Program Performance Audit Report
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English
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Program Performance Audit Report

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46 pages
English

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ASIAN DEVELOPMENT BANK PPA: BAN 23441 PROGRAM PERFORMANCE AUDIT REPORT ON THE SECOND INDUSTRIAL PROGRAM (Loan 1147-BAN[SF]) IN BANGLADESH July 2000 CURRENCY EQUIVALENTS Currency Unit – Taka (Tk) At Appraisal At Program Completion At Operations Evaluation (November 1991) (April 1994) (March 2000) Tk1.00 = $0.027 $0.025 $0.020 $1.Tk37.64 Tk40.13 Tk51.00 ABBREVIATIONS ADB – Asian Development Bank BFIDC – Bangladesh Forest Industries Development Corporation BTMC – ladesh Textile Mills Corporation EA – executing agency GDP – gross domestic product ICIR – Interministerial Committee on Industrial Reforms ICP – Interministermittee on Privatization MOI – Ministry of Industries PCR – project completion report PME – public manufacturing enterprise PPAR – program performance audit report SDR – special drawing right TA – technical assistance NOTES (i) The fiscal year (FY) of the Government ends on 30 June. (ii) In this report, “$” refers to US dollars. Operations Evaluation Office, PE-546 CONTENTS Page BASIC DATA ii EXECUTIVE SUMMARY iii I. BACKGROUND 1 A. Rationale 1 B.Formulation C. Objectives and Scope at Appraisal 2 D. Financing Arrangements 2 E.Program Completion Report F. Evaluation 3 II. IMPLEMENTATION PERFORMANCE 3 A. Policy Reforms and Institutional Development 3 B. Procurement and ...

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ASIAN DEVELOPMENT BANK PPA: BAN 23441










PROGRAM PERFORMANCE AUDIT REPORT


ON THE


SECOND INDUSTRIAL PROGRAM
(Loan 1147-BAN[SF])


IN


BANGLADESH









July 2000 CURRENCY EQUIVALENTS
Currency Unit – Taka (Tk)


At Appraisal At Program Completion At Operations Evaluation
(November 1991) (April 1994) (March 2000)

Tk1.00 = $0.027 $0.025 $0.020
$1.Tk37.64 Tk40.13 Tk51.00






ABBREVIATIONS

ADB – Asian Development Bank
BFIDC – Bangladesh Forest Industries Development Corporation
BTMC – ladesh Textile Mills Corporation
EA – executing agency
GDP – gross domestic product
ICIR – Interministerial Committee on Industrial Reforms
ICP – Interministermittee on Privatization
MOI – Ministry of Industries
PCR – project completion report
PME – public manufacturing enterprise
PPAR – program performance audit report
SDR – special drawing right
TA – technical assistance











NOTES

(i) The fiscal year (FY) of the Government ends on 30 June.
(ii) In this report, “$” refers to US dollars.




Operations Evaluation Office, PE-546 CONTENTS

Page


BASIC DATA ii

EXECUTIVE SUMMARY iii

I. BACKGROUND 1

A. Rationale 1
B.Formulation
C. Objectives and Scope at Appraisal 2
D. Financing Arrangements 2
E.Program Completion Report
F. Evaluation 3

II. IMPLEMENTATION PERFORMANCE 3

A. Policy Reforms and Institutional Development 3
B. Procurement and Disbursement 6
C. Management of the Program 6
D. Effectiveness of Technical Assistance 6

III. PROGRAM RESULTS 7

A. Achievement of the Objectives 7
B. Sustainability 10

IV. KEY ISSUES FOR THE FUTURE 10

A. Program Formulation 10
B.Ownership and Political Commitment 12
C. Accountability and Governance Structures 13

V. CONCLUSION 14

A. Overall Assessment 14
B.Key Lessons for the Future
C. Follow-Up Actions 16

APPENDIXES 17







BASIC PROGRAM DATA
Second Industrial Program (Loan 1147-BAN[SF])


PROGRAM PREPARATION/INSTITUTION BUILDING
TA No. TA Project Name Type Person- Amount Approval
Months Date
1635-BAN Strengthening of Institutional Framework for AOTA 12 $400,000 2 Jan 1992
Restructuring Public Manufacturing
Enterprises
1636-BAN Improvement of Labor Productivity in Public AOTA 9 $325,000 2 Jan 1992
Manufacturing Enterprises
1637-BAN Implementation of Privatization Program for AOTA 21 $446,000 2 Jan 1992
Public Manufacturing Enterprises

As Per ADB
KEY PROGRAM DATA ($ million) Loan Documents Actual
1ADB Loan Amount/Utilization–SDR ($ equivalent) 90.5 ($125.0) 45.2 ($62.3)
2ount/Cancelation–SDR ($ $62.7)

KEY DATES Expected Actual
Fact-Finding 10-22 Mar 1990
Appraisal 20 Oct-1 Nov 1990
Loan Negotiations 18-20 Nov 1991
Board Approval 17 Dec 1991
Loan Agreement 24 Dec
Loan Effectiveness 16 Mar 1992 20 Jan 1992
First Disbursement 13 Oct 1992
Program Completion 1 Dec 1993 25 Apr 1994
Loan Closing 30 Jun 1994 Apr
Months (Effectiveness to Completion) 20.50 27.15

BORROWER The People’s Republic of Bangladesh

EXECUTING AGENCY Bangladesh Bank and Ministry of Industry

MISSION DATA
Type of Mission No. of Missions Person-Days
Appraisal 1 97
Program Administration
Review 5 76
Tripartite Meeting 2 5
3
Program Completion 0 0
Operations Evaluation 1 30


ADB = Asian Development Bank, AOTA = advisory and operational technical assistance, BAN = Bangladesh, SDR =
special drawing right, TA = technical assistance.
1 As of December 1991.
2 As of April 1994.
3 No program completion review mission was undertaken. The program completion report was prepared based on a
desk study. EXECUTIVE SUMMARY
Reforms as a process of change -- no blueprints please!
During the early 1990s, the Government of Bangladesh implemented a series of reforms
to improve economic performance. The objectives were to (i) create competitive industries, and
(ii) enhance private sector development. Complementing the reforms for trade and exchange
rate liberalization, the Government began reforms to reduce its presence in manufacturing
activities. From 1988 to 1990, the Asian Development Bank provided policy-based loan to
introduce policy reforms for the steel and engineering, textiles, and leather industries. The
Second Industrial Program (the Program) was expected to continue the process of improving
the overall policy environment to promote industrial growth and efficiency. The new
Government’s 1991 industrial policy was accompanied by an ambitious agenda of policy
reforms; the Program was essentially designed to support implementation of this policy as it
related to public manufacturing enterprises (PMEs). The Program was also to implement
divestment and privatization measures for selected PMEs.
On 17 December 1991, the Board approved the Program loan for SDR90.456 million
(about $125 million). Three technical assistance (TA) grants were provided to assist the
Government with program implementation. The TAs supported (i) development of a legal
framework for institutional reform of PMEs, (ii) development of modalities and mechanisms for
privatization, and (iii) assessment of human resources of PMEs and labor productivity of the
manufacturing sector.
The Program focused on seven major areas of reforms: (i) minimizing the Government’s
role in the industry sector in general and in manufacturing in particular, (ii) enhancing
managerial autonomy and accountability of PMEs, (iii) enhancing financial autonomy and
accountability of PMEs, (iv) implementing privatization of PMEs, (v) rationalizing employment,
(vi) developing policy actions for the environment, and (vii) supporting institutional reforms to
provide better oversight of PMEs.
The first tranche of SDR45.228 million was disbursed in two installments in February
and April 1992. Because of the considerable delays in meeting the policy covenants, the second
tranche of the loan was canceled on 24 April 1994. The loan was closed in April 1994. The
program completion report prepared in December 1997 rated the Program as unsuccessful.
This program performance audit report presents an analysis of the Program’s design
and implementation arrangements, an assessment of the Program's effectiveness in initiating
and implementing policy reforms, and overall impact on the industrial economy. Although the
Government announced the new industrial policy in 1991 and initiated wide ranging policy
reforms, overall implementation has been weak and uneven. Several policy covenants remain
unfulfilled.
An important impact expected from the Program was the reduction of the role of the
Government and particularly PMEs within the overall economy. The PMEs’ share in investment,
output, value added, and employment has been reduced substantially.
A major aspect of PME reform was to provide a proper legal framework to enable the
PMEs and sector corporations to function as autonomous companies. By June 1992, all of the
PMEs were to be incorporated under the Companies Act. This legal change was seen as the iv
starting point for restructuring, as it freed the existing PMEs from heavily regulated procurement
processes, and labor and pricing procedures. It was expected that such autonomy would help to
make PMEs commercially viable. The Government did not agree with a crucial policy covenant
of giving PMEs the autonomy to allowmarket wages for their employees. As a result, although
most PMEs now exist as companies, overall autonomy of their boards remains weak. The
financial performance of PMEs continues to remain an area of concern as PMEs continue to
report large losses. The overall financial liabilities of PMEs also remain high. The Program was
not successful in reducing negative fiscal burden of PMEs.
While the Program specified various measures for privatization of PMEs, overall
implementation has been very slow and remains largely incomplete. Only three units were
privatized during program implementation, compared with the target of substantial divestment of
14 units and privatization of 20 textile mills.
This audit report identifies three major issues as determinants of program performance:
(i) program formulation and design weaknesses, (ii) ownership and political commitment, and
(iii) accountability and governance structure. The Program was complex because it aimed to
reform a sector that had chronic performance problems. The Program had several design
deficiencies, and did not incorporate in-depth analysis of institutional structures and government
processes to identify barriers to reforms.
Policy reforms usually require strong political commitment and ownership. The Program
was formulated, processed, and implemented by different governments. While high-ranking
officials did exhibit some ownership at times, this ownership was neither widespread nor
retained throughout the program. Even for the TAs there was only limited ownership, by the
Government and the PMEs. The TAs helped to identify important tasks, but only during
implementation. By the time most of TA reports were finalized, the Program had already missed
major performance milestones and hence the overall impact of the TAs was limited.
Poor motivation, combined with inadequate skills and little accountability, usually lead to
implementation problems. Successful reforms require a strong governance structure with clear
and effective accountability. Thus, it is important to address governance and accountability
simultaneously with civil service reforms when widespread policy reforms are being introduced
at the sector level.
Because the policy reforms identified under the Program remain largely unfulfilled, the
Program is rated as unsuccessful. Program implementation provides four important lessons:
(i) Program loans with difficult policy reforms need to build an explicit component
aimed at strengthening stakeholder partnership and thus create a demand for the
reforms.
(ii) Introducing policy reforms in a developing economy is a complex process and
the new lending instrument—program cluster loans—with targeted resource
transfer linked to performance seems more appropriate.
(iii) A robust system of monitoring within the Government is very important and
needs to be built in explicitly. Resources may be provided for this.
(iv) Privatization and restructuring of PMEs require a high level of political
commitment, hence an in-depth political analysis of the feasibility of the v
reform programs is an important prerequisite. Because there is residual
sympathy for the public sector in Bangladesh, this needs to be targeted at
multiple levels if any major change is to be brought about. Only when civil society
becomes much more demanding for reforms and modernization in Bangladesh,
reforms will take roots.
TAs aimed to support implementation and capacity building must have realistic
timetables. Most of the diagnostic analysis pertaining to identifying implementation constraints
need to be completed prior to major milestones.
Although the Program has contributed in opening up the economy indirectly, the
Government has been unable to remove the structural constraints preventing PMEs from
functioning as commercial units. It needs to develop a credible and time-bound action plan to
deal with these constraints and accelerate the process of privatization. Improved access to
financial resources is crucial for promoting tivate sector growth and diversity needed to
remove widespread poverty in Bangladesh. Since PMEs continue to account for a large share of
nonperforming assets, the Government must address this issue.
















I. BACKGROUND
A. Rationale
1. During the early 1990s, the Government of Bangladesh implemented a series of reforms to
improve the country’s economic performance. The reforms were an integral part of the medium-term
adjustment program supported under an enhanced structural adjustment facility of the International
Monetary Fund. The Asian Development Bank (ADB) and the World Bank supported a number of
1policy-based reform programs in industry and trade. Complementing the reforms for trade, exchange
rate liberalization, and macroeconomic structural adjustment programs, the Government began reform
of public sector enterprises with the goal of reducing Government presence in manufacturing activities.
2ADB provided its first Industrial Program loan to support policy-based reforms in steel and engineering,
textiles, and leather industries. The Second Industrial Program (the Program) loan was expected to
support the process of improving the overall policy environment to promote industrial growth and
efficiency.
2. When the Program was initiated, about 160 public manufacturing enterprises (PMEs) were
organized in six sector corporations. Three sector corporations, Bangladesh Chemicals Industries
Corporation, Bangladesh Steel and Engineering Corporation, and Bangladesh Sugar and Food
Industries Corporation were supervised by the Ministry of Industries (MOI) and comprised a total of 67
PMEs. Bangladesh Textile Mills Corporation (BTMC) was operating 42 units under the oversight of the
Ministry of Textiles, while Bangladesh Forest Industries Development Corporation, with 14 units, was
under the Ministry of Environment and Forest. Thirty-three enterprises were under the Bangladesh Jute
Mills Corporation. One of the most difficult problems facing the Government was to reduce the
operating losses of PMEs amounting to Tk1 billion per year. These PMEs also accounted for a large
share of the financial resources of the nationalized banks, thus crowding out access of other sectors to
these resources.
3. The 1991 industrial policy set an ambitious agenda of policy reforms; the Program was
essentially designed to support implementation of this policy as it related to the PMEs. The rationale for
the Program is elaborated in the development policy letter of November 1991 (Appendix 1). The
ultimate objective of the Program was to assist the Government in improving financial discipline of the
PMEs by setting a framework for greater accountability for performance and providing the necessary
autonomy. The Program was also to implement selected PME divestment and privatization measures.
B. Formulation
4. The policy reforms were identified and finalized through several internal studies, and a long
3consultative process with the Government. The program period was set at three and half years, from
July 1990 to December 1993.
5. Three technical assistance (TA) grants were provided to help the Government implement the
4Program: Strengthening of Institutional Framework for Restructuring Public Manufacturing Enterprises,

1 The World Bank processed three loans during the same period: Industrial Sector Adjustment Credit I, approved in 1987, and
a loan of $175 million, approved in June 1990 to address financial sector reforms. The Second Industrial Adjustment Credit
was under preparation after its identification in November 1988.
2 Loan 891-BAN(SF): Industrial Program, for SDR46.96 million, approved on 30 June 1988 and closed in April 1990.
3 Given changes in governments, several missions were fielded by ADB during March, May, and June 1990 to identify and
develop areas of policy reforms in consultation with the Government. This process continued even after appraisal with three
more missions in May, August, and September 1991. Appendix 5, page 2
5Improvement of Labor Productivity in Public Manufacturing Enterprises, and Implementation of
6Privatization Program for Public Manufacturing Enterprises.
C. Objectives and Scope at Appraisal
6. The principal objective of the Program was to stimulate growth and efficiency in the industry
sector by minimizing the Government’s role in the ownership and management of manufacturing
activities. Implementation of the Program was to enhance financial discipline of PMEs and thus free
resources to revive private sector activities.
7. The Program included policy reforms in seven areas: (i) minimizing the Government’s role in the
industry sector in general and in the manufacturing sector in particular, (ii) enhancing managerial
7autonomy and accountability of PMEs, (iii) enhancing financial autonomy and accountability of PMEs,
(iv) implementing privatization of PMEs, (v) measures to address employment issues, (vi) policy actions
for the environment, and (vii) supporting institutional reforms to provide better PME oversight.
D. Financing Arrangements
8. On 17 December 1991, the Board approved the Program loan for SDR90.456 million (about
$125 million) to support the Government's reform program. The loan became effective on 20 January
1992. The Borrower was the People’s Republic of Bangladesh and the Executing Agencies (EAs) were
the Bangladesh Bank for administration and utilization of the ADB loan proceeds, and MOI for program
implementation.
9. The loan was to be made available in two equal tranches: the first tranche on loan effectiveness
and the second by December 1992. The release of the second tranche depended on compliance with
the conditions set out in the policy matrix and the loan document.
10. The counterpart funds generated from the loan proceeds were to be used to finance (i) the local
currency cost of ongoing ADB-financed projects, (ii) other development projects, and (iii) the financial
restructuring of selected PMEs to be divested during the Program implementation period. In addition,
up to Tk900 million was to be used to rationalize employment in the PMEs.
E. Program Completion Report
11. The release of the second tranche was canceled on 25 April 1994 due to delays in meeting
important policy covenants. The loan was closed in April 1994, earlier than the target date of June
81994. The program completion report (PCR) discusses the scope, implementation, impact of policy
reforms, and benefits of the Program. Three TAs supported the program implementation (footnotes 4,
5, and 6). The PCR found that insufficient time given to implementation of the TA recommendations
resulted in the TAs not being very effective.

4 TA 1635-BAN: Strengthening of Institutional Framework for Restructuring Public Manufacturing Enterprises, for $400,000,
approved on 2 January 1992.
5 TA 1636-BAN: Improvement of Labor Productivity in Public Manufacturing Enterprises, for $325,000, approved on 2 January
1992.
6 TA 1637-BAN: Implementation of Privatization Program for Public M, for $446,000, approved on 2
January 1992.
7 Bangladesh Jute Mills Corporation was excluded from the Program as it was to be covered under a separate World Bank
loan.
8 PCR: BAN 23441: Second Industrial Program Loan, December 1997. Appendix 5, page 3
12. The PCR noted that by opening up the economy to private investment in the key infrastructure
sectors under the 1991 industrial policy, the Program paved the way for stimulation of growth and
efficiency in the industry sector in the medium to long term. However, in the short term, the impact of
the Program policy conditions was minimal due to the slow pace of the privatization program and the
inability of the PMEs to operate on commercial terms. Thus, the Program was rated as unsuccessful.
F. Evaluation
13. This program performance audit report (PPAR) focuses on important design aspects of the
Program with a view to drawing lessons for future operations. The Operations Evaluation Mission
visited the country from 6 to 21 March 2000. The final PPAR is based on a review of the PCR, loan
documents, and materials in ADB files; as well as discussions with ADB staff, EAs, other agencies of
the Borrower, and the larger development community in the field. The draft PPAR was sent to the
Borrower and the EAs with a request for comments. Although the request was followed by faxes, no
comments were received; it is therefore assumed that neither the Borrower nor the EAs wish to
comment on the PPAR.
14. The PPAR presents an analysis of (i) the Program’s design and implementation arrangements,
(ii) its effectiveness in initiating and implementing policy reforms, and (iii) overall impact on the industry
sector. The report also presents findings on progress made in an important area of industrial policy, i.e.,
PME commercialization and privatization. Based on the analysis, the PPAR lists important lessons for
future operations.
II. IMPLEMENTATION PERFORMANCE
15. The Program identified over 40 specific policy actions, which were organized in a policy matrix
with specific target dates for action. An updated report on the status of compliance is presented in
Appendix 2. Many policy covenants remain unfulfilled. Although the Government announced a new
industrial policy in 1991 and initiated policy reforms in trade and exchange control liberalization, overall
implementation of the Program has been weak and uneven. The following sections provide a summary
assessment of the implementation of major policy measures.
A. Policy Reforms and Institutional Development
16. Government Role in the PMEs. The basic objective of the Program was to reorient the existing
PMEs to become commercial organizations. Six specific components were identified and incorporated
in the 1991 industrial policy. The ultimate goal of establishing fully autonomous commercial
organizations has not been fully achieved. While the Government has withdrawn guarantees for PME
borrowing, the sector corporations (fully owned by the Government) continue to provide
counterguarantees. Output price controls continue for fertilizer, sugar, and paper, and occasionally, the
Government exercises price restraints to fulfill other objectives. Overall progress has been very slow in
divesting the PMEs. Finally, the Government has yet to set up transparent and commercial procedures
for bringing private sector personnel on to the management boards of sector corporations.
17. Improving PME Management Autonomy and Accountability. Prior to the Program, most
PMEs operated under Presidential Order 27 issued in 1972. Under this order, the Government could
virtually give any instruction to the corporations, which could do the same to the individual PME. The
Program planned to amend this framework and establish PMEs as commercial entities, independent of
Government. By June 1992, all of the PMEs were to be incorporated under the Companies Act. This
legal change was seen as the minimal starting point for restructuring and freeing existing PMEs from
heavily regulated procurement processes, and labor and pricing procedures. It was expected that by

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