Highlights

Over the evaluation period, the World Bank Group program made several tangible contributions to enhancing governance, particularly with respect to budget transparency, public procurement, and tax administration. However, overall progress was below expectations, and most targets (including in civil service, anticorruption, and access to justice) were not met.

Support to enhance governance under the fiscal years 2014–17 Country Partnership Strategy was mostly relevant, but its effectiveness was limited. The governance program under the fiscal years 2019–22 Country Partnership Framework focused almost exclusively on public financial management, stepping back from support to control corruption and strengthen the rule of law—both major constraints to progress in other areas of the program.

A lack of continuity in the anticorruption program, combined with inadequate government ownership for reform, rendered the ambitious anticorruption initiatives supported by the World Bank ineffective.

The World Bank support to improve governance relied too much on development policy operations to advance reforms that were institutionally demanding and required implementation support over an extended period, which in several cases were absent. The effectiveness of development policy operations was also undermined by inadequate insight and adaptation to political economy considerations.

The Bank Group support for public procurement and tax administration was more effective partly due to stronger government ownership (including relative stability of middle management staff in the relevant agencies).

The World Bank led a pro-reform coalition of local (both government and nongovernment) and international stakeholders on public procurement reform. The effort was initially successful in limiting the influence of vested interests. Unfortunately, there has been considerable backsliding on several key reforms.

According to the Judicial System Diagnostic (World Bank 2011b), Public Sector Reform Roadmap governance assessment, 2015 Public Expenditure and Financial Accountability (PEFA) assessment, and SCD (World Bank 2018c), the main governance weaknesses in the Kyrgyz Republic at the beginning of the evaluation period, which persisted throughout the period, were as follows:

• Low capacity for economic management and effective service delivery across the public sector. High turnover at all levels of the public service undermined the accumulation of administrative and technical skills and experience. Frequent government changes were accompanied by significant policy shifts and frequent reorganization of the public administration. These changes disrupted policy implementation and undermined capacity building, which was further aggravated by limited collaboration among state entities. At the local level, capacity constraints have been worsened by the lack of clarity over allocation of responsibilities across the governments. In addition, patronage networks are used as a way to channel resources to localities linked to those in power. These issues contributed to the widespread public mistrust of government at all levels.
• Weak management and control of public finance. Major weaknesses in the management of public resources were insufficient transparency in PFM, weaknesses in internal financial control, gaps in payroll control, and lack of a modern integrated financial management information system (IFMIS).
• Persistent corruption. The Kyrgyz Republic political system is characterized by competition among patronage networks for power and resources. A weak rule of law and insufficient budget transparency created opportunities for corruption and state capture. Half of firms surveyed in the 2013 Enterprise Survey, and just under 40 percent of firms in the 2019 Enterprise Survey, cited political instability and governance as the top constraints to doing business. The Kyrgyz Republic scored 24th out of 100 and ranked 150th (out of 175) on Transparency International’s 2013 Corruption Perceptions Index, and it scored 27th and ranked 144th out of 180 in the 2021 Corruption Perceptions Index.
• Uneven enforcement of the rule of law. Businesses and the population consistently complained about uneven and inconsistent application of laws and regulations, aggravated by uneven access to justice, which has created major uncertainties for investors, undermined competition, and weakened protection of property rights (see, for example, EBRD 2019). The Kyrgyz Republic was in the bottom 15th–20th percentile of countries for the Worldwide Governance Indicator for rule of law from 2013 through 2021. Major constraints identified in the delivery of judiciary services reflect political influence over the judiciary, underfunding of courts, and lack of modern judicial infrastructure (World Bank 2011b).

Governance was a major component of the FY14–17 CPS, but programwide support for controlling corruption and strengthening the rule of law was dropped from the FY19–22 CPF. During the CPF period FY19–22, the scope of Bank Group support to governance was narrowed to an almost exclusive emphasis on PFM. At the same time, the CPF continued the earlier efforts to strengthen governance in the energy sector. There was only limited follow-up in other (non-PFM) governance areas, of which the most prominent was to strengthen statistics as part of the Tax Administration and Statistical System Modernization Project (FY20).

The relevance of the FY19–22 CPF program was undermined by inadequate attention to anticorruption and rule of law—both critical constraints to achievement of other program objectives.1 The World Bank disengaged from directly addressing governance challenges (outside of PFM and tax administration). To some extent, disengagement reflected a lack of progress on these areas in the CPS period. While some parts of the governance agenda were addressed by other donors (for example, the European Union and the State Secretariat for Economic Affairs [SECO] Switzerland), external assistance to governance was fragmented and not commensurate with the depth or breadth of governance challenges facing the country.

Most governance-related CPS and CPF targets were not met, and overall progress was below expectations. Of five governance targets in the CPS, only one (related to competition in procurement) was achieved (see appendix B). The CPF had only one target on governance (e-filing of VAT returns) that was met. The 2018 SCD acknowledged that the World Bank had insufficient insight into political economy to secure improvements in governance (World Bank 2018c).

Public Administration Reform and Capacity Building

Central Government

The CPS sought to build a meritocratic public administration. The World Bank supported a project to enhance the capacity of central government ministries to formulate and carry out policies, improve policy consistency and interagency coordination, and reform employment and remuneration practices in the civil service (Capacity Building for Economic Management International Development Association grant FY09–14). Under two grant-funded ASA, the World Bank helped develop the Public Sector Reform Roadmap, a comprehensive longer-term strategy that established ambitious reform goals in the civil service, anticorruption, the justice sector, and sector governance and supported the initial steps of its implementation. The World Bank also facilitated implementation of the National Strategy for the Development of Statistics.

The only program results indicator for public administration and civil service reform was the World Economic Forum’s index on favoritism in government decisions. The target was to improve the global ranking of the Kyrgyz Republic from 136th in 2012 to 120th in 2017. Actual performance was much stronger—the 2017 ranking was 86th, significantly exceeding the target. The absolute score improved as well—from 2.2 (out of 7) in 2012 to 2.8 in 2017–18 (the latest data available). However, as the Bank Group was not engaged in civil service reform in the Kyrgyz Republic after FY14 (except for the modest amount of policy advice under the preparation of the Public Sector Reform Roadmap), this improved score could not be attributed to the World Bank program under evaluation.

World Bank support for Public Sector Reform Roadmap and capacity building helped facilitate institutional strengthening of key central agencies (particularly the Ministry of Finance). However, overall progress toward building a meritocratic civil service was modest. Moreover, with the exception of capacity building in PFM and statistics, most World Bank efforts in this direction were discontinued after 2017, before any tangible results were achieved. The lack of follow-up on the relatively intense World Bank engagement in the modernization of public administration reduced benefits from the earlier investment in knowledge creation and client relationships.

Local Government

The World Bank also delivered a program to strengthen local government capacity through investment projects of the community-driven development (CDD) type. This program was not linked to an explicit objective in either the CPS or CPF but implicitly supported efforts to enhance transparency and accountability in local government planning and budgeting. The Second and Third Village Investment Projects supported local government participatory planning (see chapter 6). These were complemented by grant-funded projects to improve budget literacy and information transparency at the local level. This work included a considerable effort in building communities of practice (networks of local government practitioners). However, the communities of practice were not sustained after the grant supporting them ended.

The World Bank support in this area was not effective. The objectives were directly linked to the challenge of limited local government capacity and accountability. However, the World Bank approach was through a sequence of small, inadequately connected interventions with serious sustainability risks. Other dimensions of capacity needed to be addressed to improve the delivery of local public services. These included a clear delineation of responsibilities, access to resources, and project planning, management, and technical capacity building—none of which were addressed. Support for training in budgeting and setting up communities of practice was not coordinated with the projects supporting investment in local public infrastructure. Further discussion of support to local public services can be found in chapter 6.

Public Financial Management

PFM reforms supported by the World Bank included steps to enhance budgeting and expenditure management and reporting, tax administration, debt management, public procurement, and audit. CPS objectives in PFM were strengthening budget discipline and transparency in the use of budget resources and increasing competition in public procurement—both expected to limit opportunities for corruption and improve efficiency in public resource use. Analytic underpinnings for this work derived from the 2012 Country Fiduciary System Review, 2015 PEFA assessment, and FY14 Programmatic Public Expenditure Review. 2 The World Bank supported PFM improvements through the following efforts:

• The FY14 DPO series contained prior actions to enhance budget discipline and transparency in the use of budget resources, strengthen the independence and quality of internal audit, and upgrade the legal and regulatory framework on public procurement. Prior actions on procurement were related to the adoption of the Public Procurement Law and the strengthened role of a public procurement regulatory body.
• The Public Finance Management Capacity Building Trust Fund grant (FY10–15) supported capacity building in both the Ministry of Finance and line ministries to (i) improve the Medium-Term Budget Framework, (ii) strengthen the PFM regulatory framework, (iii) improve the costing of budgetary expenditure, and (iv) implement the Internal Audit Law. This was complemented by two smaller trust fund grants (FY14–18) for Public Procurement Capacity Building.
• The FY17 Governance and Competitiveness DPO facilitated reforms in tax administration that aimed to reform VAT administration, including the acceleration of the VAT refund process, and to transfer responsibility for social insurance payments from the Social Fund to the State Tax Service (STS). These policy reforms were expected to raise efficiency in revenue administration and cut compliance costs for taxpayers. In addition, IFC delivered a program of technical assistance and advisory support on tax administration to the STS. The related analytical support was provided through the Tax Administration Diagnostic Assessment Tool (FY17) report.
• Additional support for strengthening audit and accounting in the public sector was provided through the Institutional Development Fund grant Capacity Building for Public Sector Internal Audit (FY13). The FY15 Strengthening the Chamber of Accounts (grant-funded) Project sought to strengthen the Chamber of Accounts’ institutional capacity and audit methods to improve efficiency, accountability, and transparency of public spending.

Under the CPF, the World Bank sought to deliver extensive support to strengthen PFM. The World Bank–supported interventions were intended to help control corruption and reduce inefficient resource use. However, the scope of work was substantially narrowed from the CPS program to focus on PFM as a way to reduce budget leakages. The World Bank’s support included the following efforts:

• Detailed diagnostics and policy advice were provided through Public Expenditure Reviews (FY20 and FY21), PEFA assessment (FY21), enhancing public investment management (FY18), and tax administration reform development (FY19).
• PFM (technical assistance) was improved through a project funded by the Department for International Development (now the Foreign, Commonwealth and Development Office) to enhance the capacity of the Ministry of Finance Training Center, including an upgrade in its distance learning capabilities to expand online PFM training for local government staff.
• The FY19 Economic Governance DPO assisted in strengthening the regulatory framework for public procurement through a prior action requiring the upgrading of operational procedures of the Independent Complaint Review Commission for public procurement to strengthen the objectivity and transparency in how complaints are handled.
• The grant-funded Second Capacity Building in PFM Project (approved in FY19) extended the World Bank’s support to budgeting and broad capacity building within the Ministry of Finance, implementation of a modern IFMIS, and a reform to the formula for allocating central budget transfers across local governments.
• The Tax Administration and Statistical System Modernization Project (approved in FY20) aimed to raise the effectiveness of tax collection through the redesign of core business processes in the STS to be complemented by software and hardware infrastructure upgrades.

The World Bank–supported PFM program sought to address the main weaknesses in expenditure management and tax administration identified in diagnostic work in a comprehensive, programmatic way, while gradually building local ownership within counterpart agencies. The most significant shortcoming in this area related to challenges in procuring a modern IFMIS because of difficulty in agreeing with the Ministry of Finance on a mutually acceptable strategy for the development of the IFMIS.

The World Bank support successfully contributed to enhancing PFM (including public procurement, budget reporting, internal audit, public access to budget information, and tax administration). The 2015 PEFA informed the government’s “Strategy for the Development of Public Financial Management in the Kyrgyz Republic for 2017–2025,” which served as a long-term governance framework and provided continuity for the implementation of several of these reforms. Many of the changes introduced were supported by legal amendments (Budget Code, Procurement Law, Tax Code), adoption of which was facilitated by World Bank–funded DPOs, and which, despite various pressures, were largely sustained. Table 4.1 presents evidence of progress. Other improvements included the following:

• Improving the transparency of the government’s fiscal operations, with the country’s Open Budget Index score increasing from 20 out of 100 in 2012 to 62 out of 100 in 2021. 3 This included improvements in both quality and timeliness of in-year budget reports, reduced extent of unreported government operations (for example, budget transfers and loans to state-owned enterprises), and generally improved public access to budget information (PEFA 2021; World Bank 2016b, 2022d). 4
• Strengthening the institutional capacity of the Chamber of Accounts, resulting in improved external scrutiny of the government’s budget—the corresponding score for PEFA indicator PI-30 improved from D+ in 2009 to C+ in 2015 and B+ in 2021 (PEFA 2015, 2021).
• Enhancing public sector accounting and financial reporting framework, improving compliance with international accounting standards, revising the Unified Chart of Accounts, and other efforts, contributing to improved accountability, transparency, and efficiency in the use of public funds (PEFA 2021; World Bank 2016b).
• Strengthening internal audit and control functions, linked to the establishment of the Internal Audit Methodology Unit in the Ministry of Finance and audit units in 19 line ministries (PEFA 2021; World Bank 2016b).

Source: Public Expenditure and Financial Accountability for 2009, 2015, and 2021.

Note: PI = Public Expenditure and Financial Accountability Indicator.

There is inconsistency between, on one side, positive movement in PEFA and Open Budget scores and several other external assessments of PFM progress in the Kyrgyz Republic and, on the other side, no improvement in Country Policy and Institutional Assessment ratings. Although PEFA scores rose considerably during 2009–20, the Country Policy and Institutional Assessment ratings for the effectiveness of core government functions—including those related to budgeting, public procurement, debt management, and tax administration—showed no improvement over the past decade. The reasons for this inconsistency remain unclear.

Public procurement represents the reform area where the World Bank was initially successful in limiting the influence of vested interests, although there has been recent backtracking. The World Bank supported procurement reforms through prior actions in several DPOs and projects, including the Capacity Building in PFM Projects 1 and 2, and two grants for Public Procurement Capacity Building. The main changes in public procurement, which were implemented with World Bank support and complementary support from the EBRD and the Asian Development Bank, included the following:

• Introduction of legal, regulatory, and institutional arrangements for e-procurement when the e-portal was made operational, which reduced costs of participation in procurement tenders for SMEs and increased transparency.
• Establishment of the public procurement regulatory body within the Ministry of Finance.
• Establishment of a more transparent procedure for resolving complaints in procurement, as an independent government body has been established to deal with procurement complaints.
• Simplified procurement procedures and bidding documentation.

Evidence of improvement in procurement includes an A rating on the 2021 PEFA on all four dimensions of public procurement management (indicator PI-24, compared with a baseline of B in 2014). The number of registered vendors on the e-procurement portal increased by approximately 40 percent between November 2018 and May 2021. With support from the Kyrgyz Republic chapter of Transparency International and Open Contracting Partnership, new online analytical tools, made possible by the e-procurement portal, were developed to help civil society monitor and analyze public procurement processes. Broad progress in procurement has also been recognized by representatives of the private sector, although they emphasized that a stronger government effort was needed to ensure tangible improvements in the quality of the investment climate.

Unfortunately, there has been considerable backsliding on procurement reform. Several amendments to the Procurement Law, which were not supported by the World Bank, reduced the effectiveness of the procurement framework. The first set of amendments reintroduced an option for paper procurement and substantially increased the ceiling on public procurement that was exempt from competitive practices. The April 2022 amendments are potentially even more damaging: they exempted state-owned enterprises from compliance with the Procurement Law. 5

The Bank Group helped the government advance several reforms in tax administration. Implementation of the activities was supported by IFC’s Central Asia Tax Administration Project, with additional support from DPO prior actions. Results (as reported by the 2017 Tax Administration Diagnostic Assessment Tool, Advisory Services Completion Report [IFC 2018], and Project Performance Assessment Report on the related DPOs [World Bank 2022f] and during interviews), included the following:

• Simplification of taxation for SMEs. In July 2015, the frequency of tax reporting and payment for SMEs in the Kyrgyz Republic was reduced from monthly to quarterly. In combination with improved accessibility of new e-filing (since 2017), this change brought considerable time and cost savings to taxpayers. In addition, VAT paper invoices, which required frequent taxpayer visits to tax offices, were replaced by the e-service through the taxpayer portal (prior action in the first FY14 DPO).
• Introduction of risk-based tax audit and associated improvements in tax inspections. Previously, all taxpayers were subject to regular tax audits. Risk-based tax audit principles for planned audits were adopted in 2014 and gradually became an integral part of the STS management system. Risk-based tax audit allowed the STS to focus tax audits on riskier cases and reduce costs for compliant taxpayers.
• Improved accessibility of e-filing. While basic e-filing options have been available since 2012, they were not widely used. The upgrade of both software and hardware helped expand the use of the e-filing system.
• Consolidation of collection of social payments with the regular tax administration by transferring administration of social contributions from the Social Fund to the STS (a prior action in the FY19 DPO), which reduced transaction costs and increased predictability; Bank Group analytics calculated that in 2014, reporting to the Social Fund was the most complicated of seven tax-related activities (World Bank 2022f).
• Improvements in the availability of tax services and information for taxpayers through the launch of a user-friendly taxpayer portal in 2017.

The Bank Group’s contribution was direct and significant and was made through a combination of diagnostic work (for example, the Tax Administration Diagnostic Assessment Tool); an expanded joint IFC–World Bank program of technical assistance and advisory services; and several policy changes supported by DPOs. Prior actions included the elimination of paper-based VAT invoices in favor of electronic invoices, establishment of an accelerated VAT refund process for trustworthy taxpayers, abolishment of sales taxes on exports, and transfer of responsibility for social insurance payments from the Social Fund to the STS. The World Bank supported a strong government communication campaign on tax administration and procurement reforms and mobilized private sector groups to back reform. The Tax Administration and Statistical System Modernization Project aims to consolidate and further advance the reform agenda in tax administration. It supported the modernization of the STS operational functions (through a comprehensive business process reengineering, upgrading the information technology system, improving human resources management, and strengthening the internal control and integrity functions of the STS) and facilitation of taxpayer services, including by upgrading the call center and strengthening internal and external communications at the STS.

The reforms supported by the Bank Group helped enhance efficiency in tax administration and reduced discretion and opportunities for corruption. This was reflected in a decline of the overall tax compliance costs and in improved perceptions of institutional integrity within the STS. The World Bank Enterprise Surveys indicator of percent of firms identifying tax administration as a major constraint declined from 20.2 percent in 2013 to 14.6 percent in 2019. On the basis of taxpayer surveys administered by the IFC tax advisory project, the average time spent during the year on tax compliance (tax reporting and dealing with tax administration) by a single business taxpayer was reduced by more than 40 percent, from 40.4 days in 2012 to 23.6 days in 2016 (IFC 2017). This was also supported by better availability of taxpayer information: the share of taxpayers who have considered the STS website a key source of tax-related information rose from 46 percent in 2012 to 64 percent in 2016 (IFC 2017). E-filing of VAT returns reached 100 percent in 2021 (from 30 percent in 2017), exceeding the CPF target of 70 percent.

However, the sustainability of achievements in tax administration is threatened. While the risk-based tax audit remains on the books as a primary instrument for auditing taxpayers, in practice, the STS has an opportunity to inspect any business. 6 In addition, several fundamental amendments to the Tax Code were adopted in December 2021, after parliamentary elections in November, without consultations with the private sector. As a result, some of the improvements in tax administration, such as reduced frequency of tax payments for SMEs, were eliminated.

Transparency, Accountability, and Anticorruption Policies

The CPS set out to enhance public sector integrity, including reduction in the incidence of bribes and establishment of a system for verification of declarations of personal interest. The FY14 programmatic DPO series supported the strengthening of the government’s anticorruption policies through prior actions that called for the adoption of the national anticorruption program and its action plan for 2012–14 and a Law on Conflict of Interest that introduced verification arrangements for asset declarations of civil servants as a key part of the anticorruption program’s implementation. These policies received additional support from the FY17 Governance and Competitiveness DPO, including by requiring the setup of a system for the submission and verification of declarations of personal interests of civil servants. However, there was no support for justice sector reform, drawing into question the ability of improvements in policies to have a credible enforcement mechanism.

The World Bank support for the preparation and implementation of the anticorruption program paid inadequate attention to capacity building and monitoring of progress under the agreed plan. Neither FY14 DPO 2 nor the FY17 and FY19 DPOs contained prior actions to advance implementation of the anticorruption action plan, such as requiring completion of specific actions from the anticorruption action plan. The anticorruption program did not have credible penalties for noncompliance.

There was no follow-up support on anticorruption under the CPF. The only significant intervention in this area was a single prior action under the Economic Governance DPO approved in FY19 that required enactment of the Law on Conflict of Interest (which in essence reflected lack of progress with this law despite related prior actions that were part of two earlier DPOs. While the collection of asset declarations did occur, they were not verified. According to the Implementation Completion and Results Report for the Economic Governance DPO (World Bank 2021b), the Law on Conflict of Interest has not been enforced by the government, and mechanisms for prevention and sanction of conflicts of interest as provided under the law do not function.

In IEG’s assessment, the World Bank could have done more to build demand for anticorruption reforms by expanding its engagement with civil society organizations to monitor the pace of implementation, build its capacity to undertake an independent review of declarations, and run advocacy campaigns informed by their findings. On implementation of the Law on Conflict of Interest, in other countries, the World Bank has supported the establishment of a dedicated institutional mechanism to analyze and follow up on the declarations collected. This did not happen in the Kyrgyz Republic.

Country strategy targets related to reducing corruption were not met. The share of respondents participating in the regular national public opinion survey who believed that corruption had been either a big or a very big problem in the Kyrgyz Republic remained basically unchanged between 2011 and 2020, fluctuating between 93 and 96 percent of all respondents. The target for reduction in corruption was a decline in the Graft index (ratio of the number of reported bribes for public services to the total number of reported transactions) from 15 to 10 percent. Data on the Graft index stopped being collected, and available alternative measures of the corruption prevalence do not indicate any progress. Another CPS target called for an increase of up to 15 percent in the share of verified declarations of conflict of interest (as percent of total filings) that are filed by civil servants. This target was also unmet, as no verification mechanism was put in place. The CPF did not track the country’s corruption trends at all, despite this being the major development challenge for the Kyrgyz Republic.

Judicial Sector Reform

Judicial impartiality was a serious problem throughout the evaluation period, with many court decisions reportedly biased in favor of the government (World Bank 2022f). The CPS aimed to improve access to justice. The prior actions in the FY14 DPO series supported the establishment of the Judicial Reform Council, approval of a strategic action plan on reforming the judicial system, and submission to parliament of a program to strengthen financial independence of the judicial sector. These actions were expected to reduce discretion in the application of laws and improve citizens’ trust through enhanced financial independence of the court system, more transparent and meritocratic appointment of judges, provision of more safeguards against political interference in the judicial process, and other reforms to be implemented over the medium term. The prior actions were a step in the right direction but required that the World Bank continue its support for the sector. However, there was no effective follow-up.

The CPS plan for the Judicial Development Project (investment project financing) was dropped in 2016 because of perceived lack of ownership after several changes to government counterparts. However, IEG interviews of local stakeholders, government representatives, and World Bank staff suggested instead that the World Bank management unilaterally decided to stop project preparation and never fully communicated the rationale for its decision to government counterparts. After the judiciary project was canceled, the EBRD took a lead in supporting the implementation of the judicial sector reform plan. According to the EBRD, although its support helped accelerate the adoption of several new laws, the broader impact on the quality of judicial services was minimal.

Findings

The Bank Group support to address the Kyrgyz Republic’s governance challenges witnessed a substantial narrowing over the evaluation period in the face of inconsistent and weak government commitment. Efforts to directly confront corruption and elite capture gave way to a focus on improving PFM. To a significant extent, this shift reflected greater risk aversion by the World Bank after failing to get traction under the CPS. While the pivot from tackling governance challenges more directly had some initial successes, failure to address the underlying governance shortcomings led to policy reversals and an erosion of earlier successes (as was the case in public procurement and tax administration).

Use of DPOs to make progress on politically difficult and institutionally demanding reforms had minimal impact. In the Kyrgyz Republic, ownership of reforms was often fragile, and backsliding was frequent. DPO prior actions in several instances were not completed, and critical implementation support was often lacking. For example, although a detailed anticorruption program was adopted with the support of DPO prior actions, there was minimal technical assistance to implement the plan. There were also important design shortcomings, including the absence of penalties (in the legal framework supported by the World Bank) for noncompliance with conflict of interest guidelines. The program’s results frameworks on anticorruption and governance were weak because it used ill-defined indicators and lacked monitoring and follow-up on major policy reforms.