport policy with the World Bank and IMF. It has jointly undertaken analytic work for a sector-wide education project with a number of donors. ADB studied, jointly with the World Bank, gender assessment, civil society assessment, an infrastructure and transport strategy, and a participatory poverty assessment. It jointly prepared and cofinanced projects with other partners in urban development and housing, transport, and agriculture and rural development. ADB helped build country capacity in procurement, auditing, accounting, and project management. The transport sector master plan and sector strategy, which is being developed with ADB assistance, is expected to provide a platform for aligning external funding to the Governments sector development plans. In partnership with the Government of Japan, ADB is helping the Government to formulate a sector-wide approach to education. ADB is a member of the United Nations Development Assistance Framework and a signatory to the 2006 framework. Although the Government and its main development partners subscribe to the Paris Declaration on Aid Effectiveness, the degree to which this has translated into meaningful action is limited, as there continue to be separate project implementation units for all projects; collaboration has not extended to the preparation of joint country strategies or portfolio reviews; and, although support has been provided for developing master plans for education and transport, an explicit strategy for building country capacity to manage assistance in these sectors has yet to be put into effect. 43. Repositioning as the Context Changes. Buoyant economic growth since 2003 has generated substantial increases in public resources, including greater scope for increased external borrowing. In its recent strategies, ADB has begun to anticipate these changes by signaling the possibility of selected ordinary capital resources operations, more private sector operations, cofinanced operations in transport, and more sector-oriented operations in traditional sectors. With the ongoing mining boom, the Government has greater ability to finance development activities using its own resources and more commercial sources of external finance. There is far less need for program lending assistance, and the Government is unlikely to entertain

11 tight policy conditions on program loans. Consequently, ADBs ability to contribute to development progress will hinge more on access to new knowledge and expertise and on its ability to serve as an honest broker to help develop capacity to plan and manage public investment, and less on its ability to finance projects. There has, however, been relatively limited investment by ADB in economic and sector work to replenish the knowledge base needed to underpin assistance in the various sectors of operation, largely because of the steady decline in TA resources over the past 5 years. While ADB need not repeat studies undertaken by other donors, it should ensure that its policy dialogue and operational advice is well rooted in country-specific sector and thematic knowledge. C. ADBs Contribution to Development Results

44. Overview. ADB has exploited its potential for achieving development impact and adding value, particularly through an early emphasis on support for policy reform, social sector development, economic corridor development, capacity building for good governance, government systems for procurement, project management, and a number of other aspects of public sector planning and financial management. The most important accomplishment of ADB support in economic management has been its contribution to restoring fiscal stability and enhancing budget control. The efficiency and reliability of district heating in Ulaanbaatar has substantially improved, as has access to essential municipal services in the secondary cities. The district heating effort contributed to reductions in heating subsidies and the use of coal for household heating, while deferring the need for adding new heating capacity. In the financial sector, ADB has contributed to transforming a mono-bank system into a competitive banking sector and has introduced a mortgage market, which set the stage for expanding the capital market and fueling rapid growth in lending and savings mobilization. Assistance to education has contributed to restoring primary education enrollment rates while helping to rationalize educational spending. A network of primary health care providers has been established, and social assistance, social insurance, and a multi-tier pension system have been introduced. 45. Transition to a Market Economy. During the period 19972007, ADB assistance had two main overarching objectives. The first was fostering the transition to a private sector-led market economy, and the second was poverty reduction. The first objective was largely accomplished by 2002 and 2003, with nearly 80% of production in the hands of the private sector, a liberal trade and investment regime, and good progress towards establishing and reinforcing private property rights. 46. Social Development and Poverty Reduction. Supported by the resumption of strong economic growth, the Government has had the resources with which to contribute to social development. ADB support in the social sectors, most notably in education, has made a demonstrable contribution to reducing non-income poverty. Over time, ADBs assistance for poverty reduction has appropriately become focused on inclusive social development, with the aim of contributing to the Governments MDG targets. ADB has contributed to developing an education sector master plan, which has provided the foundation for a common assistance strategy by external funding agencies. More emphasis has been placed on boosting skills training, which has addressed skill gaps and empowered youth with the skills often required to seek work abroad. In the health sector, some progress has been made in developing a network of front-line health care providers, though the vast bulk of health care spending continues to be allocated to a network of urban hospitals that has yet to be sufficiently rationalized. In urban areas, where poverty has increased with rapid migration, some progress has been registered in upgrading substandard housing; expanding the coverage of water, sanitation, heating, and hot-water supply; and improving capacity for urban planning. ADB assistance has helped establish the basic legal

12 and regulatory foundations for a social security system that provides a basic social safety net for the poorest of the poor but still suffers from ineffective targeting and the exclusion of unregistered households. 47. The poverty-environment nexus has become increasingly severe in recent years, as rapid desertification triggers migration from the countryside, creating urban ger (traditional tent) slums and contributing to severe air and water pollution in Ulaanbaatar. Outside of one agriculture project and support for a regional TA project on monitoring dust and sandstorms,13 ADB has not been effective in mainstreaming environmental objectives in its sector operations or in scaling up pilot Japan Fund for Poverty Reduction (JFPR) projects that successfully addressed peri-urban environmental problems. New projects in the pipeline for agriculture, energy, and urban development are, however, expected to place considerably more emphasis on environmental sustainability. 48. Developing Economic Corridors. ADBs support in transport has facilitated international trade, which made the expansion of commercial agriculture and tourism possible and has brought direct poverty reduction benefits to those able to tap improved road and air networks. Road projects have contributed to increased traffic volumes, expanded economic activities, and improved regional links. But the scale of required assistance is vast, as many regions remain isolated and integration with markets in the PRC and the Russian Federation are still incomplete. 49. Capacity Development. ADBs capacity development efforts had many different objectives in the first decade of ADB assistance to Mongolia but have subsequently become far more coherent and focused on building capacity for good governance and effective economic and sector management. Links among reforms, policy dialogue, and projects have been strong throughout, and country relations and donor coordination have benefited from the establishment of the Mongolia Resident Mission (MNRM) in 2001. 50. ADBs assistance for capacity development and institutional change has had some success in the management of public services in education, health, and transport. ADB-supported reforms induced private sector development and consolidation in education and health and contributed to privatization and competition in other sectors. ADB-supported policy reforms were in line with the macroeconomic policy reform programs of IMF and the World Bank and contributed to stabilizing financial markets after the Asian and Russian financial crises of the late 1990s. Reforms brought financial market soundness, trade and price policy changes, and an improved framework for private sector development. 51. Public Sector Management. Not all of ADBs efforts in capacity building and institutional reform have paid off. ADB support for reforming public sector management was overly ambitious, and the progress made in service delivery by weaving results orientation into the public planning and budgeting process has been lost to ministries tightly centralizing control over public expenditures. ADB supported establishing a merit-based civil service, developing output-based budgeting, adopting a procurement law, establishing a procurement unit in the Ministry of Finance, (MOF) strengthening the Governments accounting and auditing, and adopting a series of measures to strengthen the performance and supervision of the financial markets. However, institutional weaknesses and insufficient follow-up have rendered many of these initiatives ineffective.

13

ADB. 2002. Technical Assistance to Mongolia for Prevention and Control of Dust and Sandstorms in Northeast Asia. Manila. (TA 6068-REG, for $1.2 million, approved on 11 December).

13 52. Overall Weaknesses. While ADB assistance has contributed to positive outcomes, the impacts were sometimes less than what was originally envisaged. Agriculture sector support demonstrated that rural livelihoods can be improved through indirect rural credit provided commercially and that rural productivity can be boosted by delivering an integrated package of support services in target regions. However, agricultural assistance was confined to a very small segment of the farm community, and the sector remains dominated by low-productivity livestock rearing. ADB assistance for land privatization in urban areas has moved forward slowly, but other external funding, such as German Agency for Technical Cooperation (GTZ) and funding from the World Bank, are building upon this assistance to further promote privatization and administration. Projects in the financial sector addressed specific, crisis-triggered problems; supported the training of central bank staff; and assisted with the regulatory framework and accounting standards. With the exception of the Rural Finance Project, many ADB loans aiming to increase access to credit for specific target groups have performed well, though the effectiveness of targeting the poors access to finance has been limited. On balance, little progress has been made in diversifying the sources and geographical distribution of growth. Over time, the economy has become increasingly dominated by extractive industries, contributing to a widening rural urban income gap and inspiring rapid rural-to-urban migration. D. ADBs Institutional Performance

53. Response to Changes. As ADBs performance was responsive to changing country circumstances and evolving government demands for assistance, it is therefore assessed to have substantially harnessed its capacity to contribute to Mongolias development. Mongolia was the first developing member country to elect to undergo rapid transformation from a command to a market economy. ADBs response was highly country specific and, by corporate standards, trailblazing in many respects. A considerable amount of effort was expended on researching, analyzing, formulating, and prescribing policy reforms that were efficient and effective in facilitating the transition process at an earlier stage. ADBs first-ever program loans for governance and social security reform went to Mongolia. ADBs agriculture reform program loan and its education and health sector development programs were among the most wide ranging and comprehensive in ADB at that time. 54. ADB promptly responded to the 1997 Asian Financial Crisis with a series of operations aiming to rebuild the battered domestic financial sector. Recognizing the need for supporting further reforms to provide an institutional foundation conducive to the market economy, ADB helped core government agencies to restructure their role from directing economic activity to facilitating private endeavor, and to adopt improved planning, budgeting, accounting, procurement, and management policies. 55. As the focus of the development agenda shifted squarely to poverty reduction in the late 1990s, ADB again reoriented its strategy and program. ADB was at the forefront of helping the Government to execute fundamental shifts in the organization, management, financing, and content of a full complement of social services, including social security, education, health care, and, more recently, pensions. As rural-to-urban migration intensified, ADB focused more attention on upgrading urban settlements and developing commercially viable approaches to agricultural development. Recognizing that remoteness was a fundamental structural constraint to development, ADB has consistently worked to develop transport corridors (e.g., north-south corridor and western corridor) to integrate Mongolia with the much larger economies across its borders, initially through standalone initiatives and latter through its Central Asia Regional Economic Cooperation (CAREC) program.

14 56. Problems were encountered in implementation, particularly in the areas of governance reform, rural credit, social security, and health sector reform. With the exception of the cancelled rural credit operation, ADBs response was to stay the course, build and rebuild political consensus, delay implementation for several years where necessary, and make adjustments where warranted. As a result, ADB established a reputation as a firm but fair and trusted partner in its efforts to foster policy and institutional reform. ADB could, however, be faulted for being both excessively ambitious and underprepared in its capacity development and institutional reform aims. Simultaneously restructuring the public services responsible for health, agriculture, power, transport, education, municipal services, rural credit, social welfare, and public sector management vastly exceeded the Governments capacity to manage change. In addition, assistance was provided to change dozens of laws without sufficient respect for Mongolias legal traditions or appreciation of the Governments likely capacity to implement relatively sophisticated legislation. 57. ADB Policies, Systems, and Instruments. ADBs corporate policies and systems were challenging for a country that had no experience in borrowing from international finance institutions prior to the early 1990s. Low population densities mean applying ADB safeguard policies for land acquisition and resettlement has been less problematic in Mongolia than in other developing member countries. While the application of these policies and systems was generally appropriate in the context of ADBs operations in Mongolia, capacity development in implementing ADB safeguard requirements will remain an ongoing challenge. In addition, ADB has a large number of small projects in its portfolio and continues to prepare new small projects each year. Managing a large number of small projects imposes substantial transaction costs on a small government. ADBs mix of assistance instruments has been broadly appropriate in the case of Mongolia. Gradually the mix of assistance has shifted from emergency operations and program loans to sector development programs and investment operations, which have laid the groundwork for more harmonized assistance efforts in several sectors 58. Knowledge Products and Policy Dialogue. Advisory assistance was used to prepare lending operations and was wide ranging in the 1990s. It has progressively focused on a more narrow range of objectives over the past 5 years. The number of advisory TA grants steadily declined over the past decade, leaving a dearth of economic and sector work on which ADB can base its sector policy and strategy dialogue, and of capacity-building support for government agencies faced with changes in the legal framework and new institutional roles and responsibilities. This is a major concern, particularly in those sectors and thematic areas in which ADB has major projects and plays a key role in donor coordination. In the absence of regular sector work, ADBs ability to engage in policy dialogue has generally been confined to projectspecific matters, rather than to matters of broader development policy. 59. Client Responsiveness. Stakeholders regard ADB as a responsive development partner and acknowledge the important work ADB has done in fostering coordination in the education sector but have concerns about ADBs overall effectiveness (Box 1). The Government gives ADB high marks for its assistance in infrastructure, urban development, and the social sectors, and for the contribution that assistance has made to building the management capacity of sector institutions. Meanwhile, concerns are voiced that ADB policies and procedures are timeconsuming and opaque, ADB supervision is lax, aid coordination is especially poor, and the proliferation of small and time-consuming projects overburdens a relatively small cadre of core government technocrats. 60. Delegation. MNRM has improved ADBs accessibility and enhanced communications among the donor community. However, the vast bulk of the assistance portfolio continues to be

15 designed and supervised from headquarters. Although there has been a steady delegation of responsibilities, business processes could be further streamlined and more authority, functions, and commensurate resources could be delegated to MNRM for substantive project implementation to increase client responsiveness. Box 1: ADBs Responsiveness in Mongolia
A survey of 115 stakeholders drawn from the Government of Mongolia, the private sector, nongovernment organizations, academic organizations, and the general public was conducted in Ulaanbaatar in February and March 2008 to gauge perceptions about the responsiveness of the Asian Development Bank (ADB) to Mongolias needs. Questionnaires were mailed to 180 stakeholders. The key strengths of ADB assistance to Mongolia were as follows: (i) Strong track record. More than 80% viewed ADB assistance as both relevant to the nations priorities and effective in achieving results. (ii) Building institutions. ADB made a positive contribution to building institutions. (iii) Decentralization. The Mongolia Resident Mission was effective in managing the country relationship and implementing programs. (iv) Sector selection and continuity. Support has been provided to priority sectors, but in some instances (e.g., for the financial sector) assistance was insufficient to achieve the desired results. Stakeholders viewed ADBs key weaknesses as follows: (i) Procedures. Design and approval procedures are complex, and the tailoring of ADB policy and project approval and management procedures to suit varying client needs was insufficient. (ii) Supervision. Insufficient time was spent in the field. (iii) Aid coordination. The assistance response was weak and uncoordinated. Respondents felt that ADB could be more effective if more emphasis were placed on developing sectorwide assistance programs in key sectors and by devolving more responsibility to the Mongolia Resident Mission. Similarly, respondents suggested that ADB needed to place more emphasis on good governancenotably, anti-corruption and law-and-order were suggestedin addition to a continuing emphasis on social and economic development.
Source: ADB Client Responsiveness Survey. March 2008 (Appendix 7).

IV.

PROGRAM IMPLEMENTATION

61. External assistance can contribute to results only if it is delivered effectively. Chapter IV reviews the implementation of ADBs assistance program and assesses performance in terms of the ratings of individual operations, the timeliness with which the program was delivered, and the quality of portfolio management. A. Program Delivery Performance

62. ADBs Assistance Program. Since Mongolia joined ADB in 1991, cumulative lending has comprised 39 loans and a grant totaling $676.0 million, of which 12 were program loans valued at $219.0 million that provided support to agriculture, industry, finance, governance, health, education, telecommunications, and social security. Over the CAPE period (19972007), ADB approved $361.2 million for the public sector (24 loans and one grant), $16.1 million for the private sector (two projects), and $36.1 million for 69 TA grants (Figure 1). Lending levels peaked at an average of $70 million per annum between 1993 and 1997 and steadily declined thereafter to an average of just under $27 million per annum from 2003 to 2007. Although ADF allocations to Mongolia have been on a declining trend, Mongolia has been one of the top three recipients per

16 capita of ADF VIII and IX assistance.14 TA assistance has likewise been on a declining trend, peaking at $7.4 in 1997 and declining to a low $1.3 million in 2003. Fourteen TA grants were approved in 1997, compared with just three in 2007. Seven of the loan projects were cofinanced with multilateral and bilateral loans and grants and very little commercial funding, totaling $116.8 million. Mongolia also has 10 ADB projects financed by Government of Japan and Republic of Korea grant sources, totaling $13.2 million, and participates in an estimated 54 regional TA activities. As a result of falling loan approvals and the expiration of grace periods for the early1990s loans, ADBs net resource transfers have fallen sharply, from $65.9 million in 1997 to a low of $7.3 million in 2007. Figure 1: Annual Volume and Number of Approved Loans and Technical Assistance
Mongolia: Volume and Number of Approved Projects
$ million 70 60 50 40 30 20 10 0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007* Loan Amount
* Asian Development Fund grant of $14 million. Source: Asian Development Bank database.

Mongolia: Volume and Number of Technical Assistance

% 5 4 3 $ million 8 7 6 5 4 3 2 1 0 14 9 7 4 3 3 3

19972007
4 4 4 3 2 2 1 1 1 3

PPTAs and ADTAs, 19972007

% 16 14 12 10 8 6 4 2 0

2 1 0

1997 1998 1999 2000 2001 2002

2003 2004 2005 2006 2007 No. of TA

No. of Loans

TA Amount

ADTA = advisory technical assistance, MON = Mongolia, PPTA = project preparatory technical assistance, TA = technical assistance. Source: Asian Development Bank database.

63. Compared with many other developing member countries, in which infrastructure support predominates in both the number of operations and lending volume, ADB assistance to Mongolia has been relatively evenly spread over all of the main sectors. One third of the projects had growth as their main objective, another third had social and human resource development, and a quarter were targeted core poverty interventions. Of ADBs 69 TA grants, totaling $36.1 million, 19 were project preparatory and 50 were advisory, and nearly 40% addressed law, economic management, and public policy. The sectoral distribution of public sector loans and TA is shown in Figure 2. Mongolia has seven JFPR grants totaling $10.7 million for innovative and targeted poverty-reduction operations. A list of all projects, programs, and TA approved by ADB is in Appendix 3.

14

ADB. 2007. Special Evaluation Study. Asian Development Fund VIII and IX Operations. Manila.

17

Figure 2: Mongolia Loans and Technical Assistance, by Sector

Asian Development Bank Lending to Mongolia, 1997-2007
Water Supply, Sanitation and Waste Management, 7.4%

Asian Development Bank Technical Assistance to Mongolia, 1997-2007

Water Supply, Sanitation and Waste Management, 2.3% Multisector, 4.2%

Transport and Communications, 17.2% Multisector, 7.8% Law, Economic Management and Public Policy, 11.2% Industry and Trade, 1.4%

Agriculture and Natural Resources, 7.4% Education, 7.5%

Agriculture and Natural Resources, 11.8%

Education, 6.8%

Energy, 11.1%

Law, Economic Management and Public Policy, 32.4%

Energy, 7.2%

Finance, 17.2%

Finance, 13.5% Health, Nutrition and Social Protection, 15.5%

Industry and Trade, 0.4%

Health, Nutrition and Social Protection, 8.8%

Includes $14.0 million ADF grant. Source: Asian Development Bank database.

Source: Asian Development Bank database.

64. Project Ratings. While project completion reports have rated completed projects positively, independent post-evaluation reports paint a far more mixed picture. In 2007, all of the ongoing projects were expected to achieve their development outcomes. Of the 18 project completion reports (PCR) for projects completed from 1997 to 2007, 15, or 83%, were rated successful or better and three, or 17%, were rated partly successful. Post-evaluations were conducted for 14 operations, including PCR validation, on projects completed from 1997 to 2007. Of these, eight were rated successful or better, and six were rated partly successful. The PCR and post-evaluation findings identified the reasons for partly successful ratings as project delays, failure to achieve project targets, noncompliance or partial compliance with loan conditions, inadequate feasibility studies and overly ambitious project design, major deviations from the original project design, insufficient institutional development impact, limited attention to private sector development and balanced regional development, and inadequate government capacity to monitor project implementation performance. Of the 69 TA grants financed between 1997 and 2007, completion reports for 24 (75%) rate them satisfactory or better, and for eight rate them partly satisfactory or unsatisfactory. 15 The reasons given in TA completion reports for partly successful or unsuccessful ratings include failure to achieve policy reform, overly ambitious project design, insufficient impact on institutional development, and TA outputs and outcomes that are less likely to be sustainable. A special evaluation of two of the completed JFPR grants rated both as highly successful based on the programs innovativeness and sound management performance but questioned the lack of integration between the grants and the balance of the portfolio.16 B. Portfolio Management

65. During the CAPE period, new projects entered the portfolio at about the same rate as projects exited, averaging 1516 projects per year, of which 34 were program loans and the balance investment operations. With the fall in ADF allocations, the average project size declined from $19 million in 1997 to $15 million in 2007. Small projects are as management intensive as large projects, requiring that a large share of loan resources be devoted to project management while not commanding the attention or providing the leverage for reform that larger loans do. As of end-2007, the portfolio had four ADF operations of $10 million or less (i.e., project loans for
15 16

Project preparatory TA and small scale TA grants are not subject to performance evaluation. JFPR projects are not explicitly included in country partnership strategy and program documents.

18 cadastral survey and land registration, rural finance, and customs modernization; program loan for financial regulation and governance) and eight ongoing small grant projects funded by JFPR, Japan Fund for Information and Communication Technology (JFICT), and Korea e-Asia and Knowledge Partnership Fund (Appendix 3). 66. ADB assistance is highly dispersed geographically, with support provided to practically all urban and rural parts of the country. Involvement in a large number of individual sectors and subsectors, together with a geographically dispersed portfolio and relatively small average project size, means that opportunities for achieving economies of scale and scope, and of fostering crossproject synergies, have been sacrificed. 67. Although all of the projects continuing in the first quarter of 2008 are expected to achieve satisfactory outcomes, delays in implementation, significant departures from planned project scope, and frequent extensions in loan closure have weakened the efficiency with which ADB resources are utilized. Portfolio performance began to deteriorate once the focus of the assistance portfolio shifted from fast-disbursing program loans in the 1990s to investment operations in recent years (Appendix 5). While counterpart financing has generally been sufficient,17 the number of projects at risk or problematic is rapidly growing. Projects have required major changes in scope or, in some instances, been cancelled, and concerns are persistently voiced about the quality of ADB-financed TA. A particular problem is long start-up delays caused by weak institutional capacity and frequent rebidding for procurement contracts. 68. Despite the establishment of MNRM in 2001 and the quarterly portfolio review process, many persistent project management problems continue to be addressed project by project, rather than in a more harmonized manner. 18 The portfolio management problems include the following: (i) Approval-to-effectiveness delays. The standard time from loan approval to effectiveness is 4 months. While the average time in Mongolia was better than this in 1997, at 3.3 months, it grew to 7.4 months in 2007, nearly double the standard time, largely because Parliament must review the loan agreement twice before it is ratified by the Government, as well as because of overly ambitious loan scope and insufficient project diagnostics. (ii) Consultant quality. As work experience in the region is accorded priority in selecting international consultants, the Government questions the extent to which consultants bring new knowledge and technology to Mongolia. In some cases, international consultants did not add value to their local counterparts. (iii) Procurement delays. Practically all investment projects have suffered procurement delays because of a lengthy procurement process, insufficient numbers of qualified bidders, weaknesses in procurement planning, and, prior to the 2006 Procurement Law reform, strict centralization of procurement authority. (iv) Low disbursement rate. The numbers of projects with disbursement delays reached four in 2007, out of 14 ongoing projects, while the disbursement ratio fell from 39.4% in 1997 to 22.8% in 2007. In addition to procurement delays, low disbursements are caused by frequent changes in project management, the diminishing relevance of the project design once implementation is delayed, difficulties in meeting program loan conditions, frequent changes of government,

17 18

With the notable exception of the Ulaanbaatar Heat Efficiency Project. A similar litany of implementation deficiencies is recorded in annual country portfolio review background papers from 2002 to 2007.

19 and a lack of understanding of ADB policies and procedures that is compounded by project documents not being prepared in the local language. Extensions. Prolonged loan closing and multiple loan extensions have become common features of the Mongolia portfolio, boosting administration costs and reducing project benefits. As of end-2006, seven projects had delays in the closing date, averaging 15 months, and one was delayed by 60 months. By end-2007, seven loans had extended beyond their original closing dates. In the ongoing TA portfolio, four of the active TA grants have been implemented for more than 4 years, with the longest approaching 8 years, compared with normal implementation of 2 years or less. Insufficient supervision. After witnessing a period in which some loans were supervised every other year, most loan projects are now supervised once per year. The average supervision for Mongolia loans was for 19 days, compared with an ADB-wide average of 26 days. Monitoring and evaluation. While the social sectors are advanced in tracking results, other sectors continue to focus mainly on tracking project inputs. Project supervision reports pay scant attention to beneficiaries, the continued relevance of the project framework, or the expected results of ongoing operations. The CSP for 20062008 was the first to incorporate an explicit results framework. The results framework has served to focus the operations of the country team, and to assist the Government and the country team in tracking the progress of ADB operations. The results framework was monitored and updated as part of the annual business planning process, and the project frameworks of specific operations launched during the CSP period were designed to contribute to the results identified in the results framework. While the results framework was used to assess performance at the end of the CSP period, a dearth of specific indicators that can be monitored made it difficult to attribute progress to ADB assistance.

(v)

(vi)

(vii)

C.

Factors Affecting Implementation

69. Analysis of the portfolio and the performance in key sectors reveals that the underlying factors that explain portfolio performance, both positive and negative, include the following: (i) Enablers are (a) strong government ownership for market-oriented reform; (b) alignment of ADB assistance with the Governments evolving transition and poverty-reduction agenda; (c) shared commitment and ownership from the design stage through implementation; (d) participation and involvement in project design and implementation; (e) careful assessment of the feasibility of program reforms and project design; (f) stakeholders clear understanding of the objectives and expected results of programs, projects, or TA; (g) stable project management unit teams with shared commitment and ownership throughout implementation; (h) responsiveness of the executing agency (EA); (i) competent project management; (j) development in economic and project management; (k) timely procurement; (l) strong social demand for improved social and economic services to reverse the stark decline in living standards in the early 1990s; and (m) the establishment in 2001 of the Resident Mission and its quarterly portfolio review process. (ii) Deterrents are (a) the tremendous complexity of the transition and povertyreduction challenges; (b) lack of prior experience in implementing agencies with projects financed by international financial institutions and in ADB contractors with Mongolian conditions; (c) political instability in the sense of frequent changes in Cabinet and Parliament and tremendous turnover of government staff after elections; (d) parliamentary involvement in routine matters of project approval and

20 administration; (e) inadequate analysis of reform options and, in particular, of the institutional feasibility of reforms; (f) a difficult and volatile macroeconomic environment prior to 2003; (g) limited familiarity in the Government with ADB processes and procedures; (h) lack of capacity, both in the Government and in the private sector, for procurement and project management; (i) resistance to reform from entrenched institutions; (j) weak public sector institutions hampered by low salaries and capacity constraints; (k) procedural bottlenecks including lengthy tendering and procurement practices; (l) insufficient technical expertise; (m) unsatisfactory performance by contractors; and (n) a lack of maintenance of facilities and infrastructure (e.g., roads and urban energy conservation facilities) after project completion. On ADBs part, implementation has been hampered by staff turnover, the lack of a sector focus, insufficient sector knowledge, incomplete assessment of the absorptive capacity of the EA, inadequate delegation of resources and responsibility to the Resident Mission, inadequate project supervision, and the lack of technical skills in some areas. 70. Portfolio performance could be further improved by (i) supervising projects intensively during the start-up and initial implantation phase and ensuring that consultant recruitment and procurement is not delayed or hampered during the procurement process; (ii) building institutional capacity to implement projects before assigning implementation responsibilities to implementing agencies; (iii) simplifying project and program design; (iv) ensuring that a realistic project time frame and implementation schedule is incorporated from the start; (v) practicing greater sector selectivity and minimizing the number of very small projects with high supervision costs; (vi) encouraging the use of harmonized, sector-based approaches to reduce transaction costs, build sector management capacity, and utilize national systems and national consultants; (vii) drawing on resident mission staff competences to host regular training programs in project management, ADB policies, and procedures for EA and implementing agency staff and consultants; and (viii) recruiting international expertise primarily on the basis of leading-edge experience and competence, and twinning first-class international sources of expertise with local sources of TA to build local consulting competences. V. SECTORAL RESULTS ACHIEVED AND PERFORMANCE DETERMINANTS

71. Some components of an assistance program typically perform better than others. Chapter V covers the performance of ADBs assistance program in each of the key sectors. The performance of ADBs sector-specific strategies and programs is assessed against a backdrop of sector challenges and government strategies. Sector-specific outputs, outcomes, and impacts are identified to assess program performance and their determinants. Bottomup performance ratings, based on the assessment made in this chapter, are presented in chapter VI and Appendix 1. Sector challenges and government strategies and further details on sector assessment are given in Appendix 6 and supplementary appendix. A. ADBs Contribution to Outputs, Outcomes, and Impacts, by Key Sector 1. Transport Sector

72. ADB Sector Strategy and Program. Transport sector development was considered crucial in all of ADBs operational strategies for Mongolia. 19 Up to 1995, the interventions aimed to support and accelerate the transition process; subsequent loan projects had a broader focus on
19

ADB. 2007. Mongolia: Transport Sector. Manila.

21 economic growth, poverty reduction, and regional integration. ADBs CSP for 20062008 aimed to (i) enhance Mongolia's transport links with neighboring countries and promote regional cooperation and integration, (ii) promote and develop a sound sector policy and regulatory framework, (iii) ensure adequate fund allocations through the government budget to the road sector, (iv) improve road safety, and (v) strengthen institutional and human capacity in the sector. As of December 2007, ADB had approved for the sector five loans totaling $147.1 million and 12 TA grants totaling $6.4 million (Appendix 3). Two loans, the first approved in 1993 and the second in 1995, were for aviation. The remaining three loan projects supported road development. Of the 12 TA grants from 1992 to 2007, five were for preparing loan projects, and seven supported capacity building, including institutional strengthening and policy support. In trade facilitation, donor assistance has been dispersed, with different parts of the Government dealing with various aspects of trade development and facilitation. The first TA project,20 approved in 2000, aimed to study the development options for economic cooperation between the PRC and Mongolia. Subsequently, the scope of TA grants focused more on customs cooperation. In November 2006, ADB approved its first loan supporting trade facilitation, for a customs modernization project.21 73. Road Subsector Outputs, Outcomes, and Impacts. The first and second road development projects rehabilitated and constructed the first two sections of the main northsouth road transport corridor, which links the Asian Highway network from the Russia Federation to the PRC through Mongolia. These contributed to reducing user costs by improving pavement conditions on Mongolias northsouth transport artery. Both projects were effective in reducing travel times, improving travel comfort, reducing vehicle operating costs, and hence contributing to improved domestic and international trade. Thanks primarily to corridor development between 2002 and 2007, the road passenger traffic has doubled from 100 million passengers in 2002 to 200 million in 2007, and the amount of freight transported by road has risen fivefold from 2 million tons in 2002 to just under 10 million tons in 2007. The third project, the Regional Roads Development Project approved in 2006, will complete the last section of the corridor. Construction of the corridor and the completion of the transit agreement among the Russian Federation, the PRC, and Mongolia, will promote the expansion of transit traffic and increase trade among the neighboring countries. Feasibility studies for other important links between the Russian Federation and the PRC via western Mongolia were completed in 2007, and a new project was approved in February 2008 for the first phase of the western highway. ADBs assistance has created awareness of new construction techniques and of better ways of project management. The completed road projects have witnessed a rate of traffic growth higher than that estimated at appraisal but have also witnessed an alarming rise in traffic accidents. The first road project, for rehabilitating the UlaanbaatarAltanbulag section of the northsouth road corridor, was completed in 2001 and rated successful by the project performance evaluation report of 2007. This project contributed to improving livelihoods in the impact area but was not sufficient to enable the development of a free trade zone in Altanbulag. Improved access to markets was an important trigger for migration to the project impact area and has enabled diversification into alternative livelihoods such as shop keeping, hospitality, livestock trading, etc., with increased participation by women in some of these activities. In addition to similar livelihood impacts, the second road project constructed the NalayhChoyr section of the northsouth corridor, which contributed to the development of southern Mongolia.

20 21

ADB. 2002. Technical Assistance for Trade Facilitation and Customs Cooperation. Manila (TA 6058-REG, for $2 million, approved on 29 October). ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Grant Administration (cofinanced by Korean Government) to Mongolia for Customs Modernization Project. Manila (Loan 2307-MON[SF], for $5 million, approved on 29 November).

22 74. ADB support has contributed to the preparation of a road master plan, sector policy reforms, and strengthened institutional capacity in sector agencies. However, outcomes have been mixed. The TA for preparing the road master plan22 provided ADB with a platform for donor coordination and for entry into the roads sector, but attention to road sustainability was lacking. A legal framework for the road and road transport sector was developed, and strengthening of the road fund occurred, but road fund expenditures do not match revenues, with allocations for maintenance being much less than the funds collected from road users. In recent years, the road fund has almost become defunct. The recent TA for preparing a national transport strategy23 has yet to deliver a satisfactory result, as the strategy prepared in 2004 has not been approved by the Government. While ADBs capacity-building support was effective in restructuring the Department of Roads and in training its staff, the institutional benefits were not sustained because of changes in the structure of the ministry and staff turnover. Support for trade facilitation is in its early stages, but its impacts are expected to be substantial. Improvement in trade facilitation in the near term through improved customs clearance is essential to bringing down high overland transport and trade costs, boosting incentives for investment, and reducing the economys vulnerability to external shocks. 75. Civil Aviation Subsector Outputs, Outcomes, and Impacts. ADB assistance enabled an improvement in air safety and the upgrading of civil aviation practices to international standards. This created an enabling environment for attracting new air traffic and enhancing Mongolias access to domestic and international markets. Reliable and safe all-weather operations were attained at Ulaanbaatar Airport, and infrastructure constraints to the development of international and domestic air services were addressed. There has been significant organizational improvement and attitudinal change in the aviation sector, with air traffic control and airspace management systems upgraded to International Civil Aviation Organization standards, the Civil Aviation Authority of Mongolia developing the technical and management capability to adequately maintain the infrastructure and services to reasonable standards, and good cost recovery, as the air navigation project generated significant net earnings. 2. Financial Sector

76. ADB Assistance. Over the past 15 years, ADB has given considerable assistance toward transforming Mongolias financial sector. The assistance comprised three program loans, two project loans, one TA loan, 22 advisory TA grants, and four project preparatory TA grants. In addition, loan and equity investments were made in two commercial banks. The three program loans are the First and the Second Financial Sector Program Loans and the Financial Regulation and Governance Program (Appendix 3). 77. Financial Sector Outputs, Outcomes, and Impacts. The Government and ADB agreed that an efficiently functioning financial sector was key to achieving a market-based economy and promoting rapid economic development with the private sector as the engine of growth. That outcome was achieved successfully, in that the country now has a vibrant and efficient, fully private banking system and nascent nonbank and capital market subsectors with prospects for growth. The banking system is now entirely privatized. The 16 banks in operation perform autonomously and efficiently with satisfactory growth in deposits and loans, returns on assets and

22 23

ADB. 1993. Technical Assistance to Mongolia for the Road Master Plan and Feasibility Study. Manila (TA 1820MON, for $600,000, approved on 4 January). ADB. 2004. Technical Assistance to Mongolia for Formulating a Transport Strategy (20052015). Manila (TA 1820MON, for $300,000, approved on 13 December).

23 equity, and easing nonperforming loan ratios.24 Strong deposit and loan growth reflects improving public and investor confidence in the banking system. Real interest rates continue to be high but show a downward trend and should decline further with greater competition among banks and further diversification and deepening of the financial sector. The financial market has, in turn, contributed to private sector development and overall economic development. Bank loans have been predominantly for private sector development, which accounted for an average of 97% of total bank loans outstanding over 20022006. The private sectors contribution to GDP increased from only 3.3% in 1989 to 70.3% in 1999 and to 77.8% in 2006. 78. ADB support for capacity building covered a wide range of activities, such as commercial bank liquidation, restructuring, and privatization; upgrading commercial banking skills and management information systems; improving and strengthening the regulatory and supervisory framework of the Bank of Mongolia (BOM); introducing prudential norms and accounting and auditing standards to BOM and commercial banks in accordance with international practice (the Bank for International Settlements and the International Accounting Standards, respectively); developing the regulatory and supervisory framework for promoting the nonbank and capital market sectors; introducing new financial products into the market such as mortgage finance25, insurance schemes, pension systems, and trust and investment fund operations; and introducing an effective anti-money laundering regime. All of the advisory assistance served the objectives of reform formulation and implementation, as well as capacity development. Advisory assistance served to inform ADB-led policy dialogue and was well coordinated and sequenced with the support provided by other development partners. Overall, ADB advisory assistance contributed to establishing a fairly well regulated and supervised private and market-oriented banking system. BOM has become an independent and effective regulator of the banking sector. Under this strengthened regulatory and supervisory umbrella, the 16 privately owned commercial banks enjoy greater public confidence in their operations, operate autonomously under good governance codes, are competitive and profitable, and provide generally efficient banking services to the general public. 79. In the nonbank and capital market sectors, ADB assistance has provided the basic regulatory building blocks that were needed to broaden the financial market. ADB has assisted in establishing the Financial Regulatory Commission (FRC), which has sole responsibility for a consolidated approach to regulating and supervising the entire nonbank and capital market sectors, comprising five subsectors: nonbank financial institutions; savings and credit cooperatives (SCC); securities companies; insurance companies; and the operations of the capital markets sector, comprising the Mongolia Stock Exchange (MSE) and the Securities Clearing House and Central Depository. 80. Not all of ADBs financial sector support achieved the desired results. The performance of ADB in carrying out the sector programs was less than satisfactory.26 While it promptly undertook the design and formulation of the sector programs to meet the urgent demand, its performance during implementation was inadequate. This complex program had multiple facetssuch as policy reform, development of new laws and/or amendment of existing laws, as well as institutional capacity enhancement aspects in three different subsectors of the financial sector
24

Deposits as a percentage of GDP rose from 17.6% in 2002 to 46.2% in 2007. Return on assets fell from a high of 4.3% in 2002 to 2.2% in 2005 but rebounded to 2.5% in 2007. Return on equity of 20.8% in 2002 fell to 12.1% in 2005 but rebounded to 20.8% in 2007. Similarly, loans outstanding as a percentage of GDP increased from 18.7% in 2002 to 46.8% in 2007. Nonperforming loans rose from 5.1% of the outstanding portfolio in 2002 to 6.4% in 2004, but eased to 3.2% in 2007. 25 Of the total bank loan balance, the mortgage finance loan took 7.8% as of end of the second quarter of 2008. 26 ADB. 2007. Program Performance Evaluation Report on Mongolia: Second Financial Sector Program. Manila

24 and required above average supervision to ensure effective implementation and overall success. ADBs supervision was not commensurate with that level of complexity, however, and problems encountered led to delays in implementation and tranche releases, and shortcomings in some TA outputs. The failure of the cancelled rural finance loan, of which only a small portion was utilized, can be attributed to faulty project design by ADB. Too much emphasis was laid on the SCC system for dispensing loan proceeds, though alternative credit vehicles could have been considered, e.g., the banking system and nongovernment organizations (NGO). In addition, changes could have been implemented even after ADB found the SCC system to be incapable of dispensing the credit as originally conceived, by dispensing the credit through the banking system, instead of cancelling the major portion of the loan (about $7.7 million or 90%), which reduced access to rural credit at a time when it was already in short supply. The capital markets development effort made by ADB under the financial sector reform programs was not effective in privatizing the MSE and selling shares of state-owned enterprises through it. 27 Earlier ADB assistance for the capital market development not only appeared to be premature, given the level of financial sector development and economic restructuring at that time, but also did not adequately consider the countrys potential for domestic capital market development. Nevertheless, recently the FRC, BOM, and MOF are actively engaged in dealing with reform measures and the MOF formed a new unit to focus on financial sector policy and capital market development. 81. Capital market activity steadily increases as the financial market broadens and alternative forms of investment finance and term savings instruments are adopted. Some 380 companies are listed on the MSE and the quality of listed firms has been improved. Mining and telecommunication firms tend to dominate the market, which continue to trade but a few days per month. In 1998, just under a third of the companies listed on the exchange (i.e., 129 firms) were government-owned, and today less than a tenth (32 firms) are publicly owned. The value of the market capitalization has steadily increased over the past decade, rising from MNT51 billion (about $47 million) in 2002 to MNT890 billion (about $761 million) in July 2008. A wide range of capital market institutions, including leasing companies, insurance companies, pension funds, investment funds, and private equity funds have established operations during the past 5 years. While the activities in the market are growing, the market and institutional risks are also growing. The new regulatory authority (i.e., FRC) has very limited capacity to handle the risks. 3. Urban Development Sector

82. ADB Strategy and Assistance. Urban development was first included as a distinct sector in ADBs 1992 Mongolia country strategy. The 2005 CSP reinforced the strategic link by reorienting the urban strategy toward providing services vital to the achievement of the MDGs. The CSPs four expected urban outcomes were improved (i) living conditions for the urban poor, (ii) access for the poor to basic services, (iii) urban environmental conditions, and (iv) planning. The three expected urban outputs were the (i) upgrading of low-income housing, (ii) provision of services to marginal urban areas, and (iii) urban sector strategy. ADB has been among the most active donors in urban development in Mongolia with a combination of lending and nonlending interventions. Urban sector lending commenced in 1997. Since then, ADB has approved five loans totaling $110.1 million (Appendix 3). In addition, ADB provided three grants from the JFPR fund for assisting ger and rural remote areas in the amount of $5.7 million. Finally, ADB provided 10 TA grants totaling $5.6 million, of which five were for preparing loan projects and five supported capacity building, including institutional strengthening, and policy support.

27

ADB. 2008. Special Evaluation Study on ADB Assistance for Domestic Market Development. Manila

25 83. Urban Sector Outputs, Outcomes, and Impacts. Urban assistance was able to achieve the intended sector output of improving service provision to urban residents, particularly for water connections, sanitary services, and heating connections in aimag (province) centers and for district heating in Ulaanbaatar. ADBs urban program has (i) helped to better define water and wastewater tariff needs, (ii) helped to develop a housing mortgage market, (iii) upgraded urban service delivery, (iv) enhanced private sector participation in urban service delivery, (v) improved living conditions in ger areas, and (vi) developed community involvement programs. In providing integrated urban infrastructure assistance covering water supply, sanitation, waste management, and district heating to 13 aimag centers, ADB effectively optimized potential synergies among the separate urban subsectors. Urban loans and the JFPR grants developed systems and infrastructure to improve living conditions in poor ger areas. Most notably, the JFPR grant TA for Improving the Living Environment of the Poor in Ger Areas of Mongolia Cities28 identified ways to improve the living conditions of the extremely poor, including the provision of low-cost housing, the construction of sanitation facilities, economic development, and developing poverty impact assessment. The impacts of ADBs urban assistance program included (i) greater access to clean water and sanitation, (ii) improved access to heating for formal area residents in Ulaanbaatar and selected aimag centers, (iii) the provision of low-cost housing for ger area residents; (iv) the upgrading of low- and middle-income housing; (v) the establishment of a sustainable, marketbased system for the delivery of housing finance to meet the borrowing needs of low- and middleincome households; and (vi) assistance to local urban strategy development. Economic growth indicators show that, on the average, the aimag centers covered under ADBs two provincial urban services loans grew substantially more quickly than other aimag centers. It also appears that ADBs interventions have had a modest, indirect impact on reducing poverty in the selected aimag centers. ADBs assistance for housing finance led to a fledgling mortgage market that exceeded sector development goal expectations. 84. Not all areas of urban sector support have been equally successful. The Ulaanbaatar District Heating Project encountered numerous implementation problems that resulted in a cumulative implementation delay of 3.5 years, due to the need to rebid three procurement packages after overbids by all of the bidders, an overambitious implementation schedule, delays caused by the redesignation of the EA when the Energy Authority was dissolved in the restructuring of the energy sector and the District Heating Company took over, and the failure of the Spanish Governments cofinancing of the rehabilitation of the steam system operations to materialize. While progress in upgrading the district heating system was ultimately accomplishedmost notably improving heating efficiency in Ulaanbaatar by nearly 45%the EA, the District Heating Company, is financially weak, and arrangements for operating and maintaining heating equipment appear to be inadequate. The expected sector output of upgrading low-income housing was partly achieved. The Housing Finance Sector Project that aimed to establish a long-term market-based sustainable housing finance system succeeded in lending over $16.7 million to individual borrowers, much more than the original appraisal target of $10.0 million, but it would appear that the project beneficiaries were for the most part middle-income households, not low-income. A JFPR grant aiming to assist ger area residents in Ulaanbaatar and 10 other cities in Mongolia also succeeded in upgrading conditions for a substantial number of ger area residents.

28

ADB. 2002. Grant Assistance (Financed from the Japan Fund for Poverty Reduction) to Mongolia for the Improving the Living Environment of the Poor in Ger Areas of Mongolias Cities Project. Manila.

26 4. Social Sectors a. Education

85. ADB Sector Strategy and Program. ADB strategies for the education sector in 1991 2005 were to reestablish basic education infrastructure and provide the foundation for improvements in the quality of education. The CSP for 20062008 provides continuity with goals for (i) improving access to, and the quality of, basic educational services; (ii) more efficient and effective education provision; (iii) promoting demand-driven vocational education; and (iv) more effective aid coordination. The CSPU for 20072009 reiterates these goals in its stated strategy to (i) align the skills and education of the labor force with market demand to mitigate growth constraints caused by human resource shortfalls and (ii) provide better education opportunities for the poor so they can better participate in economic growth processes. ADB has been a major provider of assistance to education since 1991. As of December 2007, ADB had approved four loans amounting to $42.5 million for three projects, plus 10 TA operations totaling $4.4 million and two grant projects amounting to $2.0 million for the sector. The Education Sector Development Program (ESDP), approved in 1996, consisted of an integrated package of policy reforms, investments, and associated TA to help transform the countrys education sector to meet the demands of a market-oriented economy (Appendix 3). This was the first time ADB used the sector development program modality. Two subsequent ADB education projectsthe ESDP II, approved in 2002, and the ESDP III, approved in 2006have built on the success of the ESDP. From 1992 to 2007, ADB provided 10 TA grants, four of which were for preparing projects and six of which were for capacity building, including institutional strengthening and policy support. ADB also provided support through two grant projects. One of these was funded by JFICT and aimed to improve access to, and the quality of, education for the rural population, and the other was financed by JFPR and supported informal skills training for unemployed youths and adults. 86. Sector Outputs, Outcomes, and Impacts. ADB assistance has contributed to improved enrollment and retention rates; upgraded the quality, performance, and sustainability of primary and secondary educational facilities and services; improved educational management capacity; and promoted policies that enabled private schools to be established. ADB provided substantial improvements to educational infrastructure and resources, including for curriculum development, textbook production, teacher training, rural education, integrating information technology into the educational system, establishing a national higher-education accreditation authority, and, currently, developing a more relevant model of technical and vocational education. By 2004, 210 schools had been rehabilitated under the ESDP and the ongoing ESDP II. Through the ESDP reform program, the educational facilities and staff of 120 primary and secondary schools were rationalized and merged into 45 complex schools, which contributed to improving the effectiveness of the educational system and the quality of educational services. For example, the establishment of the first complex school, Ireedui Complex School, reduced by nearly half the number of staff, generating salary savings of MNT2.8 million per month. By 2006, about 20% of students and 21% of teachers and school service staff in Ulaanbaatar city were in complex schools. The grant project for improving access to rural education in Mongolia through information and communication technology was innovative and addressed the needs of children in remote areas.29 The ESDP and ESDP II were instrumental in boosting gross enrollment rates from 82% in 1996 to 94% in 2007. Thanks to ADB-supported improvements in educational quality, Mongolia now has an exceptionally strong basic education system characterized by high rates of participation, educational achievement, and parental and teacher motivation. The education
29

ADB. 2004. Grant Assistance (Financed from the Japan Fund for Information and Communication Technology) to Mongolia for Information and Communication Technology for Innovating Rural Education. Manila.

27 projects and associated TA grants provided policy frameworks for further reforms. The new Education Master Plan for 20062015, prepared with ADB assistance, is considered a key sector output that will provide a strategic framework to ensure that spending and investment in the sector are evidence-based, informed, and sustainable. In January 2007, Parliament passed the amended Education Law, which provides the legal basis for the transition to 12 years of secondary education beginning in school year 2008/2009. The extension of the current 10-year school system to 12 years will align Mongolias educational system with international standards. The two education projects still under implementation, the ESDP II and ESDP III, are making satisfactory progress and are expected to substantially achieve their goals and objectives. Moreover, a quadrupling of public sector teacher salaries since 2003 has substantially improved teacher morale and incentives. The overall success of ADB support for basic education is demonstrated by Mongolias selection for the Education for All Fast Track Initiative in 2007, which will provide financial resources to enable the implementation of the new Education Sector Master Plan. b. Health

87. ADB Strategy and Assistance. To reduce the need and demand for expensive hospital services, the strategic focus of ADB assistance has been to shift resources from curative to preventive health services by reducing hospital beds, establishing a primary health care (PHC) system and improving the quality of PHC services. ADB has provided for the health sector three loans for two projects totaling $29.9 million, grant financing of $14.0 million for one project, eight TA grants amounting to about $3.5 million, and three grant projects for $4.0 million (Appendix 3). The Health Sector Development Program (HSDP), approved in November 1997 for $15.9 million, consisted of a policy-based loan ($4.0 million), an investment loan ($11.9 million), and associated TA ($0.6 million) to support reforms to (i) ensure the financial sustainability of the health system in a market environment, (ii) maintain universal access to quality essential health services, and (iii) improve health service quality. The HSDP II, approved in June 2003 for $14.0 million, aimed to improve rural health service delivery and build capacity in the health sector. The HSDP III, approved in October 2007 for ADF grant financing of $14.0 million, builds on and consolidates reforms in Mongolias PHC system under the HSDP completed in 2003 and the ongoing HSDP II. As of December 2007, ADB has provided five advisory TA grants to support sector reforms and capacity building and three project preparatory TA grants. Two grant projects funded by JFPR supported government efforts to reduce the maternal mortality rate and improve access for disadvantaged groups. One grant project, Information and Community Technology for Improving Rural Health Services, was financed by JFICT.30 88. Sector Outputs, Outcomes, and Impacts. Health assistance has had mixed results, although setbacks have contributed to positive learning processes. The HSDP, HSDP II, and HSDP III and associated TA grants have helped the Government to plan and implement organizational and financial reforms since 1997 and have successfully introduced a number of significant changes in the health system. One of the major accomplishments under the HSDP was the introduction of 237 family group practices (FGP) to provide PHC in cities and towns throughout the country by 2002. However, there are continuing challenges to the FGP system, including (i) inadequate funding, (ii) ambiguous legal status, (iii) inadequate incentives for FGP contractors, and (iv) unsatisfactory quality of services in FGPs serving large peri-urban settlements for lack of diagnostic equipment or an effective referral system. The results of ADBsupported health policy reform initiatives have been uneven. The rationalization of hospital
30

ADB. 2004. Grant Assistance to Mongolia for Information and Community Technology for Improving Rural Health Services. Manila.

28 services and hospital licensing initiatives have enjoyed limited success, and financial resources continue to be skewed toward hospitals rather than PHC services. Other reforms included the introduction of licensing and accreditation. While the licensing of FGPs has been established and applied nationwide, hospital accreditation has been applied only to a limited extent, reflecting lukewarm support for reforming the hospital sector. The implementation of reforms related to rationalizing hospitals and health personnel has been incomplete. Civil works upgrading rural hospitals was in many instances of inadequate quality and in most cases did not include the provision of water and sanitation, leaving rural hospitals with very poor sanitary conditions. Most rural district hospitals lack complete, functioning sets of basic diagnostic equipment to facilitate appropriate referral, and pharmaceutical supplies are very limited. c. Social Protection

89. ADB Strategy and Assistance. When the socialist system of social welfare provision collapsed, poverty and unemployment became widespread and acute. The Government made various attempts to establish a new social security system, but these were beset by severe budgetary constraints. From 2001, ADB assistance has aimed to help the Ministry of Social Welfare and Labor establish a viable and efficient system to (i) reorient social welfare provision to help the poorest and most vulnerable, (ii) provide programs of assistance for the unemployed, and (iii) establish a system of social insurance based on employer and employee contributions. ADB has approved two loans amounting to $12.0 million in support of the Social Security Sector Development Program (SSSDP), as well as five TA grants for $3.6 million and one grant project amounting to $1.0 million for the sector. The SSSDP, approved in August 2001, comprised a policy loan ($8.0 million), an investment loan ($4.0 million), and associated TA aiming to support reforms that strengthen the ability of the social security system to deliver essential welfare, insurance, and employment services to vulnerable groups. Four of the five TA grants were advisory, for assisting the government in developing a sustainable social security system appropriate to a market economy and building capacity for its implementation. One grant project funded by JFPR focused on enhancing employment opportunities for poor disabled individuals (Appendix 3). 90. Sector Outputs, Outcomes, and Impacts. Social protection assistance has had mixed results. New models and methods for social security provision, though slow to gain acceptance or move from policy statement to practice, are slowly being introduced. Recent achievements include approval for a center-based program for extremely vulnerable people; an integrated communitybased social service program, with draft standards prepared for formal legal approval; charters for employment training centers and business incubation centers; and required amendments to the employment promotion law. However, one of the main goals of ADBs program of supportto refocus eligibility criteria for social welfare benefits on the poorest groupswas not met despite agreement on program policies, advisory TA, and special study support. After government broadened social welfare eligibility in 2006, the third SSSDP tranche was cancelled. While ADBsupported social insurance and employment services schemes were implemented, the number of people contributing to them has declined, as has employer compliance with regulations for compulsory contributions. Although unemployment rates have fallen slightly, assistance has reached only a small proportion of the unemployed. 5. Law, Economic Management, and Public Policy

91. ADB Sector Strategy. Support for improvements in law, economic management, and public policy have been a central focus of ADB assistance since operations commenced in Mongolia in 1991. In that year, together with IMF and the World Bank, ADB helped the

29 Government to formulate its Medium-Term Economic Strategy, outlining measures to achieve macroeconomic stabilization and reform. It was agreed that ADB would initially focused on the industrial sector through TA to identify appropriate policy reforms. This led to the Industrial Sector Program Loan31, the first of 20 program and sector-development loans approved since 1993 (12 of which were approved after 1997), to reform telecommunications, power, roads, aviation, agriculture, education, finance, health, land administration, and public resource management (Appendix 3). All these loans included governance aspects, in particular legal and regulatory reforms and associated institutional capacity development. ADBs support to governance after 1997 continued the focus on building an enabling legal framework to encourage private sector development in the transition to a market economy. Most notably, ADB responded to the Governments initiative in the late 1990s to improve public resource management through supporting the adoption of New Zealands reform legislation for public financial management to manage Mongolias public service. 92. ADB Sector Assistance. Between 1997 and 2007, a total of 22 advisory TA grants, accounting for approximately 40% of the total volume of TA support, were provided in the areas of law, economic management, and public policy. Advisory assistance was concentrated in the areas of public sector financial management (i.e., planning, budgeting, accounting, and auditing), procurement, developing a national statistical system, and building legal capacity. In addition, ADB provided lending support for a comprehensive program of public sector management reforms. In December 1999, ADB approved the Governance Reform Program (GRP) loan for $25.0 million equivalent, 32 along with three TA grants totaling $1.8 million (Appendix 3). The GRPs overall goal was to facilitate the transition to a new structure of public sector governance in Mongolia by establishing a sound system of public sector financial management and accountability and a transparent system for data and information dissemination. To achieve this, the GRP focused on five objectives: (i) improving aggregate fiscal discipline, (ii) strengthening the public sectors budget formulation and execution, (iii) enhancing the public sectors operational efficiency, (iv) addressing the social impact and financing needs of the reforms under the GRP, and (v) preparing the groundwork for the continuation of reform. In October 2003, the Board approved a cluster of loan33 and a capacity-building TA loan for the second phase of the GRP and Public Sector Management and Finance Law (PSMFL)-related measures on strategic planning, output-based budgeting, performance contracting, output costing, performance auditing, improving the enforcement capacity of the State Service Council to improve civil service quality, and initiating pension reforms. 93. Rule of Law Outputs, Outcomes, and Impacts. Laws that helped open sectors to competition and foreign investment (e.g., aviation and telecommunications) brought immediate and substantial benefits. ADB assistance for improving prudential regulations in the banking sector and the legal framework for the capital market has facilitated the introduction of new financial market products in insurance, leasing, and mortgages, and these products have witnessed rapid growth in recent years. At the same time, a number of proposed financial sector laws and amendments were not passed into law, as diagnostics and policy dialogue with senior officials and politicians proved to be ineffective. Moreover, the implementation of laws drafted with
31

ADB. 1993. Report and Recommendation of the President on a Proposed Loan and Technical Assistance to Mongolia for the Industrial Sector Reform Program. Manila. (Loan 1244, for $30 million, approved on 17 August). 32 ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Mongolia for the Governance Reform Program. Manila (Loan 1713-MON, for $25 million, approved on 2 December). 33 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Mongolia for the Second Phase of the Governance Reform Program. Manila (Loan 2010-MON, for $13.5 million, approved on 14 October).

30 ADB assistance has been inconsistent, with too little consideration given to the quality of legal drafting and the impact of transporting laws from a common law jurisdiction to a civil law tradition. 94. Economic Management Outcomes and Impacts. In the area of economic management, the enactment of the PSMFL in 2002 has helped to clarify the respective roles and functions of the central, provincial, and local governments. All bank accounts of government agencies and special funds are incorporated in a treasury single account at the MOF. PSMFL support for public accounts and audits has contributed to much better control over expenditures and better estimates of expenditures and revenues in central ministries. The introduction of service contracts between central ministries and provincial and local governments, and the introduction of performance contracts for individual staff, has strengthened accountability and enhanced staff management. International accrual accounting standards have now been officially adopted by the Government, though agencies still operate by cash accounting and then prepare accrual financial statements at year end for auditing. Mongolias central auditing function has been strengthened, and financial audits are undertaken based on modified interim accounting standards issued by the MOF. A combination of more disciplined budget processes, stronger expenditure controls, and improvements in revenue administration have contributed to a substantial improvement in the fiscal balance. The overall budget deficit declined from 12% of GDP in 1999 to 4.5% in 2001, and since 2005 the budget outturn has recorded a surplus for 3 years in a row. Capital spending, albeit still low, has recovered from 3.2% of the GDP in 2005 to 9.8% in 2007. Underpinning fiscal stability, revenue collection has been on a steadily increasing trend, rising from 33.2% of the GDP in 2002 to 40.5% in 2007. 95. Unintended Impacts. No evidence exists that the implementation of PSMFL-supported reforms has contributed to an improved system of public expenditure planning, budgeting, and management for development results, other than by contributing to improved expenditure controls and fiscal balance. The PSMFL reform program has focused on strengthening the authority of key central ministries to the neglect of local ministries. The implementation of the PSMFL caused local agencies to lose control over local expenditures in areas such as health and education, and program managers lack the flexibility to modify budgets to suit local needs. Contrary to the positive trend in fiscal balance, the size of the public sector has increased at a rapid pace since 2002 and is budgeted to exceed half of the GDP in 2008, with public spending dominated by current outlays, including higher outlays for subsidies than for capital expenditures. The national budget continues to be specified and approved annually in the form of highly detailed expenditure line items rather than on a functional basis, and it is neither results oriented nor rooted in a medium-term expenditure framework. Strategic business plans lack prioritization and realism, and very little relationship exists among strategic business plans, medium-term expenditure frameworks, and the annual budget. There is a mismatch between budget allocations and national strategies (e.g., promoting the private sector but having public expenditures exceed half of the GDP). Public performance reporting is quite variable across ministries, with some agencies providing only very limited information to the public. Agency practices in terms of the human resource management are generally inconsistent with PSMFL requirements for a merit-based public sector. The Government Service Council lacks the capacity to fulfill its mandate, and government agencies are often heavily politicized. In terms of accountability, the lack of internal auditing capacity limits the scope of fiscal controls, while the actual use of performance indicators to assess expenditure outcomes is rare. 96. Other Public Policy Outcomes and Impacts. ADB assistance has contributed to a public procurement system that fosters competition, transparency, and accountability. A series of TA grants contributed to the formulation of Mongolias Public Procurement Law; sensitized ministry and agency staff to the workings of the procurement law; developed the capacity of a procurement

31 oversight unit in the MOF; and helped the Agency for Construction and Architecture to set up a computerized registry of suppliers, contractors, and consultants. Combined with reforms in public sector accounting and auditing, the new public procurement system has facilitated aid mobilization and utilization. While these new procurement arrangements are substantial improvements over previous practice, the public procurement system suffers from political interference, insufficient competition, poor dissemination of tenders and awards, lax oversight, and insufficient penalties for corruption. 6. Agriculture Sector

97. ADB Strategy and Assistance. ADBs goals in agriculture and rural development have been to develop a more market-oriented, efficient, and sustainable agriculture sector and to reduce poverty by providing more income-generating opportunities. This was to be realized by establishing competitive agricultural markets, restructuring public services, and improving the capacity of private and NGO service providers to increase the productivity and profitability of agricultural production. Toward these strategic objectives, ADB assistance included a comprehensive sector review in 1993 followed by the $35.0 million Agriculture Sector Program in 1995, which aimed to support a reform program oriented toward promoting competitive agricultural markets. This was followed in 2001 by the Agriculture Sector Development Program (ASDP), which included a $10.0 million investment project and a $7.0 million program loan (Appendix 3). It aimed to support the disengagement of the government from nonessential services and the private sectors assumption of these functions (i.e., supplying seed, vaccines, equipment, outreach services, and rural financial services) and to reform the legal framework to support cooperative development and community-based resource management. The project targeted four poor provinces in the western region and included (i) support for well rehabilitation, veterinary services, cooperative development, and rural communications; (ii) horticulture development; and (iii) a credit line for short-term loans to farmers. The ASDP has addressed rural lending by providing training to commercial bank staff to familiarize them with the unique and sitespecific characteristics of agricultural production, as well as training for borrowers in repayment responsibilities and general banking requirements. ADB also helped the Government to develop its Agriculture Sector Strategy to attract and coordinate development partners sector assistance. 98. Sector Outputs, Outcomes, and Impacts. Steady progress has been made in improving agricultural policy. The legal basis for the group management of rural land and water resources has been established. Export license procedures have been simplified and made more transparent. The Agriculture Bank has been restructured and privatized. Fees for private veterinary services have been decontrolled. Meat inspection and veterinary licensing standards have been established. Agriculture insurance laws have been revised. And NGOs have been included in the implementation of the Green Revolution program. Not all reform efforts have been successful. Loans made under various commodity funds (for wheat and agriculture) continue to suffer high default rates. The sole producer of vaccines, Biokomobinat, operates at a loss supplying vaccines for government programs at prices below the market. Although the independent Science and Technology Council has been established, it has little private sector involvement or funding. And the extension system remains underfunded and with little reach. For staple crops, the Government continues to use the crop fund to subsidize production, primarily by channeling low-cost loans to producers, for which repayment rates have historically been poor. 99. Agricultural project support has made valuable contributions but reached relatively few beneficiaries. Under the ASDP, 8,000 farmers have received training and outreach support on seedling preparation and greenhouse farming, plant protection, small-scale irrigation, vegetable storage and processing, and marketing for processed products. This has substantially boosted

32 farm incomes and contributed to new income-earning opportunities. Average yields per hectare increased by 14% for cereals, 60% for fodder, and 27% for potatoes in the four project aimags between 2001 and 2006, and beneficiary incomes rose by 1060%. Some 328 wells were rehabilitated, benefiting 3,200 herder families and securing sustainable water sources for 2 million hectares of pastureland. A system in which herder groups manage water holes and collect fees to operate the water pumps has been established. Nearly 30,000 loans, with a total value of $30 million, were provided to herders and farmers to help them purchase animals, grow and market crops, and develop other income-generating activities. The repayment rate on these loans is nearly 98%. While there was only one commercial bank serving the four aimags at the start of the project, there are now five commercial banks with an active presence in the region. B. The Programs Contribution to Outcomes and Impacts, by Thematic Area

100. Transition. The transition of the Mongolian economy from a centrally planned to a marketbased system has advanced extremely well. There has been substantial progress in the implementation of fundamental economic reforms favoring price liberalization, privatization, and the establishment of market institutions. Overall macroeconomic policies have remained prudent, debt levels have become manageable, and a freely floating exchange rate regime is now in place. While Mongolia has suffered bouts of inaction on reforms and financial market contagion, there has been relatively little reform reversal. Moreover, the transition process was not hindered by widespread social and political unrest, as was seen in many other transitional economies. By 2001, Mongolias real GDP had recovered to the level enjoyed at the onset of its transition process. Foreign direct investment in mining and Mongolian workers remittances have increased significantly in recent years, fuelling the observed high GDP growth. ADB made an important contribution to this process, particularly through its program lending that supported marketoriented reforms while helping to cushion fiscal decline and smooth consumption during the early years of the transition process. 101. Private Sector Development. From generating virtually 0% of the GDP in 1990, the private sector now generates 7580%. More than 90% of all enterprises are privately owned. This achievement is the result of a wide-ranging privatization program and the creation of an enabling environment generally supportive of new private enterprises. Several recent private sector assessments have identified high-cost transport, skills shortage, corruption, and institutional and regulatory weaknesses as key constraints on private sector development. ADB has provided assistance aiming to address each of these constraints through its support for improved market access (i.e., transport and trade facilitation), human resource development through education and health, trade facilitation and price liberalization in agriculture, broadening access to financial market instruments (mortgage markets, microfinance, rural credit, and capital markets), and improved governance of financial markets, including corporate governance. ADB also worked to transform line ministries from being providers of services to being enablers and regulators of private initiative. While some progress has been made, substantial challenges remain, and the overall effectiveness of ADB assistance in terms of actually lowering transport costs, boosting access to trained workers, combating corruption, and building market-friendly institutions has been relatively modest. More time and effort will be required in each of these areas to overcome these constraints on private sector development. 102. Positive synergies can be reaped from closer cooperation and coordination between ADBs assistance for public and private sector operations. The new CPS should develop a private sector development strategy that draws on the joint inputs of ADBs public sector staff and Private Sector Operations Department (PSOD). Greater cohesion between ADBs public and private sector operations could be accomplished by (i) concentrating capacity-building assistance on

33 improving the regulatory environment for private sector participation; (ii) providing long term financing to projects with high development impacts; and (iii) supporting public-private partnerships (PPP) in specific sectors such as urban infrastructure and transport infrastructure along with PSOD efforts to attract strategic investors for the first generation of PPPs. 103. Good Governance. ADB has made an important contribution to fostering public sector governance and, more specifically, to reducing corruption risks by providing support to foster free trade, privatize state-owned enterprises and banks, establish a corporate governance code, establish a modern public procurement system, build public audit capability, restructure key ministries and agencies to focus on providing core services and enabling private initiative, and establish prudential financial market regulations, including the development of anti-money laundering legislation. For nearly a decade, ADB has been at the forefront of assistance to fundamentally transform governance of the public sector by helping the Government apply the New Zealand model of public sector management. While this, and consolidation of spending authority into a single treasury account, had considerable success in restoring fiscal stability, it has inadvertently contributed to excessive centralization of public sector management and budgetary authority and has not brought the anticipated improvements in public sector planning, accounting, budgeting, staffing, performance reporting, results orientation, and accountability. In retrospect, applying highly sophisticated public sector management tools to reinvent the Government of Mongolia proved to be premature. 104. Environmental Sustainability. During the past decade, no particular ADB project has been specifically dedicated to environmental improvement, but the practice of subjecting all ADB projects to environmental impact assessment has provided a model that the Government now applies to the more environmentally risky publicly and privately funded projects. ADB investments that were intended to have strong environmental spin-off benefits included support for a land cadastre, improving urban services, and pilot-testing innovative approaches to delivering basic services in urban ger areas. Support provided through regional assistance on monitoring dust and sand storms34 has contributed to regional models that could possibly be scaled up to help combat desertification. However, ADBs contribution to environmental sustainability was modest. Procurement delays impeded ADB assistance toward establishing a land cadastre, and insufficient attention to energy conservation and traffic management combined to weaken ADBs contribution to improving the urban environment. Although several other donors are active in the environmental area, the situation is steadily deteriorating. Air pollution has become a major problem in Ulaanbaatar, where ambient concentrations of particulate matter exceed World Health Organization standards and are linked primarily to reliance on coal-burning stoves in gers and heat-only boilers. Vehicle ownership is rising rapidly, and it is estimated that 80% of the vehicles inspected do not meet national or international emissions standards. In rural areas, pasture degradation, desertification, and deforestation have adversely affected areas around the Gobi Desert and left former grazing areas incapable of sustaining agricultural activities. As a result of deforestation and overgrazing, dust storms are common and appearing with increasing frequency. A project in the pipeline aiming to foster sustainable development in rural and urban areas has the potential to begin to address several of these issues, but the scope and focus of that effort remains to be defined. 105. Capacity Development. The effectiveness of capacity development support has been mixed. Planning and strategy formulation capacities in several ministries have improved thanks to ADB support, as has the regulation of the financial markets. Private sector capacities have also improved with the growth of the informal sector and the more recent influx of foreign investment.
34

Footnote 13.

34 ADB assistance to the Statistics Department on a national sampling frame, statistical analysis methods, and labor force and participatory poverty analysis survey methods have been effective in improving capabilities and enlarging the scope of the national statistical reporting system. Likewise, support to the National Audit Office has built capacity for undertaking three different kinds of external audits. In other areas, capacity building efforts fell short of their objectives because (i) there was no clear strategy for institution building; (ii) support for reform laws did not consider the institutional requirements associated with implementing them; (iii) short-term TA tended to temporarily plug capacity gaps in the Government for preparing sector strategies and drafting new laws; (iv) insufficient attention was paid to capacity-development readiness; and (v) capacity development objectives (e.g., reforming public sector governance) were overly ambitious compared with the limited TA resources available to the program. The quality of consultants, both international and national, has been a serious concern, with an overreliance on consultants with some track record in Mongolia rather than on those with leading-edge technical skills. Government involvement in defining consultants terms of reference and recruitment has been insufficient. 106. Performance of the Program Loan Instrument. Program loans dominated ADB's assistance portfolio in the 1990s but became progressively less important over the current CAPE period. The 2002 CAPE found program loans effective in smoothing public finance during the transition process and in fostering reform. However, the first generation of policy matrixes tended to be overloaded with activities that were not necessarily policy reforms as such but rather were inputs to the reform process. Policy matrices in the post-2002 generation of program loans, in governance, health, education, finance, and social security, continued to be overloaded and emphasize passing new legislation, as opposed to effectively implementing improved policies. Second- and third-generation program loans did build on progress made by previous loans, while adding new reform areas. As the economy steadily improved and the need for budget support diminished, the pace of program loan implementation slowed. The degree of compliance with program loan conditions varied. 107. Regional Cooperation. ADB support for regional cooperation through CAREC has built confidence and created an effective institutional forum for negotiating complex cross-border projects. Ministerial and other senior meetings have contributed to policy harmonization and facilitated projects aiming to expand trade and investment flows. In the transport sector, the Western Highway, connecting the PRC through Mongolia to the Russian Federation, although long discussed, has been realized with a combination of the national program and CAREC support. Regional TA identified substantial bottlenecks at the border and helped inspire the 2006 Customs Modernization Project 35 . In the energy sector, a comparison of power tariffs across CAREC countries helped sensitize the authorities to the urgent need to bring power tariffs more in line with supply costs. Since late 2006, ADB has supported a program of Mongolia-PRC cooperation that is expected to substantially boost investment flows in the years to come. Under this arrangement, some progress has been made in developing institutional arrangements for the first export-oriented thermal power project to supply the PRC. Between 2002 and 2007, Mongolia was involved in 54 regional TA grants. While some have produced particularly useful outcomes, the vast majority have not addressed issues of high national priority in Mongolia or been well integrated with ADBs Mongolia country strategy. Establishing a better division of labor and clearer set of priorities between regional and country assistance could boost returns from both.

35

ADB. 2006. Report and Recommendation to President to the Board of Directors on a Proposed Loan and Grant Administration (cofinanced by Korean Government) to Mongolia for Customs Modernization Project. Manila.

35 C. ADBs Added Value

108. There are numerous areas in which ADB did add value over and above the financing provided. The use of program lending to support reform in the areas of governance and social protection, and the introduction of a sector development program in education, were new to ADB at the time. And the approach adopted for reforming the health sector was quite novel. ADB policy dialogue and a corporate policy of staying the course when reforms ran into opposition helped to maintain forward momentum, even if reforms were ultimately not in the time frame initially envisaged. ADBs role as a neutral broker in CAREC has allowed Mongolia to negotiate on equal terms with its much larger neighboring economies and to build the trust and confidence required to tackle problems regionally. While fostering aid coordination has been difficult, ADB has stayed the course, and there are encouraging signs that support to education is beginning to evolve into a platform for more harmonized sector-wide assistance approaches. D. Performance Determinants

109. Across the program, performance was best when (i) a thorough sector diagnostic informed the preparation of assistance initiatives, (ii) there was sustained high-level support from the Government and Parliament for agreed reforms, and (iii) the Government had both the capacity and the willingness to fully implement agreed policy and institutional reforms. At the project level, designs that were simple had superior outcomes. Capacity-development efforts have been the most successful in those institutions, such as the National Statistical Office and BOM, that have managed to retain skilled staff. VI. OVERALL PERFORMANCE ASSESSMENT AND RATING

110. The performance of the country assistance program was formally assessed to facilitate performance judgment and to ensure that the CAPE provides uniform treatment to all aspects of ADB support. Performance assessment combines a topdown assessment of ADB performance as a whole with a bottomup assessment of ADB performance in the key sectors. 111. The topdown assessment applied the following evaluation criteria: (i) ADBs positioning, the subcriteria including program relevance and alignment, selectivity and sector focus, and partnerships; (ii) ADBs contributions to development results and their likely sustainability, impact, and value addition in key sectors and areas of ADB assistance; and (iii) ADBs response and performance, including response to changes; the suitability of ADB policies, systems, and instruments; knowledge products and policy dialogue; and client responsiveness and delegation. These are discussed in chapter III, sections B, C, and D. 112. ADB assistance as a whole using the topdown perspective was assessed to be successful. Key factors that explain the rating include ADB assistance being (i) well aligned to country requirements and government strategies; (ii) delivered through a program marked by the innovative use of a variety of new assistance instruments and a strong measure of nonlending support; (iii) increasingly responsive to client needs; and (iv) successful in making important contributions to the transition process, social development, fiscal stability, and economic recovery. The topdown assessment would have been more positive were it not for the lack of strategic focus and sector selectivity, deterioration in portfolio performance, limited contribution to capacity building, limited delegation to the resident mission, relatively weak monitoring of program delivery and performance results, and poor track record in donor coordination. Details of the topdown rating by criteria are summarized in Table A1.1 of Appendix 1.

36 113. The bottomup ratings are assessed on the basis of the actual and expected performance of those sector operations completed and ongoing during the CAPE period. For this bottomup rating, the combination of lending and nonlending support in a particular sector is assessed against the standard evaluation criteria of relevance, effectiveness, efficiency, sustainability, and impact. Details of the bottomup rating by criteria are summarized in Table A1.2 of Appendix 1. 114. The bottomup rating of ADB assistance to each of its key sectors of support is based on the assessment summarized in chapter V. A more detailed discussion of sector-wide performance assessment, including a justification for the sector performance ratings, is provided in Appendix 6. From a bottomup vantage point, ADBs sector assistance is assessed to be successful because assistance was relevant or better to the needs of all sectors, the impact of the sector support was substantial, and program benefits were assessed as likely to be sustained. The effectiveness and efficiency of the program were more mixed, with some sectors performing quite well and others performing below expectations. Program performance was strongest in the education, banking, transport, urban, and agriculture sectors, where ADB was at the forefront of key sector policy and institutional reform efforts, and where ADB-assisted reforms and investments were implemented in a timely manner. Conversely, performance in health, social protection, law, economic management, and public policy suffered from insufficient diagnostics, overambitious project designs, and flagging political support for policy and institutional reforms. 115. The overall rating for ADB assistance during the CAPE period is successful, derived by combining the topdown and bottomup ratings and weighting them equally. While performance was rated as successful, there is scope for improvement and a need for an innovative approach to ADB assistance in the next CPS for Mongolia, taking into account the countrys critical development constraints and ADBs corporate goals and strategy. VII. A. Key Findings KEY FINDINGS, LESSONS, AND RECOMMENDATIONS

116. From Program Lending to Investment Operations. By 2002, as the financial system stabilized and started to recover, the emphasis of ADB support shifted from program lending to investment project operations. Annual ADF allocations for Mongolia gradually declined from $60 million to $70 million for most of 1990s to around $25 million in recent years, resulting in projects that were both smaller in size and more difficult to implement efficiently. Portfolio management became increasingly difficult, with start-up delays and project extensions of several years. 117. From ADF Loans to Grant ADF. Since 2003, strong rates of economic growth have resumed, and the budget recorded in 2007 its third year of consecutive surpluses. Starting in 2007, ADF assistance was provided in the form of 100% grants following an ADB-wide grant financing policy, though by then Mongolias public debt situation had substantially improved. In retrospect, converting the program to an all-grant basis was several years too late and it may have sent the wrong signals about the creditworthiness of the Government. 118. Commitment to Transition and Poverty Reduction Paid Off. ADBs assistance played an important role in facilitating Mongolias transition process and in assisting in the development of market-related institutions. ADBs projects have usually delivered the expected benefits, and through these ADB has made important contributions to establishing the policy-setting and institutional framework for a market economy and has helped to restore fiscal stability and strengthen control over the budget process. The Governments commitment to establishing an

37 open economy led by the private sector has been steadfast despite a volatile and challenging economic setting. 119. Reaching the Poor. ADBs main contribution to poverty reduction was indirect, through support for establishing a market economy, restoring fiscal stability, enhancing Mongolias connections to regional and global markets, and fostering a process of private sector-led growth and employment creation. Starting in the late 1990s, poverty reduction was woven into the design of ADB assistance, as the assistance focus shifted to fostering inclusive growth and social development. This led to its focus on non-income poverty determinants, through support for improving the quality of health and education services to the poor, providing basic urban services in provincial cities, and assisting poor farmers in western Mongolia. In addition, JFPR grants have played an important role in pilot-testing innovative approaches to service delivery in the urban ger and remote rural communities. A mix of indirect and targeted interventions to augment human resources, enhance living conditions, and provide better access to services was an appropriate strategy for addressing poverty in Mongolia. 120. Country Assistance Paid Off in Several Sectors. In terms of nationwide impacts, ADBs success was in education, banking, transport, and urban development sectors. In these highperforming sectors there was strong government ownership, follow through on major sector policy reforms, a judicious use of lending and nonlending assistance, and, over time, increased coordination of external assistance support. ADBs JFPR-funded projects have exhibited positive results in Mongolia. Used judiciously, JFPR resources can provide an important element of responsiveness, flexibility, and innovation to ADBs program of support. While difficulties continue in successfully supporting reforms in public sector management, health, and social protection. 121. Private Sector Development. Overall, ADBs private sector participation remains limited because Mongolia currently lacks well-defined legislative and regulatory frameworks necessary for it. PPP was selected as one of the key priorities in the National Development Strategy that was passed by the Parliament in February 2008. At the same time, a private sector development strategy was also formulated for the first time since the transition. The strategy aims to increase productivity and flexibility, promoting private sector development in regions and building all types of PPP through improving the legal environment, arbitration, logistics, and consultation mechanisms. ADB also strives to support government in developing these frameworks. ADBs support for private sector development has been realized through assistance that enhanced connectivity, improved the soundness of the financial markets, augmented urban utilities and services, and improved agricultural productivity. Rapid growth in trade, visitor arrivals, inward investment, and the number of small and medium-sized enterprises demonstrate that returns on assistance in these areas are high. Support was provided by PSOD for two small financial sector operations, which mainly helped to introduce ADBs private sector operations to Mongolia. Support in this area has largely been sector specific, limiting opportunities for cross-sector synergies and complementarity between public and private sector operations. Efforts are being made, however, to support privatization in the civil aviation sector, introduce new modes of PPPs, and to draw on both public and private sector support to reform the financial sector and encourage power exports. 122. Platform for Regional Cooperation Established. Mongolia has tremendous potential to be transformed from a nation with high transport and transaction costs into a regional economic hub. ADB assistance for regional cooperation and economic integration has played, and can continue to play, an important role in this process. ADB support for regional cooperation through CAREC has become increasingly effective over time. Assistance under CAREC has paid off in terms of developing investment in trade facilitation and of building the western transport corridor

38 that is part of the Asian Highway network. Trust and confidence have been built, and Mongolia now has a well-established forum for benchmarking policy practices and negotiating with its neighbors. There are potential benefits for Mongolia and its neighboring countries from fostering cross-border and regional cooperation. Cross-border export opportunities for Mongolia include power and livestock-based products. 123. Limited Use of Results Framework. A results framework was included for the CSP for 20062008, but tracking results has proved to be difficult because of the large number of targets and indicators, which are largely qualitative, and weak correspondence between the expected results of ADB assistance and national goals and objectives. The results framework was a new tool and helped to clarify the logic and focus of the assistance program, but it has been difficult to fully operationalize because there was a dearth of specific indicators that could be monitored and a limited number of assistance instruments. There was also lack of full awareness and institutional capacity within the client government. In retrospect, a more focused results framework with specific indicators that could be frequently tracked would have been more useful. B. Lessons

124. Overly Sophisticated Governance Reform Program. ADB assistance was not successful in every case, and lessons can be learned from areas of program performance that have not fully met expectations. From 1999 to 2002, ADB support for public sector governance aimed to restore fiscal stability and enhance budgetary control, and it was highly successful. Thereafter, support for good governance focused on public administration reforms, output-based budgeting, and accrual accounting under the PSMFL, a New Zealand approach to managing the public service that was passed in Mongolia in 2002. Given the very advanced nature of the law and the lack of capacity in Mongolia to implement it, however, progress was decidedly mixed, suggesting that more careful diagnostics at the start might have resulted in a more measured approach to reforming public sector management. 125. The Rush to Law. ADB provided assistance to help the Government introduce many new laws. These were often drafted under considerable time pressure and often drew on international best practices. Once new laws were adopted, ADB then provided support to help build the institutions that would put them in place. In some instances, this was successful, but in many cases it left institutions with large capacity gaps. A highly fragmented TA effort temporarily plugged a number of these gaps and relied excessively on building capacity by training officials, many of whom have moved on. In retrospect, a more systematic approach to capacity development, pilot-testing institutional innovations, and developing new laws within the Mongolian legal tradition could have been more effective. 126. ADB Became Overstretched. There is some evidence that ADB became overstretched during the CAPE period. As ADF levels declined and the assistance emphasis shifted from program loans to investment operations, the average loan became smaller, and the value and number of advisory TA grants fell even more sharply. ADBs resources became stretched over a large number of regions, subsectors, institutions, and themes, losing strategic focus and steadily raising aid transaction costs. Within its sectors of operation, ADB obtained some strategic focus with the CSP for 20062008, but new initiatives in energy and the environment added to the complexity of the program in 2007 and 2008. The shift from a heavy emphasis on program lending in the 1980s and early 1990s to investment operations in the past decade was associated with a marked deterioration in portfolio performance, manifested primarily in substantial project start-up and initial implementation delays.

39 127. Investment Efficiency Considerations. The imperative of supporting a rapid transition from central planning to the market, to combat the fallout from the Asian financial crisis, and to reverse the long decline in economic performance meant that many operations were launched before institutional arrangements were in place to secure their efficient and sustainable operation. The supply of district heating, water, sewerage, and sanitation services was rehabilitated before a tariff structure was established to sustain those services, and ultimately tariffs were not adequately reformed. Major sections of the northsouth highway were constructed before there was sufficient recurrent finance or institutional capacity for maintaining them or ensuring that goods and people could flow quickly over borders. New schools and health posts were developed in remote rural areas while communities were rapidly migrating to Ulaanbaatar and other urban centers. In an effort to be as responsive as possible, ADB assistance was designed and delivered strictly sector by sector, and projects were spread nationwide, limiting scope for regional economies or crosssectoral synergies (e.g., resulting in clinics with no water supply). In retrospect, more attention to long-term public investment efficiency would have boosted long-term program returns and served to help discipline the process of public sector investment planning. 128. Urban Versus Rural Development. Mongolia has witnessed rapid demographic change. It is estimated that the capital city accommodates nearly half of the nations population. Other regions have suffered substantial population losses. Large inflows of remittances have fueled rural-to-urban migration, and this is expected to continue in the years to come. Should rural-tourban migration trends continue, the vast bulk of the population could reside in the capital city in a decade. Rapid migration without adequate urban planning or the provision of social services or infrastructure has placed a serious burden on the capital city and its peri-urban areas. While remaining actively engaged in supporting rural poverty reduction, ADB could have given more consideration to helping Ulaanbaatar prepare for the expected influx of migrants. A focus on developing Ulaanbaatar and selected secondary cities would enable ADB to improve project efficiency and foster greater cross-project synergies. 129. TA Quality. TA consultancy services are provided by ADB at substantial cost. However, the quality of the services provided by the consultants is often far below what is required. In many cases, too little emphasis was placed on the transfer of technical know-how and skills and on building domestic training and outreach capacity. Moreover, while ADB-assisted projects are large by Mongolian standards, they are usually too small to attract major international consultants, vendors, and contractors. A combination of second-tier international consultants and limited competition tends to push-up costs and weaken consulting quality. As few major infrastructure projects are financed, the Governments capacity to manage complex contracts and resolve disputes is relatively weak. 130. Donor Coordination. ADB has had some success in leveraging its limited resources to mobilize funding from other development partners. Its support for coordination in education has been seen as a model for other sectors. But, despite some success in the education sector, ADB has had substantially less success in fostering harmonized assistance approaches; building country systems to lead sector development; or collaborating in areas such as portfolio management, sector analysis, country strategy development, or launching sector-wide approaches and mobilizing resources from other development partners. The establishment of MNRM in 2001 has improved communications among partners, but insufficient delegation of responsibility, understaffing, and poor use of national officers mean that the aid effectiveness payoffs from being more accessible in-country have yet to be realized. In a setting in which Government preferred to work with its donors separately, there has been a real trade-off between being responsive and collaborating effectively with other development partners. In the long run,

40 building the country systems so that the Government can utilize external resources more effectively will require substantial improvement in cooperation among the countrys aid donors. C. Recommendations

131. Country Context. The country context has changed dramatically. The country has been successful in adopting its first generation market-based economic reforms. However, challenges of designing and implementing second generation policy reforms remain, which would be more demanding than before. Lately, the economy has been growing at a high rate but the growth momentum is still fragile. Sustaining a high growth rate, a stable macroeconomy, and ensuring inclusive social and economic development are other important medium-term challenges. With abundant natural resources, Mongolia is well positioned to translate 2 decades of economic reform into sustained economic growth and higher living standards. Mongolias medium-term outlook is favorable. Economic growth is forecast to accelerate from 79% in 20082010 to 12 14% in 20112012, when the large Oyu Tolgoi copper and gold mine is expected to come on stream. Other large mineral and power projects could boost growth even further. In the medium term, Mongolia needs to exploit its mineral wealth as efficiently as possible and use that wealth to combat poverty, build human resources, expand opportunities for private sector-led employment creation, and reduce its vulnerability to external shocks. 132. Providing assistance effectively to a nation that is witnessing multiple booms will require careful reconsideration of ADBs role, choice of assistance instruments, and partnering arrangements. The following are key recommendations for consideration by ADB management in formulating the new CPS and related programs and their implementation. Detailed sector-specific recommendations are presented in each of the sector assessments provided as supplementary appendixes. 133. Reorienting ADBs Role. If the minerals sector continues to develop rapidly, the Mongolian economy can become a middle-income country over the next CPS period of 20092013. At that level, its access to concessionary assistance would likely become far more limited. To prepare for hardening aid terms, more emphasis should be placed on building country capacity for sound public financial management through assistance in the areas of investment planning, program planning, project screening, and debt analysis and public debt management. Mongolia is now facing a number of difficult economic management challenges that require new knowledge, technical expertise, and capacity-development assistance. These are in diverse areas, including capital market regulation, public investment planning, project management, and public finance. In financial sector development and economic management, for instance, the Government requires substantial capacity-building assistance, the scale of which is substantially greater than what could reasonably be accommodated through ADB's annual TA budget for Mongolia. Accordingly, consideration should be given to developing an umbrella TA loan or TA cluster for public administration, economic management, and financial market regulations, desirably with donor cofinancing. Also, with the food crisis, water scarcity, and climate change, agriculture assistance and natural resources management is becoming a challenge in developing countries including Mongolia. ADB can play an important role to protect the countrys renewable natural resource base. In addition, demand for electricity (power) is increasing and it also has export potential. 134. As the development agenda evolves, ADB will need to substantially boost the volume of its economic and sector work, while avoiding duplicating with the efforts of other development partners, if its role is to shift from serving primarily as a source of concessionary finance to a source of new knowledge and a catalytic financier. In particular, ADB has the opportunity to draw on its vast experience in PPPs to help the Government establish a policy and regulatory regime

41 that will encourage viable and sustainable PPPs. If policy dialogue indicates that the Government wishes to tap non-concessionary sources of assistance from multilateral banks, then ADB can use its ordinary capital resources to play a catalytic role in drawing in private investment for the firstgeneration of infrastructure PPPs. In this regard, ADBs risk-mitigation role becomes important, as purely private sector participation in infrastructure can be risky for all parties. 135. Considering these changing environments, ADB should gradually shift from serving primarily as a source of concessionary finance toward being a source of new knowledge and catalytic financing. ADB should assist in building country capacity for sound public sector financial management, investment planning, and debt management. ADB should support the Government in designing and implementing further policy reforms and in integrated and harmonized institutional capacity development in several of the economic management areas. 136. Strengthening Strategic Focus and Sector Selectivity in ADBs Operations. With a relatively small ADF envelope, ADB cannot expect to play a meaningful strategic role in every sector and thematic area. To add greater value, ADB should focus on a small number of key subsectors where ADB has good prospects for assisting the Government to improve policy and institutions, while providing catalytic financing for large strategic investments, and utilizing JFPR and other small grant sources for innovative pilot projects. ADB should focus lending assistance in those sectors and thematic areas that address constraints on the countrys sustained economic development, including the rural-to-urban migration problem and structural change, which are consistent with ADBs corporate goals and strategy and where it has a relatively long track record. Strategic sector selection can be based on a set of criteria such as continuity, internal and external demand, possibility of mobilizing resources from other development partners and private sector, subregional and regional cooperation, private sector development, and environment sustainability. In core sectors such as transport, education, and urban sector, ADB should provide a full compliment of lending and nonlending services. ADB should strengthen policy dialogue and donor coordination support in those sectors in which ADB has been involved but where longstanding policy deficiencies continue to hamper program performance. 137. Focus also has a temporal dimension in the sense of entering into new areas only after consolidating and securing returns on major past investments, such as the investment in the northsouth transport corridor, by focusing on the effective operation of the road fund and border infrastructure development. In sectors such as health, social protection, and agriculture, where reform efforts have been erratic, there is merit in staying the course through advisory assistance and policy dialogue, and in providing new loans only once long-standing agreements on policy and institutional reform have been met. ADB can also make use of grants under various trust funds for exploring innovative approaches that can lead to larger-size ADB assistance in the future. 138. Supporting Private Sector Development and Fostering Public-Private Complementarity. There is scope for boosting the number of private sector operations and fostering complementarity between public and private sector operations. In particular, ADBs public sector assistance can help the Government establish a public utilities tariff and regulatory regime that would facilitate the PPPs needed to help meet Mongolias power, transport, and urban infrastructure requirements. 139. In the medium term, only a more diversified economy can provide opportunities for the poor to participate in growth. Assistance is required to improve the enabling environment for private sector participation to diversify employment sources, boost productivity, and enhance the efficiency with which services are delivered. ADB support for vocational and higher education can

42 empower the nations youth with the skills required to compete in the global marketplace. The private sector currently depends largely on short-term financing from commercial banks because of Mongolias underdeveloped capital markets and nonbanking sectors. ADBs further support for financial market development and long-term instruments for financing especially PPP projects would facilitate further private sector participation and for making sources of finance more accessible, affordable, and tailored to varied needs and mitigate the risks associated with the financial markets and institutions. 140. Fostering Regional Cooperation to Boost Trade and Investment Flows. ADB support for regional integration can play an increasingly important role in facilitating cross-border trade and investment, especially once the northsouth corridor is completed, the western regional corridor advances, and the legal framework for mining sector investment stabilizes. ADB private sector operations are likely to support private sector companies with a regional orientation. These can help accelerate development in the Gobi region while fostering catalytic investment in sectors other than mining. ADB can help Mongolia explore subregional cooperation in capital market development, power trading, and export of agro-based products. ADB needs to facilitate policy dialogue for promoting cross-border and regional cooperation. 141. Improving Portfolio Performance and Client Responsiveness. Portfolio performance has steadily deteriorated over the CAPE period. While factors such as a dearth of qualified domestic contractors cannot be overcome quickly, many other factors can. Portfolio performance could be further improved by (i) supervising projects intensively, particularly during the start-up phase; (ii) building institutional capacity to implement projects, including systematic performance monitoring and evaluation undertaken in partnership with the Government; (iii) simplifying project and program design; (iv) ensuring that project time frames and implementation schedules are realistic; (v) practicing greater sector selectivity and minimizing the number of very small projects with high supervision costs; and (vi) delegating more supervision responsibility to MNRM staff. 142. ADB should improve its client responsiveness through various efforts. It can make an important, indirect contribution to development efforts by strengthening the overall effectiveness of the public investment effort. This becomes more important as the Government finances a growing portion of its investment effort from domestic resources and non-concessionary sources of external finance. The top priority is to cooperate with other partners to build country systems that can design and implement sector-wide approaches, streamline project implementation across projects and donors, undertake joint review missions, and develop an improved monitoring and reporting systems to foster greater transparency and results orientation. The institutional setting in Mongolia is complex, and ADB needs a strong presence on the ground to be able to contribute effectively to building country systems. These suggest a need to strengthen the Resident Mission and bolster its responsibility for project administration and supervision and its participation in project development, policy dialogue with the Government and development partners, in addition to country programming, results monitoring, as well as to expand it and make more effective use of national officers.

Appendix 1

43

EVALUATION METHODOLOGY, APPROACH, AND RATINGS A. Evaluation Methodology and Approach

1. This study has followed Asian Development Bank (ADB) guidelines for preparing country assistance program evaluations (CAPE).1 ADBs overall development effectiveness is assessed in both a topdown and a bottomup manner. This CAPE combined a topdown assessment of ADB performance as a whole with a bottomup assessment of ADBs performance in key sectors. 2. The topdown assessment applied the following evaluation criteria: (i) ADBs positioning, (ii) ADBs contributions to development results, and (iii) ADBs performance as a development partner. The bottomup assessment examined the performance of ADB lending and nonlending assistance in key sectors by assessing its relevance, effectiveness, efficiency, impact, and sustainability. 3. The study drew on a broad range of evaluation methods, including (i) a review of literature from ADB, the Government of Mongolia (the Government), and independent sources; (ii) in-depth interviews with key informants from government and nongovernment organizations, private sector entities, academe, development partners, ADB staff, in-country experts and observers, beneficiary organizations, and other stakeholders; (iii) a perception survey of the performance of ADBs assistance; (iv) interactive meetings and consultations throughout the CAPE process; (v) field observations of selected projects; (vi) the presentation of performance results to country stakeholders through workshops; and (vii) and the dissemination of the draft CAPE report (including background reports) to the country team, ADB operations staff, executing agencies, government officials, and other groups for their review and comments. It built on the results of the first CAPE undertaken for Mongolia and drew on past project and technical assistance performance evaluation reports, as well as on the results of several special evaluation studies. 4. The CAPEs assessment of sector operations is based on a series of rapid assessments of ADB assistance in the following sectors: transport, finance, social, urban development, agriculture, and governance. These have built on a number of project and technical assistance performance evaluation reports and special evaluation studies conducted in these areas in recent years, and review of ongoing operations. 5. CAPE stakeholder consultations with the Government focused on ADBs general strategic direction and choices, the results of past projects, and the likely results of ongoing operations. The perception survey focused on the responsiveness of ADB policies, rules, requirements, and management practices to the needs of clients, including those in the central Government, and executing and implementing agencies. B. TopDown Performance Assessment

6. The topdown assessment reviews the extent to which ADBs assistance was relevant to the countrys evolving needs, was responsive to the countrys abilities to use aid effectively, and made an appreciable contribution to development nationally. Key lessons and findings are derived from the performance assessment. The operational relevance of these findings and lessons are then discussed in a series of forward-oriented recommendations.

ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Report. Manila. Available at www.adb.org/Documents/Guidelines/Country-Assistance-Program/guide-preparation-0206.pdf.

44

Appendix 1

1.

Positioning of ADB's Assistance Strategy and Program

7. The strategic positioning of ADB's assistance strategy and program is assessed by applying the following criteria: (i) Relevance. What were the priority development issues, trends, conditions, and needs in Mongolia? How were they addressed by the Government and other stakeholders? What were the resulting external assistance requirements? Did ADB country strategies and programs address relevant and priority development needs, and were they consistent with Government development strategies? (ii) Selectivity and Focus. Have ADB operations focused on relevant and priority sectors, geographic areas, and counterpart organizations, considering potential development impact, Government priorities and reform initiatives, and ADB corporate objectives? Do activities focus on ADB's core competencies, and how do they complement the activities of other development partners? (iii) Partnerships. Were ADB operations designed to complement the assistance of other development partners? Has ADB contributed to building capacity in the Government to effectively coordinate external assistance? 2. 8. Contribution to Development Results

ADB's contributions to development results are assessed by addressing the following: (i) To what extent has ADB contributed to long-term changes in development conditions in Mongolia? (ii) Has ADB contributed to the transition process? (iii) Has ADB contributed to social development, economic corridor development, poverty reduction, and capacity development? (iv) Has ADB contributed to public sector management, governance, and partnership with the private sector? 3. Responsiveness and ADBs Institutional Performance as a Development Partner

9. ADBs client responsiveness and institutional performance are assessed by examining the following: (i) Response to Changes. Given expectations, has ADB strategy responded adequately, flexibly, and in a timely way to changing and emerging country needs and Government demand for ADB assistance? How have contentious issues been handled and problems resolved? (ii) Application of ADB Policies, Systems, and Assistance Instruments. Were ADB policies, systems, lending instruments, and assistance modalities appropriate for country conditions? (iii) Provision of Knowledge Products and Policy Dialogue. Was ADB effective in providing relevant knowledge products and advice to the Government? (iv) Client Responsiveness. How do the Government, civil society, and the private sector perceive ADBs role and performance and in what ways would they suggest that service be improved? How well did ADB respond to client needs through organizational efficiency measures (e.g., delegating key functions to Mongolia Resident Mission)? 10. Based on the analyses in chapter III, sections B, C, and D, the topdown rating of ADB is summarized below.

Appendix 1

45

Table A1.1: TopDown Ratings Criteria ADB Positioning Program Relevance and Alignment Selectivity/Sector Focus Partnerships Contribution to Development Results Transition to a Market Economy Social Development Economic Corridor Development Poverty Reduction Capacity Development Public Sector Management/Governance/PPP ADBs Response and Performance Response to Changes Application of ADB Policies and Systems/Instruments Provision of Knowledge Products and Policy Dialogue Client Responsiveness/Delegation Total TopDown Rating Rating Substantial (6) High Modest to Substantial Modest to Substantial Substantial (6) High Modest to Substantial Substantial Substantial Modest to substantial Modest Substantial (6) High Substantial Substantial Modest to Substantial Successful (18)

ADB = Asian Development Bank, PPP = public-private partnership. Note: The figures in parenthesis are numerical ratings. The ratings and corresponding score for the three criteria are high (8 points), substantial (6 points), modest (4 points), negligible (0 points). Strategic performance is assessed highly successful if the total score is greater than or equal to 20, successful if between 16 and 19, partly successful if between 11 and 15, and unsuccessful if 10 or less. Source: Asian Development Bank estimates. See chapter III, sections B, C, and D for assessments of each of these factors.

C.

BottomUp Performance of ADBs Sector Assistance

11. For each of the main sectors in which ADB has had operations, performance was assessed in a bottomup manner. ADBs development effectiveness at the sector level in Mongolia has been assessed by applying the following criteria: (i) Relevance. Relevance was assessed based on consistency with the needs of the country and the Governments development plans, as well as on harmonization with other development partners. Have ADBs sector operations focused on critical impediments to sector development; been based on ADB country and sector strategies; been aligned with Government sector priorities; supported the sector policy and institutional reforms of the Government; adequately considered sector conditions in the country and the scope for sector development; vigorously considered the potential for private sector involvement; and been effectively coordinated with other key development partners? (ii) Effectiveness. Effectiveness was assessed based on how successful the sector assistance program has been in contributing to the achievement of the intended outcomes in support of the Mongolias sector development goals and objectiveness. Has ADB sector assistance achieved meaningful outputs and outcomes? What has been the level of effectiveness and what were its determinants (including the appropriateness of program design, quality of policy dialogue and advisory services, implementation assistance, etc.)? (iii) Efficiency. Efficiency was assessed by the extent to which ADBs resources have been used optimally, including the degree to which the direct net economic benefits of ADBs assistance have reached the targeted beneficiaries. Have ADB

46

Appendix 1

(iv)

(v)

sector operations maximized the ratio of outputs and outcomes to resource levels and been formulated and implemented in a cost-effective and efficient manner? Sustainability. Sustainability was assessed based on the likelihood that the results and benefits of ADB assistance will be sustained in the future, which reflects the adequacy of fiscal, political economy, and environmental dimensions. What is the likelihood of sustaining achieved outputs and outcomes? Are conducive fiscal, political, and environmental conditions in place? To what extent has ADB assistance helped strengthen national institutional capacity for formulating sector policies and the management of sector programs and investments? Impact. Impact was assessed based on the degree of contribution to long-term changes in development conditions. It covers both socioeconomic impact at the ground level and the institutional and reform changes at the sector level.

12. These ratings are discussed in more detail in chapter V, sections A and B, and in supplementary reports covering rapid sector assistance performance evaluations of ADB assistance in the transport, finance, urban development, and social sectors. The rationale for the performance rating assigned to each sector is provided in Appendix 6. Table A1.2 is a summary of the bottomup sector ratings. Table A1.2: BottomUp Sector Ratings
Sector Transport Finance Urban Education Health Social Protection Agriculture Law, Economic Management, and Public Policy All Sectors Relevance Effectiveness Highly relevant (3) Effective on the high side (5) Relevant (2) Effective (4) Relevant (2) Highly relevant (3) Relevant (2) Relevant (2) Relevant (2) Relevant (2) Effective (4) Highly effective (6) Less effective (2) Less effective on the high side (3) Effective on the high side (5) Less effective on the high side (3) Effective (4) Criteria Efficiency Sustainability Highly Likely (4) efficient (3) Efficient (2) Likely (4) Efficient (2) Highly efficient (3) Less efficient (1) Less efficient (1) Efficient (2) Less Efficient (1) Efficient (2) Likely (4) Likely (4) Likely (4) Less likely on the high side (3) Likely (4) Less likely (2) Impact Substantial (4) Substantial on the high side (5) Substantial on the high side (5) Substantial on the high side (5) Modest (2) Modest (2) Modest on the high side (3) Substantial on the low side (3) Substantial (4) Overall Successful (19) Successful (17) Successful (17) Highly successful (21) Partly successful (11) Partly successful (11) Successful (16) Partly successful (11) Successful (16)

Relevant (2)

Likely (4)

Note: The figures in parenthesis are numerical ratings. The ratings and corresponding score for the five evaluation criteria are highly relevant (3 points), relevant (2 points), partly relevant (1 point), and irrelevant (0 points); highly effective (6 points), effective (4 points), less effective (2 points), and ineffective (0 points); highly efficient (3 points), efficient (2 points), less efficient (1 point), and inefficient (0 point); most likely sustainable (6 points), likely (4 points), less likely (2 points), and unlikely (0 points); and high impact (6 points), substantial (4 points), modest (2 points), and negligible (0 points). Sector performance is assessed highly successful if the total score is greater than or equal to 20; successful if between 16 and 19; partly successful if between 11 and 15; and unsuccessful if 10 or less. Major sectorsfinance, transport, and urban developmentare weighted twice that of the others in calculating the sector-wide totals. Total numbers are rounded. Source: Asian Development Bank estimates.

Appendix 1

47

D.

Overall Performance Rating

13. The CAPE provides an overall ADB country program performance rating. This combines the bottomup assessments of development effectiveness at the sector level with the topdown assessment of ADB country positioning and strategy, the contributions of ADB programs to development results, and ADB performance. Topdown and bottomup performance are equally weighted to derive a single headline rating. The overall CAPE performance score is derived by adding up the total sector rating and the countrywide rating. This is assessed as highly successful if the total score is equal to or greater than 40, successful if between 30 and 39, partly successful if between and 20 and 29, and unsuccessful if 19 or less. E. Methodological Limitations

14. While the CAPE considers the relevance and effectiveness of government development strategies and approaches to help assess the development effectiveness of ADB-financed investments, the CAPE did not evaluate or rate government strategies and programs. Rather, ADBs operations in Mongolia are assessed in the context of the Government strategic priorities, policies, and institutional framework and practices at the country and sector levels. 15. A very large percentage of the ADB-funded projects in Mongolia launched over the past 10 years are only recently or not yet completed. This poses two challenges: (i) not many project completion reports or project performance assessment or evaluation reports from these recent projects are available as inputs for the CAPE, and project assessments rely largely on rapid assessments of project and sector effectiveness; (ii) project efficiency, sustainability, and impact are difficult to determine for ongoing operations, so ratings in these areas for sectors with a large number of ongoing projects are indicative. 16. While ADB has been a large source of development assistance, it is difficult to isolate and attribute results to its interventions alone. Moreover, weaknesses in the monitoring and evaluation database, which has tended to focus on input monitoring, make it difficult to characterize results. Finally, while ADB has played an important role in providing non-programmed services, such as policy dialogue, these are poorly documented and difficult to assess. 17. An ADB client responsiveness survey was carried out mainly in Ulaanbaatar. Questionnaires were mailed to 180 stakeholders including government and nongovernment sectors, and 115 responses were received. It was supplemented by responses obtained through sector and project level discussions with government central and line ministries and their executing and implementing agencies. Further details are presented in Appendix 7.

48

Appendix 2

MONGOLIA KEY INDICATORS Table A2.1: Mongolia Economic Indicators (19972007)

Item A. 1. 2. Income and Growth GDP, per capita ($, current prices) GDP Growth (%, constant prices) - Agriculture - Industry - Services Sectoral Shares (% of GDP) - Agriculture - Industry - Services Savings and Investment (market prices) Gross Domestic Investments (% of GDP) Gross National Savings (% of GDP) Money and Inflation Consumer Price Index (average, % change) Money Supply (M2) (annual % change) Government Finance (% of GDP) Revenue and Grants Expenditure and Onlending Overall Fiscal Balance Balance of Trade/Payments Current Account Balance ($ million) Merchandise Exports ($ million) Merchandise Imports ($ million) Trade Balance ($ million) Merchandise Exports ($) Growth (annual % change) Merchandise Imports ($) Growth (annual % change) Foreign Direct Investments ($ million) 1997 458.3 4.0 4.3 (2.6) 7.5 35.9 26.2 37.9 1998 422.6 3.5 6.6 3.7 1.1 37.5 20.7 41.8 1999 377.5 3.2 4.4 1.6 3.1 37.0 20.7 42.3 2000 394.2 1.1 (15.9) 0.8 15.3 29.1 21.9 49.0 2001 423.3 1.0 (18.3) 15.5 6.1 24.9 22.0 53.1 2002 518.0 3.8 (12.4) 4.3 11.0 20.5 22.8 56.7 2003 582.0 6.1 4.9 5.9 6.7 20.7 25.7 53.6 2004 720.0 10.6 15.8 18.3 4.1 22.2 29.2 48.6 2005 905.0 7.3 10.7 5.2 7.1 21.9 33.5 44.6 2006 1,224.0 8.6 7.5 6.9 10.1 19.5 40.4 40.1 2007 1,489.0 9.9 15.8 7.1 9.0 20.6 38.4 41.0

3.

B. 1. 2. C. 1. 2. D. 1. 2. 3. E. 1. 2. 3. 4. 5. 6. 7.

28.1 24.7

35.2 14.3

37.0 14.2

36.2 9.8

36.1 8.5

26.7 18.0

35.5 28.4

34.5 36.0

37.0 38.2

35.1 42.1

41.1 43.7

20.5 19.8

6.0 8.8

10.0 31.7

8.1 17.5

7.9 28.0

0.3 41.9

5.1 49.7

8.3 20.3

12.7 37.3

5.1 30.8

9.0 57.3

25.5 34.5 (9.0)

27.6 41.9 (14.3)

27.2 39.4 (12.2)

34.5 41.5 (7.0)

38.5 43.9 (5.4)

33.8 39.0 (5.2)

33.4 37.1 (3.7)

33.1 35.0 (1.8)

30.1 27.5 2.6

36.6 28.5 8.1

40.6 38.4 2.2

74.0 569.0 538.0 31.0 34.3 5.4 25.0

(76.0) 462.0 582.0 (120.0) (18.7) 8.2 18.9

(60.0) 454.0 567.0 (113.0) (1.8) (2.6) 34.0

(54.0) 536.0 676.0 (140.0) 18.0 19.2 40.0

(77.0) 523.0 693.0 (170.0) (2.4) 2.5 43.0

(108.0) 524.0 753.0 (229.0) 0.2 8.7 78.0

(99.0) 627.0 827.0 (200.0) 19.7 9.8 132.0

27.0 872.0 1,021.0 (149.0) 39.0 23.5 129.0

29.0 1,069.0 1,224.0 (155.0) 22.5 19.8 258.0

222.0 1,545.0 1,516.0 30.0 44.6 23.9 290.0

101.0 1,952.0 2,170.0 (218.0) 26.3 43.2 328.0

Appendix 2
Item F. 1. 2. 3. G. 1. 2. 3. 4. External Payments Indicators Gross Official Reserves ($ million) External Debt Service (% of exports of goods and services) Total External Debt (% of GDP) Memorandum Items GDP (Togrog billion, current prices) GDP ($ million, current prices) Exchange Rate (Togrog/$, average) Population (million) 1997 1998 1999 2000 2001 2002 2003 2004 2005

49
2006 2007

137.5 6.3 57.4

123.2 6.7 78.1

157.0 5.7 95.9

191.0 3.8 90.1

207.0 5.3 84.3

268.0 4.5 76.9

204.0 34.0 85.4

208.0 7.5 74.6

333.0 2.9 56.6

718.0 2.8 45.0

1,001.0 2.0 39.4

833.0 1,054.0 790.3 2.3

817.0 972.0 840.5 2.3

925.0 906.0 1,021.0 2.4

1,019.0 946.0 1,077.2 2.4

1,116.0 1,016.0 1,098.4 2.4

1,413.0 1,273.0 1,110.0 2.5

1,660.0 1448.0 1,147.0 2.5

2,152.0 1,814.0 1,187.0 2.5

2,780.0 2,307.0 1,205.0 2.6

3,715.0 3,156.0 1,177.0 2.6

4,558.0 3,894.0 1,170.0 2.6

GDP = gross domestic product, M2 = broad money supply. Source: International Monetary Fund Staff Report, July 2008. IMF. Key Indicators of Developing Asian and Pacific Countries, 2008. ADB.

50

Appendix 2

Table A2.2: Mongolia Country Social Indicators

Item 1998 A. Population Indicators 1. Total Population (million) 2. Annual Population Growth Rate (%) Social Indicators 1. Total Fertility Rate (births/woman) 2. Maternal Mortality Rate (per 100,000 live births) 3. Infant Mortality Rate (below 1 year/1,000 births) 4. Life Expectancy at Birth (years) - Female - Male 5. Adult Literacy (%) - Female - Male 6. Primary School Gross Enrollment (%) 7. Secondary School Gross Enrollment (%) 8. Child Malnutrition (% below age 5) 9. Population with Access to Safe Water (%) 10. Population with Access to Sanitation (%) 11. Public Education Expenditure (% of GDP) 12. Human Development Index Rank 13. Gender-Related Development Index Rank Poverty Indicators 1. Poverty Incidence (% of population) 2. Poverty Gap Ratio 3. Inequality (Gini Coefficient) 4. Human Poverty Index - Rank Period 2002 Latest Year Remarks

2.3 1.4

2.5 1.4

2.6 1.6

2007 2007

B.

2.2 158.5 64.0 63.2 66.1 60.4 97.8 97.5 98.0 87.2 69.1 13.0 60.0 52.0 2.3 101 104

2.0 109.5 58.0 63.6 66.5 60.8 97.8 97.5 98.0 89.0 82.3 7.0 61.0 52.0 5.6 117 94

2.4 93.0 21.0 66.0 69.2 62.8 97.8 97.5 98.0 93.0 92.4 6.0 62.0 59.0 5.3 114 100

2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2006 2006

C.

36.3 7.6 0.35 19.1 38.0

36.1 2.1 0.44 19.1 36.0

32.2 2.1 0.33 16.3 40.0

2006 2002 2006 2006 2006

GDP = gross domestic product. Sources: Key Indicators of Developing Asian and Pacific Countries, ADB. Human Development Reports, 20002007. International Monetary Fund 2008 Article IV Consultation-Staff Report, July 2008.

Appendix 2

51

Table A2.3: Mongolia Millennium Development Goals

Goals Goal 1 Eradicate extreme poverty and hunger Targets Target 1 Halve, between 19902015, the proportion of people living in poverty. Target 2 Halve, between 19902015, the proportion of people who suffer from hunger. Goal 2 Achieve universal primary education Target 3 Provide primary education to all girls and boys by 2015 Poverty Headcounts 1998: 43% 2004: 36% Prevalence of underweight children 2000: 13% 2005: 6% Net enrolment ratio in primary education 2000: 91% 2005: 93% Proportion of pupils starting grade 1 who reach grade 5 2000: 87% 2005: 97% Youth literacy rate of ages 1524 2000: 98% 2004: 98% Baselines Targets 2015: 18%

2015: 0%

2015: 100% 2015: 100% 2015: 100%

Goal 3 Promote gender equality and empower women

Target 4 Eliminate gender disparity in primary and secondary education by 2015 and to all levels of education no later than 2015

Goal 4 Reduce child mortality

Target 5 Reduce by two-thirds, between 19902015, the under-5 mortality rate

Gross primary education enrolment (female/male ratio) 2000: 1.04 2005: 1.02 Gross secondary education enrolment (female/male ratio) 2000: 1.23 2005: 1.13 Share of women in wage employment in the non-agricultural sector 2000: 49% 2005: 53% Proportion of seats held by women in national parliament 2000: 8% 2006: 7% Under-five mortality rate (per 1,000 live births) 2000: 65 2005: 26 Infant mortality (per 1,000 live births) 2000: 50 2005: 21 Proportion of 1-year old children immunized against measles (%) 2000: 94% 2005: 98% Maternal mortality (per 100,000 live births) 2000: 110 2005: 93 Proportion of births attended by skilled health personnel 2000: 97% 2005: 100%

2015: 1.00 2015: 1.00

2015: 30% 2015: 27%

Goal 5 Improve maternal health

Target 6 Access for all individuals of appropriate age the required reproductive health services and reduce by three quarters, between 1990 and 2015 the maternal mortality ratio.

2015: 50 2015: 100%

52

Appendix 2

Goals Goal 6 Combat HIV/AIDS, tuberculosis, and other diseases

Targets Target 7 Have halted by 2015, and begun to reverse the spread of HIV/AIDS. Target 8 Reverse the spread of tuberculosis

Baselines Contraceptive prevalence rate (% of married women 1549 years) 2000: 67% 2004: 69% Prevalence of tuberculosis/per 100,000 persons 2000: 199 2005: 177 Death rates associated with tuberculosis/per 100,000 persons 2004: 32.2

Targets

2015: 100

2015: 0.0

Goal 7 Ensure environmental sustainability

Target 9 Integrate the principles of sustainable development into country policies and programs and combat air pollution in urban areas, especially in Ulaanbaatar Target 10 Halve, by 2015, the proportion of people without sustainable access to safe drinking water Target 11 By 2015, to have achieved a significant improvement in the lives of slum dwellers

Percentage of land area covered by forest: 2000: 7.0% 2005: 8.0% Percentage of protected land area: 2005: 14.0% Carbon dioxide emission (ton/ person) 2000: 3.0% 2005: 6.0% Proportion of population using improved water source 2005: 62%

2015: 9.0% 2015: 30.0% 2015: 4.0% 2015: 70%

Proportion of population using adequate sanitation facilities 2005: 59% Debt service as a percentage of exports of goods and services 2000: 6.0% 2005: 3.0%

Goal 8 Develop a global partnership for development

Target 12 Deal comprehensively with debt problems of developing countries Target 13 In cooperation with the private sector, make available the benefits of new technologies, especially information and communications

Telephone lines and cellular subscribers (per 1,000 population) 2000: 114 2005: 279 Personal computers (per 1,000 population) 2000: 13 2005: 133 Internet users (per 1,000 population) 2000: 13 2005: 105 Source: Household Income Expenditure Survey 2003, Asian Development Bank Basic Statistics, Human Development Report 2007, International Monetary Fund 2008 Article IV Consultation-Staff Report, July 2008.

Appendix 3

53

ADBS LENDING AND NONLENDING ASSISTANCE PROGRAMS Table A3.1: ADB Public Sector Loans and ADF Grant in Mongolia (19972007)
Loan Sector No. Loan Title Public Sector Loans and ADF Grant Agriculture and Natural Resources 1. 1736 Cadastral Survey and Land Registration 2. 1821 Agriculture Sector Development Program Program Loan 3. 1822 Agriculture Sector Development Program Project Loan Education 1. 1908 Second Education Development 2. 2238 Third Education Development Energy 1548 Ulaanbaatar Heat Efficiency Finance 1. 1743 Second Financial Sector Program 2. 1847 Housing Finance (Sector) 3. 4. 1848 2218 Rural Finance Financial Regulation and Governance Program Fund Type Approved Amount $ million Date Approved Current Status PCR/ Rating PPER/ Rating

ADF ADF ADF

9.9 7.0 10.0

27-Jan-00 21-Dec-00 21-Dec-00

Active Closed Active

ADF ADF

14.0 13.0

06-Aug-02 21-Jun-06

Active Active

ADF

40. 0

25-Sep-97

Closed

ADF ADF ADF ADF

15.0 15.0 8.7 10.0

22-Jun-00 18-Oct-01 25-Oct-01 15-Dec-05

Closed Closed Active Active

Health, Nutrition, and Social Protection 1. 1568 Health Sector Development Program 2. 1569 Health Sector Development Project 3. 4. 5. 6. 1836 1837 1998 0086 Social Security Sector Development Program (Project) Social Security Sector Development Program (Program) Second Health Sector Development Third Health Sector Development

ADF ADF ADF ADF ADF ADF grant

4.0 11.9 4.0 8.0 14.0 14.0

04-Nov-97 04-Nov-97 28-Aug-01 28-Aug-01 05-Jun-03 19-Nov-07

Closed Closed Active Active Active Active S S (low side)

54

Appendix 3

Sector Industry and Trade 2307 Customs Modernization

Fund Type ADF

Approved Amount $ million 5.0

Date Approved 20-Dec-06

Current Status Active

PCR/ Rating

PPER/ Rating

Law, Economic Management, and Public Policy 1. 1713 Governance Reform ADF Program 2. 2011 Capacity Building for ADF Governance Reform Program 3. 2010 Second Phase of the ADF Governance Reform Program (Program Loan) Multisector 2301

25.0 2.0 13.5

02-Dec-99 14-Oct-03 14-Oct-03

Closed Active Active

PS

Urban Development Sector

ADF

28.2

19-Dec-06

Active

Transport and Communications 1. 1700 Second Roads Development 2. 2087 Regional Road Development

ADF ADF

25.0 37.1

30-Sep-99 22-Jul-04

Closed Closed

HS

HSa

Water Supply, Sanitation, and Waste Management 1. 1560 Provincial Towns Basic ADF Urban Services 2. 1907 Integrated Development of ADF Basic Urban Services in Provincial Towns Total

6.8 20.1 361.2b

30-Sep-97 06-Aug-02

Closed Active

ADB = Asian Development Bank, ADF = Asian Development Fund, PCR = project/program completion report, PPER = project/program performance evaluation report, HS = highly successful, S = successful, PS = partly successful. a PCR validation rating. b Including the 14.0 million Asian Development Fund grant in health sector. Source: Asian Development Bank database.

Appendix 3

55

Table A3.2: Other Grant Sources of ADB Projects in Mongolia (19972007)

Project No. Project Name Grants from JFPR, JFICT, and Others 9014 Expanding Employment Opportunities for Poor Disabled Persons 9015 Improving the Living Environment of the Poor in Ger Areas of Mongolia's Cities 9044 Information and Communication Technology for Innovating Rural Education 9053 Information and Communication Technology for Improving Rural Health Services 9063 Maternal Mortality Reduction 9085 Non-formal Skills Training for Unemployed Youth and Adults 0070 Customs Modernization Project 9106 9109 9115 Community-Driven Development for Urban Poor in Ger Areas Community-Based Heating Supply in Rural Remote Areas Access to Health Services for Disadvantaged Groups in Ulaanbaatar Total (10 projects) Approved Amount ($) 1,000,000 2,200,000 1,000,000 1,000,000 1,000,000 1,000,000 500,000 1,500,000 2,000,000 2,000,000 Source JFPR JFPR JFICT JFICT JFPR JFPR Korea E-Asia and Knowledge Fund JFPR JFPR JFPR Date Approved 1 Apr 02 7 May 02 6 Apr 04 2 Aug 04 10 Feb 05 20 Feb 06 20 Dec 06 02 Mar 07 29 Jun 07 19 Dec 07

13,200,000

ADB = Asian Development Bank, JFPR = Japan Fund for Poverty Reduction, JFICT = Japan Fund for Information and Communication Technology. Source: Asian Development Bank database.

Table A3.3: ADB Private Sector Projects in Mongolia (19972007)

Investment No. 7197/2081 7259/2343 Company Name Trade and Development Bank of Mongolia Khan Bank Investment Amount 1.6 0.0 OCR 4.5 10.0 Total 6.1 10.0 Date Approved 20-Apr-04 01-Aug-07

ADB = Asian Development Bank, OCR = ordinary capital resources. Source: Asian Development Bank database.

Table A3.4: Mongolia List of Cofinanced Loans ($ million, 19972007)

Loans Total 1548 1743 1836 OCR 40.0 Ulaanbaatar Heat Efficiency Financial Sector Program Social Security Sector Development Program (Investment Loan) Second Education Development Regional Road Development Urban Development Sector 40.0 ADF 103.3 15.0 Total 143.3 40.0 15.0 Bilateral Loan 26.9 3.0 Bilateral Grant 48.4 Multilateral Loan 40.8 32.0 Official 116.1 3.0 32.0 Commercial 0.7 Export Credit Total Cofinancing 116.8 3.0 32.0

56
Appendix 3

4.0 14.0 37.1 28.2

4.0 14.0 37.1 28.2

23.9

45.0 1.5 1.4

4.0 4.8

4.0 49.8 25.4 1.4 0.5

0.7

4.0 49.8 25.4 2.1 0.5

1908 2087 2301

2307

Customs Modernization 5.0 5.0 0.5 = not applicable, ADF = Asian Development Fund, OCR = ordinary capital resources. Source: Asian Development Bank database.

Appendix 3

57

Table A3.5: Preparatory and Advisory Technical Assistance in Mongolia (19972007)

TA No. TA Title Agriculture and Natural Resources 2458 Strengthening Land Use Policies (Supplementary) 2819 Agriculture Sector Development Program 3395 Capacity Building for Cadastral Survey and Land Registration 3606 3686 4359 4846 Education 3174 3351 3913 4487 4803 4950 Energy 2887 3016 3029 3299 3965 Finance 2797 2964 3208 3397 3406 3459 3709 3904 4236 4393 4737 4910 Capacity Building in Agriculture Crop Production Agriculture Sector Strategy Study Agriculture and Rural Development Education Sector Strategy Study Second Education Development Capacity Building for Accounting and Auditing Professionals Third Education Development Development of a Sector-Wide Approach (Swap) in Education Education Sector Reform Egiin Hydropower BOT Energy Rehabilitation Improving Energy Authority's Billing and Collection System Capacity Building for Energy Planning Renewable Energy Development in Small Towns and Rural Areas Development of a Regulatory Framework for Non-Bank Financial Institutions Improving Accounting and Auditing Systems Strengthening Restructuring of the Banking System Rural Finance Housing Sector Finance Strengthening Financial Sector Development Strengthening Policy for Social Security Reform TA to Support Privatization in the Banking Sector Third Financial Sector Program Establishing an Effective Anti-Money Laundering Regime Capacity Building for Financial Sector Reforms Strengthening the Pension System Type AD AD AD PP PP AD PP AD PP AD PP AD PP PP PP AD AD AD Approved Amount 4,271,000 244,000 492,000 990,000 695,000 500,000 350,000 1,000,000 2,450,000 150,000 550,000 500,000 500,000 150,000 600,000 2,600,000 150,000 900,000 450,000 700,000 400,000 6,208,000 100,000 688,000 220,000 700,000 600,000 600,000 600,000 150,000 500,000 500,000 900,000 650,000 Date Approved 14-Aug-97 27-Jun-97 27-Jan-00 21-Dec-00 23-Jul-01 12-Jul-04 02-Oct-06 12- Mar-99 20-Dec-99 04-Sep-02 16-Dec-04 21-Jun-06 03-Jul-07 03-Oct-97 07-May-98 10-Jun-98 17-Nov-99 04-Nov-02 Current Status Closed Closed Active Closed Closed Active Active Closed Closed Closed Closed Active Active Closed Closed Closed Closed Active PS U S TCR/ Rating GS TPER/ Rating

S PS

AD AD AD PP PP AD AD AD PP AD AD AD

20-May-97 23-Dec-97 17-Jun-99 02-Feb-00 02-Mar-00 22-Jun-00 28-Aug-01 23-Aug-02 03-Dec-03 17-Sept-04 15-Dec-05 20-Dec-06

Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Active Active S HS S

PS PS

PS

58

Appendix 3

TA No. TA Title Health, Nutrition, and Social Protection 2907 Support for Decentralized Services 2978 Social Safety Net 3750 Second Health Sector 4123 Health Sector Reform 4364 Awareness and Prevention of HIV/AIDS and Human Trafficking Industry and Trade 3934 Trade Policy Review Law, Economic Management, and Public Policy 2769 Institutional Strengthening of the Local Government and Decentralization (Phase II) 2868 Initial Phase of Civil Service Reforms 2931 Program Preparation of Governance Reforms 2967 Retraining of Legal Professionals in a Market Economy 2990 Analyzing Development Issues in Mongolia 2993 Capacity Building in Project Accounting 3031 Development of Procurement Legislation and Guidelines 3090 Institutional Strengthening of the Housing Sector 3316 Initial Phase of Public Administration Reform 3317 Public Expenditure Management 3318 Study on Central-Local Aspects of Reform Implementation 3628 Establishment of a Central Procurement Monitoring Office 3684 Improving Social Statistics 3811 Improving Aid Coordination and Management 3920 Strengthening Public Sector Administration and Financial Management 3948 Capacity Building for Integrated Regional Development Planning 4077 Retraining of Legal Professionals in a Market Economy II 4304 Procurement Management Capacity Building 4352 Developing an Urban Development and Housing Sector Strategy 4383 Participatory Poverty Assessment and Monitoring 4936 Supporting the Sustainable Development of Mongolia's Mineral Deposits 4957 Mainstreaming Managing For Development Results in Investment Planning and Public Funds Management

Type AD PP PP AD AD

Approved Amount 3,185,000 600,000 985,000 600,000 650,000 350,000 150,000 150,000 11,698,300 550,000 150,000 967,300 1,000,000 150,000 150,000 550,000 800,000 1,100,000 496,000 235,000 600,000 500,000 300,000 650,000 600,000 150,000 150,000 350,000 300,000 150,000 1,800,000

Date Approved 04-Nov-97 31-Dec-97 29-Oct-01 05-Jun-03 22-Jul-04

Current Status Closed Closed Closed Closed Active

TCR/ Rating HS S

TPER/ Rating

AD AD AD PP AD AD AD AD AD AD AD AD AD AD AD AD AD AD AD AD AD AD AD

30-Sep-02 14-Mar-97 15-Sep-97 10-Dec-97 23-Dec-97 23-Feb-98 10-Mar-98 23-Jun-98 19-Oct-98 02-Dec-99 02-Dec-99 02-Dec-99 02-Feb-01 12-Jul-01 18-Dec-01 05-Sep-02 24-Oct-02 20-Dec-02 19-Dec-03 02-Jul-04 31-Aug-04 04-Jun-07 01-Aug-07

Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Active Closed Closed Closed Active Active S HS HS PS S S S GS

GS HS S HS S

Appendix 3

59
TCR/ Rating TPER/ Rating

TA No. Multisector 2890 2890 3685 4632

TA Title Housing Sector Policy Housing Sector Policy (Supplementary) Integrated Development of Basic Urban Services in Secondary Towns Urban Development and Housing

Type AD AD PP PP PP AD AD PP AD AD PP AD

Approved Amount 1,510,000 150,000 60,000 700,000 600,000 3,170,000 500,000 670,000 300,000 600,000 300,000 150,000 650,000 825,000 825,000 36,067,300

Date Approved 08-Oct-97 26-Mar-98 19-Jul-01 18-Aug-05 22-Jul-97 30-Sep-99 10-Oct- 02 15-Nov-02 13-Dec-04 05-Sep-05 10-May-06 30-Sep-97

Current Status Closed

GS Closed Closed Active Closed Closed Closed Closed Closed Active Active Closed S

Transport and Communications 2827 Second Roads Development 3268 Policy Support in the Road Sector 3938 Civil Aviation Policy Development 3990 Third Roads Development 4471 Formulating a Transport Strategy (20052015) 4643 Prefeasibility Study of the Western Regional Road Corridor Development 4785 Western Regional Road Development Water Supply, Sanitation, and Waste Management 2881 Capacity Building for the Provision of Urban Services in Provincial Towns Total 69

PS S PS

PS

AD = advisory, BOT = build- operate- transfer, GS = generally successful, HS = highly successful, PP = project preparatory, PS = partly successful, S = successful, TA = technical assistance, TCR = technical assistance completion report, TPER = technical assistance performance evaluation report, U = unsuccessful. Source: Asian Development Bank database.

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GOVERNMENTS STRATEGIC DIRECTIONS AND ADBS COUNTRY OPERATIONAL STRATEGIES FOR MONGOLIA A. Governments Strategic Directions

1. When Mongolia joined the Asian Development Bank (ADB) in 1991, its economy was in crisis and the country was in flux. Financial support and technical assistance (TA) previously provided by the Soviet Union had been withdrawn. Physical infrastructure, particularly power and heating supply, was on the verge of collapse. Competition in all economic spheres was limited, as state enterprises maintained monopoly control over key production activities; financial intermediation went through the State Bank; and almost all capital assets, including the housing stock, were owned by the government. Trading ties had been with the members of the Council for Mutual Economic Assistance, principally the Soviet Union, with which Mongolia had built up large debts in the decades leading up to the transition. Officials were challenged to revise policies, transform institutions, and manage an economy in crisis. External assistance was required to quell the crisis, stabilize the economy, and launch the transition from central planning to a market economy. 2. By 1997, Mongolia had achieved commendable progress in privatization, macroeconomic stabilization, and structural reforms. Programs were well advanced to privatize parts of the staterun economy, prices and the exchange rate had largely been liberalized, trade links had shifted from the former Soviet Union to market economies and the Peoples Republic of China, and public finance had been reformed to adapt it to market economy needs. In 1997, the Enterprise Law was changed, easing the requirements for establishing private enterprises. This and the reduction in the minimum funding required to establish a limited liability corporation led to a sharp increase in the number of private businesses. By 1997, the private sector generated 72% of domestic production, and the informal sector, in particular, expanded rapidly once price and other controls were abolished and people were allowed to travel freely. 3. For much of the 1990s, the focus of the authorities was on containing the economic crisis and fostering the policy and institutional reforms necessary to create a market-oriented economy. In response to low and falling incomes and widespread poverty, the authorities launched in 1994 its National Poverty Alleviation Program with financial support from the United Nations Development Programme, the World Bank, ADB, and bilateral donors. In the program, small projects were undertaken to create temporary and permanent jobs, support basic education, enhance basic medical services for the rural population, and strengthen the development of social infrastructure, among other things. 4. In 1996 and 1997, the economy entered a second phase of economic distress. The financial crises in Asia and the Russian Federation triggered a sharp drop in demand and price for Mongolias main commodity exports, copper and cashmere, while the Russian Federations aggressive entry into the international gold markets harmed Mongolias gold exports. Export earnings dropped significantly, reducing the Governments tax revenues and dividend payments from the copper export company Erdenet. At the same time, foreign direct investment and foreign assistance from aid agencies in the main Asian countries declined sharply. Large enterprises facing cash shortages triggered a drawdown on bank deposits, depleting their reserves, and created a growing volume of nonperforming loans. By 1996, inflation had picked up and economic growth had slowed, widening deficits in the budget and current account. Banks became increasingly illiquid as public confidence waned, prompting the central bank to provide extensive credit to keep the financial system afloat. With enterprises failing and banks struggling under the weight of bad debt, the fiscal situation sharply deteriorated, and the Government sought

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61

assistance from the International Monetary Fund (IMF) to stabilize the economy and from ADB and the World Bank to develop a more coherent and realistic fiscal framework, including measures to integrate the public investment program into a strategic planning and budgeting process. 5. A series of IMF arrangements served to establish a framework for macroeconomic and structural policy reform. IMF entered into the broad and ambitious Second Enhanced Structural Adjustment Facility, covering the period from mid-1997 to 2001. The program focused on achieving single-digit inflation in its first year by retightening financial policies. On the structural front, the program concentrated on financial sector reform in the aftermath of the banking crisis. However, the program called for, in addition to tax reductions and zero-rating of import duties, large-scale privatization, the elimination of remaining price controls, modifications to the legal system to strengthen property rights, and a restructuring of the educational system. This was followed by the IMF Poverty Reduction Growth Facility in September 2001, which concentrated on fiscal sustainability. By that time, inflation had been contained, monetary control had been improved, and, while fiscal deficits were largely financed through aid inflows, external debt had surpassed 90% of the gross domestic product. 6. The Government outlined its strategic objectives in the Action Program of the Government of Mongolia for 20002004. The action program emphasized deepening economic reform, improving the provision of social services, improving income distribution, and promoting good governance. Simultaneously, the Government launched a number of reform measures, including approval of the Good Governance for Human Security Program and the Privatization Program, passed the Employment Law and Energy Law, and amended the Banking Law. 7. Simultaneously, the Government embarked on a series of efforts to change the role of the state to a smaller one more consonant with a market economy. The number of ministries was reduced from 16 to 9 with the objective of improving the coordination of plans and projects. The Government initiated civil service reform that included reorganizing the governments systems and operations, rationalizing staff, and improving public financial management. Local governments were slowly given greater authority and autonomy, though their fiscal and staff resources were increasingly limited. The Government tried to broaden the tax base, strengthen revenue collection, and control expenditures. 8. Poverty reduction became a more central goal of economic policy and was fully integrated with macroeconomic policies with the Interim Poverty Reduction Strategy (2001), which built on the poverty partnership agreement that was undertaken with ADB in March 2000. In 2003, a full poverty reduction strategy (PRS) was completed as the Economic Growth Support and Poverty Reduction Strategy (EGSPRS), incorporating the Millennium Development Goals (MDG). The EGSPRS involved strong participation by sectoral ministries and civil society and included detailed sectoral strategies. The EGSPRS included a 30-page medium-term policy matrix for 20032006. Under the EGSPRS, the Government committed itself to (i) reducing the number of people in extreme poverty by 25% by 2005 and by 50% by 2015, (ii) providing universal primary education to all people, and (iii) reducing infant and child mortality by 50% by 2005. The EGSPRS included several short-term priorities, including deepening of reforms to ensure macroeconomic stability, improving the health of the banking sector, supporting export-oriented industries, fostering regional development, developing infrastructure, and mainstreaming gender dimensions in poverty interventions to promote gender equality. Medium-term policy was to focus on expanding sources of economic growth, prioritizing the development of processing industries for domestic raw materials, mining and other extractive industries, tourism, information technology, and infrastructure development. It envisaged a shift away from an approach to poverty reduction

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centered on income transfers to one based on inclusive growth and sustainable human development. 9. While welcoming the Governments efforts to integrate poverty reduction into its planning process, donors raised concerns that proposed reforms had not been adequately costed, reforms in some areas (e.g., governance) had not been well defined, and action programs would be required to sequence and prioritize interventions. The IMF and World Bank Joint Staff Assessment (IMF Country Report No. 03/302)1 noted the tension between the goal of fostering private sectorled growth and open trade policies on one hand and the government-led effort for regional development and the promotion of processing industries on the other. 10. In 2003 the Government presented to the United Nations General Assembly the first Mongolian MDG progress report. It noted that Mongolia has made good progress in addressing non-income poverty, but that remote rural areas and ger (traditional tent) settlements on the outskirts of Ulaanbaatar lag well behind established urban areas in nearly all health and education indicators. The most challenging MDG is to halve the incidence of poverty by 2015. 11. In 2004, the Government prepared an EGSPRS progress report. It endorsed the earlier strategy but concluded that the restoration of high growth could not be the basis for substantial employment given the economys narrow concentration on mining and primary industry. The report further highlighted high levels of rural poverty. Areas for increased attention in the future included deepening education reform, strengthening the delivery of basic health services, improving governance, and establishing a sound regional development framework. In response to the EGSPRS progress report, the donor community cited a need for improved costing and priority setting and encouraged the Government to bring together its various medium-term strategies and guidelines in a medium-term budget framework and to enhance poverty monitoring. 12. The Government derived from the EGSPRS and adopted a national action plan for 2004 2008. The action plan continued to emphasize private sector-led economic growth but with a greater emphasis on regional development and fostering knowledge-based industries. It aimed to improve living standards, narrow disparities between rural and urban areas, and foster human resource development. Special emphasis was placed on improving governance by strengthening the institutional capacity and accountability of the public service, expanding civil service participation in decision making, enhancing transparency, and fostering the rule of law. 13. The Government has prepared its National Development Strategy for the period up to 2020, which is fully consistent with achieving the MDGs. The National Development Strategy recognizes that Mongolia has overcome challenges associated with the transition from a singleparty to a multiparty democratic system, from a socialist to a market economy, and from a period of economic decline and instability to sustained growth. It also recognizes that poverty, exclusion, inequality, environmental degradation, new health concerns such as HIV/AIDS, and social frustration are growing challenges. It aims for Mongolia to reach middle-income status by developing favorable social conditions, fostering human development, guaranteeing human security, and enabling sustainable and inclusive economic growth. It accords priority to human development including education, health, and environmental preservation; capacity development and intellectual development; achieving the MDGs; promoting knowledge-based economic growth including ecologically friendly manufacturing and services; and encouraging good governance. Two components are particularly prominent in the Governments long-term strategy: (i) higher,
1

IMF. 2003. Mongolia: Joint Staff Assessment of the Poverty Reduction Strategy Paper. Washington, DC.

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63

stable, private sector-led growth to improve living standards and narrow income disparities; and (ii) social development to improve income opportunities, the quality of public services, and access to them for the poor. The strategy envisions further enterprise privatization, the enhanced development of the nations mineral endowment, small and medium-sized enterprise promotion, infrastructure development, and legal and institutional reforms as key to creating an enabling environment for inclusive growth. It enumerates a series of financial sector development priorities to support growth. Towards social goals, it targets education and private sector growth to generate employment and raise incomes. Improved access to health care (particularly maternal and child health services and primary health care), schooling, urban services, and housing are highlighted. Medium-term policies, strategies, and actions are to be anchored in the long-term strategy. 14. Mongolia is in the process of raising awareness of the Paris Declaration on Aid Effectiveness principles and commitments across various government agencies and their development partners. It is developing capacity and institutions and building country systems and coordination procedures to make its use of external aid more effective. To this end, the long-term development strategy is more results oriented than previous Government strategies, with welldefined results and outcomes established for assessing progress in human development, environment, economic development, regional development, public service reform, national security, and foreign relations. Moreover, the long-term strategy is linked to a medium-term growth and fiscal framework, though detailed action planning, prioritization, and costing of the many proposed initiatives has yet to be accomplished. B. ADBs Strategic Directions

15. 1991 Interim Country Operational Strategies (COS). ADB prepared an interim COS in 1991 that aimed to support the restructuring of the economy while improving international competitiveness to overcome economic isolation. The sector focus was on developing the agroindustrial base through assistance to agriculture and industry and rehabilitating the infrastructural base through assistance to energy, transport, and communications. To help build capacity for mounting policy reforms, considerable assistance was programmed to strengthen institutions in such areas as national statistics, financial sector reforms, external trade policy, and planning. The program was to be delivered through TA and lending, which, in response to the need for budget support to cover the costs of transition, consisted primarily of quick-disbursing program loans. 16. The 1994 COS maintained the aims of restructuring the economy to improve the efficiency of resource utilization and supporting private sector development. Its main objective was to facilitate Mongolias transition to a market economy by (i) creating an environment in which a competitive, efficient market economy can flourish; (ii) developing the necessary human resources and skills; and (iii) providing the needed infrastructure. In addition to program lending to support the transition, public sector investments focused primarily on infrastructure, which was in line with the focus of the Governments Public Investment Program for 19931996. In addition to support for infrastructure, the strategy included agriculture at the policy and institutional levels and through the Employment Generation Project and industry and mining through assistance to improve banking and credit services, privatization, policy and legal frameworks, and training. TA was extended to the health sector for policy and organizational reforms. While the strategy was primarily designed to promote efficient resource use and foster a competitive private sector, it also paid attention to rising unemployment and poverty. Emphasis was placed on reversing the decline in health, education, and social security systems, and on strengthening the social safety net. It signaled a change in ADBs support for growth from one focused on infrastructure to a more inclusive growth policy aiming to support the generation of employment by the private sector, poverty reduction, and improved sector governance.

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17. The Poverty Partnership Agreement. In 1999, ADB prepared a poverty partnership agreement (PPA) with the Government. This was the first PPA that ADB had concluded with any of its developing member countries, and it was formulated at the same time that ADBs corporate Poverty Reduction Strategy was prepared. The PPA declared that ADBs operations from 2000 2005 would be geared toward generating economic growth with poverty reduction as the overarching strategic objective. It further signaled that growth-promoting interventions would be sought in areas with the potential to contribute most to poverty reduction. The PPA signaled ADBs support for (i) better governance to boost economic productivity, (ii) economic diversification, (iii) expanding demand for skilled labor, (iv) structural reform to remove barriers to private sector growth, and (v) a medium-term reduction in the fiscal burden on the private sector. It indicated that ADBs choice of sectors would hinge on their potential for reducing poverty. Based on a careful poverty assessment, it concluded that ADB would be involved in supporting the financial sector, agriculture, the public sector, the social sectors, and urban development. 18. The 20002002 COS. This was built on the PPA and aimed to foster economic growth and poverty reduction by emphasizing private sector-led employment and income generation. Although the 2000 COS argued that the transition to the market was largely complete, it continued to support efforts to develop market-oriented institutions and build the human resource base required to manage a market economy. It replaced support for infrastructure investments with support for governance reforms. It aimed to generate income and employment through private sector development as a means of addressing long-term poverty reduction concerns. Assistance to financial and capital market institutions, industrial and agricultural businesses, and tourism, and to reorienting the public sector, was to remove barriers to increased private sector development and economic diversification. Poverty concerns were to be addressed through employment generation, maintaining human development achievements, and strengthening the reform of social protection. The governance agenda included assistance to developing a medium-term capacity-building strategy and public sector reforms. The COS declared that sectors and projects alike would be selected for their poverty-reduction potential and that synergies between projects would be strengthened. Strategic performance targets were identified that were consistent with those established in the PPA and included several poverty-reduction targets, the achievement of universal primary education by 2025, halving infant mortality and reducing maternal mortality by two-thirds by 2005, and improving access to reproductive health services. 19. Country assistance plans were prepared from 1997 to 2000. These reviewed the economic setting and project implementation performance, presented 3-year rolling plans for lending and nonlending operations, and reviewed the performance of ongoing operations in each supported sector. Whereas the 1997 plan summarized the overall operational plan in terms of programs for policy support and capacity building, later plans contained information about sectors and crosscutting concerns such as environment. 20. Country Strategy and Program (CSP) Updates 20022006. Between 2002 and 2006, ADB prepared succinct annual updates of its country strategy and program (CSPU). These included a brief review of the development situation, examination of the implementation of the country strategy and program, portfolio management, and a discussion of the forward program. The CSPUs noted that both income and non-income poverty continued to be serious concerns, requiring a strategy that aimed to promote job creation while improving the provision of essential social services for the poor. To promote job creation, ADB operations focused on establishing an environment conducive to sustainable private sector-led growth. To improve the provision of social services for the poor, priority was accorded to restructuring the institutional framework for the financing and delivery of social services.

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65

21. Coming after two severe winter disasters and droughts in 1999 and 2000, the 20022004 CSPU accorded special emphasis to rural poverty reduction. It reaffirmed that ADB would remain involved in the road sector to redress regional imbalances and foster regional economic integration. More emphasis was placed on support for fiscal reform in light of widening fiscal imbalances. A major program of economic and sector work was planned, including a poverty assessment; a joint public expenditure review with the World Bank; and assessments of governance, private sector development, environment, and sector studies in education, health, urban development, and road infrastructure. These were intended both to assist the Government in its policy and strategy formulation and to help underpin the preparation of ADBs new country strategy. 22. The 20032005 CSPU reaffirmed the priorities established in the previous update. Emphasis was also placed on fostering regional economic integration through support for the northsouth trunk road and efforts to facilitate cross-border trade. With Mongolias accession to the Central Asia Regional Economic Cooperation in 2002, more emphasis was accorded to regional cooperation. In addition, with the establishment of the Mongolia Resident Mission in January 2001, ADBs role in aid coordination was strengthened. The 20032005 CSP signaled ADBs commitment to improved aid coordination and utilization by participating in the local consultation process to formulate the EGSPRS and programming technical assistance in collaboration with the World Bank and the United Nations Development Programme to support the Governments preparation of the EGSPRS. 23. The 20042006 CSPU signaled ADBs intent to prepare a new CSP in 2004 in a coordinated manner with the World Bank and to align the country assistance strategy with the Governments EGSPRS. The strategic focus on the core areasfinancial sector development, governance reform, the provision of essential social services, agriculture and rural development, and regional developmentwas maintained. A quarterly portfolio review mechanism was introduced in 2003 to help improve project implementation. In light of weaknesses in project management, a number of projects were slipped in the pipeline. 24. As a result of delays in preparing a new CSP, a CSPU was prepared for 20052006. Positive economic momentum had been maintained, and, with the resolution of the outstanding Russian Federation bilateral debt, Mongolias external debt situation had considerably improved. The CSPU for 20052006 noted that ADBs new country strategy was under preparation and that it would focus on tackling persistent poverty, taking into account accelerated rural-to-urban migration, structural changes in the economy, and capacity-building needs. Asian Development Fund (ADF) allocation constraints required that a crop-processing project be cancelled and the TA program scaled back. 25. Mongolias CSP for 20062008, released in August 2005, was its first results-based CSP. It identified the main challenge as broadening and sustaining Mongolias growth while providing opportunities for the many people who had not yet benefited from the transition to a market economy. It signaled a need to pay more attention to improving health and education and to enhancing the living standards of the poor. Constraints to private sector development, and to the involvement of the poor in the growth process, would need to be specifically targeted, and measures would need to be taken to ensure that public services were made accessible to the poor. The strategy included a detailed poverty diagnostic that has served as a framework for linking ADBs strategy to desired poverty-reduction outcomes. The Strategy built on the lessons of ADBs 2002 country assistance program evaluation, noting the importance of assessing progress in terms of development results rather than on the delivery of inputs, utilizing rigorous performance

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indicators, and ensuring that assistance had a clear strategic focus. The CSP concluded that ADB could adopt a more focused strategy since much of the important rehabilitation and emergencyresponse agenda was complete. Building on these lessons, and to address key poverty-reduction challenges, ADBs strategy focused on providing support to the Governments implementation of its PRS through two main pillars: broad-based growth and inclusive social development. The pillar of broad-based growth was designed to contribute to agricultural and associated growth, improve productivity in key industries, open economic opportunities in rural areas, and widen the export base. The pillar of inclusive social development aimed to contribute to expanding economic opportunities; raising and stabilizing incomes; reducing unemployment; and improving education, health, and living conditions among the poor. Governance and gender concerns were to be mainstreamed into operations. The 3-year strategy planned for ADF support of $85 million (about $28 million each year) with an additional $40 million in regional cooperation support for the 3-year period. Priority areas for ADB intervention included agriculture, transport, education, health, urban development, and public sector management. While public sector support for financial market development was de-emphasized, the CSP announced ADBs first private sector operation in Mongolias largest commercial bank. 26. The Mongolia CSP incorporated many features that are prerequisites for a results-based CSP, including extensive dialogue with stakeholders, close alignment with national development goals and priorities, efforts to harmonize and coordinate assistance programs with other development partners, and the use of existing joint mechanisms between the Government and donors for monitoring outcomes. It included a results matrix to track results and improve program management. Many numerical indicators and targets were provided to track those outcomes to which ADB would contribute in the areas of financial markets, transport, and skills training. In other areas, more qualitative targets and objectives were specified, such as better business management practices in agriculture. 27. The subsequent CSPU for 20072009 confirmed that the direction of the CSP remained relevant but signaled a number of important changes in ADBs strategy to accommodate changes in Government strategy, the initial assessment of ADBs managing for development results (MFDR) agenda, heightened concerns about governance, the priorities identified in ADBs second medium-term strategy, and the need to harmonize ADBs strategy and program with the priorities of other funding sources. To these ends, the Agriculture and Rural Development Project was reoriented to focus on the role of private investment and rural infrastructure; project preparatory TA was programmed for sustainable urban transport and environmental management with a focus on land degradation and pasture management; and planned urban development was to be redirected to environmental issues. Given ADF resource constraints, more attention was to be devoted to harmonizing ADB lending with the priorities of other funding sources and to meeting ADBs commitments under the Paris Declaration on Aid Effectiveness. Assistance was to be provided to help the Government develop strategies for education, agriculture, and transport that could be the bases for aid coordination. The intention to develop sector support programs in health and education was announced, and the CSPU signaled the Mongolia Resident Missions intention to undertake initiatives for the results-based monitoring of projects. Support for building MFDR capacity in the Government was consolidated in a single advisory TA aiming to improve systems for monitoring and evaluation, capacity building for impact assessment, and civil society participation in MFDR. 28. The country operations business plan for 20082010 announced that ADF assistance for Mongolia was to be provided in the form of 100% grants for 2007 and 2008 because of creditworthiness considerations. This meant that a volume discount of 20% to the 2-year indicative ADF level of $58.4 million would be applied, reducing the 2-year indicative assistance to $46.8

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million. Project cost ceilings were revised, enabling ADB to finance up to 99% of total project costs. Projects in transport and urban development were consolidated into single operations, and sector-oriented assistance in health, education, and the environment was advanced. The business plan envisioned ordinary capital resources financing for projects that were likely to generate substantial revenue streams, such as the South Gobi Infrastructure Project in 2009, which would provide financing to supplement and catalyze private sector financing for a coal-fired power plant to export electricity to the Peoples Republic of China. With rapid growth, much more emphasis is to be placed on private sector operations in the capital market (e.g., in banking, insurance, equity funds, and the mortgage market) and in infrastructure finance (air transport, alternative energy, and urban infrastructure).

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Appendix 5

PORTFOLIO PERFORMANCE OF LENDING PROGRAM Table A5.1: Overall Performance Ratings of Projects and Programs in Mongolia, By Sector (19972007, circulation years) Sectors Agriculture and Natural Resources Education Energy Finance Health, Nutrition, and Social Protection Industry and Trade Law, Economic Management, and Public Policy Transport and Communications Water Supply, Sanitation, and Waste Management Total PCR Total S (%) Rated 1 0 1 100 2 100 4 50 2 100 1 100 1 100 5 100 1 100 18 83 PPER Total S (%) Rated 1 0 1 100 1 0 4 50 1 100 1 0 1 0 4 100 14 57

PCR = project completion report, PPER = project performance evaluation report, S = successful. Note: PPER ratings already include reports which will be circulated in 2008, before the country assistance program evaluation discussion in the Development Effectiveness Committee meeting. These include one project each for health and governance, and one PCR validation in the road sector. Source: Operations Evaluation Department database on project ratings.

Table A5.2: Overall Performance Ratings of Technical Assistance in Mongolia, by Sector (19972007, circulation years) Sectors Agriculture and Natural Resources Education Energy Finance Health, Nutrition, and Social Protection Industry and Trade Law, Economic Management, and Public Policy Multisector Transport and Communications Water Supply, Sanitation, and Waste Management Total TCR Total Rated 4 2 3 9 2 17 1 5 1 44 S (%) 75 100 67 67 100 94 100 60 100 82 27 67 Total Rated 4 2 4 9 1 1 6 TPER S (%) 50 100 75 56 0 100 83%

S = successful, TCR = technical assistance completion report, TPER = technical assistance performance evaluation report. Source: Operations Evaluation Department database on project ratings.

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Table A.5.3: Project Performance Ratings of Ongoing Portfolio (2007) Project Ratings Impact Implementation Outcome Progress
S S S S

Loan Number
A. 1. 2. B. 1. 2. C. 1736(SF) 1822(SF) Education 1908(SF) 2238(SF) Energy 1548(SF) D. 1. 2. E. 1. 2. 3. G. Finance 1847(SF) 2218(SF)

Project Name
Cadastral Survey and Land Registration Project Agriculture Sector Development Project

Agriculture and Natural Resources

Second Education Development Project Third Education Development Project

S HS

HS HS

Ulaanbaatar Heat Efficiency Project

Housing Finance Sector Loan Financial Regulation and Governance Program

S S

HS S

Health, Nutrition, and Social Protection 1836(SF) 1837(SF) 1998(SF) Social Security Sector Development Project Social Security Sector Development Program (Program and Investment Loans) Second Health Sector Development Project S S S PS S HS

Industry and Trade 2307(SF) Customs Modernization Project S S

H. 1. 2. I.

Law, Economic Management, and Public Policy 2010(SF) 2011(SF) 2nd Phase of the Governance Reform Program (Subprogram 1) Capacity Building for Government Reform S S S S

Transport and Communications 2087(SF) Regional Road Development Project S S

K. 1. 2.

Water Supply, Sanitation, and Waste Management 1907(SF) Integrated Development of Basic Urban Services in Provincial Towns S S S

2301(SF) Urban Development Sector Project S HS = highly satisfactory, PS = partly satisfactory, S = satisfactory, SF = special fund. Source: Asian Development Bank estimates.

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Table A5.4: Sectoral Classification of Projects (amount in $ million)

19911996 Net Share Loan (%) Amount 7 33 13 14 20 50 20 39 13 63 27 104 15 100 303 19972007 Net Share Loan (%) Amount 12 29 8 29 4 41 16 54 24 58 4 5 12 41 0 8 64 12 100 58 379

Sectors Agriculture and Natural Resources Education Energy Finance Health, Nutrition, and Social Protection Industry and Trade Law, Economic Management, and Public Policy Multisector Transport and Communications Water Supply, Management Total Sanitation, and Waste

No. of Loans 1 2 3 3 2

Share (%) 11 5 16 13 21 34 100

No. of Loans 3 2 1 4 6 1 3 2 3 24

Share (%) 8 8 11 14 15 1 11 0 17 15 100

Note: Including $14.0 million grant from Asian Development Fund IX. Source: Asian Development Bank database.

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SECTOR PERFORMANCE ASSESSMENT SUMMARY 1. This section discusses the performance of assistance provided in each of the main sectors receiving Asian Development Bank (ADB) support. A description is provided of ADB assistance to each sector, its implementation, and the factors taken into consideration in assigning a performance rating. Sector performance was rated using the evaluative criteria of relevance, effectiveness, efficiency, sustainability, and impact. A. Transport Sector

2. Sector Challenges and Government Strategies. As a landlocked country with a relatively small and poor population dispersed over a vast area, Mongolia has to overcome obstacles posed by the countrys distance from international markets, extreme climatic conditions, and isolated regions and population centers. A large geographic area and low population density mean that Mongolia's transport system is basic, with connectivity by road, railway, and air limited to major towns and centers of economic activity. Only the central region of the country is adequately served by rail, road, and air transport services. These conditions continue to give rise to high transport costs, leaving many communities isolated and rendering internal and external trade highly dependent on the performance of the transport sector. Traditionally, the Russian Federation has been Mongolias closest trading partner. With the growth in the economy of the Peoples Republic of China (PRC), Mongolia has gradually expanded its trade relations, making the PRC its largest trading partner. Accessing markets other than the Russian Federation and the PRC has been constrained by institutional factors that substantially boost trade costs, including (i) dependence on Russian Federation and PRC railways; (ii) customs regulations not harmonized with those of neighbors; (iii) restrictions on the carriage of goods such as animal products, which have been Mongolias largest export commodity; and (iv) restrictions on the movement of vehicles. Transport policy and sector strategies have been governed by the Road and Road Transport Sector Policy Statement of 1995, which provided for restructuring the road sector to separate out the regulatory and commercial functions by devolving commercial activities from the Department of Roads to private companies. The 1998 Road Act and the subsequent Road Transport Act provided legislative support and enabled the establishment of the National Transport Advisory Committee and the Road Transport Board to regulate tariffs for freight and passenger traffic. In the case of trade facilitation, Mongolia has adopted several procedures linked with the Revised Kyoto Convention on the Simplification and Harmonization of Customs Procedures, as well as with the World Customs Organization. To improve trade access, Mongolia signed bilateral agreements with the Russian Federation and the PRC in 1991 for transit trade. More recently, the Governments investment plan envisages large investment outlays that could place a heavy burden on the transport sector. The absence of a road network linking all aimag (provincial) centers or adequate policies, and currently insufficient budget allocations for maintenance, raise fundamental questions on the sustainability of the proposed investments. 3. ADB Assistance. Transport sector development was considered crucial in all of ADBs operational strategies for Mongolia. As of 31 December 2007, ADB had approved for the sector five loans totaling $147.1 million and 12 technical assistance (TA) grants totaling $6.4 million. Two loans, the first approved in 1993 and the second in 1995, were for aviation. The remaining three loan projects supported road development. From 1992 to 2006, ADB provided 11 TA grants, of which six prepared loan projects and six supported capacity building, including institutional strengthening and policy support (Appendix 3). Policy and institutional reform has been a consistent focus of the six advisory TA grants even after the first phase of the transition period. Project preparatory TA focused on developing projects to address Mongolias internal and external isolation. Project preparatory TA in civil aviation during the initial years of the first phase

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focused on restoring basic connectivity. ADBs entry into trade facilitation began in 2000 with a regional TA for studying development options for economic cooperation between the PRC and Mongolia in eastern parts of the Inner Mongolia Autonomous Region of the PRC and in Mongolia. Subsequently, ADB approved four more regional TA grants and one small TA to expand its assistance for this sector. In 2006, ADB approved its first loan in trade facilitation for a customs modernization project.1 4. Implementation. The implementation of ADBs road and civil aviation projects has generally proceeded satisfactorily. Although the two completed road projects were delayed to some extent, this was attributed to the road sectors having received prior assistance only from the Soviet Union and to international contractors from ADB developing member countries lacking experience with Mongolian conditions. The timely mobilization of equipment and supply of construction materials from ADB developing member countries was a major difficulty for civil works contractors, and extreme winter conditions, limiting the construction season to only 6 months, made even a minor delay in the contractors mobilization schedule critical. Second, the projects were completed without any cost overruns. The typical factors affecting implementation across the sector were capacity and knowledge constraints faced by the public sector in implementing projects and a lack of adequate private sector participation. In the case of trade facilitation support, various multilateral organizations have initiated separate programs, e.g., ADB, the United Nations Economic and Social Commission for Asia and the Pacific, and the Transport Corridor EuropeCaucasusAsia, a multilateral organization supported by the European Union. While there is no particular overlap in the nature of the TA initiated by the separate activities, there is a risk of increasing the administrative load on governments required to manage these initiatives. It is crucial for the driving organizations to harmonize their efforts to reduce administrative costs, as well as to ensure that the initiatives produce complementary outputs. Second, there has been insufficient harmonization among international donors working in trade facilitation in Mongolia. Although German Agency for Technical Cooperation has been advising the Ministry of Industry and Trade on trade policy, for example, there is little interaction with ADBs carrying out of a trade policy review. 5. Relevance. ADB's assistance to Mongolia's transport sector was assessed as highly relevant. Loan and TA grants have responded to critical sector needs and addressed physical, institutional, and policy constraints. ADB's choices were particularly relevant to the transition process of Mongolia with few exceptions. The preparation of a road master plan TA2 provided ADB with a platform for donor coordination and entry into the roads sector, though it focused more on developing roads and not so much on their sustainability. In particular, the road master plan did not provide sufficient direction for maintenance priorities. Sustainability issues have revolved around the construction of low-cost roads and the need to achieve an appropriate balance between resource allocations for road maintenance and construction. ADBs assistance in improving the UlaanbaatarAltanbulag road was justified, as it established an efficient road network linking the key economic centers of Ulaanbaatar, Darhan, and Erdenet, as well as Altanbulag, on the Russian Federation border. The assistance to civil aviation remains relevant to the Governments development strategy. 6. Air transport is an extremely important mode of long-distance transport in Mongolia. It was fundamental to opening up the economy to new markets and facilitating tourism development.
1

ADB. 2006. Report and Recommendation to President to the Board of Directors on a Proposed Loan and Grant Administration (cofinanced by Korean Government) to Mongolia for Customs Modernization Project. Manila (Loan 2307-MON[SF], for $5 million, approved on 29 November). ADB. 1993. Technical Assistance to Mongolia for the Road Master Plan and Feasibility Study. Manila (TA 1820MON, for $600,000, approved on 4 January).

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ADBs assistance in trade facilitation is considered highly relevant, with loans and TA grants appropriately designed to respond to the main constraint, which is customs clearance. However, the need exists for a more integrated approach between transport and trade facilitation assistance, to ensure synergies are achieved, and to rectify the lack of donor coordination in assistance for trade policy and trade facilitation. 7. Effectiveness. The assistance program in the transport sector was assessed as effective on the high side. The expected outcomes in the first two road projects were reduced user costs through improved pavement conditions on Mongolias northsouth transport artery. Subsequent road projects aimed more broadly to improve accessibility and regional connectivity, as well as to provide social and economic benefits to the poor. The two completed loan projects have individually been broadly effective in delivering the expected outcomes. The Roads Development Project was effective in reducing travel times, improving travel comfort, and reducing vehicle operating costs. The Second Roads Development Project provided similar benefits. ADBs assistance has been effective in terms of creating awareness of new construction techniques and improving project management. The completed projects have witnessed growth in traffic higher than that estimated at appraisal, though road safety has deteriorated. TA performance in the road sector had mixed results. While the policy components were broadly effective in ensuring the creation of new legislation, the cost recovery component was less effective in improving the functioning of the road fund. The institutional components were effective in restructuring the Department of Roads and in training staff, but this was not sustained due to the changes in the structure of the Ministry of Roads, Transport, and Tourism and staff turnover. In addition, the TA for the preparation of a national transport strategy did not achieve its intended results. 8. In civil aviation, ADB assistance enabled improvement in air safety and the upgrading of civil aviation practices to international standards. The physical developments expected from the projects were all achieved, as were the intangible outcomes of organizational improvement and attitudinal change in the aviation sector. The institutional strengthening components of both projects and the attached TA brought about stronger service provision and safety regulatory capacity in the sector. 9. Efficiency. Efficiency is measured using the economic rates of return of each project and aggregating them across the sector. Overall, the transport sector assistance program was assessed as highly efficient. Notwithstanding relatively low traffic volumes, the first two road projects economic internal rates of return (EIRR) were close to 18% and thus bordered on a highly efficient rating. Although the actual cost savings expected in terms of vehicle operating costs were less than those forecast at appraisal, the higher-than-expected actual traffic provided the offset to ensure high EIRRs. Rates of return are less secure for the third road project since road use hinges on Mongolias ability to develop cross-border agreements with the PRC for trade, as well as tripartite transit agreements with the PRC and the Russian Federation for transit movement. In civil aviation, ADB's projects met economic efficiency criteria, with EIRRs above 12%, and are financially viable. 10. Sustainability. Overall, the sustainability of the outcomes derived from ADB's sector assistance is rated as likely. Some 7 years after completion, ADBs first road project, linking Ulaanbaatar with Altanbulag, was found to be in fair condition. Risks and future challenges lie in reliable funding for road maintenance, maintenance management, and skills and institutional capacity. In Mongolia, a road fund has been in existence since 1991. Since 1995, a fuel tax has substantially boosted fund resources. Nonetheless, adequate maintenance funding for roads remains an issue. In 2006, the Government provided less than half of the road maintenance requirement. Given budgetary constraints, the demand for government counterpart funds for

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externally funded infrastructure projects competes with and crowds out maintenance funding. Externally funded projects may exacerbate funding scarcity for maintenance, when funds are diverted for constructing new roads. Another risk is inadequate institutional capacity in local authorities responsible for maintaining lower-level roads. Given the long-term nature of capacity development, TA grants would have had more lasting effects if they had been more focused and sequenced with longer implementation schedules. 11. The civil aviation projects are likely to be sustainable, as there is market demand for airport services and air navigation systems. The Civil Aviation Authority of Mongolia has developed technical and management capability to adequately maintain the infrastructure and services to reasonable standards. The Governments commitment to the projects has been strong, and they have recovered operating costs. The air navigation project has generated significant net earnings. 12. Impact. The impact of ADBs sector assistance was assessed as substantial. ADB assistance helped develop the country's primary northsouth road corridor between the Russian Federation and the PRC, facilitate sector policy reforms, strengthen the institutional capacity of sector agencies, and prepare the road master plan. Improved access to markets was perceived to be an important trigger for migration in the road project impact areas. This has enabled diversification in alternative livelihoods such as shop keeping, hospitality, livestock trading, etc., with the increased participation of women in some of these activities. The second road project rehabilitated the NalayhChoyr section of the northsouth corridor and contributed to the development of mines in the Gobi Desert and other parts of southern Mongolia. While there have been tangible outcomes from advisory TA in terms of policy changes and institutional development, their actual development impacts have yet to be fully realized. The near-term impacts on sector institutions have been generally positive in terms of creating awareness of new construction techniques and better project management. Support for trade facilitation is in its early stages but is essential to bringing down high transport costs, boosting incentives for investment, and reducing the economys vulnerability to external shocks. 13. Sector Lessons. ADBs ability to scale up assistance in the transport sector is limited by Asian Development Fund-financing constraints, which have resulted in very small loans (under $30 million) in the sector, while sector funding requirements are sharply increasing, particularly in the areas with new mining investments. In addition, low infrastructure service demand means that projects likely have low economic returns initially, which highlights the need to select projects carefully and foster cross-project synergies to ensure reasonable returns. From a strategic perspective, ADB appropriately chose the northsouth corridor for improvement, taking into account the benefits of regional cooperation and trade with the Russian Federation and the PRC. ADB needs to continue along these lines and consolidate its past investments by focusing on border improvements and road maintenance to ensure that benefits are realized and sustained. Trade facilitation efforts need to include not only developing bilateral trade but also increasing international trade. Initiatives such as the Central Asia Regional Economic Cooperation are a positive step in this direction. No attention has been paid to railway development, because until recently the railway system was under the control of a joint venture between the Russian Federation and Mongolia. The recent decision to establish a second railway company owned by the Mongolian Government should widen opportunities for developing multimodal transport systems. The transport sector has witnessed a slow down in terms of policy development and the translation of policy into action. This suggests the need for (i) consistent policy dialogue with adequate conditionality and time-bound targets, (ii) better government ownership for advancing institutional changes, and (iii) political will for policy development and its associated reform

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agenda. Moreover, ADB could transfer lessons from other countries where a road fund is managed more transparently and efficiently. 14. Sector Recommendations. ADB should continue to be involved in transport and trade facilitation, securing synergy between them. The main challenge relates to the question of what should be the level of investment given the limited traffic demand. ADB needs to continue to work closely with the Government to adopt a stepped approach that assesses the development and economic needs of the country and balances them against the available funding from public and private sources. This stepped approach entails developing rolling investment plans of 45 years. Investment projects included in these plans will need to be supported by specific feasibility studies that predict the potential developmental and economic impacts and build a case for their funding. Second, efficiency in the operations of transport providers and users and in the movement of traffic on the infrastructure will be key to achieving the Governments ambitious goals for the transport sector. However, a coherent set of policies that provide a mechanism for optimally allocating scarce resources and strengthening institutions is still missing. The formulation and timely adoption of a national transport policy is, therefore, the most critical challenge to decision makers in the transport sector. ADB needs to work closely with the Government in finalizing this policy, ensuring adequate consultation. Third, the Government has recognized the need to improve the sustainability of transport infrastructure and management of assets. However, it has a long way to go in terms of developing maintenance regimes based on needs, achieving a balanced distribution of public funds, identifying alternative financing sources including the private sector, and improving cost recovery. These are opportunities and areas where development partners can add value in terms of policy dialogue and transferring knowledge from other countries. Fourth, in the area of trade facilitation, Mongolia needs to overcome several constraints (e.g., shortages of railway and storage infrastructure, the lack of paved roads connecting key connection points, poor port infrastructure at Tianjin in the PRC; and poor harmonization of customs and vehicle movements across the border), which provide new funding opportunities for ADB and other aid agencies. Appendix 2 of the Operations Evaluation Departments recent transport and trade facilitation sector evaluation report identifies a set of constraints that ADB needs to address as part of its trade facilitation efforts. ADB should facilitate dialogue for customs harmonization and border formalities, which would require a broader action plan. The Government has made efforts to improve these conditions, and there remains sufficient room for ADB to provide value addition. B. Financial Sector

15. Sector Challenges. The complex transition from a centrally planned to a market economy required an equally complex transformation from a mono-bank financial sector into a competitive financial market. The concerted support of the International Monetary Fund, the World Bank, and ADB was employed in successive waves of policy-based loans and technical assistance to stabilize the financial system and to assist in breaking up the mono-bank style financial market, privatizing state banks, improving legal and institutional structures, diversifying and deepening the financial market, and strengthening bank supervision and regulation. In the mid-1990s, the commercial banks that came into being with the break up of the mono-bank system inherited a large accumulation of nonperforming loans, particularly those given to state-owned enterprises (SOE). Many of these banks became illiquid and insolvent. Eight of 20 banks closed between June 1998 and December 1999, while others were kept in operation through frequent injections of liquidity. Nonperforming loans, though declining from a high of 54% in 1999, remained at a high level of 711% during 20002004. This reflected the poor performance of the loans, weak internal controls and risk assessment capacity, and the need to strengthen the collateral framework. Other

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areas that needed strengthening were governance and depositor protection. At the same time, the nonbank financial institutions and capital market subsectors needed to be further developed. 16. Government Strategies. In 2000, the Government formulated its Medium-Term Strategy for Financial Sector Development covering the period 20002005, based on lessons from efforts to reform the financial sector during the previous decade. It addressed the liquidity and solvency problems faced by commercial banks in the wake of the 1999 financial crisis. In 2003, the Government prepared its national action plan for 20042008, which continued financial sector reforms to (i) consolidate financial sector stabilization, (ii) strengthen the stock exchange to mobilize savings for productive investments, and (iii) develop a broader range of financial services and instruments. 17. ADB Assistance. Over the past 15 years, ADB has given considerable assistance in support of the transformation of Mongolias financial sector. The assistance comprised three program loans, two project loans, one TA loan, 21 advisory TA grants, and three project preparatory TA grants. In addition, loan and equity investments were made in a commercial bank. The three program loans are the First and the Second Financial Sector Program Loans and the Financial Regulation and Governance Program (Appendix 3). ADBs financial sector strategy for Mongolia addressed three priority concerns: (i) creating an environment conducive to a competitive, efficient market economy; (ii) developing human resources and the requisite skills base in the country; and (iii) establishing adequate physical infrastructure for a market economy. 18. During 19911999, ADB aimed to support reforms for extensive operational and financial restructuring of commercial banks. These reforms covered banking practices and skills and the banking sector policy, legal, regulatory, and supervisory framework needed for the Mongolian banking sector to reach internationally acceptable financial and prudential norms. During the next 5 years from 2000 to 2005, ADB aimed to support the Governments Medium-Term Strategy for Financial Sector Development through (i) the ongoing bank restructuring and privatizing program, contributions to further strengthening financial sector policies and procedures, and the introduction of financial sector-based good governance; and (ii) the diversification and deepening of the financial sector and financial services. In line with the Governments action plan for 20042008 and ADBs country strategy and program (CSP) for 20062008, ADBs financial sector strategy focused on further stabilizing, diversifying, deepening, and strengthening the banking sector through better governance practices and depositor protection, improved supervision of banks, and the development of a more effective collateral framework. Steps were taken to consolidate the fragmented regulatory structure for nonbank financial institutions and strengthen their weak institutional capacity; fill gaps and anomalies in the legal framework; improve governance practices, disclosure, and investor confidence; harmonize tax impediments; and introduce an effective anti-money laundering regime through ADBs Financial Regulation and Governance Program, approved in November 2005. Ongoing operations support improving financial regulation, upgrading the skills and systems of commercial banks, and promoting the establishment of a mortgage facility through the housing finance project. 19. The implementation of programs, projects, and TA has generally been completed within the planned time frames. In regard to the three program loans, the Financial Sector Program Loan was completed successfully and within the planned completion date. The Second Financial Sector Program Loan was also completed successfully but with a delay of about 2 years caused by delays in implementing policy actions relating to issues such as corporate governance, loan collateral, the interbank market, and the strengthening of the Mongolia Stock Exchange. The implementation of the Financial Regulation and Governance Program continues successfully without any major impediments to hinder completing implementation as planned. Of the two

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project loans, the housing finance sector loan has been completed successfully and on time. The program performance audit report prepared for the first loan in October 2003 rated the program loan as successful overall, and the program completion report (PCR) prepared for the second loan in July 2005 rated it successful overall. The Housing Finance Sector Loan was implemented successfully and is to be closed shortly. The Rural Finance Loan was unsuccessful and cancelled in August 2006, with only about $1 million out of the $8.69 million loan utilized due to competition from the privatized banking system, which spread into rural areas with rural finance products, and the failure of many of the savings and credit cooperatives that were to serve as vehicles for dispensing the loan in rural areas. Of the 21 advisory TA grants, 18 have been completed, with 14 rated generally successful and four rated partly successful. The outcomes of the other three, continuing advisory TA grants achieved so far have earned a rating of generally successful. Except in three cases, the TA grants have been completed successfully by the planned completion dates. 20. Relevance. ADBs strategies and programs for assisting Mongolias financial sector in general were assessed as relevant. They were in accordance with the Governments and ADBs sector strategies and coordinated well with those of the donor partners (e.g., International Monetary Fund, International Development Association of World Bank, and United States Agency for International Development), with ADB playing a lead role. They evolved over approximately 15 years and responded positively to changes in circumstances. They remained focused and encompassed a relatively balanced approach to assisting the development of the three constituent subsectors of the financial sectorbanking, nonbank, and capital market. However, its assistance to the capital market appeared premature (e.g., restructuring and privatization of the Mongolia Stock Exchange [MSE]) considering the countrys potential for domestic capital market development at that time. 21. Effectiveness. The strategy and program for development of the overall financial sector was assessed as effective. This result is supported by the completed program performance audit report on the Financial Sector Program Loan I (FSPL) I, PCR on FSPL II, TA completion reports, and the Operations Evaluation Departments TA performance evaluation reports done on six of the 18 completed advisory TA grants. The Government and ADB agreed that an efficiently functioning financial sector was the key to achieving a market-based economy and promoting rapid economic development with the private sector as the engine of growth. That outcome was achieved successfully in that the country now has a vibrant and efficient, fully private banking system, which dominates the financial sector controlling over 90% of its total assets, as well as nascent nonbank subsectors (e.g., mortgage, insurance, and leasing) with good prospects for future growth. They have, in turn, contributed positively to private sector development and overall economic development in the country. The capital markets development effort made by ADB under the financial sector reform programs was less effective in privatizing the Mongolia Stock Exchange (MSE) and selling shares of SOEs through it. ADB assistance in creating functioning securities legislation and supervision structure was not effective at the completion of the TA. Despite the Cabinet passing a resolution in 2004 calling for privatization, MSE has not been privatized until now. FSPL II targets related to selling shares in SOEs through MSE were only partly met. However, the measures requiring changes in exchange rules and minimum capitalization levels for brokers were met. 22. Efficiency. ADBs strategy and program was assessed as efficient. The program loans, project loans, and TA were completed reasonably within the completion dates as forecast at the time of appraisal. Efficiency could be judged by the present performance of the banking system. The banking system has now been entirely privatized. The 16 banks now in operation perform autonomously and efficiently with satisfactory growth rates in deposits and loans, returns on

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assets (ROA) and equity (ROE), and easing nonperforming loan ratios. 3 These data show the banks provide efficient services to the public, while deposit and loan growth rates reflect improving public and investor confidence in the banking system. Real interest rates continue to be high but show a downward trend and should decline further with greater competition among banks and further diversification and deepening of the financial sector, supported by the expanding nonbank and capital market subsectors. There were some inefficiencies with respect to the 2-year delay in the completion of the FSPL II, with delays in key securities legislation, cancellation of the rural finance loan, and three TA grants whose outcomes were ineffective. However, overall, the strategy and program have been efficient. 23. Sustainability. Overall, the sustainability of the outcomes of ADBs sector assistance is considered likely. The reforms supported by ADBs program loans have helped the Bank of Mongolia to establish a sound regulatory, supervisory, and accounting and auditing framework for the banking system. It is enforced effectively, and the banking system functions well. The Financial Regulatory Commission (FRC), which was recently set up, is developing the legal, regulatory, supervisory, and accounting and auditing frameworks for the nonbank and capital market sectors; work is progressing satisfactorily, with substantial achievements expected by 2008. FRC has begun to supervise and control operations of the nonbank financial institutions. The minimum capital requirement has been increased to MNT200 million to enlarge the fund base for operations and reduce the impact of risk assets on the viability of the nonbank financial institutions4. The main challenges presently facing FRC are continued upgrading of regulations to meet international standards and enhance its capacity to provide strengthened supervision to the nonbank and capital market sectors. FRC, Bank of Mongolia, and the Ministry of Finance are actively cooperating in dealing with reform measures and the Ministry of Finance formed a new unit to focus on financial sector policy and capital market development, The authorities are aware of the fragility of the three subsectors and are taking steps to address this issue through further strengthening and enforcement of the regulatory frameworks, good governance practices, internal controls, and measures to improve investor confidence in the nonbank and capital market subsectors. The smaller banks and insurance companies are particularly susceptible to adverse economic developments. The sustainability of ADBs capital development efforts will rest on the results expected to be achieved under the Financial Regulation and Governance Program with regard to creating an adequate legal and institutional framework for capital market development and addressing supply problems. 24. Impact. The contribution of ADBs assistance for developing Mongolias financial sector over the past 15 years is substantial on the high side. ADBs assistance helped Mongolia transform its mono-bank system into a two-tier system that is now privately owned and efficiently provides the banking services demanded by investors and the general public. It is now capable of responding to market signals and helping in the efficient operation of a market-based economy. The private sector has benefited the most from this transformation. The loans made by the banking system have been predominantly for private sector development, averaging about 97% of total loans outstanding over 20022006. Accordingly, the private sectors contribution to the gross domestic product (GDP) increased from only 3.3% of the GDP in 1989 to 70.3% in 1999 and to
3

Deposits as a percentage of GDP rose from 17.6% in 2002 to 46.2% in 2007. Return on assets fell from a high of 4.3% in 2002 to 2.2% in 2005 but rebounded to 2.5% in 2007. Return on equity of 20.8% in 2002 fell to 12.1% in 2005 but rebounded to 20.8% in 2007. Similarly, loans outstanding as a percentage of GDP increased from 18.7% in 2002 to 46.8% in 2007. Nonperforming loans rose from 5.1% of the outstanding portfolio in 2002 to 6.4% in 2004, but eased to 3.2% in 2007. Nonbank financial institutions are engaged in the following activities: lending, factoring, leasing, issuance of guarantees and payment instruments, electronic payments and remittances, foreign exchange services, trust services, investment of short-term financial instruments, and advisory services. Deposit taking is not allowed.

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77.8% in 2006. The private sectors significant contribution to the GDP helped to accelerate economic growth in the country. The GDP growth rate increased from 3.2% in 1999 to 9.9% in 2007. There is increasing foreign investment in the nonbank financial institution sector. 25. The impact of ADBs capital market assistance remained relatively low. Nonetheless, capital market activity steadily increases, as the financial market broadens and alternative forms of investment finance and term savings instruments are adopted. Some 380 companies are listed on the MSE, slightly down from a high of 420 companies earlier in the decade, as efforts are made to improve the quality of the listed firms. Mining and telecommunication firms tend to dominate the market, which continues to trade but a few days per month. In 1998, about a third of the companies listed on the exchange (i.e., 129 firms) were government-owned, and today less than a tenth (32 firms) are publicly-owned. The value of the market capitalization has steadily increased over the past decade, rising from MNT51 billion (about $47 million ) in 2002 to a high of MNT890 billion (about $761 million) in July 2008. Higher equity results from a combination of bluechip firms entering the market (i.e., mobile telecommunication companies) and price appreciation. While high rates of interest on bank deposits discouraged investor interest in the debentures market, there continues to be growing investor interest in equities as the economy advances. 26. Sector Lessons and Issues. The success of the financial sector strategies and programs resulted from continued Government commitment and ownership of the programs; the way the programs were formulated and implemented through the combined efforts of the Government and key donors, with ADB playing the lead role; and the emphasis placed on bank privatization, which allowed a more efficient and effective financial intermediation system to be put in place than would have been possible had they been restructured under the same government ownership. Another key lesson is that ADB should not overestimate the capacity of the Government to formulate and implement reforms and new laws and/or amend existing ones. New reforms and laws, and amendments to existing laws, should have been better sequenced, phased, and presented in a more convincing manner through greater research, analysis, and consultation. A substantially enhanced ADB supervision effort would have been required to advance a process of complex financial sector reforms. Similarly, more proactive project performance monitoring could have identified early warning signs in the Rural Finance Loan and addressed the problems, preventing an unwarranted and premature loan cancellation. As it is common in the smaller developing member countries, the capital market in Mongolia has not developed to the extent originally envisaged. 5 This is related with the outstanding issues including regulatory capacity and enforcement by the new integrated regulatory agency (i.e., FRC); lack of supply of securities to trade; and nascent bond market development. 27. The International Monetary Funds recent financial system stability assessment for Mongolia 6 presents the following main findings of the assessment; (i) The financial system is developing and performing well, in line with the economy as a whole, but faces a number of challenges. There are signs the economy is overheating and the countrys dependence on a relatively narrow range of commodity exports and the rapid credit growth are also sources of risk; (ii) While the bank supervision framework is reasonably well developed, implementation needs to be strengthened. Supervision of non-bank financial institutions and the capital markets is still at an early stage of development and so has gaps, providing a further source or risk; and (iii) Several important initiatives to support financial system development are underway or planned, but they
5 6

ADB. 2008. Special Evaluation Study: ADB Assistance for Domestic Capital Market Development. Manila. IMF. September 2008. Mongolia: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision and Monetary Policy Transparency. Washington, DC.

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need to be carefully designed and sequenced. Supporting improvements to legislation and other infrastructure are also needed. 28. Sector Recommendations. Maintaining the stability of the banking system requires the continued strengthening of the regulatory, supervisory, governance, internal control, and accounting and auditing frameworks. First, it is recommended that ADB support further reforms in the banking sector, using suitable modalities to meet these new challenges and opportunities. The smaller commercial banks (about five in number) operate only marginally in terms of deposit and lending operations, internal controls, staff skills, and profitability. In this context, ADB may consider equity and loan investments in selected banks to strengthen their capital structure; widen their long-term resource base; strengthen their governance, internal control, and risk assessment in accordance with best international practice; and improve their overall viability. Second, the short-term nature of deposits currently raised by commercial banks allows them to provide only the short-term loans that are more suitable for trading, microfinance, and consumer finance. Given the circumstances, small and medium-sized enterprises that require longer-term loans of up to 5 years have limited access to bank finance at present. ADB may examine the prospects for introducing longer-term deposit and loan instruments and products for small and medium-sized enterprises promotion. Third, the rural finance sector continues to be poorly serviced, because commercial banks find business opportunities in the urban centers easier and more profitable. Three commercial banks are operating successfully and profitably by providing mainly micro and rural finance. ADB may investigate the possibility of using these three banks to channel a credit line to meet the countrys rural finance supply gap. Fourth, based on the success of primary mortgage finance, private commercial banks, with the support of the Government, have established the Mongolia Mortgage Corporation to promote a secondary mortgage finance market and are looking into prospects for securitization. ADB may examine the possibilities of providing assistance for developing this new secondary mortgage product by way of strengthening the legal and regulatory framework and perhaps providing equity and loan support for the mortgage corporation for the further promotion of housing development and the attended benefits that would accrue for the economy in terms of new business opportunities and employment generation in consultation with other development partners. Fifth, FRC was set up in early 2006 as the umbrella authority to supervise both the nonbank subsector (nonbank financial institutions, securities companies, insurance companies, and savings and credit cooperatives) and the capital market sector, including MSE and the Securities Clearing House and Central Depository. A wide range of capital market institutions, including leasing companies, insurance companies, pension funds, investment funds, and private equity funds have established operations during the past 5 years. Many of these are largely unregulated, posing prudential risks, because of gaps in the legal setting and weaknesses in supervision. It is faced with the challenge of filling the gaps in the legal framework and strengthening the regulatory, supervisory, governance, internal control, accounting and auditing frameworks, and risk management. There is a need for ADB to assist the FRC with capacity enhancement in terms of human resources and institutional development. Finally, considering the smallness of the domestic capital market, ADB may also look at ways of promoting regional approaches in developing the capital market under relevant regional cooperation initiatives. C. Urban Sector

29. Sector Challenges. At end 2006, about 1.6 million Mongolians, or roughly 60% of the total population of 2.6 million, lived in urban areas. Ulaanbaatar accounts for most of this urban population and is estimated to have between 1.0 million (38% of the total population and 63% of the urban population) to 1.4 million residents. The average annual growth rate of 3.6% for Ulaanbaatars population during 20032006 is triple that of the total Mongolian population, at

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1.2%, and nearly 4.5 times that of the aimag (province) centers, at 0.8%. Poor ger (traditional tent) areas occupy the outskirts of Ulaanbaatar and many aimag centers. Virtually none of the ger areas are connected to a central heating network, and very few have access to piped water. Government surveys record that in 2006 just over a half of Mongolian households had access to clean water, less than 25% of Mongolians were serviced by sewers, many of the sewage treatment plants and collection systems built before 1995 did not function, and most aimag centers lack a garbage collection system or a secure landfill for disposing of solid waste. Ulaanbaatar is currently one of the most heavily polluted cities in Asia. During the long winter season, when residents resort to burning coal, the air quality of Ulaanbaatar falls well below recommended World Health Organization standards for indoor ambient air pollution. 30. Government Strategies. Since 2000, the Government has formulated urban policies, plans, and implementation strategies. The recent National Development Strategy for 20072021 includes urban-related strategies for meeting the Millennium Development Goals (MDG). For example, the Government plans to prioritize urban migration to the aimag centers to ease migration pressure on Ulaanbaatar. An important step in the development of urban utilities was the 2004 Mongolia Water Law, which established a new water agency and called for the semiprivatization of the publicly owned water supply and sanitation agencies in the aimag centers. Another priority of the Government is its 40,000 Houses Program, which envisages building 15,000 houses in suburbs, 15,000 ger area homes, and 10,000 apartment units. 31. ADB Assistance. ADB has been among the most active donors in urban development in Mongolia. Urban sector lending commenced in 1997. Since then, ADB has approved five loans in the amount of $110.1 million, including loans for Ulaanbaatar Heat Efficiency (1997), Housing Finance (2001), Urban Development Sector (2006), Provincial Towns Basic Urban Services (1997), and Integrated Development of Basic Urban Services (2002). In addition, ADB provided three grants from the Japan Fund for Poverty Reduction (JFPR) for assisting ger and remote rural areas in the amount of $5.7 million, with a focus on community participation, affordable heating in remote rural areas, and upgrading urban ger areas. Finally, ADB has provided 10 TA grants totaling $5.6 million, of which five prepared loan projects and five supported capacity building, including institutional strengthening and policy support (Appendix 3). The latter five TA grants concentrated on housing policy, urban development and housing strategy, and capacity building for provincial town services. The main expected urban sector outcomes were improved living conditions for the urban poor, access for the poor to basic services, urban environmental conditions, and planning. 32. Implementation. Urban sector development has had to overcome a number of constraints, including (i) disparity in the provision of urban infrastructure and services between apartment and ger areas; (ii) poor coverage of heating, water supply, sewage, and water removal services; (iii) old and deteriorated apartment infrastructure; (iv) outdated and unresponsive standards and norms for urban land use, zoning, and construction; and (v) unsatisfactory implementation of norms, regulations, and standards. Several of these constraints were addressed by ADBs urban assistance program, but they remain as substantial constraints on future program implementation. Factors affecting ADB project implementation included delays in consultant selection and procurement and issues arising from the short summer construction season. For some projects, frequent changes of project team leader may have affected project implementation. With regards to procurement, ADB devoted substantial resources to developing procurement regulations, procedures, and capacity to prevent future program implementation delays. ADBs country performance audit report7 found that project staff were familiar with the
7

ADB. 2003. Country Performance Audit Report: Mongolia Report. Manila.

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regulations and guidelines but recommended more staff training since implementation was poor. The Ulaanbaatar District Heating Project encountered numerous implementation problems that resulted in a cumulative implementation delay of 3.5 years, arising from the need to re-bid three procurement packages after all of the bidders overbid, an overambitious implementation schedule, delays caused by the re-designation of the executing agency (EA) when the Energy Authority was dissolved as result of the restructuring of the energy sector and the District Heating Company took over, and the failure of the Spanish Governments cofinancing of the rehabilitation of the steam system operations to materialize. 33. Relevance. Overall, urban sector operations are rated as relevant. ADBs urban strategy was found successful in addressing relevant and priority development needs in Mongolia and was consistent with the Governments development strategies. ADBs urban sector operations were generally found to be firmly based on the evolving country and urban sector strategies during the evaluation period. The one exception was the assistance for district heating in Ulaanbaatar, which was critical both in terms of improving an essential service and in helping to reduce energy subsidies. Although originally based on an early country strategy in which energy was a priority focus, subsequent country strategies excluded energy as a strategic focus. The urban sector operations were generally aligned with Government urban sector priorities and often included sector policy and institutional reforms. 34. Effectiveness. Overall, ADBs urban sector operations were rated as effective. Urban sector assistance was able to achieve its intended sector output of increasing service provision to urban residents, particularly for water connection, sanitary services, and heating connections in aimag centers and for district heating in Ulaanbaatar. In particular, the three loans in the urban sector, starting in 1997 with Provincial Towns and Basic Urban Services, followed in 2002 by the Integrated Development and of Basic Urban Services in Provincial Towns and in 2006 by the Urban Development Sector Loan, were all well-designed to meet the intended sector outcomes. The first two interventions achieved sector outcomes of improved access for the poor to basic services and improved urban environmental conditions through better access to safe water, sanitation, heating, and solid waste collection in 13 aimag centers. The PCR for loan 1560 rated the project as satisfactory to highly satisfactory for meeting the development objectives and satisfactory for implementation progress. The District Heating Project achieved its sector outcome of improving the reliability and adequacy of heat supply in Ulaanbaatar, albeit with considerable delay beyond the original schedule. The Housing Finance Sector Project8 succeeded in lending over $16.7 million to individual borrowers, compared with the original appraisal target of $10.0 million. However, the expected sector output of upgrading low-income housing was not achieved, as the Housing Finance Sector Project benefited upper- and middle-income borrowers, rather than the intended low-income borrowers. None of the proceeds reached the low-income borrowers, not because of poor loan design or implementation issues but rather because of market forces. The loan created a sustainable commercial mortgage market, which is an important sector result in its own right. Preliminary assessment of the two completed JFPR grants indicates that they were highly effective in improving living conditions for the urban poor. The draft housing sector strategy prepared under the TA for Developing an Urban Development and Housing Sector Strategy was well prepared, but its findings were not supported by the Ministry of Construction and Urban Development.
8

ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Mongolia for the Housing Finance (Sector) Project. Manila; ADB. 2008. Project Completion Report on the Mongolia: Housing Finance (Sector) Project. Manila; And Draft report dated March 2008. Government of Mongolia/ADB/Project Management Unit. 2007. Housing Finance (Sector) Project: Implementation Outcomes. Manila.

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35. Efficiency. The urban sector assistance program is rated as efficient. Efficiency in the lending program can be measured by comparing EIRR for each of the urban projects. Generally the loan projects had medium-to-high EIRRs according to estimates prepared at project appraisal. EIRRs estimated at appraisal for loan 19079 indicate that the water-supply components in three townsChoibalsan, Dalandzadgad, and Sainshandhad highly satisfactory EIRRs ranging from 46.3% in Choibalsan to 56.2% in Dalandzadgad. While the EIRRs were lower in other towns, they remained well above the economic opportunity cost of capital of 12%. EIRRs for district heating ranged from 23% to 58%, all above the economic opportunity cost of capital of 12%. The sanitation improvement, solid waste management, and bathhouse components of the project were selected on a least-cost basis. Ex-post EIRRs remain to be verified through independent evaluation. With tariffs held low to be affordable, financial rates of return are expected to be below the cost of capital. As noted above, the Ulaanbaatar District Heating Project encountered numerous implementation problems that resulted in a cumulative implementation delay of 3.5 years. Despite this, the draft EIRR for the project was estimated in the PCR at 36.0%, which significantly exceeds the 23.4% estimated at appraisal. 36. Sustainability. The sustainability of ADBs urban sector operations is rated as likely. All the urban services projects correctly focused on enhancing the underlying political, financial, and environmental conditions to ensure sustainability. ADB loan projects (helped local urban public service organizations to develop fiscal responsibility and incorporate, thus making them more independent and reliant on tariff revenues. Urban loans and the JFPR grants developed systems and infrastructure to improve living conditions in poor ger areas. Loan covenants also required that tariffs should reflect actual system delivery costs while keeping tariffs capped for the extremely poor. As a result, the urban public service organizations are more likely to be sustainable while supplying subsidized clean water for the poor. The loan for district heating in Ulaanbaatar also addressed the sector outcome of improving access to reliable and adequate heat supply. However, the EA, the District Heating Company, is financially weak, and arrangements for operating and maintaining heating equipment appear inadequate. To improve operation and maintenance arrangements, it has requested permission to sell some of the heat system assets procured with the use of the ADB loan proceeds to Housing Communal Service Companies, but it is unclear whether the potential owners would have the institutional capacity required to operate and maintain these systems. 37. Impact. Overall, the impact of ADBs urban assistance program was rated as substantial on the high side. The impacts of ADBs urban assistance program included (i) greater access to clean water and sanitation, (ii) increased access to heating for formal area residents in Ulaanbaatar and selected aimag centers, (iii) the provision of low-cost housing for ger area residents, (iv) the upgrading of low- and middle-income housing, (v) the establishment of a sustainable, market-based system for the delivery of housing finance to meet the borrowing needs of low- and middle-income households, and (vi) assistance to local urban strategy development. Access to clean water and sanitation is an MDG that Mongolia has endeavored to attain. ADBs urban sector program contributed to improving access in this area. Economic growth indicators show that, on average, the aimag centers covered under ADBs two provincial urban services loans grew substantially faster than other aimag centers. It appears that ADBs interventions have had a modest impact, albeit indirectly, on the reduction of poverty in the selected aimag centers. ADBs assistance for housing finance created a fledgling mortgage market that exceeded sector development expectations. Support for district heating in Ulaanbaatar has reduced heat losses by 4045%. The impacts of ADBs lending for improved basic urban services (loans 1560 and 1907)
9

ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Mongolia for the Integrated Development of Basic Urban Services in Provincial Towns Project. Manila.

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included (i) a substantial reduction in nonrevenue water; (ii) increased access to clean water and sanitation, thus reducing the incidence of water-borne diseases; (iii) increased access to heating for formal area residents; and (iv) assistance with local urban strategy development. Urban loans and the JFPR grants developed systems and infrastructure to improve living conditions in poor ger areas. Most notably, the JFPR grant for Improving the Living Environment of the Poor in Ger Areas of Mongolia Cities10 identified ways to improve the living conditions of the extremely poor, including providing low cost housing, constructing sanitation facilities, economic development, and developing poverty impact assessment. A higher rating was not given because housing finance did not achieve its stated outcome of providing satisfactory housing to low-income households. 38. Sector Lessons. From ADBs perspective, its urban sector operations in Mongolia entail the extensive use of human resources, as investments are dispersed across various components in many cities. In such circumstances, it is usually more efficient to delegate project administration to the Resident Mission. The appointment of an urban development specialist to the Resident Mission in 2007 and the concomitant delegation of the administration of two loans are considered very appropriate in this context. A second lesson relates to the advantages that can be attained from optimizing synergies between various assistance modalities. For example, the implementation of the Housing Finance Sector Project, in isolation, would not have ensured the achievement of the sector outcome of upgrading low-income housing because most of the project beneficiaries were middle-income households. It may be noted that low-income households were among the beneficiaries originally targeted. However, a JFPR grant aiming to assist ger area residents in Ulaanbaatar and 10 other cities in Mongolia was successful in upgrading the housing of a substantial number of ger area residents. 39. Recommendations. With growing rural-to-urban migration, urban development should become a major area of focus in the next country partnership strategy. Continuing migration to Ulaanbaatar and aimag urban centers is expected to put further pressure on the urban environment. Investment is needed, particularly in Ulaanbaatar, for improving air and water quality. Most aimag centers do not have an environmental plan, environmental ethos, or community involvement programs. Initially, ADB may consider providing assistance in the formulation of urban environment plans and programs in the aimag centers. ADB may consider increasing its involvement in tackling Ulaanbaatars urban environmental issues, possibly through collaboration with other development partners in new urban programs. There are numerous opportunities for ADB to cooperate with other bilateral and multilateral donors on issues of aimag development, urban water, sanitation, transport, air pollution control, and using grant assistance to foster private participation at the aimag level in water and sanitation service delivery. The next CSP should formulate a more detailed urban development road map and identify indicators for each of the sector outcomes and outputs that can be monitored and are linked to urban-related MDGs. At the same time, continued policy dialogue with the Government is necessary, as is helping it reform district heating services in Ulaanbaatar more efficiently and sustainably. D. Social Sectors 1. Education

40. Sector Challenges and Government Strategies. The educational system in Mongolia has faced a range of severe challenges, many of them associated with the transition to a market economy, fiscal pressures, and the need to improve service delivery to poor communities. In
10

ADB. 2002. Grant Assistance (Financed from the Japan Fund for Poverty Reduction) to Mongolia for the Improving the Living Environment of the Poor in Ger Areas of Mongolias Cities Project. Manila.

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urban areas, educational facilities remain inadequate, posing major constraints on enrollment, retention, and improving the quality of educational services. State schools exclusion from formal education of undocumented children, mainly of rural-to-urban migrant families, adds to urban poverty and illiteracy. In the rural areas, changing demographic conditions and, most notably, a decline in the number of small, semi-subsistence herder communities, demands that strategies for providing education in remote rural areas be reassessed. Overall, the quality of primary and secondary education is inadequate due to the poor quality and irrelevance of the curriculum, significant number of teachers with inadequate qualifications and skills, lack of consistent educational standards, and inadequacy of teaching resources. The Governments education policy has been driven by its Education Sector Strategy for 20002005 and the Education for All strategic plan, both of which were prepared with ADB assistance. The major focus of the sector strategy has been on improvements in (i) access to, and the quality and relevance of, basic education services; and (ii) developing qualified and competitive human resources to foster economic growth. 41. ADB Assistance. Up to 1995, ADB assistance aimed to support and accelerate the countrys transition. During this time, ADB support focused on projects and programs in the sectors considered crucial in the countrys economic transformation: agriculture, industry, energy, and transport. Because of considerable progress in social development under the socialist regime, investments in education were accorded a lower priority. Since the mid-1990s, ADB assistance has had a broader focus on economic growth and poverty reduction. Education was identified as one of the core sectors because of its potential to provide the labor force with market-related training and skills necessary for employment in a market-oriented economy. ADBs education support was closely linked to two major elements of the Governments poverty reduction strategy: (i) stable, broad-based growth and (ii) inclusive social development. Education is crucial to the two pillars, as human resource constraints on productivity are a barrier to growth, while unemployment caused by the lack of education is a major cause of poverty. 42. As of 31 December 2007, ADB had approved for the education sector four loans amounting to $42.5 million for three projects, plus 10 TA operations totaling $4.4 million and two grant projects amounting to $2.0 million (Appendix 3). The Education Sector Development Program (ESDP), approved in 1996, consisted of an integrated package of policy reforms, investments and associated TA to help transform the countrys education sector to meet the demands of a market-oriented economy. It was the first time ADB had used the sector development program modality. Two subsequent ADB education projectsthe ESDP II, approved in 2002, and the ESDP III, approved in 2006have built on the success of the ESDP. From 1992 to 2007, ADB provided 10 TA grants, four of which were for preparing projects and six were for capacity building, including institutional strengthening and policy support. Project preparatory TA activities focused on developing projects designed to make education more relevant and responsive to the demands of a market economy. Two grant projects were provided for education. One funded by Japan Fund for Information and Communication Technology (JFICT) aimed to improve access to, and the quality of, education for the rural population, and the other, financed by JFPR, supported informal skills training for unemployed youths and adults. 43. Implementation. The implementation of programs, projects, and TA has generally proceeded satisfactorily. Only the ESDP has been completed, and that has been rated as highly successful. The two projects still under implementation, the ESDP II and ESDP III, are both making satisfactory progress according to their project performance reports as of 31 December 2007. Eight of the 10 TA grants for the sector have been completed. TA completion reports are

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available for three of them, all rated as successful. 11 Two TA grants had TA performance evaluation reports, with successful and highly successful ratings. Performance reports for the two TA grants under implementation indicate that they were making satisfactory progress as of 31 January 2008. Factors affecting the implementation of ADBs sector strategy were mainly inconsistent policy approaches, with Mongolias leadership oscillating between pro-reform and anti-reform agendas, which slowed acceptance of organizational and management reforms in primary and secondary schools. A further issue affecting ADBs strategic objective to improve the quality of education is continuing mass migration from rural to urban areas, which has caused major imbalances in educational service provision and greatly tested the capacity of schools in areas witnessing high population inflows. Schools in urban centers have seen demand for services increase substantially, while some rural schools now operate below capacity. In addition, the lack of safe water and sanitation pose significant hygiene and health risks, especially for students in dormitories. Other important factors that have affected implementation include the adjustment of domestic energy prices to levels close to the border price, which translated into enormous energy bills for schools, with spending on heating crowding out almost all other spending. As well, Mongolia's steady economic decline until 2002 meant that teachers worked for a salary of less than $50 per month in 2002, which was well below the poverty line. A quadrupling of civil service salaries and a fivefold increase in teachers salaries between 2003 and 2007 has energized the sector and brought some positive incentives back into play. At the project level, factors affecting implementation included delays in recruiting consultants, the lack of activity plans for major project components, and the need to improve coordination with other development partners. 44. Relevance. ADBs assistance to the education sector is assessed as highly relevant. ADB interventions are consistent with Government priorities and development strategies and ADB country strategies. With the termination of financial and technical support from the Soviet Union in 1991, the quality of and access to education in Mongolia rapidly deteriorated. State education expenditures were massively reduced, and conditions in schoolssuch as facility maintenance, heating systems, teaching resources, and incentives for teachersdeteriorated to the point that many schools were forced to close. ADBs program of assistance has addressed critical needs in the sector, consistent with the evolving demands of the transition to a democratic government and a free market economic system. 45. Effectiveness. Assistance to the sector is assessed as highly effective. It achieved the key objective of reorienting the education sector from a centrally planned to a market economy and accomplished the targets of establishing (i) education development policies appropriate to a market-oriented system, (ii) models for school rationalization, (iii) a new curriculum and associated revision and improved publication arrangements for textbooks, (iv) in-service and pre-service teacher training, and (v) a replicable model for information and communication technology (ICT) use for poor rural schools and communities. Sector interventions resulted in the rehabilitation of education facilities, construction of energy-efficient kindergartens and primary schools, and installation of ICT facilities in primary and secondary schools. Sector operations successfully strengthened institutional capacity in the education sector, including a new structure and management system for the Ministry of Education, Culture, and Science (MECS), which enabled MECS to fulfill its strategic planning, policy-making, and regulatory roles. Through the ESDP reform program, the educational facilities and staff of around 120 primary and secondary schools
11

The three completed TA grants with generally successful completion report ratings are TA 1801-MON Human Resource Development and Education Sector Reform; TA 2913-MON Capacity Building for Accounting and Auditing Personnel Institutional Strengthening in the Education Sector; and TA 3174-MON Education. Two completed TA grants were small and did not require completion reports. Two did not have completion reports. One TA grant did not have a completion report but had a performance evaluation report.

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were rationalized and merged into 45 complex schools, which contributed to improving the effectiveness of the educational system and quality of educational services. By 2004, 210 schools had been rehabilitated under the ESDP and the ongoing ESDP II. The grant project for innovating rural education in Mongolia through ICT addressed the needs of children in remote areas. The ESDP and the ESDP II have contributed to lowered dropout rates and improved teaching and learning environments and have developed strategies for using ICT to bring education content, modern pedagogy, and information into schools. In 1996, the gross enrollment ratio had fallen to 82%, and dropout rates had increased. Since then, ADB assistance has arrested the decline. In the 20062007 school year, the gross enrollment ratio had risen to 94%, indicating that Mongolia will achieve its education-related MDG. The three loan projects and associated TA improved school enrollment and the overall quality of education services and provided policy frameworks for further reforms. In 2005, the Government endorsed the Second Education Master Plan (2006 2015), which was prepared with ADB assistance. The Government decided to extend the current 10-year system to a 12-year system in 2008, which will align Mongolias education system with international standards. The assistance has contributed to the policy foundations for a sector-wide education development program in Mongolia, though there is still a need to raise the standards of tertiary education and vocational education (addressed in the ESDP III) and to address the exclusion of unregistered children from state education services. 46. Overall, sector assistance has positively contributed to improving education sector performance. Enrollment at all levels, which declined sharply during the economic crisis, rebounded and increased considerably from 1996 to 2007.12 The most rapid growth in enrollment was experienced in higher education, which had more than tripled over the last 10 years. There was a significant enrollment increase in grades 58, indicating a consistent increase in survival rate in grade 5. Teacherstudent ratios at all levels of general education increased, while dropout rates declined from 3.5% in 1996 to 2.2% in 2007. In addition, the student population per school and the number of students per class in general education rose, albeit with a slight decline in 2006/2007. 47. Efficiency. ADBs assistance to the education sector is rated as highly efficient. Under the ESDP, civil works were conducted more widely than originally planned because so many schools could not be used without repairs to heating systems and basic renovation. The most costeffective ADB-supported intervention has been the establishment of model complex schools, which bring three levels of general education together in one school under consolidated management. Network or inter-district schools increased efficiency by overcoming the fragmentation of education services and maximizing resources. For instance, the project performance evaluation report for the ESDP estimated that the establishment of the first complex school, Ireedui Complex School, reduced by nearly half the number of staff before amalgamation, generating salary savings of MNT2.8 million per month. By 2006, about 20% of students and 21% of teachers and school service staff in Ulaanbaatar city were in complex schools. These model schools are now considered by educationalists in Mongolia as a blueprint for developing efficient primary and secondary education services in urban areas and are continuing to operate successfully under the ESDP II and the ESDP III. Model institutions for vocational education are now being supported by the ESDP III and will demonstrate efficient, modern teaching and management methods. To further improve efficiency in the education sector, ADB has provided TA for MECS to improve donor harmonization. Assistance includes support for strengthening the financial management structure as a precondition for gradually establishing a sector-wide approach to education.
12

Gross enrollment rates in primary and in basic education declined between 2005 and 2007 but still represented improvement over enrollment rates following Mongolias transition (82% in 1996).

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48. In terms of process efficiency, the ESDP was implemented as planned, on schedule, and without cost overruns. Project implementation of the ESDP II, which is now 98% complete, is ahead of schedule, according to the project performance report as of 31 March 2008. The slight delay in implementing the ESDP III is not expected to affect overall implementation. 49. Sustainability. The policies and investments under the three loan programs and associated TA are rated as likely to be sustainable. The assistance program laid the foundations for transforming the educational system and demonstrated models for future sector development. Despite the many changes in political leadership since the first ESDP commenced, the reforms introduced 13 years ago have been supported by the Government. An 11-year system has been introduced for primary and secondary schools, with the objective of having 12 years of compulsory education established by 2008. New standards for primary and secondary education have been set and are being enforced to bring the educational system closer to world standards. The policies and investment objectives established in ADB operations have been extended or sustained under the Governments Second Education Master Plan. The Government has continued to give priority to investments in education and human resource development. The education sectors share of general government expenditure has remained consistently high, averaging 22% over 2000 2005. On average, about MNT16 million of the state budget is spent on in-service training for teachers. The main threat to the sustainability of the investments is that inadequate state budgetary allocations for school maintenance force schools to ask parents for annual contributions, which many cannot afford. 50. Impacts. The impacts of ADB assistance to the education sector are rated as substantial on the high side because the program contributed to improved enrollment and retention rates; upgraded the quality, performance, and sustainability of primary and secondary education facilities and services; improved educational management capacity; and promoted policies that enabled private schools to be established. ADB provided substantial improvements to educational infrastructure and resources, including for curriculum development, textbook production, teacher training, rural education, integrating ICT into the educational system, establishing a national higher education accreditation authority, and, currently, developing a more relevant model of technical and vocational education. ADBs support for sector planning and coordination was instrumental to Mongolias selection for the Education for All Fast Track Initiative, whereby Mongolia became eligible in 2007 to receive a grant that will enable the implementation of the Second Education Master Plan. ADB assistance has supported efforts to attain two MDGs, achieving universal primary education and eliminating gender disparity in primary and secondary education. Although below the 1990 gross enrollment ratio, the 2006 ratio represents an improvement over enrollment rates following Mongolias transition (82% in 1996). Based on 2006 data, progress has been made in achieving gender equity in educational participation. Mongolia appears to be on track to eliminate the disparity in the ratio of boys to girls in primary and secondary schools, which in the past favored girls due to rural demands for boys labor. 51. In 2006, the Government developed a proposal to the Millennium Challenge Corporation, assisted by ADB in coordination with the World Bank, United Nations Childrens Fund, Japan, and Germany. Mongolia was subsequently selected to the Education for All Fast Track Initiative, which is the first global compact on education and seeks to help low-income countries achieve free, universal basic education by 2015. Mongolia is now eligible to receive a grant from the Fast Track Initiative donors to cover the funding gap in the education budget from 2007 to 2009.13 This will enable the implementation of the Second Education Sector Master Plan (20062015). To sharpen
13

The Fast Track Initiative approved an $8 million grant for Mongolia for 2007.

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Second Education Sector Master Plan priorities and improve harmonization, ongoing ADB TA support is helping MECS establish a sector-wide assistance program for the education sector. 52. Sector Lessons. While assistance has been affected to some extent by political instability, organizational and management reforms supported by ADB, such as the establishment of complex and networked schools, eventually won wide national support. This suggests that successful models can eventually overcome political resistance to change. The main factors contributing to the success of ADB support in the education sector included (i) an excellent working relationship with the EAs and other development partners, (ii) the high performance standards and continuity of staffing in project implementation units, (iii) the extensive country knowledge and experience of ADB project specialists, and (iv) continued efforts to promote the harmonization of external assistance activities. 53. Sector Recommendations. In the future, large-scale internal migration should be taken into account in planning the geographical distribution of educational services, and the targeting of project activities must anticipate likely demographic movements. In provincial towns and cities and Ulaanbaatar, where the population and economy are growing and are likely to continue to grow in the long term, investment in new, large, durable, and energy-efficient schools and dormitories may have high priority, on the understanding that there will be further consolidation of school management following the complex school model. In rural districts and sub-districts, distance education technology, teacher-manager incentives, and support for mobile services for homebased education for kindergarten and grades 14 may be provided. This would provide the flexibility needed in a rapidly changing pastoral economy and avoid the psychologically undesirable necessity of sending the children of nomadic herders younger than 9 years of age to boarding schools. At the same time, significant but unknown numbers of children in urban areas are excluded from enrolling in government schools because they are runaway or street children without documentation or from families that have not completed the complicated deregistration and reregistration legal requirements for internal migrants. As Government funding is allocated by district and population, if citizens are not deregistered in their former district of residence and reregistered elsewhere, government funds are not correctly allocated. There is concern that many provinces and districts are overfunded, while urban areas are underfunded because residents are not correctly registered. As this issue affects the poor in all the social sectors, it would be a fruitful area for future ADB policy dialogue and assistance. To help ensure the attainment of the objectives of ADB interventions in education, risks to sustainability and long-term impactsuch as budgetary allocations for operation and maintenance, policy changes with changes in government, and institutional capacity constraints that may arise with changes in government staffwould need to be closely monitored. 2. Health

54. Sector Challenges and Government Strategies. Until the early 1990s, Mongolias health system depended almost entirely on centrally managed, hospital-based health services designed to meet the requirements of socialist agricultural and industrial collectives, the state bureaucracy, and other state agencies, supplemented by centralized specialist hospitals. In the early 1990s, collectives collapsed, the economy moved toward a market system, the bureaucracy was reorganized, and the Government was nearly insolvent. Health services deteriorated, and the health system was unable to meet the needs of most of the population at the level they had been accustomed to under socialism. Without subsidies from the former Soviet Union, the financial resources to sustain this health system were no longer available by early 1990s. About 40% of staff left the state health service, the net reduction being around 25% because new medical graduates continued to enter the system. In 1995, reforms to the health sector commenced.

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These included introducing a health insurance fund, training in general health care practices, and introducing the principles of primary health care (PHC) in the medical school curriculum. However, health services continued to deteriorate, and it became clear that there was a need for more fundamental reform to develop a three-tier system in which primary and preventive services would form a foundation with referral to rationalized secondary and tertiary levels of care, supported by associated training, management assistance, policy advice, new equipment, and the provision or rehabilitation of health service infrastructure. The Government's main health sector goal is to achieve equitable health care by targeting resources especially for the poor and to areas in greatest need. The Government developed the Health Sector Master Plan in April 2005, which included strategies to (i) further improve the coverage, access, and utilization of health services, especially for disadvantaged groups, by promoting quality primary health care; (ii) strengthen health workers skills and management; (iii) strengthen the financial management system to improve resource use; (iv) improve the health insurance system; and (v) support a sector-wide health care approach to improve resource management. 55. ADB Assistance. ADB has been a major partner in Mongolias efforts to reform its health care system and health financing mechanisms since the early 1990s. ADB has provided for the health sector three loans for two projects totaling $29.9 million, ADF grant financing of $14.0 million for one project, eight TA grants amounting to about $3.5 million, and three grant projects for $4.0 million (Appendix 3). The Health Sector Development Program (HSDP), approved in November 1997 for $15.9 million, consisted of a policy-based loan ($4.0 million), an investment loan ($11.9 million), and associated TA ($0.6 million) to support reforms to (i) ensure the financial sustainability of health system in a market environment, (ii) maintain universal access to quality essential health services, and (iii) improve health services quality. The HSDP II, approved in June 2003 for $14.0 million, aimed to improve rural health service delivery and build capacity in the health sector. The HSDP III, approved in October 2007 for ADF grant financing of $14.0 million, builds on and consolidates reforms in Mongolias PHC under the HSDP, which was completed in 2003, and the ongoing HSDP II. As of December 2007, ADB had provided five advisory TA grants to support sector reforms and capacity building and three project preparatory TA grants. Two grants projects funded by JFPR supported government efforts to reduce the maternal mortality rate and improve access by disadvantaged groups to peri-urban areas. One grant project, Information and Community Technology for Improving Rural Health Services, was financed by JFICT.14 56. Implementation. The implementation of ADB projects and TA has generally proceeded satisfactorily. The completed HSDP was rated successful but at the low end because, although it achieved its objective of promoting PHC, key issues remain, such as the financing of health services, rationalization of the health sector, and quality of health services. The HSDP II and the HSDP III are both making satisfactory progress according to their performance reports. Seven of the eight TA grants for health have been concluded, with TA completion reports available for three. One was rated as highly successful, and two were rated as successful. The implementation of ADB-supported reforms has been adversely affected by political resistance to change. Although a PHC system introduced under the HSDP and the HSDP II was successful, there has been political and popular resistance to reducing the number of beds and hospitals. As a result, the previous plans of the Ministry of Health (MOH) to close or merge hospitals were suspended during the HSDP II. Furthermore, new hospitals are being built and the number of hospital beds has increased in Ulaanbaatar since 2000. About 70% of health expenditure continues to be allocated to hospital services, while PHC remains severely underfunded. There have also been issues
14

ADB. 2004. Grant Assistance (Financed by Japan Fund for Information and Communication Technology) to Mongolia for Information and Community Technology for Improving Rural Health Services. Manila.

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affecting the staffing of the project implementation unit, which suggest that relations between ADB and MOH need to be more consultative 57. Relevance. ADBs assistance is rated as relevant in terms of the needs of the sector, government priorities at the time, and the ADB country strategy. To reduce the need and demand for hospital services, the strategic focus of ADB assistance has been to shift resources from curative to preventive health services by reducing hospital beds, establishing a PHC system, and improving the quality of PHC services. The establishment of family group practices (FGP) and the development of health insurance and new financing mechanisms for PHC services were particularly relevant, given the need to arrest the decline in child and maternal health status and to improve the cost effectiveness of the health care system. 58. Effectiveness. ADBs program of assistance is assessed as being less effective in terms of meeting the goals and objectives set for assistance to the sector. Mongolia has been reforming its health care system and health financing mechanisms since the early 1990s, and ADB has helped the Government to plan and implement sector reforms since 1997. ADB has been successful, under the HSDP and the HSDP II, in introducing FGPs to provide PHC. The Government established 237 FGPs in Ulaanbaatar and in all provincial urban centers nationwide by early 2002. In theory, FGP teams of doctors and nurses work as private entities through contracts with local administrations and are paid on a capitation basis under performance-based contracts that incorporate incentives for FGPs to treat the poor. However, since its establishment, the FGP model has been gradually eroded. FGPs continue to face significant challenges including (i) inadequate funding; (ii) ambiguous legal status (while legally private, FGPs are fully dependent on state funding and regulation); (iii) inadequate incentives for FGP contractors, and (iv) unsatisfactory quality of service from FGPs serving large peri-urban areas. The implementation of reforms in many areas remains unfinished. Hospital accreditation has been applied only to a limited extent, reflecting limited support for reform of the hospital sector. The implementation of reforms related to rationalizing hospitals and health personnel has been incomplete. The civil works upgrading of rural hospitals was in many instances of inadequate quality and, in most cases, did not provide water and sanitation, leaving rural hospitals with very poor sanitary conditions. Most rural district hospitals lack complete, functioning basic sets of diagnostic equipment to facilitate appropriate referral as intended, and pharmaceutical supplies are very limited. FGPs in peri-urban settlements where rural-to-urban migration is the greatest are particularly overburdened. 59. Efficiency. ADBs assistance to the sector has been assessed as less efficient. The strategy of combining hospitals to create a smaller number of larger and more efficient facilities; closing small, redundant hospitals; and reducing the duplication in services would have freed up resources and created a more efficient distribution of resources among primary, secondary, and tertiary services. However, this fundamental reform was not achieved under the HSDP or the HSDP II, and unresolved issues include the financing of health services, the rationalization of the hospital sector, and health service quality monitoring. Other policy elements introduced under the HSDPsuch as private sector outsourcing of noncore hospital services, quality-related monitoring mechanisms, supporting human resource movement to underserved rural areas with additional financial incentives, and information campaigns on PHCwere not sustained beyond the HSDP. According to a recent health sector assessment, despite rapid population growth in Ulaanbaatar from rural-to-urban migration, there are still too many hospital beds, in-patients, and specialists and not enough experienced general practitioners. Furthermore, the private FGP model has not solved the problems of the state in finding nonpublic resources to finance PHC services. To date, the health system remains burdened with inefficiencies.

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60. Sustainability. ADBs program of assistance is assessed as likely to be sustainable. Policy reform promoted by ADB is reflected in the Government Health Sector Master Plan, which places central emphasis on PHC and to further strengthening the FGP system. The continuing ADB assistance through HSDP III will continue to work to resolve financial management issues in the sector. The Government is making continued efforts to address quality issues by, for example, increasing requirements for hospital reregistration, introducing more rigorous requirements for licensing medical practitioners, and introducing quality controls for pharmaceuticals. 61. Impact. The impact of ADBs assistance to the health sector has been modest because of uneven outcomes. The HSDP, HSDP II, and HSDP III and associated TA have helped the Government to plan and implement organizational and financial reforms since 1997 and have successfully introduced a number of significant and necessary changes in the health system. One of the major accomplishments under the HSDP was the introduction of FGPs to provide PHC in cities and towns throughout the country. Through implementing reforms that have placed emphasis on improving the quality of basic health, ADB assistance has helped to create an enabling environment that has Mongolia on track to achieve its health-related MDGs. ADB assistance has complemented programs supported by other development partners aiming to reduce infant and child mortality and improve nutrition and maternal health. 62. Sector Lessons. Program experience to date demonstrates that privatization should be introduced judiciously in the health sector. The private FGP model has failed to finance PHC health services. Another lesson is that ADB needs to improve its engagement with MOH, as well as with the political levels of government, to achieve consensus on sector policy development, particularly with respect to improving health services accessible to the poor, targeting diseases of the poor, and reducing the financial burden on poor people. A further lesson is the need for improved vigilance by ADB in relation to the design and construction of civil works for health infrastructure. 63. Sector Recommendations. Structural changes are needed in health care delivery, but they cannot be accomplished without concomitant changes in health care financing. Accordingly, future ADB assistance to the sector should be closely linked to the Governments commitment to implement the Health Sector Strategic Master Plan (20062015), particularly the plan policy to address the inefficient allocation of resources between curative hospital services and preventive PHC services. Excess hospital capacity at the secondary and tertiary level, particularly in Ulaanbaatar, needs to be rationalized for this to happen. Although agreed with ADB in the past, it has not been implemented. With respect to medical education and training, the need exists to (i) reorient medical and paramedical training so that graduates are encouraged to take up careers in providing public, family, and primary health care services; (ii) provide incentives to encourage experienced health personnel to serve in rural areas; and (iii) increase the extent and quality of nursing education to raise the ratio of nurses to doctors in all health facilities. 3. Social Protection

64. Sector Challenges and Government Strategies. One third of the people of Mongolia live in poverty, with the poor comprising 27% of the population of Ulaanbaatar. They are concentrated in peri-urban areas of the city, which are populated mainly by rural-to-urban migrants. A large portion of new migrants are unemployed and unregistered. The Governments social protection strategy is to (i) upgrade the quality of and access to social welfare services; (ii) create adequate and efficient infrastructure for the delivery of social protection services; (iii) deliver employment services to youths, informal sector employees, workers abroad, the poor, and the extremely poor; (iv) provide financial support to reduce poverty and unemployment; and (v) strengthen the social

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insurance system and make the social welfare and care services more qualified and accessible. To these ends, the Government provides various forms of welfare assistance and free social services for registered individuals belonging to groups officially designated as vulnerable. In practice, state welfare mechanisms tend to benefit poor citizens less than others. This is partly because of the broad official definition of vulnerability, which includes all children under 16, elderly people, mothers with newborns, single parents, and unemployed people, irrespective of their socioeconomic status. 65. ADB Assistance. ADB approved for social protection two loans amounting to $12.0 million in support of the Social Security Sector Development Program (SSSDP), five TA grants for $3.6 million, and one grant project for $1.0 million (Appendix 3). The SSSDP, approved in August 2001, comprised a policy loan of $8.0 million, an investment loan of $4.0 million, and associated TA of $0.6 million aiming to support reforms to strengthen the social security systems ability to deliver essential welfare, insurance, and employment services to vulnerable groups. Three of the four TA grants were advisory TA to help the government develop a sustainable social security system appropriate for a market economy and build capacity for its implementation. One grant project funded by JFPR focused on enhancing employment opportunities for poor disabled individuals. 66. Implementation. The implementation of the investment loan of the ongoing SSSDP has made satisfactory progress, but the policy loan has not. Although there have been achievements in the areas of employment promotion and social insurance, policy measures in the area of social welfare services faced setbacks following the Governments decision to adopt a social welfare package that increased benefits universally to newborns, schoolchildren, newlyweds, pregnant mothers, and mothers with five or more children. This brought the cancellation of the third tranche of the policy loan on 22 November 2007. Of the five TA grants for the sector, four have been completed. TA completion reports find that weak project management unit capacity, staff turnover, and policy vacillation affected project implementation. The ministry concerned took on a new and unfamiliar venture for Mongolia, establishing three new programs for social welfare, social insurance, and employment services to help the unemployed find work and, if necessary, acquire job skills. Slow progress in the social welfare component is linked to weak institutional capacity for undertaking policy reforms in the area and delays in developing the Social Security Master Plan, which was partly a result of less-than-satisfactory performance of advisory services provided under the TA. Other factors affecting implementation include poor coordination among the Ministry of Finance and the Economy (EA for the policy loan), Ministry of Social Welfare and Labor (EA for the investment loan), and MECS (implementing agency for the skills-training and entrepreneurship-development subcomponents of the investment loan), and insufficiently close collaboration with the Nordic Development Fund for activities it financed. 67. Relevance. ADBs assistance to the sector is assessed as relevant. ADB interventions were aligned with the Governments sector goals and priorities to develop and strengthen the national social security system and thereby reduce poverty, prevent the decline of living standard, and provide employment to the poor. Prior to the transition, social services were fully and generously funded by the state through its central ministries. After 1990 and the collapse of the social welfare system, poverty and unemployment became widespread and acute. In response, the Government created a new social security system, but the new system was ineffective at targeting those most in need, and the entitlements it provided were unsustainable due to severe budgetary constraints. Reform was necessary to ensure that the social security system was in line with the requirements of a fledging market economy and concentrated limited resources on those most in need.

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68. Effectiveness. The program of assistance is rated as less effective but on the high side. Although most of the planned activities to support social insurance and employment services were satisfactorily completed, the poor have been provided with very little protection from income poverty. There has been a decline in the number of people contributing to the social insurance schemes and a decrease in employer compliance with regulations for compulsory social insurance contributions. Although the unemployment rate has fallen slightly, social assistance reached only a small proportion of the unemployed. Under the social welfare provisions, a nursing home was rehabilitated, other civil works were carried out, and a wide range of training and capacity-building activities were completed satisfactorily. However, a key objective of the social welfare componenttargeted assistance to the poorer segments of the populationwas not achieved despite extensive planning activities, outputs, TA, studies, and program loan support . 69. Efficiency. The program of assistance was assessed as less efficient. A key objective for the sector was to ensure that limited resources for social protection were used efficiently. This has not occurred, largely because social welfare assistance does not target those who need it the most. The 2003 Social Security Strategy Paper, prepared with ADB assistance, provided a policy framework, including needs assessment, poverty targeting, and means testing to identify those most in need of social welfare assistance. However, the framework has not been adopted so far. Eligibility is still broadly-based, including the payment of baby bonuses, and assistance is provided without effective means testing for single parents, the unemployed, the disabled, mothers of heroes over the age of 55, and the elderly. This enables people who are not poor to capture many of the benefits, so that welfare payments are small, thinly spread, and inadequate to lift the most needy out of poverty. The implementation of the means-testing reforms was limited by public sensitivities, popular expectations, and political demands that access to social welfare benefits should be broadly-based. 70. Sustainability. The assistance is rated as less likely sustainable on the high side. The Government has remained committed to financing social welfare services and provided adequate counterpart funds and staff to implement project activities under the SSSDP. However, the sustainability of the social security system is threatened by the Government's inability to better target social assistance to the poorer segments of society. A new law, enacted in January 2008, did revise the eligibility criteria for recipients of social welfare benefits but still did not distinguish between those who have low incomes from those with incomes above the poverty line. The legislation did not effectively address the urgent need for the Government to direct public resources toward the poorest and most vulnerable citizens to allow increased levels of assistance per beneficiary. The social security system will likely be sustainable if better targeting mechanisms, like those proposed under the Social Security Strategy Paper, are adopted to identify those who are most in need of social welfare assistance. 71. Impacts. The contribution of ADB assistance to the social welfare sector is assessed as modest. On the positive side, new models and methods for social security provision, though slow to gain acceptance or move from policy statement to practice, are now in place, and implementation is proceeding in fits and starts. Recent achievements include approval for a center-based program for extremely vulnerable people, an integrated community-based social service program with draft standards prepared for formal legal approval, charters for employment training centers and business incubation centers, and required amendments to the employment promotion law. However, one of the main goals of ADBs program of support, to refocus eligibility criteria for social welfare benefits on the poorest groups, was not carried out. 72. Sector Lessons. Mongolia had few staff trained in market-oriented social welfare approaches at the start of the CAPE period, so much of the initial policy work was led by

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international consultants, with associated issues of ownership and a mismatch between local requirements and imported programs. Implementation of the anticipated reforms was limited by demand for broad-based access to social welfare benefits and the exclusion of the poorest urban dwellers from assistance because of their lack of proper registration papers. 73. Sector Recommendations. ADB should continue to engage in policy dialogue with the Government to determine how it can more effectively provide assistance to efforts to merge the functions of MOH and the Ministry of Social Welfare and Labor (MSWL). For instance, assistance could be offered to transfer MSWL employment and training functions to MECS, MSWL functions related to disabilities and the aged could be transferred to MOH, and MSWL social work functions could be shifted to city and provincial governments. There is a need to establish a new agency responsible for managing an appropriately targeted social and health insurance system. The combination of poor benefit targeting and exclusion of unregistered peri-urban residents from most programs means that poverty reduction from social protection support has been quite limited. Through policy dialogue and selected advisory support, ADB can help the authorities ensure that services are targeted to those who need them the most. With regard to the provision of social serviceseducation, health, and social protectionto undocumented citizens, especially the poor, ADB should help the Government to fast-track civil registration of the unregistered poor to gain them access to education and health services and other state benefits. E. Law, Economic Management, and Public Policy

74. Rule of Law Challenges and Government Strategies. When Mongolia embarked on its transition to a market economy, there were no laws governing commerce and property, and neither officials nor legal professionals had any experience of operating in a market economy. Drawing from their historic political and administrative ties with the former Soviet Union, Mongolia adopted a legal framework based on civil law. However, even before the Constitution was adopted, a substantial body of laws were enacted by the first elected government, including commercial laws on banking, bankruptcy, consumer protection, labor, general taxation, personal income tax, customs, and excise tax. These laws were necessarily formulated quickly, often by translating similar laws from other national jurisdictions, requiring a series of major amendments through the 1990s and the 2000s. 75. Economic and Public Sector Management Challenges. By the mid-1990s, tremendous budget pressures emerged due to the sheer size and inefficiency of Mongolias public sector. To serve a population of 2.6 million, there were over 7,000 public entities that relied on budgetary support and operated as separate financial entities. In 1995, the Government adopted various decentralization measures aimed at improving service delivery, but they were relatively ineffective given the multiplicity of agencies performing similar tasks. Fiscal weaknesses were reflected in lax controls, gaping deficits, and the rapid accumulation of public debt. Fiscal distress fueled inflation and spilled over to contaminate the banking system. This was related to (i) weak budget management, reporting, procurement, and control frameworks; (ii) the full devolution of expenditure requirements to agencies and lower tiers of government; (iii) weak revenue administration; (iv) limited political and bureaucratic commitment to fiscal prudence; (v) weak operational and financial practices of the budgetary bodies; and (vi) Government agencies undertaking a mix of commercial and public-service responsibilities. With the support of its development partners, the Government undertook a series of measures designed to restore fiscal discipline, eliminate the public sectors commercial role, and launch a comprehensive program of public sector governance reform.

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76. ADB Assistance. Support for improvements in law, economic management, and public policy have been a central focus of ADB assistance since operations commenced in 1991. In that year, together with IMF and the World Bank, ADB helped the Government to formulate its Medium-term Economic Strategy, outlining measures to achieve macroeconomic stabilization and reform.15 It was agreed that ADB would initially focus on the industrial sector through TA to identify appropriate policy reforms. 16 This led to the Industrial Sector Program Loan, 17 the first of 20 program and sector development loans approved since 1992, 12 of which were approved after 1997, to reform telecommunications, power, roads, aviation, agriculture, education, finance, health, land administration, and public resource management. All these loans included governance aspects, in particular legal and regulatory reforms and associated institutional capacity development. 77. ADBs support to governance after 1997 continued the focus on building an enabling legal framework to encourage private sector development in the transition to a market economy. Most notably, ADB responded to the governments initiative in the late 1990s to improve public resource management by supporting the adoption of New Zealands reform legislation for public financial management to manage Mongolias public service. 78. Between 1997 and 2007, a total of 22 advisory TA grants, accounting for more than 40% of all national program TA support, were provided in the areas of law, economic management, and public policy (Appendix 3). Advisory assistance was concentrated on the areas of public sector financial management (i.e., planning, budgeting, accounting, auditing), procurement, national statistical system development, and building legal capacity. In addition, ADB provided lending support for a comprehensive program of public sector management reforms. In December 1999, ADB approved the Governance Reform Program (GRP) loan for $25.0 million equivalent,18 along with three TA grants totaling $1.8 million.19 The GRP was the initial pilot phase of a multiprogram public sector reform strategy designed by the Government in collaboration with ADB. The GRPs overall goal was to facilitate the transition to a new structure of public sector governance in Mongolia by establishing a sound system of public sector financial management and accountability and a transparent system for data and information dissemination. To achieve this, the GRP focused on five objectives: (i) improving aggregate fiscal discipline, (ii) strengthening the public sectors budget formulation and execution, (iii) enhancing the public sectors operational efficiency, (iv) addressing the social impact and financing needs of reforms under the GRP, and (v) preparing the groundwork for continuing the reforms. The centerpiece of the GRP was the introduction of public sector governance reforms on a pilot basis in selected budgetary agencies.

15

An annual donor consultation meeting was jointly arranged by Japan, Mongolia's largest bilateral donor, and the World Bank, with the United Nations Development Programme coordinating implementation. 16 ADB. 1991. Technical Assistance to Mongolia for Restructuring and Development of the Industrial Sector in Mongolia. Manila (for $635,000, approved on 29 October). 17 ADB. 1991. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to Mongolia for the Special Assistance Project. Manila (Loan 1109-MON, for $30 million, and TA 1585-MON and TA 1586-MON, approved on 29 October). 18 ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Mongolia for the Governance Reform Program. Manila (Loan 1713-MON, for $25 million, approved on 2 December). 19 ADB. 1999. Technical Assistance to Mongolia for the Initial Phase of Public Administration Reform. Manila (TA 3316-MON, for $1.1 million, approved on 2 December). ADB. 1999. Technical Assistance to Mongolia for the Public Expenditure Management. Manila (TA 3317-MON, for $496,000, approved on 2 December). ADB. 1999. Technical Assistance to Mongolia for the Study of Central-Local Government Aspects of Reform Implementation. Manila (TA 3318-MON, for $235,000, approved on 2 December).

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In October 2003, the Board approved a cluster of loan20 and a capacity-building TA loan for the second phase of the governance reform program. That loan was designed to support the implementation of measures related to the Public Sector Management and Finance Law (PSMFL) on strategic planning, output-based budgeting, performance contracting, output costing, performance auditing, improving the enforcement capacity of the State Service Council to improve civil service quality, and initiating pension reforms. The second program loans initial closing date was deferred from the anticipated December 2005 until March 2008, and the capacity-building TA was likewise extended until December 2008. 79. Relevance. ADBs support for law, economic management, and public policy was rated as relevant. ADB supported key laws consistent with the governments strategy, with particular emphasis on creating an enabling legal environment for private sector-led growth and improved public resource management. ADBs support for economic management reforms correctly focused first on reducing the fiscal deficit and thereafter on improving medium-term fiscal forecasting, planning, budgeting, accounting, auditing, and public sector management practices. Support for strengthening public procurement practices was essential to help Mongolia tap foreign aid and rebuild its public investment program. The performance of the GRP was rated as relevant by its project performance evaluation report (PPER) in that it responded to an urgent need of the Government. The GRP was valid at the time of PPER as the programs rationale was in line with Mongolias draft national development strategy and ADBs CSP for 20062008. However, it also cautioned that the program design was overly ambitious in estimating the time required for draft laws to pass through the legislature and did not adequately identify the risks and assumptions underpinning governance reform. Conflicts between public sector management reforms that strengthened control by central Government ministries and local governments were insufficiently addressed. Coordination among the multilateral banks in reforming public expenditure management was insufficient, with ADB introducing output-based budgeting while the World Bank introduced program-based budgeting. Moreover, while the laws supported by ADB incorporated good international practice, they were not adequately aligned with Mongolias civil law tradition. 80. Effectiveness. Overall, ADBs support has been rated as less effective but on the high side. Laws that helped open such sectors as aviation and telecommunications to competition and foreign investment brought immediate and substantial benefits. Although ADB built on considerable support to legal reform in the finance sector in the 1990s, in the 2000s a number of proposed laws and amendments were not passed into law because of ineffective diagnostics and policy dialogue with senior officials and politicians. Mongolia is one of the few countries where ADB has supported land administration reform. Given substantial delays in program implementation, questions have been raised as to ADBs comparative advantage in this area. The legal retraining TA developed the legal capacity of the 360 or so legal professionals who attended the courses and to the eight trainers, who subsequently moved to other positions in the private sector. While some significant achievements were realized, progress in several key areas of the program remained limited, according to the PPER of the GRP. Mongolia experienced a downward trend in its fiscal deficits thanks to better expenditure control and improved revenues. 81. In the area of economic management, enactment of the PSMFL in 2002 has helped to clarify the respective roles and functions of the central, provincial, and local governments. Introducing a single treasury account (an initiative supported by IMF and the World Bank) has facilitated treasury oversight of public expenditures. PSMFL support for public accounts and
20

ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Mongolia for the Second Phase of the Governance Reform Program. Manila (Loan 2010-MON, for $13.5 million, approved on 14 October).

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audits has contributed to much better control over expenditures and better estimates of expenditures and revenues in central ministries. A public investment program was prepared for 20022004 but subsequently has not been updated. Selected ministries, including health and education, have improved their strategic business planning, while other ministries and local governments have made little real progress. Weak priority setting and program costing has rendered those strategic plans of little use. While medium-term fiscal forecasts, 3-year budgets, and output budgets have been prepared, what is reported to Parliament is a single-year budget that is highly detailed with expenditure line items. The introduction of service contracts between central ministries and provincial and local governments, and of performance contracts for individual staffers, has strengthened accountability and enhanced staff management, though Mongolias public service remains heavily politicized and suffers frequent staff turnover. International accrual accounting standards have now been officially adopted by the Government, but agencies operate by cash accounting and then prepare accrual financial statements at yearend for auditing. Mongolias central auditing function has been strengthened, and financial audits are undertaken based on modified interim accounting standards issued by the Ministry of Finance. 82. The PSMFL reform program has strengthened the authority of key central ministries to the neglect of local ministries. Although ADB provided a series of TA grants to build local government budgeting and planning capacity, the implementation of the PSMFL caused local agencies to loose control over local expenditures in areas such as health and education, and program managers lack the flexibility to modify budgets to suit local needs. Many mid-level managers do not fully understand the PSMFL reforms or apply the associated tools and techniques. Public performance reporting is quite variable across ministries, with some agencies providing only a very limited range of information to the public. Agency practices in terms of human resource management are generally inconsistent with PSMFL requirements for a merit-based public sector. The Government Service Council lacks the capacity to fulfill its mandate, and government agencies are often heavily politicized. Despite detailed advice provided in 1998 regarding changes required to laws affected by PSMFL passage, inconsistencies remain in, for example, procurement, civil service, and consolidated budget laws. These differences cause operational delays, as inconsistencies are addressed case by case. 83. ADB capacity-building support has helped the country develop the basic institutional infrastructure needed to conduct procurement under externally financed capital projects. The TA for Capacity Building in Project Accounting was successful in building the capacity of EAs to prepare project accounts in a timely manner and according to generally accepted accounting standards. A series of TA grants contributed to the formulation of Mongolias Public Procurement Law, sensitized ministry and agency staff on the workings of the new law, developed the capacity of a procurement oversight unit in the Ministry of Finance, and helped the Agency for Construction and Architecture to set up a computerized registry of suppliers, contractors, and consultants. Assistance from the World Bank and the Government of Korea has complemented ADB support in the area of procurement. While the new procurement arrangements are a substantial improvement over previous practices, the public procurement system suffers from political interference, insufficient competition, poor dissemination of tenders and awards, lax oversight of the integrity of the process, and insufficient penalties for corruption. 84. Capacity-building support in the sector was effective in some areas and limited in others. ADB assistance to the Statistics Department on a national sampling frame, statistical analysis methods, and labor force and participatory poverty analysis survey methods has been effective in improving capabilities and enlarging the scope of the national statistical reporting system. Likewise, support to the National Audit Office has built capacity for undertaking a variety of external audits. In other areas, ADB has tended to provide advisory assistance to change

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fundamental laws and thereafter provide support for a few years to help the Government implement them. In those cases, TA to develop capacity has generally been too short, insufficiently coordinated with assistance provided by other development partners, and not based on a rigorous diagnosis of capacity gaps. The design of capacity development TA has given insufficient consideration to the scope of conceptual changes in the paradigm shift from a planned to a market economy or to the frequent turnover of civil servants. 85. Efficiency. ADBs support for law, economic management, and public policy was rated as less efficient. Since 1997, ADB has supported the formulation of, or amendments to, a substantial number of laws and regulations and also provided a significant number of TA grants to develop institutional capacity to implement new laws. In the public sector and fiscal management, the first governance program provided support to the budget, was disbursed in a timely manner, and helped overcome a fiscal crisis. However, there has been considerable duplication of effort. ADBs first governance program loan in 1999 led to the preparation of various guidance materials and manuals to support the implementation of financial management reforms. Under ADBs second program loan in 2003, a similar set of guidance materials are again being prepared. Despite funding for the preparation of a plan for implementing the PSMFL under project preparatory TA for the 1999 loan and again under the 1999 loan itself, the 2003 loan is again funding preparations for such a plan. The second governance program loan suffered 3 years of implementation delays. In general, too little TA resources have been provided to achieve the desired capacity-development outcomes, especially when fundamental changes were envisaged in the Governments role and the way the Government was managed. In terms of outcomes, there is limited evidence that public spending has become more efficient in achieving outcomes or better tailored to suit the needs of diverse local communities. Parliament continues to make policies and programs without sufficient prior analysis or screening by the Government. Budgeting continues to be by line item and input oriented, planning efforts lack prioritization or fiscal realism, and political considerations influence staffing and procurement decisions. 86. Efficiency has suffered because of insufficient coordination between ADB and the World Bank. ADB supports the introduction of output-based budgeting while the World Bank supports program-based budgeting. ADB supported the rapid implementation of governance reforms in Mongolia while the World Bank favored a more incremental approach. Both agencies have developed procedures for producing binding budget ceilings as part of central Government financial management reforms. 87. Sustainability. ADBs support for reforms in the areas of law, economic management, and public policy was rated as less likely sustainable. ADB has supported the formulation and amendment of a considerable number of laws and regulations, particularly on commerce. While there have been positive impacts resulting from some laws that ADB has supported, insufficient resources have been provided to support their implementation. Apart from TA training some judges in commercial law over 2.5 years, no support has been provided to enhance the judiciarys capacity to adjudicate on new and amended laws. Issues associated with the quality of legal drafting and the lack of consistency with Mongolias civil law tradition are cause for longer-term concern. TA to support institutional capacity development has been too short to respond to the regular changes in the civil service resulting from political decisions and too focused on the central Government. Limited staff numbers, a shortage of advanced skills, limited in-house training capacity, and the lack of required organizational systems result in agencies being unable to comply with the requirements of the PSMFL. The PPER of the GRP rated the program as less likely to be sustainable. The PSMFL is illustrative of the impact that an overly ambitious and poorly sequenced implementation strategy can have on the sustainability of reforms to public

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resource management. While there have been positive outcomes resulting from ADBs support for the GRP, insufficient resources have been provided to support its progressive implementation. 88. The sophisticated planning, output-budgeting, performance-contracting, multi-year fiscal frameworks, and accrual accounting requirements introduced under the PSMFL will require (i) depoliticizing staffing and public investment priority setting; (ii) establishing an appropriate division of labor between Parliament and the Government in public policy formulation and public expenditure management; (iii) establishing the programs and program priorities of key ministries and agencies; (iv) developing and regularly updating a prioritized, multi-year public sector investment program; (v) effectively planning and budgeting in local governments; and (vi) developing effective capacity for internal auditing and reporting in the main Government agencies. In addition, conflicts between the PSMFL and other laws affecting the budgeting and management of the public service will need to be formally resolved. The prospects that these conditions, which are essential to the success of the PSMFL, will be met are limited, particularly in the near term. Other development partners have suggested a need to scale back aspirations in this area and concentrate instead on a more limited set of reforms, such as program budgeting, that appear to be within the reach of Mongolias government institutions. Neither the ownership, the understanding, nor the techniques have been embedded after 6 years of support for extensive public sector management reforms, which does not augur well for sustaining these reforms in the years to come. 89. Impacts on the Rule of Law. ADBs support for the rule of law has put in place the legal frameworks to facilitate private sector participation in telecommunications and civil aviation, both of which promptly attracted large foreign investment inflows. ADB assistance for improving prudential regulations in the banking sector and the legal framework for the capital market has facilitated the introduction of new financial market productse.g., insurance, leasing, and mortgagesthat have witnessed rapid growth in recent years. In those areas, the impact of ADB assistance was substantial. The implementation of laws drafted with ADB assistance has, however, been inconsistent, and too little consideration has been given to the quality of legal drafting and the effect of transporting laws from a common law jurisdiction to a civil law tradition. In the area of legal capacity building, ADB proposed supporting the establishment of an institution capable of sustaining a long-term training capacity but did so with short-term TA resources that were insufficient to achieve the planned outcome. 90. Economic and Public Sector Management Impacts. ADB support for public sector management reform has contributed to significantly improved fiscal processes and to the restoration of a sustainable fiscal balance. Most former extra-budgetary funds have been integrated into the budgeting, accounting, and reporting processes. All bank accounts of Government agencies and special funds are incorporated in a treasury single account at the Ministry of Finance. Public spending is subject to routine audits by the National Audit Office, and Parliament exercises regular oversight of the budget and its execution. The gap between actual and planned recurrent expenditures has narrowed over time, reflecting an absence of cashrationing and reflecting the Governments ability to meet routine commitments in a timely manner. A combination of more disciplined budget processes, stronger expenditure controls, and improvements in revenue administration have contributed to a substantial improvement in the fiscal balance. The overall budget deficit declined from 12.2 % of GDP in 1999 to 7.0% in 2000 and 5.4% in 2001. Since 2005, the budget outturn has recorded a surplus for 3 years in a row. Capital spending, albeit still low, has recovered from 3.2% of GDP in 2005 to 9.8% in 2007, though the amount budgeted for capital spending continues to exceed what is disbursed by a margin of 50% or more. Underpinning fiscal stability, revenue collection has been on a steadily increasing trend, rising from 30.1% of GDP in 2005 to 40.6% in 2007. These are substantial impacts of ADB assistance.

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91. One of the most significant outcomes of the GRP was its contribution to enhancing awareness of the need for public sector administration and financial management reforms. The PSMFL triggered debate on the desired level of autonomy for budgetary bodies at provincial and local government levels within the framework of the Mongolian Constitution. The PSMFL requires local bodies to deliver their outputs in accordance with policy priorities and performance contracts established by sector ministries and other relevant bodies that coordinate economic activities at the central and local levels. These provisions have been discussed extensively and reviewed by stakeholders, including the budgetary bodies, provincial officials and the major political parties. 92. The parliamentary process over 19972002 ensured that the various provisions of the legal framework were actively debated. Local concerns were discussed in various forums held between the standing committees of Parliament and groups of provincial governors. In the civil service, the overriding concern has been in relation to the (i) possibility that provincial and local agencies may lose their independence and control and (ii) capacity constraints that would impede the effective implementation of reforms. Despite these concerns with the PSMFL, there was widespread recognition of the need for Mongolia to reform its public sector. 93. However, some weaknesses remain. Contrary to these positive trends, the size of the public sector has increased at a rapid pace since 2002 and is budgeted to exceed half of the GDP in 2008, with public spending dominated by current outlays including higher outlays for subsidies than for capital expenditures. Budget management responsibilities and performance accountability arrangements have concentrated public spending authority in the hands of central Government ministers and weakened the authority of local governments and agencies responsible for delivering services. The national budget continues to be specified and approved annually in the form of highly detailed expenditure line items, rather than on a functional basis, and it is neither results oriented nor rooted in a medium-term expenditure framework. Strategic business plans lack prioritization and realism, and there is very little relationship among strategic business plans, medium-term expenditure frameworks, and the annual budget. Budgeting continues to be conducted by cash accounting rather than by accrual accounting. The lack of internal auditing capacity limits the scope of fiscal controls, while the actual use of performance indicators to assess expenditure outcomes is rare. 94. Other Impacts. ADB assistance has contributed to a public procurement system that fosters competition, transparency, and accountability. While the implementation of the system continues to be marred by institutional weaknesses, a growing number of private firms participate in public tenders. Given the large number of tenders, few have been challenged in court. Combined with reforms in public sector accounting and auditing, the adoption of a sound, transparent, and accountable public procurement system has facilitated aid mobilization and utilization. 95. Overall Impacts. Based on impact assessed in various governance areas, the impact of ADB assistance in law, economic management, and public policy sector was rated as substantial on the low side. 96. Sector Lessons. The transition process required that ADB provide extensive and wideranging support for establishing laws and institutional arrangements for a market economy and for making the public service supportive of the private sector, accountable, and responsive to the needs of the poor. Much had to be accomplished in a very short time in a setting that was rapidly evolving, and with few resources and a dearth of information or experience to build on. Intentions

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were good and operations were relevant, but performance outcomes were decidedly mixed. Three key lessons can be derived: (i) Building on a nations legal tradition. Consideration should be given to the effect on legal integrity of providing technical advisors to bring in laws from a legal tradition different to that of the nation they are advising. Since 1995, ADB has been aware that the Government required assistance in developing legal drafting capacity. In contrast to the considerable resources provided to ensure expert technical advice was provided to formulate new laws or amendments, very little assistance was provided to improve the quality of legal drafting. (ii) Linking legal reform to capacity-building diagnostics. Laws were drafted under considerable time pressure and often drawing on international best practices. Once new laws were adopted, ADB then provided support to help build the institutions that would put them in place. In some instances, this was successful, but in many cases it resulted in institutions with large capacity gaps and a highly fragmented technical assistance response that, in the short term, substituted for local capacity and relied excessively on training to build the capacity of officials, many of whom have moved on. A more systematic approach to capacity development, pilottesting institutional innovations, and developing new laws within the Mongolian legal tradition would have been more effective. (iii) Overly ambitious public sector management reform. Reforming public financial management systems is first and foremost a political task. It is a long-term process, for which some authors consider 1525 years a realistic time frame. Public financial management systems are highly path dependent, which means that a staged development approach to managing the change process is more likely to be successful than the big bang approach that was applied in Mongolia. International experience suggests that a big bang approach can generate rapid progress in the early stages of planning and piloting reforms, but the subsequent mainstreaming of new practices is often delayed and erratic. Given the nationwide implications of the government reforms embodied in the PSMFL, an implementation strategy that piloted innovations and then developed procedures and practices following a learn-by-doing approach would have been more effective in building ownership and understanding of complex public sector management reforms. Moreover, the very advanced nature of New Zealand-style public sector management reforms and the lack of capacity to implement them in Mongolia has meant that progress has been mixed and other key donors have pursued quite different fiscal reform strategies. The key lesson for ADB is the need to carefully and candidly assess the feasibility of major governance reforms before offering support and to secure the cooperation of other development partners before launching such initiatives. 97. Sector Recommendations. The focus of ADB assistance for improvements in economic governance should be narrowed from reforming public sector management under the PSMFL to a more realistic emphasis on improving core economic management functions, particularly in public sector financial management. Ensuring that there are robust forward plans for public investment; that projects are formulated and screened properly; and that project procurement takes place in a fair, transparent, and competitive manner will make a valuable contribution to combating corruption and improving service delivery. Assistance in these areas may be provided in close cooperation with other development partners. In terms of legal reform, ADB should consider helping the Government to review current laws for their consistency with the countrys civil law tradition and developing legal drafting capacity in the Ministry of Justice and Parliamentary Secretariat.

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98. Development partners have suggested a need to scale-back aspirations for financial management reform in Mongolia and to concentrate on a more limited set of initiatives, such as program-based budgeting, that appear to be within the reach of Mongolias government institutions. With the impending closure of its GRP ll loan, ADB can take this opportunity to review its comparative advantage and strategic approach to governance reform in Mongolia. F. Agriculture Sector

99. Sector Challenges and Government Strategies. Agricultures share in the economy has steadily declined since 1999, accounting for just 21% of the GDP in 2007. Livestock accounts for more than 84% of sector output, with the balance contributed by crops. A series of severe droughts from 1999 to 2002 caused a decline in livestock numbers from 30.2 million in 2000 to 23.9 million in 2002. Subsequently, livestock numbers have rapidly expanded, reaching an estimated 40.3 million in 2007. Government programs have focused on the need to improve pasture management, rehabilitate wells, and develop commercially viable cropping systems. Efforts to modernize agriculture have been confronted by (i) high levels of poverty among rural herders; (ii) difficult climatic conditions, poor transport systems, and the small domestic market; (iii) substantial climatic and market risks with few mitigating measures; (iv) low productivity in cropping and livestock from the poor quality of seed stock, poor animal nutrition, disease susceptibility, inefficient crop harvesting and marketing, and a weak technology base; (v) ineffective private support services and under-resourced public support services; (vi) a lack of clear property rights for land and water; (vii) limited access to rural finance on affordable terms; and (viii) mounting pressure on the natural resource base, including degraded pastures in periurban areas, abandoned marginal croplands, decayed water management facilities such as wells and irrigation canals, poor soil fertility, and soil erosion caused by deforestation and mineral extraction. Although successive governments have supported market-oriented development, the Government continues to intervene in commodity markets to foster food security. The Governments agricultural strategy was ratified by Parliament in the 2003 Policy of Government on Food and Agriculture, which included measures to (i) create favorable economic and business conditions for agricultural development; (ii) increase productivity and the output of the main commodities; (iii) improve the availability of safe, high-quality, organic food products; and (iv) foster balanced development of pastoral and intensive farming, improved water supply, risk management institutions, improved veterinary and breeding services, and sustainable pastureland tenure and fodder supply. 100. ADB Assistance. ADBs goals in agriculture sector development have been to develop a more market-oriented, efficient, and sustainable agriculture sector and to reduce poverty by providing more income-generating opportunities in rural areas. This was to be realized by support for establishing competitive agricultural markets, restructuring public services, and improving the capacity of private and NGO service providers to increase the productivity and profitability of agricultural production. Toward these strategic objectives, ADB assistance included a comprehensive sector review in 1993 followed by the $35.0 million Agriculture Sector Program in 1995, which aimed to support a reform program oriented toward promoting competitive agricultural markets. This was followed in 2001 by the Agriculture Sector Development Program (ASDP), which included a $10.0 million investment project and a $7.0 million program loan (Appendix 3) and aimed to support the disengagement of the government from nonessential services and the private sectors assumption of these functions (i.e., supplying seed, vaccines, equipment, outreach services, and rural financial services) and to reform the legal framework to support cooperative development and community-based resource management. The project targeted four poor provinces in the western region and included (i) support for well rehabilitation,

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veterinary services, cooperative development, and rural communications; (ii) horticulture development; and (iii) a credit line for short-term loans to farmers. The ASDP has addressed rural lending by providing training for commercial bank staff to familiarize them with the unique and sitespecific characteristics of agricultural production and training borrowers in repayment responsibilities and general banking requirements. ADB helped the Government to develop an agriculture sector strategy to attract and coordinate development partners assistance to the sector. 101. Relevance. ADBs strategies and programs for assisting Mongolias agriculture sector are assessed as relevant to the sector. ADBs program loan aimed to divest the Ministry of Food and Agriculture of its commercial functions, streamline the management of the crop fund, and reorient the ministry away from direct supply-side interventions and toward a more market-friendly policy role. ADB support for preparing the Agriculture Sector Development Strategy (20062015) helped provide a framework for the long-term development of the sector. Capacity-building support aimed to develop policies and strategies for land law and pastureland management, both of which are vital to animal husbandry and natural resource conservation. ADBs investment project assistance aimed to develop market-oriented solutions to rural poverty and was concentrated in western Mongolia, where problems of isolation and resource degradation hampered agriculture and livestock development. ADB harmonized its assistance with that of other development partners and has provided support to the Ministry of Food and Agriculture to mobilize and coordinate assistance from its development partners. 102. Effectiveness. Overall, ADBs agriculture sector operations were rated as effective on the high side in meeting sector goals and objectives. ADB assistance has been successful in developing a market-oriented agricultural strategy, which was positively received by the Ministry of Food and Agriculture, but the strategy has not been formally endorsed or adopted by the Government. The ASDP loan aimed to streamline sector policy, reform the management of the crop fund, and privatize a number of state-owned companies, the most important of which was the Crop Production Company. New land and water laws have established the principle of herder group management of natural resources, which is intended to help combat overgrazing and resource degradation. Export license procedures have been simplified and made more transparent. Competitive bidding is used for distributing commodity aid, and procedures were adopted for the management of the crop fund. The agriculture bank has been restructured and privatized. Fiscal policies have been adjusted to improve incentives for agricultural investment. Fees for private veterinary services have been decontrolled, and meat inspection and veterinary licensing standards have been established. Agriculture insurance laws have been revised. Nongovernment organizations have been included in the implementation of the Green Revolution program, which has helped to boost the yields of a number of crops. At the same time, loans made under the wheat fund and agriculture fund continue to suffer high default rates. The sole producer of vaccines, Biokomobinat, operates at a loss because of prices paid below market for vaccines for government programs. The independent Science and Technology Council has been established but has little private sector involvement and low levels of funding. There has been relatively little cost recovery in extension services, and the extension system remains underfunded and with little reach. There are, moreover, concerns about the degree to which market-oriented approaches will continue to be adopted. For staple crops, the Government continues to use the crop fund to subsidize production, primarily by channeling low-cost loans to producers, for which repayment rates have historically been poor. 103. On a small scale in four western aimags (provinces), the ASDP has established production models that are market oriented, efficient, and sustainable, and which contribute to poverty reduction by boosting productivity and expanding income-earning opportunities. Nearly

Appendix 6

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7,900 farmers have received training and outreach support on seedling preparation and greenhouse farming, plant protection, small-scale irrigation, vegetable storage and processing, and marketing for processed products, which has substantially boosted farm incomes and contributed new income-earning opportunities. Average yields per hectare in the project aimags increased by 14% for cereals, 60% for fodder, and 27% for potatoes between 2001-2006, while beneficiary incomes rose 1060%. Some 328 wells were rehabilitated, benefiting 3,200 herder families and securing sustainable water sources for 2 million hectares of pastureland. A system in which herder groups manage water holes and collect fees to operate the water pumps has been established. Training has been provided under the veterinary service component to serologists, epidemiological staff, and meat inspectors on the detection of economically important diseases, meat inspection, sanitation in meat plants, and hygiene. This has been effective in demonstrating that livestock in western Mongolia is free of foot-and-mouth disease and has helped producers maintain their exports to the Russian Federation. More than 100 cooperatives in 39 soums (counties) were assisted, though they have tended to be more groupings of extended family members than commercial undertakings. Consequently, the objective of developing businessoriented group marketing of livestock products was not fully achieved. A rural microfinance facility was introduced as an alternative to Government-channeled soft loans through a commercial bank. Nearly 30,000 loans with a total value of $30 million were provided to herders and farmers to help them purchase animals, grow and market crops, and develop other income-generating activities. The repayment rate on these loans is nearly 98%. 104. Efficiency. ADB assistance to the agriculture sector is rated as efficient. Although the start up of the ASDP suffered delays, once the project started, implementation proceeded smoothly, and the project has generated benefits that are substantially in excess of its costs. Preliminary calculations suggest that the project has had relatively high financial and economic rates of return, with project staff estimating a financial rate of return of 28% and an EIRR of 38%. 105. Sustainability. Overall, the sustainability of the outcomes of ADBs sector assistance is considered likely. Cost-recovery principles have been applied, and fees are being paid for the use of rehabilitated wells and irrigation schemes. Repayment rates for agricultural micro-credits are good, and greenhouse production systems are profitable and likely to continue in operation. Strong private demand for livestock support services should ensure that capacities created with project support continue to be utilized. What is somewhat uncertain, however, is the extent to which the Government will abandon its efforts to subsidize and control agricultural markets and adopt the more market-oriented policies embodied in the agriculture sector strategy. A tendency to vacillate between centrally planned and market-oriented policies and programs continues to hamper productivity improvement in the sector. 106. Impact. The impact of ADBs sector assistance was assessed as modest on the high side. On the policy side, the main accomplishments include the liberalization of livestock exports and the establishment of a legal framework for sustainable land and pasture management. However, while the Government has reduced its use of price controls and trade-distorting measures, it continues to adopt a topdown and interventionist approach to sector development. On a small scale, the ASDP has created models of high-productivity agriculture and community management of natural resources. The project has succeeded in introducing approximately eight new types of vegetables, as well as units for vegetable processing. It has helped strengthen institutions (e.g., surveying livestock, rehabilitating serum laboratories, and training private veterinarians) so that livestock products in the four western aimags could continue to be exported to the Russian Federation. The well-rehabilitation program has conferred long-term user rights to the wells to groups of herdsman on the condition that they operate and maintain them, providing a model for community participation and management. The project has demonstrated that micro-credits are a

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viable business for banks. While there was only one commercial bank serving the four aimags at the start of the project, there are now five commercial banks with an active presence in the region. The capacity of the Ministry of Food and Agriculture, herders, farmers, and local nongovernment organizations has been strengthened, particularly at the local level, though the benefits have been concentrated in a relatively small group. 107. Sector Lessons. On a pilot scale in four western aimags, ADB has made good progress in improving the capacity of the private sector and mainstreaming environmental protection in pasture management, but much more remains to be done to boost productivity, diversify rural incomes, reverse overgrazing, and link domestic producers to international markets. Scaling up what has worked well under the ASDP could serve to demonstrate to the Government that decentralized, market-friendly interventions can have a powerful and lasting payoff. 108. Sector Recommendations. Though the direction of recent economic development has reduced the macroeconomic importance of agriculture, the sector continues to employ a substantial portion of the active workforce. Although that percentage is likely to decline, especially if an overdue reform of the herding subsector takes place, agriculture will continue to provide most rural employment and safeguard rural livelihoods over the near to longer term. Rather than eliminating rural concerns, rural-urban migration of recent years is modifying the structure of the sector, giving more importance to semi-intensive and intensive animal husbandry and to diversified crop production in peri-urban areas. Helping the Government to develop high value chains that link peri-urban farmers to urban retailers would require support for improved technology, market information, farmer cooperation, and rural finance. Support would be needed to assist the Government's reform of property legislation so that high-value crop producers in periurban locations have secure land tenure. Taken together, these trends provide a good case for ADBs support of the sectors structural transformation. Associated with this is the need to acknowledge the role agricultural activities have to play in future climate mitigation efforts for example through efforts focusing on improved agricultural land management which has huge annual carbon dioxide mitigation potential. 109. Rural Mongolia also comprises a unique mixture of environmental assets of local and global importance and a way of life. Taken together, these provide a technical justification for ADB involvement in natural resource conservation (e.g., combating desertification and over-grazing) and sustainable resources use. These needs are perhaps the greatest in the case of water and grassland ecosystems both of which suffer from a spatially unbalanced use, a sector-based rather than integrated (e.g., catchment-based) management, and insufficient protection from degradation and depletion that threaten the important non-use value of these resources. Consideration for future ADB assistance should take into account the Governments own programs, contribution by other development partners, and innovative assistance modalities to maximize development impact.

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ADB CLIENT RESPONSIVENESS SURVEY A. Introduction

1. The country assistance program evaluation triangulation process is designed to collect empirical evidence on the contribution of the Asian Development Bank (ADB) to outcomes through a perception survey, data analysis, and literature review. As part of the process, a client and stakeholder survey was conducted by the Country Assistance Program Evaluation Mission to gauge different stakeholders perceptions of ADBs responsiveness to Mongolias development needs. A questionnaire was translated into Mongolian and mailed in Ulaanbaatar to 180 stakeholders, including government representatives from executing and implementing agencies, private business, nongovernment organizations, civil society and academic institution representatives, and the general public. A total of 115 people responded to the survey, of which 35% were from government organizations, 26% from the private sector; 13% from nongovernment organizations and academic institutions, and 26% the general public. 2. The questionnaire consisted of 15 multiple-choice and two open-ended questions. The multiple choice questions pertained to the needs of the country; performance in key sectors; and better governance, capacity building, aid coordination, and poverty reduction. Multiple choice questions touched on issues related to the perceived strengths and weaknesses of ADB assistance. The open-ended questions were designed to solicit the views of stakeholders on future poverty reduction priorities and help identify the challenges and constraints that ADB could focus on. 3. A test run of the questionnaire revealed that some respondents had insufficient exposure to ADB and found it difficult to respond to the questions. Accordingly, the option of do not know was added to each of the multiple choice questions. For some questions, up to 30% of respondents selected do not know. Table A7 summarizes the findings of the multiple-response questions. B. Survey Findings

4. ADB Relevance and Effectiveness. The first set of questions (numbers 13) were designed to assess the relevance and effectiveness of ADBs operations. More than 80% of respondents believed that ADB assistance was relevant to the nations priorities and reasonably effective in achieving results. The majority felt that ADB had made a positive contribution to building institutional capacity. There were concerns, however, about the sustainability of assistance results, with nearly half of respondents expressing the view that progress made in the past was less likely or unlikely to be sustained in the future. 5. ADBs Assistance in Governance Reform. Respondents reported ADB assistance as relatively ineffective in improving governance. Some two thirds of all respondents thought that ADBs assistance in terms of improving rules and regulations to improve the transparency and accountability of government agencies and to facilitate private sector development had a modest to negligible effect. This response was believed to be conditioned by the combination of rising corruption and weaknesses in public service delivery. 6. Delivery of ADB Services. A series of survey questions (numbers 610) aimed to gauge the effectiveness of different aspects of the way in which ADB delivers services. Most of respondents thought that the Mongolia Resident Mission was helpful, but more than half suggested that it should be more client oriented and that the staff should visit the field more often.

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ADBs greatest strengths were thought to be its ability to foster ownership by beneficiaries and executing agencies, consistent support in key areas, and responsiveness to national needs and government requests. The complex design and approval process of loans and technical assistance programs was named as ADBs main weakness. Nearly 40% of respondents did not know how ADB could improve its operations. The remainder suggested that ADB should combined sector-wide development approaches in key sectors with Resident Mission administration of projects. 7. Aid Coordination and ADB Positioning. The last set of questions related to aid coordination and the role that ADB played in the multi-donor assistance effort. More than 90% of respondents thought that aid coordination was weak and that corrective actionsuch as greater dialogue, joint strategies, and program and portfolio reviewswould be needed to boost coordination. Nearly half of respondents saw stronger systems of internal coordination among the government agencies responsible for planning, monitoring, and poverty reduction were crucial to improving aid effectiveness. Many respondents felt that there was a need for much stronger policy coordination to provide a consistent framework around which external aid could be mobilized and utilized. Some 80% of respondents felt that ADB should continue providing assistance to the sectors it has assisted in the past. There were concerns that assistance to the banking sector had been insufficient in the past and that much more effort would be needed in the future, given the recent failure of the savings-and-loans cooperatives and continued problems of high intermediation costs and low access. 8. Future Priorities. Respondents felt that, in the future, ADB should accord more emphasis to social development by providing more resources to education, health, and social assistance, while continuing to create economic infrastructure, support rural and regional development, facilitate access to new knowledge, boost small and medium-sized enterprises, and enhance access to credit. Respondents felt that more emphasis should be placed on promoting good governance, particularly to combat corruption and strengthen the rule of law. Respondents said that ADB assistance should be used to help the country build its indigenous industries, including the processing of minerals, cashmere, other wool, sheepskins, other hides, and other animal products.

Appendix 7

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Table A7: Summary of Client Responses

1. Questions How useful is ADB's assistance in terms of relevance to the country's development priorities? Answers Highly relevant Relevant Partly relevant Not relevant Do not know Responses How do you perceive Highly effective ADB's assistance in Effective terms of achievement of Partly effective development Ineffective outcomes/impacts in the Do not know key sectors assisted? Responses How do you perceive Very likely ADB's assistance in Likely terms of sustainability of Less likely its projects in the key Unlikely sectors assisted? Do not know Responses How do you perceive Substantial ADB's assistance in terms Significant of contributions to Modest strengthening institutional Negligible capacity of government Do not know agencies to deliver Responses services more effectively? How do you perceive Substantial ADB's assistance in Significant terms of improving govt. Modest accountability and Negligible facilitating private sector Do not know development? Responses What is your perception Very useful Useful about the role of ADB's Not very useful Mongolia Resident Not useful Mission in helping to Do not know improve ADB's Responses operations? Please suggest way(s) to Consult more improve MNRM's often operations in the future Visit project sites (you may tick more than often one answer). Be client oriented Other Responses What do you perceive to Responsiveness be the main strength(s) Consistency of ADB's operations (you Fostered may tick more than one ownership answer)? Other Responses Govt 4 20 14 2 0 40 3 19 15 3 0 40 7 17 14 2 0 40 7 15 17 1 0 40 5 13 17 5 0 40 7 15 14 4 0 40 12 11 19 4 46 11 12 15 6 44 Private Sector 1 11 15 2 1 30 2 12 12 2 2 30 0 11 15 3 1 30 1 11 8 8 2 30 1 11 15 1 2 30 4 18 2 6 0 30 9 11 9 6 35 8 8 11 5 32 NGO, Academy 0 9 6 0 0 15 3 5 7 0 0 15 0 6 7 2 0 15 0 8 2 5 0 15 1 4 2 8 0 15 1 7 1 6 0 15 3 7 6 2 18 4 7 6 1 18 Total Public 0 8 8 8 6 30 0 10 11 2 7 30 3 9 8 4 6 30 0 3 9 11 7 30 0 4 7 13 6 30 0 2 11 6 11 30 2 7 14 10 33 8 4 2 20 34 5 48 43 12 7 115 8 46 45 7 9 115 10 43 44 11 7 115 8 37 36 25 9 115 7 32 41 27 8 115 12 42 28 22 11 115 26 36 48 22 132 31 31 34 32 128 % 4.3 41.7 37.4 10.4 6.2 100 6.9 40.0 39.1 6.2 7.8 100 8.7 37.4 38.2 9.5 6.2 100 6.9 32.2 31.3 21.8 7.8 100 6.2 27.8 35.6 23.5 6.9 100 10.4 36.5 24.4 19.1 9.6 100 19.7 27.3 36.4 16.6 100 24.2 24.2 26.6 25.0 100

2.

3.

4.

5.

6.

7.

8.

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9.

10.

Questions What do you perceive as the main weakness(es) of ADB's operations (you may tick more than one answer)? Please suggest way(s) to improve ADB's operations in the future (you may tick more than one answer).

11.

12.

What is the most important way to improve Government's leadership and ownership in the country's development agenda? Are there any sectors that you think ADB should reduce/withdraw assistance? If yes, please specify sector(s) and reason(s). What is your perception about the level of aid coordination in the country?

Answers Incoherence Complexity Lack of synergy Other Responses Be more focused Local project administration Sector-wide approach Other Responses Aid coordination Internal coordination More involvement Other Responses No Yes: -ADB is not good -others important -needs more effort -other Responses Highly satisfactory Satisfactory Need improvement Much improvement required Do not know Responses Highly satisfactory Satisfactory Need improvement Much improvement required Do not know Responses More coordination Policy dialogue Joint meetings Other Responses

Govt 8 14 9 11 42 10 15 13 6 44 6 20 14 0 40 38 2 0 0 0 40 0 7 27 6 0 40 2 10 25 3 0 40 12 10 15 3 40

Private Sector 13 10 6 4 33 5 6 15 4 30 5 15 10 0 30 19 2 1 8 0 30 2 1 14 13 0 30 2 2 18 8 0 30 9 8 11 2 30

NGO, Academy 3 5 7 1 16 3 5 5 3 16 2 7 4 2 15 11 0 1 3 0 15 0 0 8 7 0 15 0 3 10 2 0 15 3 5 4 3 15

Total Public 0 9 4 20 33 9 4 15 6 34 5 13 7 5 30 21 0 0 0 9 30 0 0 14 16 0 30 0 3 11 7 9 30 0 21 4 5 30 24 38 26 36 124 27 30 48 19 124 18 55 35 7 115 89 4 2 11 9 115 2 8 63 42 0 115 4 18 64 20 9 115 24 44 34 13 115 % 19.4 30.6 21.0 29.0 100 21.8 24.2 38.7 15.3 100 15.6 47.8 30.4 6.2 100 77.4 22.6

13.

100 1.7 6.9 54.9 36.5 0 100 3.5 15.6 55.7 17.4 7.8 100 20.9 38.3 29.5 11.3 100

14.

What do you think about ADB's efforts in aid coordination with other partners: government agencies, donors, private sector, civil society etc.?

15.

Please suggest way(s) in which ADB should improve aid coordination activities.

ADB = Asian Development Bank, Govt = Government, NGO = nongovernment organization, MNRM = Mongolia Resident Mission. Source: Operations Evaluation team.

MANAGEMENT RESPONSE TO THE COUNTRY ASSISTANCE PROGRAM EVALUATION FOR MONGOLIA: FROM TRANSITION TO TAKEOFF

On 23 October 2008, the Director General, Operations Evaluation Department, received the following response from the Managing Director General on behalf of Management: I. General Comments 1. We welcome the Country Assistance Program Evaluation (CAPE) for Mongolia. We find it comprehensive and carefully researched. We note that the CAPE has rated ADBs assistance to Mongolia as successful. We agree with this assessment and the overall conclusions of the CAPE, including recognition of the difficulties faced as the country strategy implementation mechanism shifted from program to investment projects. 2. The CAPE indicates that Mongolia needs to (i) exploit its mineral wealth as efficiently as possible and use that wealth to combat poverty; (ii) build human resources; (iii) expand opportunities for private sector-led employment creation; and (iv) reduce its vulnerability to external shocks. We concur and will use these and other CAPE recommendations in the development of the Country Partnership Strategy (CPS) 2009-2013 which is currently under way. II. Comments on Specific Recommendations Recommendation 1. Country Context and Repositioning ADBs Role 3. We generally concur with recommendations 1 (ii)1 (iv). However, we question the validity of recommendation 1 (i), and question its coherence with other recommendations, and the country context. Mongolia is a small, financially and environmentally vulnerable country. It is too early for ADB to consider shifting from concessionary finance to a source of knowledge-based support. Basic institutions and service delivery are still at very rudimentary levels of development. Indeed, recommendations 1(ii)1(iii) correctly state that there is a need to continue developing capacity in a number of critical areas. This includes sound and transparent financial management, service delivery in urban infrastructure and improving education systems. This is crucial to ensure that both Government and ADB investments are used efficiently. Further, as pointed out in recommendation 1 (iv), support is required for protection of natural resources. ADB is well placed for this activity given our emphasis on safeguard policies and use of clean technologies. We foresee a need for ADB to continue concessionary financing in the medium term as well as increase efforts in knowledge development and transfer.

Recommendation 2. Strengthening Strategic Focus and Sector Selectivity in ADB Operations 4. We appreciate OEDs views on selectivity in recommendation 2 (i), but do not concur. Our view is that selectivity can be applied at a sector rather than subsector level given Mongolias size and developmental challenges. The program must be sufficiently flexible to allow effective dialogue and project development for the medium term, especially in an economy that has the potential to grow quickly. We also have reservations with regards to recommendations 2 (ii) and 2 (iii) regarding the very narrow focus for assistance to areas where ADB has a long track record. While the strong focus will be on areas within our longterm relationship, new issues such as climate change, environmental concerns associated with new energy technology, and cross-border services are critical for Mongolias future. In Mongolia, it is important that policy and institutional development receive long-term continuous support from ADB across a broad range of issues, and this is an expressed desire of the new government. ADB's continued assistance, provided in a flexible and adaptive manner to respond to opportunities for reform as they arise is important to guide and sustain this process. Recommendation 3. Supporting Private Sector Development and Fostering Public-Private Complementarity 5. We concur fully with the three recommendations. The Government and ADB will need to tackle the following challenges: (i) tariff reforms establishment of an independent tariff agency, monetization of subsidies, etc.; (ii) enforcement of public policiesstrict adherence to the city master plans, transparent licensing systems and procedures, etc.; and (iii) reforms of public governance and management. Well-developed basic, vocational and higher education systems are sensible investments so that the country's youth will be able to compete globally and the economy will diversify. Skills training and improving the quality of basic and tertiary education are areas where ADB can provide much needed assistance and significant impact. Work in development of financial markets, particularly cross-border financing and longer-term financing, will be explored during CPS development. Recommendation 4. Fostering Trade and Investment Flows Regional Cooperation to Boost

6. Regional cooperation is especially significant for Mongolia as a landlocked country with a narrowly-based economy. We concur with recommendations 4 (i), 4 (ii) and 4 (iv). The Central Asia Regional Economic Cooperation (CAREC) membership offers Mongolia an opportunity to strengthen physical and economic links with neighbors in the Northeast Asia region and better realize growth potential. Supporting transport corridors and trade facilitation are priorities under the framework of both CAREC and Mongolia-PRC cooperation. Private sector participation is also highlighted as a theme of the CAREC program, to which more efforts will be devoted. The ongoing policy dialogue to

promote cross-border power projects, financial services, and regional trade will continue to be supported and further strengthened. 7. Recommendation 4 (iii) suggesting exploration of a subregional capital market would be an interesting approach for a small country. However, given geographical and political considerations, a subregional approach may not be feasible. It would be more reasonable to assume that suitably-sized Mongolian companies seeking investors (presumably mining firms at the current time) would choose to maximize their potential market outreach opportunities by listing on key international exchanges where many other natural resource-based companies list. In addition, the financial sector is small and still at an early stage of development with limited human resources available for ensuring robust financial institutions. Therefore, we do not concur with the suggestion on subregional capital market development at this point. As indicated in an earlier OED study, capital market development in small economies, even at the subregional level, may not be an efficient use of scarce resources. Recommendation 5. Improve Portfolio Performance and Client Responsiveness 8. We support this recommendation. We note the successful rating OED has given to the Mongolia program. This is directly related to significant efforts taken upstream at the concept design stage and during project implementation. Indeed, Mongolia Resident Mission established a Project Administration Unit in 2007 to further improve project supervision, monitoring, and implementation. In addition, sector risk assessments have recently been completed in the key sectors of education and urban transport as part of the CPS process, and action plans are being developed to strengthen Government project implementation capacity. 9. Regarding donor coordination, ADB has the lead in coordinating key sectors such as transport and education where a sector-wide approach is currently under discussion. We are also coordinating on a daily basis with agencies such as the IMF and the World Bank which are located in the same building, and regular donor meetings and roundtables are held with ADB. Therefore, we believe that efforts to improve portfolio performance have been underway for some time, and new activities and opportunities continuously explored in many areas, particularly donor coordination. These efforts have led to the success of the Mongolia program.

DEVELOPMENT EFFECTIVENESS COMMITTEE Chairs Summary of the Committee Discussion on 29 October 2008 MONGOLIA COUNTRY ASSISTANCE PROGRAM EVALUATION: FROM TRANSITION TO TAKEOFF 1. The country assistance program evaluation (CAPE) for Mongolia rated ADBs overall operations in Mongolia for the period 1997-2007 as successful, based on the studys top-down (strategic and institutional performance) and bottom-up (sector level performance) assessments. However, from the CAPEs key findings, ADB would be faced with the challenge of remaining relevant and effective, given that the country context has changed, and the past strategy may no longer be relevant in the future. 2. Management agreed with the overall assessment and conclusions of the CAPE, and informed that it would use most of the recommendations in developing the Mongolia Country Partnership Strategy (CPS) 2009-2013. However, Management and OED had differing views on three specific areas of recommendations in the CAPE, namely: (i) gradually shifting from serving primarily as a source of concessionary finance towards becoming a source of new knowledge and catalytic financing; (ii) focusing on a small number of key subsectors to be strategic and selective; and (iii) exploring subregional cooperation in capital market development. 3. Director, OED1 explained how a new strategy by ADB could respond to changes in the country context of Mongolia. He noted that given ADBs engagement in ten sectors and 21 subsectors, ADB would need to be selective and strategically focused to avoid spreading itself too thinly. He also clarified that OEDs point regarding exploring the possibility for regional cooperation in the capital markets meant providing an opportunity for Mongolia to learn about good practices in neighboring countries, which could strengthen its institutional capacity, and exploring opportunities for cross-listing on securities markets. 4. Director General, EARD clarified that ADB had already substantially reduced the number of sectors it is engaged in and, while being selective at the sector level, ADBs operation in the Mongolia would need to be flexible at the subsector level. The current thrust is to focus ADBs support on four key sectors: transport, education, health, and energy. Country Director, Mongolia Resident Mission (MNRM) noted that from the preparation of the last CPS, ADB has already engaged in core sectors. Director General, EARD mentioned that ongoing discussions for the new CPS emphasize reorienting ADBs role with the changing country context, and supporting the government to be flexible in response to external shocks. ADB would continue providing assistance for basic infrastructure without neglecting its catalytic role. The two aspects are not mutually exclusive, but rather complementary, as catalytic financing is a fundamental role for ADB in some sectors. 5. Director General, EARD mentioned how ADB has taken various steps in the last 12 months to improve its portfolio performance in Mongolia, through allocating adequate staff resources for project implementation in MNRM and having project readiness filters in place for EAs. He emphasized that engaging Mongolia in a subregional approach to capital market development may not be feasible. Evaluation of capital market would depend on the impact of the mining sector and overall liquidity situation in the country. Management, however, is active in pursuing capacity building in institutional set-up, prudential regulation, and regulatory framework in the capital market. 1

6. DEC presented differing views on the issue of the development of a regional capital market for Mongolia. Concerns were raised on the appropriateness of the recommendation given the size of the economy, and geographical and political considerations. 7. One DEC member noted that being too selective in sector engagement would limit ADBs flexibility during implementation period. While another DEC member questioned the quality of project supervision and client responsiveness if ADB continues to engage in too many sectors. 8. Some DEC members also inquired about the impact of the current financial crisis on Mongolia. Country Director, MNRM considered the current financial situation as an opportunity to send signals to the government about the external environment and about the risk that the current situation may not be as good as previous projections. Conclusions 9. DEC welcomed the Mongolia CAPE, and noted that, given the volatile situation with commodities prices and dependence of Mongolia on mining resources, there were sufficient challenges ahead in the development of Mongolia. 10. DEC noted that Management has concurred with most of the recommendations of the CAPE including strengthening the strategic focus in ADB operations by being selective in terms of sectors and confining itself to transport, education, health, and energy. DEC recognized the need for flexibility at the subsectoral level within these sectors. 11. As regards capital market development, DEC underscored the need for having a proper regulatory regime in Mongolia to ensure the robustness of the capital market in Mongolia irrespective of its size.

Ashok K. Lahiri Chair, Development Effectiveness Committee