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Quality of Aid: It's the Donors, Stupid!

Article no: EN20080818-Article-4.6-2008

Quality of Aid: It's the Donors, Stupid!

International aid is necessary for the achievement of the Millennium Development Goals (MDGs) because it supplements the domestic resources of poor countries allowing them to increase the quantity and quality of their public services ? such as education and healthcare ? and to fund the policies and investments necessary for development. Just increasing aid, however, is of limited relevance, if it is not used effectively. A lot of ODA is not spent well because of donor practices ? not because of recipient?s corruption or incompetence. Improving donor practices, especially through aid harmonization can go a long way in helping achieve the MDG?s. By Eveline Herfkens

* Aid to whom and for what?

A large share of aid goes to middle income countries, which do not need external concessional resources to achieve the Millennium Goals: Germany spends almost half of its aid on middle income countries. A substantial amount of the remaining ODA is spent within donor countries. An example of this is the funding of scholarships of students from developing countries, a billion dollars annual subsidy, from aid budgets to donor countries? universities, contributing to brain drain from developing countries.

Of the ODA that is left quite a lot is not delivered in a way that allows countries to use it effectively, as its timing is unpredictable and/or can not be programmed. The OECD?s Development Assistance Committee (DAC) recently developed a new concept to measure aid levels: country programmable aid (CPA). This is aid that remains after deducting all ?aid? spent in donor countries themselves, is unpredictable, or otherwise can not be programmed by recipients to use according to their development plans. Based on OECD?s calculations, CPA represented a dismal 46.8% of gross 2005 bilateral ODA. Germany scores even lower: only 30% of its ODA is ?programmable?.

Increasing aid effectiveness means ensuring that aid actually helps developing countries deliver the public services and economic opportunities that will allow their people to escape the grips of poverty. And even the aid that meets the CPA criteria poses challenges to recipient countries, as the donor community struggles to get rid of its old bad habits.

* Lessons of half a century

A stereotypical donor aid programme of the past consisted of a series of stand-alone projects, designed, implemented and managed by the donor, according to donor priorities and preferences. These projects did not necessarily respond to the needs and priorities identified in country by local actors.

Moreover, donors were often reluctant to pay 'recurrent' costs, i.e. on-going expenditures such as maintenance and salaries; they had a preference for 'investment' spending like new hospital buildings, providing donors with ?visibility?. But these new investments would only increase recurrent cost bills for maintenance and salaries, which had to be shouldered by financially strapped recipients, long after the donor had left.

In the meantime these individual projects do not tackle the root causes of poor service delivery: one project (or village) at a time will not lead to development if it bypasses and ignores the overall policies and responsibilities of the developing country government. The donor-led project approach to development led to a raft of small uncoordinated donor projects, which ? even when successful ? hardly made a dent on development; they were tiny islands of perfection in oceans of despair, which collapsed back into the ocean once the donor left.

Thousands of separate donor projects also imply a massive and wasteful amount of administration for already weak local governments; especially as different donors each have their own rules and procedures, e.g. for staff recruitment, procurement, monitoring, reporting and evaluation. Recipients are asked to follow literally thousands of complicated rules and prepare scores of written reports, for different donors often requiring exactly the same information.

The number of developing countries with over 40 active official donors has ballooned from zero in 1990 to over 30 today. According to the OECD the total number of aid activities surged from 20,000 in 1997 to 60,000 in 2004; and the average size of aid activities (measured in 2004 prices) dropped from around $2.5m to $1.5m between 1997 and 2004. Adding to this multiplicity of donors, new official donors (China) and new types of donors (private foundations and local authorities from rich countries) are emerging.

Receiving aid involves a ridiculous amount of work for the recipient, which can be devastating for countries with overstretched local capacity. Local officials are so busy meeting donor demands that they can not ensure the normal functioning of government programmes, or to respond to the genuine concerns and demands of their own citizens!

As UNCTAD summarized 2006 (in its report "Economic Development in Africa, Doubling Aid: Making the ?Big Push? work"), ?There is a very real danger of a vicious circle arising, as weakened state institutions encourage donors to by-pass them which in turn further erodes state capacities and leads to more aid being channelled through projects and non-government organizations. This is also an environment that can breed corruption, on both a large and a petty scale... The evidence suggests that a proliferation of different donor-funded projects can undermine governance, ownership and the commitment to prioritize expenditure?.

Good governance, government accountability and transparency are crucial for sustainable development. By funding projects, donors provide financing outside of the recipient government?s budget, undermining local accountability, including the most powerful parliamentary tool ? the annual scrutiny and approval of the national budget.

* Why old habits die hard

Donors have preferred project financing not just because it allows them more visibility: more fundamentally, donors feel that they have control over projects and so are better able to ensure accountability to their own parliaments and taxpayers. However, by delivering funds outside of the national budget, donors have merely given themselves a false sense of security.

One argument that donors used was that by keeping funding in off-budget projects they could ensure that it went to the 'right' kinds of expenditures e.g. primary health care, rather than to expenditures that the donor does not support such as military spending. But, by providing funding for the ?right' kinds of expenditures, donors release governments from the responsibility to provide those same services, freeing up resources within the government budget which can be spent other things. Trying to ring fence aid by keeping it off-budget in a project is simply providing donors a false sense of security. No external intervention can be isolated from the overall context.

Instead of focusing narrowly on the use of aid funds or on an individual project, donors together need to engage in a country?s overall development strategy. The only way that donors can ensure that their funding is well used is to monitor the totality of the recipient government's budget, and to actively help improve the recipient government's systems for public financial management. This is all the more important given that aid is usually a small share of the total resources available to developing countries. The arguments that donors use in favour of continued across-the-board use of the project approach are largely fallacious and give only the illusion of control.

The Paris Declaration on Aid Effectiveness:
A practical plan to improve aid

In 2005 in Paris, over 100 countries and donor agencies agreed in the Paris Declaration on Aid Effectiveness to a series of specific measures for implementation and performance indicators for assessing progress. The Declaration lays out a practical, action-orientated roadmap to improve the quality of aid and its impact on development. Its 56 partnership commitments are organised around five fundamental principles for making aid more effective:

* Ownership: Developing countries - not just governments, including parliaments and civil society - must set their own strategies for development, improve their institutions and tackle corruption. Donors should respect that ownership. Donors need to realise that they do not develop developing countries - they develop themselves! Aid by itself will not result in development and 'buy' the Millennium Goals. Donors must stop thinking about 'our' German or Japanese projects, and instead start to focus on 'their' - the developing country's - development process, moving away from building 'our' schools or hospitals to supporting 'their' education or health policies. Donors should stop micro-managing, and back-off of conditionalities. They should engage and listen more, to improve their understanding of the local political context.
* Alignment: Donor countries must bring their support in line with these objectives and use local systems. Where local conditions permit, donors should transfer the management of aid to the partner government allowing it to use its own procedures and ensuring that the use of these funds is subject to scrutiny by developing country citizens and parliaments.
Aid should also be sufficiently flexible to meet developing country needs, including recurrent costs, the main financing need in health and education. According to Oxfam (2007 "Paying for people: financing the skilled workers needed to deliver health and education services for all") currently just eight cents in every dollar of aid is flexible enough to be used to pay for new nurses and doctors.
Effective alignment implies also that aid needs to be predictable. Developing countries need to know how much funding they are to receive and when, and donors need to provide funds on schedule. Otherwise the recipient can not plan and implement the long-term policies required for development. How can governments hire teachers or promise free medication for AIDS sufferers in one year, and then have to fire teachers or withdraw medication a year later because promised aid did not come through?
* Harmonisation: Given the burden for recipients to deal with the proliferating multiplicity of donors and their demands, donors need to coordinate their action, simplify procedures and share information to avoid duplication. They should streamline aid procedures, harmonise them, and increasingly work together using common practices. Led by the recipient government to ensure ownership, donors must coordinate better and ensure more coherence and complementarity in their actions by drawing up a division of labour between them across countries and sectors. They should produce more joint analyses, undertake joint missions, and work together to find ways in which to adopt common practices so that recipients have to deal with fewer procedures. They can run joint programmes by pooling funds so that the recipient only has to deal with one large programme rather than several smaller ones, and with just one set of procedures. Harmonisation also requires that donor agency field staff have the authority and flexibility to seize opportunities for better working practices at the country level.
* Managing for results: Developing countries and donors focus on producing - and measuring - results.
* Mutual accountability: Donor and developing country partners are accountable for development results.

Implementation of the Paris Declaration would ensure major breakthroughs in improving aid effectiveness, tackling issues that have hampered development for decades.

* Accra: Taking stock, taking action?

Concern about aid effectiveness is decades old. What is new is a broad international consensus on what donors need to do to improve it (see box). This consensus is based on the evidence of well-documented lessons learnt from the mistakes and failures of the last half century. In September 2008, ministers, heads of development agencies and civil society organisations from around the world will gather in Accra, Ghana for the Third High Level Forum on Aid Effectiveness.

The 2008 OECD survey, which has just been completed, underscores what needs to be done to reach the Paris Declaration targets for 2010. Alas, the results from the survey show that progress is not uniform across countries and donors, and many indicators still register no change against the baseline established in 2005.

There is some progress: particularly the new EU guidelines on complementarity and division of labour among Member States in development cooperation are promising. However, overall the implementation of the Paris Agenda seems to be stagnating: the survey does not show an increase in use of local systems, while predictability of aid (only two thirds of aid arrives on schedule) and use of common arrangements in fact decreased.

Donors cling to planting flags on their contributions and to illusionary control mechanisms, as they are too risk averse to rely on country or other donors systems and to delegate real power to their in-country staff. Most importantly, they fail to educate their parliament and public opinion on what makes aid effective, thus limiting their own political space to do so.

The message is clear: political will translated in serious efforts in turning principles into actions is essential to deliver the promised results. It is high time to translate rhetoric in action, as the credibility of the aid effectiveness debate ? yes, of aid itself - is at stake.

Eveline Herfkens is the director of the United Nations Millennium Campaign.

Posted: 18 Aug 2008

Recommended citation: Herfkens, Eveline (2008) ?Quality of Aid: It's the Donors, Stupid!?, World Economy & Development In Brief (WDEV), Luxembourg, 18 Aug (