Governance Reform in Nepal: Effects of Aid Conditionality on

Country-ownership
(A preliminary draft)
Ganesh Prasad Adhikari
Abstract
The present study examines the effects of aid conditionality on the country-ownership
aspect of governance in Nepal. From theoretical perspective, the study is confined to review
three concerned concepts: (i) conceptualizing governance, (ii) understanding conditionality,
and (iii) improving country-ownership. In order to know the critical issues of country-
ownership in Nepal, the study reviews three issues: (i) efforts for improving governance in
Nepal, (ii) an overview of donor-support in governance reform, and (iii) donor influence in
national policy. The survey data reveals that all the governance-related conditionalities have
been positively affecting for improving country-ownership in Nepal. It was also identified
that there is no correlation between level of the enforcement of aid conditionality and its
effects on the country-ownership in donor-funded activities.
1. Introduction
The concept of modern governance emerged in response to the growing dysfunction
of welfare state and it has become an important component of neo-liberalism. Since the early
1990s, International Financial Institutions and donor agencies have been considering
governance reform as a precondition of aid allocation. The governance-related aid
conditionalities are primarily concerned with the globalization of neo-liberalization, which is
characterized by deregulation, privatization, right-sizing civil service, introducing
managerialism in public sector, and reducing governmental control function. To treat such
political issues of state reform, donor agencies have been using the technical term
‘governance reform’. It helped them to become ethical for intervening the political affairs in
the aid recipient countries. In this context, the issue of country-ownership is vital for
sustaining reform.
In order to examine the effects of aid conditionality on the country-ownership in
donor-funded activities, the primary data were collected through ‘experience survey’—“the
survey of people who have practical experience with the problem to be studied” (Kothari,
1992: 45). The survey was conducted by the researcher without hiring any enumerator during
the period of first October 2005 to last January 2006. Respondents were selected by using
‘judgmental quota sampling’ technique. The general criterion of selecting sample items was
set that each selected respondent must have at least five-year experience in the concerned
field. There were altogether 100 respondents that included 40 government officials involved
in aid coordination, 30 auditors involved in auditing donor funded projects and 30 academics
related to public finance. The responses were recorded by using ‘delivery and collection
questionnaire’ technique.
2. Conceptualizing Governance
For the last two decades, the term ‘governance’ has become a catch-word among
development practitioners and academicians all over the world. But governance has become a
vague word since it is considered as a remedy of all kinds of governability crises that are
concerned with the management of economic, political, administrative and social aspects of
human life varying from global to local level situations and from public to private sectors.
Because of its vagueness, governance has never been precisely defined. However, let us
discuss on some of its popular definitions.
The World Bank (1994: xiv) defines governance as the manner in which power is
exercised in the management country’s economic and social resources. The World Bank has
identified three distinct aspects of governance: (i) the form of political regime; (ii) the process
by which authority is exercise in the management of a country’s economic and social
resources for development; and (iii) the capacity of governments to design, formulate, and
implement policies and discharge functions”. This definition is strictly concerned with
political and economic conditionality for the World Bank’s own lending operation.
For United Nation’s System, governance is a means of human development.
According to United Nations Development Program (UNDP, 1997: 2-3), “Good governance
is viewed as the exercise of economic, political and administrative authority to manage a
country’s affairs at all levels. It comprises mechanisms, processes and institutions through
which citizens and groups articulate their interests, exercise their legal rights, meet their
obligations and mediate their differences”. In the same vain United Nations Secretary-
General Kofi Annan states: “Good governance is ensuring aspect for human rights and the
rule of law; strengthening democracy; promoting transparency and capacity in public
administration” (cited by Weiss, T.G., 2000: 797). This definition reflects as a model for the
implementation of neo-liberal economic policies.
Organization for Economic Cooperation and Development (OECD, 1995: 14) also
follows the ideas of the World Bank, i.e., “The concept of governance denotes the use of
political authority and exercise of control in a society in relation to the management of its
resources for social and economic development”. This definition focuses on the role of public
authorities in discharging services.
Ali Kazancigil (1998: 70) States that the definitions provided by the World Bank,
UNDP, and OECD are in the same vain in which governance is not distinguished from
participatory democratic government that has limited analytical and operational usefulness.
Consequently he identified the need of sociological analysis for its clearer understanding. It
reveals that there is a lack of proper theoretical framework of governance for guiding
practitioners in the field.
According to Kazancigil (1998: 69), in social science literature, governance has been
analyzed and assessed from two perspectives: (i) rational choice theory and public policy
studies; and (ii) the historical sociology of institutions. From policy perspective, governance
is considered as the best political framework for policy-making without politics in a
technocratic coordination of market model. From sociological perspective, governance is an
institution that encompasses partnership among development actors and the rules and
regulations for managing public affairs.
To make the meaning of governance more specific, we need to talk about the specific
types of governance. We say local, national, regional, and global governance; likewise,
governance can be political, economic, and administrative. We also talk about e-governance,
meta-governance, and corporate governance. International donor agencies have had been
preaching sound governance, good governance, and democratic governance to developing
countries for making their aid effective. While talking about different types of governance,
we came to know that the term ‘governance’ can be understood differently in different
context and also from different perspectives.
Since the early 1990s, good governance has become an important component of the
international agenda; and multilateral and bilateral donor agencies have been supporting
political democratization (including elections, accountability and human rights) and
economic liberalization in developing countries (Weiss, 2000:801). As a condition of
development, governance is recognized as a universally valid project. Smouts (1998:81)
observes that the international financial institutions have been using the term ‘governance’ to
justify the political conditions that they impose on countries which they consider poorly
equipped for the proper management of the loans they receive.
Alacantara (1998:107) determines that the international financial and donor
community have been using the technical term ‘governance’ to treat political issues of ‘state
reform’ or ‘socio-political change’ so that they can intervene in the internal political affairs of
sovereign states.
Since the early 1990s, almost all the donor agencies working in Nepal have been
committed to achieve the Millennium Development Goals (MDGs). Even if their specific
priorities differ at least in emphasis, they all emphasize on different issues of governance—
political accountability, civil service service reform, civil society participation, public sector
reform, insuring freedom of information, financial transparency, decentralization of authority,
corruption control, human rights, etc. (Khanal, 2005). These issues are also being internalized
by the Nepal government for its overall development.
3. Understanding Conditionality
Conditionality refers to the conditions attached to funds disbursed by international
financial institutions including bilateral donors. To Stiglitz (2002:44) “Conditionality refers
to more forceful conditions, ones that often turn the loan into a policy tool”. Reality of Aid
(2002: 8) reports: “Conditionality relates not only to donor goals but also the process for
achieving these goals”.
Theoretically, donor conditions are the terms of using aid money which are negotiated
between all parties to loan contract and are mutually agreed. But in practice, it is important to
note that how is agreement reached and how are conditions formulated and applied. In other
words, the question is whose reality counts in setting conditions. By nature, donor—the
powerful partner—is certainly influential. On the other side, recipients are bound to accept
donor conditions if they are to get aid.
Conditionality is mostly a debated topic in the field of development. Almost all the
aid agreement papers contain basic conditions. In some cases, recipient countries should have
to pass new policies in parliament to meet donor’s requirements. In some cases, donors
suspend their assistance if a recipient country does not come up to specified minimum
standards for utilizing aid money. Donor conditions are related to various intentions, such as
reforming policies, controlling corruption, using expatriate consultancy, promoting donors’
market, promoting democracy, etc.
Donor conditions may be explicit or implicit as well as highly rigid to flexible.
During 1980s donor conditionalities were of traditional type variously known as ex ante
conditionality, project conditionality, political or policy-based conditionality, macro-
economic conditionality, etc. The traditional or ex ante conditionality in policy-based lending
is often concerned with policy imposition from international financial institutions to
developing countries.
Because of its intrusive nature, the traditional conditionality has had been widely
criticized. As response to such criticism, new forms of conditionality came into practice. Ex
post conditionality focuses on country-ownership, selectivity and partnerships (Koeberle,
2003: 249). Many scholars call selectivity as ex post conditionality or allocative
conditionality (Uvin, 2004: 71). In outcome-based conditionality the choice of policies are in
the hand of country authorities and the loan disbursements are made on the basis of
achievements of results rather than on the implementation of policies expected to attain
program objectives.
The emergence of new issues of conditionality is associated with the emergence of
new development approaches or paradigms. Under the governance paradigm, governance
conditionality focuses on budget management, anticorruption measures, and the public sector
management. After the emergence of pro-poor approach to development, “poverty-focused”
or “social” conditionality existed, that is concerned with achieving Millennium Development
Goals. Likewise, after the innovation of poverty reduction strategy (PRS), “reverse
conditionality” (Taylor, 1997 cited by Wood and Lockwood, 1999: 28) existed in which
borrower governments would propose their economic programs to donor agencies.
 In process conditionality, recipient governments are expected to follow certain
procedural steps rather than accept specific policies. It helps develop country-ownership of
aid activities by employing PRS process. The process conditionality is also known as “post
conditionality” approach (Uvin, 2004: 72). In the PRS process, the recipient countries should
have to follow the guidelines provided by the World Bank. The completed PRSPs must be
submitted to the World Bank and the IMF boards for approval. The World Bank also involves
in drafting the discussion documents to be used in the consultation for preparing PRSP. The
whole process of PRS is in the line of neo-liberal thinking that donor agencies want to induce
in developing countries.
4. Improving Country-ownership
In recent years, country-ownership has become a central concept in the field of
development aid. Literatures on aid effectiveness emphasize on ownership believing that
donors can only advice and support but not buy or induce economic reforms (World Bank,
1998). Donor agencies have recognized the importance of country-ownership and readiness
to reform for effective policy reforms and sustainable development. Wood and Lockwood
(1999:1) clearly state that recipient government and civil society are not committed to
implement reform program because they have not fully engaged in designing their programs.
It means the lack of ownership is the cause of the poor implementation of conditionality.
The primary aim of donor conditionality is to try to induce policy reform in recipient
countries. Both the ‘policy prescription from donors’ and the ‘country-ownership of reform’
are essential for development cooperation; the debates about it have tended to focus on how
to keep balance between these two contradictory efforts. According to Collier et al. (cited by
Wood and Lockwood, 1999: 32), ownership can be improved through recipients choosing
policies, lenders choosing objectives, and aid being disbursed according to performance.
There are several methods for improving the country-ownership of donor supported
programs. The high level officials of IMF, Khan and Sharma (2003: 237) identified the
following four initiatives to foster greater ownership: (a) encouraging countries to design
their own reform programs or PRSP; (b) streamlining structural conditionality; (c)
introducing flexibility in the timing of structural reform (i.e., adopting floating tranch
conditionality); (d) applying conditionality to outcomes rather than policy prescriptions (i.e.,
outcome-based conditionality).
It is widely believed that there is rhetoric of ownership and the reality of coercion.
Recipient countries have had accepted donor conditions to access aid money. If country-
ownership is to be improved, the traditional aid procedures and practices must be reformed. A
report, The Reality of Aid (2002: 14) indicates the following key areas to improve ownership:
(a) reducing the reliance on donor country technical assistance; (b) untying aid; (c)
unconditional cancellation of remaining bilateral debt for the poor countries; (d) transparency
and more flexible program management; (e) public and political commitment to increase
resources for international cooperation.
Improving country-ownership is not only concerned with donor procedures but also
with recipient’s development culture. Where there is not a culture of participation and
consensus building in recipient countries, the ownership can not be improved properly. For
examining the country-ownership of IMF adjustment program, Khan and Sharma (2003) used
the agency theory in which the principal-agent (or lender-borrower) framework of
relationship was observed.
Khan and Sharma (2003: 237) determine that country-ownership is difficult to
achieve when programs have too many objectives that is exactly what is happening in recent
years. For example, the traditional mandate of IMF was to establish macro-economic and
financial stability. Since 1990s, the IMF expanded its objectives to facilitate transactions to
market economies, integrate domestic economies with world economy, diversify production
and exports, develop financial sector, and promote high quality growth.
The World Bank (2005:14) highlights emerging good practices—ownership,
criticality, additionality, and medium-term framework—for better application of aid
conditionality. It means the donor practices are good when they: support for the development
of country-ownership, focus on critical actions needed to achieve key outcomes, become
flexible to develop national policy options, and provide aid to support country-led medium-
term framework.
5. Efforts for Improving Governance in Nepal
After the restoration of democracy, the constitution of the Kingdom of Nepal was
promulgated in 1990 that guarantees a multiparty policy, a constitutional monarchy, people’s
sovereignty and fundamental human rights. The constitution recognizes the importance of
decentralization, the equitable distribution of economic resources, the rights and welfare of
children and the upliftment of economically and socially deprived communities. In practice,
however, a great deal remains to be done for translating these clauses into reality.
In the spirit of the democratic constitution, several legal Acts were passed and
institutions created for improving governance in Nepal. They were:
• Karya Bibhajan Niyamabali 2047 (Business Allocation Rules 1990)
• Karya Sampadan Niyamabali 2047 (Transaction of Business Rules 1990)
• Administrative Reform Commission 1991
• Civil Service Act 1993
• Civil Service Regulations 1993
• Civil Service Reform Act 1994
• Human Rights Commission Act 1996
• Human Rights Commission 1999
• Local Self-Governance Act 1999
The council of ministers is responsible for directing, controlling and regulating
country. The council of ministers has to conduct the government business on the basis of two
rules—Karya Bibhajan Niyamabali that allocates the functions for different ministries and
the Karya Sampadan Niyamabali, though confidential, defines the working procedure of
cabinet, ministers and constitutional bodies.
In 1991, a high level Administrative Reform Commission was formed under the
chairmanship of the Prime Minister Girija Prasad Koirala. The report of this commission was
devoted to recommend on efficient, economical and people-oriented governance system and
more specifically in the line of “reinventing government”.
For reforming civil service, Civil Service Act was passed in 1993, Civil Service
Regulations in 1994 and Civil Service Reform Act in 1994. Similarly for improving human
rights, Human Rights Commission Act was passed in 1996 and the Human Rights
Commission was created in 1999.
Several donor agencies including United Nations System (UNS, 1999:55) appreciated
the Local Self-Governance Act 1999 considering it as a significant breakthrough in reducing
administrative inefficiencies and promoting decentralization or for empowering local
authorities. But, Bihari Krishna Shrestha (2000:46-47) concludes that the Local Self-
Governance Act 1999 is just an “old wine in a new bottle”, because it is just a compiled
single volume of three separate Acts of local bodies—VDC Act, DDC Act and Municipality
Act—promulgated in 1991. However, the Local Self-Governance Act aims at strengthening
local institutions in terms of financial autonomy, making them directly accountable to people.
Apart from making legal provisions and creating institutions, the Nepal Government
has also incorporated policy issues of governance reform in its development plans. The Ninth
Plan (1997-2002) is the first plan document in pronouncing the policy of governance. The
plan contains a separate chapter on good governance and management. The Tenth Plan (NPC,
2003:17-21) document appreciates the Ninth Plan’s progress in policy reforms in the areas of
decentralization, civil service reform, governance, tax reform, public expenditure reform,
financial sector and infrastructure reform. These reforms are also incorporated in the Tenth
Plan (NPC, 2003:43).
Decentralization: To create a legal framework of decentralization, the Local Self
Governance Act was enacted in 1999. To reform institutional framework a high level
Decentralization Implementation Monitoring Committee (DIMC) was set-up.
Civil service reform: To make the civil service more results oriented as well as
people oriented, a long term Governance Reform Program (GRP) was initiated. For right-
sizing the civil service, Nepal Government froze more than 12000 vacant positions during the
Ninth Plan period.
Governance: For addressing corruption practices, “four anticorruption legislation
were passed by the Parliament …[and] a Judicial Property Probe Commission was also
established” (NPC, 2003:18).
Tax reform: For improving revenue collection, a Value Added Tax (VAT) was
introduced and Income Tax Act was revised. For strengthening tax administration, The
Departments of VAT and Taxation was amalgamated into one.
Public expenditure reform: A Public Expenditure Review Commission (PERC)
submitted its comprehensive report to the Finance Minister in 2001. PERC recommended,
among others, to formulate Medium Term Expenditure Framework (MTEF) that was adopted
in the budget of fiscal year 2002/03. Government has formed various task forces to look into
implementing the recommendations made by the PERC (ESP, 2001:103-4).
Financial sector: For reforming financial sector, a Financial Sector Strategy
Statement (FSSS) was prepared in 2001. The reform programs of FSSS are now (during 10 th
plan period) being implemented to strengthen autonomy of the Nepal Rastra Bank and to
place two major commercial banks under external management.
Infrastructure reforms: “During the Ninth Plan, important reforms were initiated to
encourage private sector participation in infrastructure, particularly in power,
telecommunications, education, health, and rural infrastructure” (NPC, 2003:20).
The important reform initiatives include: allowing the private sector entry in the
generation, transmission, and distribution of hydro- power; opening of the telecommunication
sector for private investment; providing alternative educational and health care services
through private sector and improving service delivery through community participation and
management; creating a separate institutional mechanism (i.e. Department of Local
Infrastructure Development and Agriculture Road) and formulating a Public Infrastructure
Construction and Transfer Policy to promote private sector participation for constructing
local roads; and distributing fertilizer and seed through private sector.
In recent years, the governance reform has become a matter of discussion also in
Nepal Development Forum (NDF). In NDF-2002, the Nepal Government strongly committed
to making public-sector management lean, transparent, competitive, economical, efficient,
service-oriented, accountable and more gender-sensitive (NDF, 2000:119). In the meeting,
the donor representatives also addressed the issue of “a crisis of governance” in Nepal. In
response, the Nepal Government committed to reduce poverty, improve its planning,
budgeting and expenditure management, effectively implement programs, and improve
accountability and transparency.
In NDF-2004, secretary of Ministry of Finance Bhanu Prasad Acharya presented a
discussion paper on the reform agenda. The then ongoing reforms he discussed were: public
expenditure reforms, tax reforms, public enterprise reforms, private sector development,
financial sector reforms, decentralization, improving financial management and
accountability, improving budgeting and expenditure management, civil service reform and
sector-specific reforms. Most of these reforms are discussed in chapter 5.
6. An Overview of Donor-support in Governance Reform
B. D. Bhatta (2000:370) explicitly states that good governance emerged in the late
1980s as a new paradigm which was dictated by the international agencies led by the World
Bank. Governance reform has been considered a path to economic growth and poverty
reduction. This is the reason why donors want to assist for reforming governance.
Several donor agencies have had been involved in supporting Nepal for her
governance reform as given below:
Table 6.1.3: Donor partners involving in governance area
Governance area Multilaterals Bilaterals
Civil service reform WB, ADB, UN Agencies UK, Switzerland
Anti-corruption ADB Denmark, Norway,
Switzerland, UK
Decentralization WB, ADB, UN Agencies Canada, Denmark,
Germany, Netherlands,
Norway, Switzerland, UK,
US
Human rights — Canada, Denmark, Norway
Switzerland, UK
Social inclusion WB, ADB, EU, UN Canada, Denmark,
Agency Germany, Netherlands,
Norway, Switzerland, UK
Integrated security — US
development
Source: The World Bank (2004:49) Nepal: Country Assistance Strategy, 2004-2007.
The above table shows that, among bilateral donors, there is predominance of
European donors. They are: Denmark, Germany, Netherlands, Norway, Switzerland and UK.
Non-European donors implementing governance-related projects were only Canada and US.
Among multilaterals, ADB, World Bank and UN Agencies have been involving in almost all
areas of governance. But the World Bank and ADB focus on macro-level governance
whereas the UN Agencies focus on local governance.
United Nations System (UNS, 1999:56) aims to assist Nepal government in
governance improvement particularly in decentralization, capacity-building of local
institutions, and empowerment of disadvantaged groups. It means the UN Agencies want to
focus on local governance. The widely known example is the Local Governance Program
(LGP) supported by UNDP. The UNDP is a lead donor for coordinating all the donors
involved in local governance and decentralization.
For both multilateral and bilateral donors, the UK is a lead donor in the field of good
governance including administrative reform. In the field of democratic governance including
judicial reform, Denmark is the lead donor in Nepal (ODI, 2000:17). The role of leading
donors is to coordinate other donor partners involved in the concerned field. They not only
help in donor-donor coordination but also serve as s focal point of Nepal government to deal
with in the concerned field.
After promulgating the Local Self-Governance Act in 1999, many donors have shown
their interest in supporting Nepal’s efforts in decentralized decision-making. UNDP involved
in the decentralized management of local development by implementing its Participatory
District Development Program (PDDP) in 20 districts. A local trust fund has been established
in each participating district for ensuring financial sustainability. DANIDA also involved in
decentralized policy reforms. Likewise GTZ, USAID, FINNIDA and NORAD are involved
in supporting Nepal’s initiative in decentralized decision-making by implementing different
projects (see: FACD, 2005).
Almost all the constitutional bodies in Nepal are also reformed by donors. DFID
reformed 4 constitutional bodies—Public Service Commission (PSC), Commission for
Investigation of Abuse of Authority (CIAA), Prime Minister’s Office (PMO), and National
Planning Commission (NPC)—by implementing the projects: Nepal NPC project, CIAA
Institutional project, PMO project, and support to NPC respectively during the second half of
the 1990s. The reforms were aimed at improving their functions. For example, for improving
the functions of Public Service Commission, the objective of the project was to improve the
selection, recruitment and promotion procedures within the civil service (UNDP, 2000).
The DANIDA also helped reform Parliament Secretariat, and Election Commission
by implementing the projects: support to the Parliament Secretariat and support to Election
Commission. Likewise the World Bank reformed NPC by executing the NPC strengthening
project. UNDP also executed “Reform of the Judiciary” project (2000-2005) to support the
strategy of Nepal government by addressing some key issues related to rule of law and
judiciary and to enhance access to and improve the quality of justice for all citizens and
particularly women and members of disadvantaged group (FACD, 2005:39). The project
beneficiary was Supreme Court, a constitutional body.
The World Bank has supported Nepal’s Poverty Reduction Strategy (PRS) paper by
implementing two projects—Poverty Reduction and Growth Facility (PRGF) and Poverty
Reduction Support Credit (PRSC). The key components of these projects are: financial sector
strengthening, public sector reforms, governance reforms including service delivery
improvements and social inclusion promotion (FACD, 2005:60 and 62).
The ADB has also supported the implementation of PRS by implementing a project
“Public Sector Management Program”. This project was to strengthen the fiscal position of
the government, disengage the government from the public enterprise management and
ownership, and strengthen public and private sector governance (FACD, 2005:60)
The DFID (2005:14-15) funding policy focuses on (i) improving public expenditure
management and privatizing state-owned enterprises, (ii) decentralization and sectoral
devolution, (iii) combating corruption, and access of justice. Much of its support is directed
through Enabling State Program (ESP) which runs several projects for reforming governance
in Nepal.
Thus, most of the development projects and programs undertaken after the mid-1990s
are implicitly related to governance reform. The reason behind it is that the governance has
become a cross-cutting issue of development since the early 1990s. In some cases,
governance reform has also been projectized.
In most cases, it is difficult to segregate purely governance-related projects from
among all donor-funded projects. However, a recent Development Cooperation Report
(FACD, 2005) presents a list of projects related to rule of law and good governance (see:
Appendix-F).
Among the governance related projects, the ADB funded “Governance Reform
Program” was the largest project in terms of the amount of aid (see its case study in
Appendix-H). The second largest program is Enabling State Program of DFID that aims at
developing practical understanding of good governance in the country. It focuses mainly on
pro-poor governance. The committed amount for these two programs was more than NRs 20
billion each. But the ADB committed loan assistance and DFID grant. In some cases, ADB
also provided grant, for example, for “Strengthening Rule of Law”.
A single project of UNDP was not as large as that of ADB and DFID. But UNDP
provided more aid than any other donors, for governance reform, by launching several
projects—(i) Enhancing Access to Justice through Media Campaign, Settlement Fairs and
Strengthening Community Mediation Practice; (ii) Human Rights Based Approach to
Programming with special Focus on Conflict; (iii) National Human Rights Action Plan; (iv)
Strengthening Rule of Law; (v) Coordination and Support of International Electoral
Observers; and (vi) Local Governance Program. The largest project of UNDP was “Local
Governance Program”. The objective of this project was to strengthen and support
decentralized, participatory and sustainable management of local development and to
strengthen the planning and management capacity of DDCs and VDCs (FACD, 2005:120).
The USAID has also contributed in this field by implementing projects such as:
Anticorruption and Law Enforcement, and Specialized Project 8- Promoting Peace through
Improved Governance and Income in Target Areas. The objective of former project was to
strengthen rule of law and of later was to mitigate the conflict in Nepal through support for
the provision of quick and visible benefits to the under-served and conflict affected
populations, and through support for peace process.
DANIDA, SNV, NORAD and SDC have also contributed in the field of local
governance, human rights, and good governance. Among their projects, the DANIDA’s
“Human Rights Good Governance” is the largest one. The objectives of this project are: (i) to
create effective public awareness on human rights, victims of human rights; (ii) to support
abused victims; (iii) to mitigate and resolve social conflicts; (iv) to create a strong broad
based democratic organizations of Dalits; (v) to qualitatively improve the training of media
practitioners in mastering the core score skills of journalism; and (vi) to strengthen the
capacity and the necessary systems of the Election Commission for managing and conducting
democratic elections (FACD, 2005:63).
On the whole, almost all donors have had been involving to support the effort of governance
reform in Nepal. But the Nepal’s largest donor, the Japan have not shown her interest in
projectizing governance. But it does not mean that Japan has no interest in governance. Japan
makes Nepal conscious in reforming governance through aid agreement paper aiming at
improving the aid effectiveness.

7. Donor Influence in National Policy

In Nepal, government consults donor agencies for reforming development policies
and strategies (ESP, 2001:82). The reason behind it is that Nepal is an aid dependent country.
ESP (2001: 104) reports that, in FY 2000-1, the government planned to cover 65 percent of
its development expenditure from foreign aid. The ratio of total outstanding loans to Nepal’s
GDP was 19 percent in 1984-85 and 50 percent in 1998-99. Some 30 percent of
government’s regular expenditure has to be set aside to service debt.
Donors generally agree to provide financial assistance only when the government is
serious about the donors’ concerns and such concerns are generally related to policy reform.
As an example, Enabling State Program reports:
Nepal has concluded negotiations to enter the IMF-sponsored ‘Poverty Reduction Growth
Framework” (PRGF). This would guide the country’s economic policies, including social
spending, for three years. The PRGF focuses on macro-economic stability, structural reform,
and poverty reduction. Nepal has to meet three conditions to enter: 1) award management
contracts to run the Nepal Bank Limited and Rastriya Banijya Bank; 2) produce a mid-term
budget review; and 3) produce a Poverty Reduction Strategy Paper. Nepal’s entry into PRGF
would enhance the country’s credibility in the international arena and deliver $20 million IMF
assistance per year (ESP, 2001:6).
ESP (2001: 93-4) quotes the NPC’s report that, in 1997, the Parliament, the Cabinet
Secretariat, the Prime Minister’s Office and other sectoral ministries suffered from a lack of
skills and their capacity to influence pro-poor policies was also impaired by their agenda
being strongly influenced by the donors.
 Dhungel (2000:82) writes that foreign aid is usually tied with reform commitment; he
further concludes: “The improvement in policy reform, although slight, is not by deliberate
choice but imposed by donors.” Thus, we can say that donors have become a prominent force
with considerable influence on policy reform in Nepal. Devendra Raj Panday (2001:178)
writes that a policy framework paper was prepared by IMF secretly and the government
officials claimed that the paper was prepared by them.
Our modern world has become a single social system with growing ties of
interdependence in many facets of human life. The increasing interdependence of world
society is termed as ‘globalization’. The globalization of policy-making should be understood
as the donor influence on policy-making in recipient countries. Wallerstein “argued that one
of the most important changes in the policies of the late twentieth century is the context to
which the policy agenda is no longer set and defined with purely national boundaries” (cited
by Parsons, 1995:232).
The extent of the globalization of policy-making is clearly stated by Harrop when he
notes that:
International environment forms much of the national policy-making. Policy-makers in each
country share a policy context formed by the international economic cycle of prosperity
recession, depression and recovery…. International organization such as the EC also forms an
increasingly important part of the context of national policy-making…. The mass media and
international conferences ease this process of policy diffusion. Policy-makers in one country
seek to emulate the process of colleagues overseas (Harrop, 1992:263).
Since donor agencies are from foreign countries, one can raise a question of their
legitimacy for participating in national policy-making. According to D.R. Panday (2001:183),
we cannot deny them for their intellectual and professional rights and responsibilities to
contribute to the process of our development. It is so because they are considered as our
development partners who wish to see our welfare.
Before this millennium, the planning process in Nepal was traditional. Even in the
preparation of Tenth Plan, there was nominal participation of local governments,
beneficiaries and civil society. Main objectives of the development plan are dictated by donor
agencies. Foreign aid is usually tied with new policy initiatives.
All the existing models of policy-making are also useful to understand donors’ power
by considering donors as interest group. In the present day Nepali society, donor community
may be more influential than any other interest groups particularly in the context of policy
reform.
As far as the influence on policy decision is concerned, donor agencies are probably
the most influential actors in Nepal. The government often tries to accommodate donors’
views rather than consulting with political parties, civil society and general public in the
policy-making process. Most of the donors say: “If such-and-such policies are reformed, then
so-and-so projects/programs will be funded”. This hypothesis is concerned with aid
negotiation. During 1990s, donor agencies actively participated in reforming constitutional
bodies such as strengthening parliament secretariat, cabinet secretariat, election commission,
and CIAA. They also influenced in reforming macro-economic policies through tax reform
project, economic liberalization project, advisory services facility project, etc.
The Tenth Plan document is the Poverty Reduction Strategy Paper, which is not only
the nation’s realization but also the reflection of donors’ ideas or their policy of development
cooperation. The expenses for the different activities of plan preparation are funded by some
donors. Their informal advisory role may be crucial in the plan preparation process in Nepal.
Most of the development activities in Nepal are donor-funded. In this context, the
government often tries to accommodate donors’ views in the policy process (ESP, 2001: 82).
The situation of hyper aid-dependency is highly functional to donor agencies for influencing
policy decisions in Nepal. According to Dhungel (2002: 27), “Donors dictate the government
policies in Nepal, and as a result public policies are devoid of national ‘ownership’.”
In short, Parliament is the final authority of approving or rejecting the policy
initiatives. Cabinet of ministers and NPC lead in designing public policies. NPC, sectoral
ministries and local government institutions are to be formally consulted for designing public
policy. Political parties, civil society and general public are consulted only when government
feels necessary to do so. There is no fixed mechanism for institutionalizing the public
discussions for policy-making.
8. Effects of Conditionality on Country-ownership
How far aid conditionality affected on the country-ownership aspect of governance in
Nepal? For answering this research question, 20 donor conditionalities (or prescriptions) were
taken into consideration as in the following table.
Table: Effects of conditionality on country-ownership in Nepal
Donor conditionality (prescriptions) Positive effects on Level of
country-ownership enforcement
Responses Rank Mean Rank
out of 100 score
Prepare expenditure framework 97 1 2.71 1
Develop country ownership 91 2 1.80 17
Be accountable and transparent 89 3 1.32 20
Decentralize decision-making 86 4 2.13 15
Use democratic process 85 5 2.34 10
Insure sustainability 83 6 1.96 16
Insure social inclusion 76 7 2.45 5
Reform regulations/procedures 75 8 2.33 11
Control corruption 74 9 2.50 4
Control fungibility 70 10 1.76 18
Generate matching fund 66 11 2.41 7.5
Reform private sector 65 12 2.68 2
Reform public sector 61 13 2.44 6
Increase tariffs 50 14 2.41 7.5
Decrease subsidies 38 15 2.35 9
Use donors’ auditing procedure 36 16 2.14 14
Direct funding in local level 34 17 1.35 19
Direct execution by donors 27 18 2.27 12
Use foreign consultants 17 19 2.63 3
Procure donors’ goods 0 20 2.21 13
Total (percentage) 61
Note: n=100; rank correlation = -0.0906
In the above table, the items of donor-conditionality are placed in order corresponding
to their frequencies of “more positive effect” on country-ownership. The table indicates that
the first 14 conditionalities affect more positively and the last 6 conditionalities more
negatively on the country-ownership. The table also shows the different levels of
enforcement by donors for each conditionality in terms of the mean score of responses. The
mean score is calculated from three levels of enforcement—high, moderate, and low. The
possible range of mean score is 1 to 3. Since the Spearman,s rank correlation between the
level of enforcement and the effect of conditionality on country-ownership is -0.0906, there is
no correlation between them.
9. Concluding Remarks
In the survey study, all the governance-related aid conditionalities were found ‘more
positively’ affecting on the country-ownership of donor-funded activities in Nepal. Such
governance-related aid conditionalities were identified as: prepare expenditure framework,
develop country-ownership, be accountable and transparent, decentralize decision-making,
use democratic process, insure sustainability, reform regulations/procedures, control
corruption, control fungibility, generate matching fund, reform public sector, reform private
sector, and increase tariffs. The survey data also reveals that there is no correlation between
level of the enforcement of conditionality and its effects on country-ownership.
On the other hand, the donor conditions not related to improving governance were
found ‘more negatively’ affecting on the country-ownership. Such conditionalities taken into
consideration under study were: procure donors’ goods, use foreign consultants, direct
execution by donors, direct funding in local level, use donors’ auditing procedure, and
decrease subsidies.

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