Posted by Michel Lazare
One of the main changes in development aid policy over the last decade was the decision made by the international community to move away from project aid in favor of direct budget support. This meant shifting away from aid financing specific projects and disbursed outside of the beneficiary country's public financial management (PFM) system (e.g., money deposited on projects' accounts in the commercial banks) to favor generally unearmarked aid funds directly disbursed using the beneficiary country's PFM system (e.g., direct budget support deposited on the treasury's account at the central bank).
Evaluation of the efficiency and effectiveness of this new aid policy is a key issue for the international community. Just a few weeks before the upcoming Fourth High Level Forum on Aid Effectivemess to be held in Accra (Ghana), the UK's National Audit Office (NAO) has published, on February 8, 2008, a report evaluating DFID's (the UK's development agency) performance in providing budget support. This report titled: "Department for International Development -- Providing Support to Developing Countries", concludes in a nuanced way:
"Evidence on whether budget support has yielded better value for money than other forms of aid is not conclusive. While budget support has some advantages compared to other forms of aid, it also carries significant risks which need to be better managed."
Background:
The March 2, 2005 Paris Declaration, issued from the Third High Level Forum on Aid Effectiveness, is the key document supporting the current policies of the international community on aid. As the relevant OECD web page notes it:
The Paris Declaration, endorsed on 2 March 2005, is an international agreement to which over one hundred Ministers, Heads of Agencies and other Senior Officials adhered and committed their countries and organizations to continue to increase efforts in harmonization, alignment and managing aid for results with a set of monitorable actions and indicators.
Out of the 12 Paris Declaration's monitorable indicators, a number supports the shift to direct budget support and the use of the beneficiary country's PFM system for disbursements, for instance, indicators 5a, 6 and 8.
Indicator 5a: Use of country public financial management systems — Percent of donors and of aid flows that use public financial management systems in partner countries, which either (a) adhere to broadly accepted good practices or (b) have a reform program in place to achieve these.
Indicator 6: Strengthen capacity by avoiding parallel implementation structures — Number of parallel project implementation units (PIUs) per country. (to be reduced)
Indicator 8: Aid is untied — Percent of bilateral aid that is untied.
Conclusions of NAO's Report:
According to the NAO, "budget support has:
- often enabled partner governments to increase expenditure on priority areas;
- resulted in partner governments providing more services, particularly in health and education;
- helped increase the capacity of partner governments to plan and deliver services effectively and to develop better poverty-focused policies;
- helped partner governments to strengthen their financial management systems and encouraged other donors to support such reforms;
- facilitated donor alignment to, and support for, the developing nation’s own strategies; and
- reinforced existing economic stability and good economic management."
While these findings would appear has strong achievements supporting poverty reduction (e.g., increased spending on priority areas including in health and education), the NAO nuances the message by noting in particular that "challenges remain:
- service expansion has often been at the expense of service quality;
- progress in strengthening financial management systems has been slower than expected; and
- DFID and other donors expect budget support to reduce the transaction costs of administering aid, but have found it difficult to quantify these costs."
It also notes the risks associated with budget support:
- DFID has done a good job of moving public financial management up the development agenda. It has taken a lead role in developing and using tools to assess the quality of developing country systems and to assess the level of fiduciary risk. But there is scope for DFID to sharpen its estimates of the significance of weaknesses for potential inefficiencies or leakage, and to set out more clearly the extent to which UK and other funds are at risk.
- DFID requires a shared commitment to three objectives as a basis for providing aid through developing country governments: reducing poverty and achieving the Millennium Development Goals; strengthening financial management and accountability; and respecting human rights and other international obligations. DFID’s monitoring of the first two commitments is well established but monitoring of commitment to human rights has been less systematic
Finally, the NAO formulates the following recommendations:
- "DFID should always set out clearly its precise objectives for budget support programs, specifying exactly what it expects to achieve and by when.
- DFID should build on its current monitoring arrangements to make sure that for each budget support program it can systematically assess progress against its objectives. Such monitoring should reflect a balance of process, output and outcome indicators and be coordinated with development partners.
- DFID has done more than most donors to strengthen statistical systems for monitoring progress. But the available information is often still not sufficient for donors to monitor all key aspects of poverty reduction on a timely basis. In countries where it uses budget support, DFID should identify any key weaknesses in the national monitoring systems and give increased priority to mitigating them, seeking support from other donors in doing so.
- DFID should, together with its partners, further strengthen its risk assessments and analysis of developing country government systems. Specifically, it should make more explicit its judgment of the significance of system weaknesses for potential inefficiencies or leakage of aid in the recipient country. It should use more quantified estimates of these factors where possible. It should use this information to tailor appropriate safeguards to mitigate risks.
- DFID needs to set up systematic in-country monitoring along the dimensions of human rights in its guidance. Before using budget support, DFID should establish transparent procedures to respond quickly, firmly and proportionately if concerns arise and make sure contingency plans for other ways of delivering aid cover the most significant risks.
- DFID should improve its analysis of the prospects for using budget support by:
- formalizing appraisal of options which vary the proportion of budget support in a country program;
- formalizing appraisal of options for using alternative forms of aid; and
- bringing together the risks and benefits of each option to facilitate comparison.
- In support of the above, DFID needs to rationalize and strengthen the guidance and support available to country teams and keep it up to date."
The full text of the NAO's report can be downloaded here: Download 07086.pdf
