Budget support is becoming an endangered species: what Busan must do to save it

Developing country Finance Ministers arriving at the Busan High Level Forum on Aid Effectiveness in November may be surprised to discover that their favourite way of receiving aid – budget support – is fast becoming an endangered species: swept away by donor scepticism about good governance and budget accountability; and swallowed by the contemporary need to demonstrate that every dollar or pound of aid delivers demonstrable development results.

The evidence for this is not hard to find, on the ground or in donor rhetoric. Marcus Manuel of ODIOverseas Development Institute (London) has presented figures which show that the purest form of budget support, General Budget Support, has hovered at under 2% of bilateral oda, with the figure rising to 3% if multilaterals are included. The EC, the UK and Sweden are outliers on the upside, with figures closer to 20%. A ‘second tier’ (Netherlands, Finland and Norway) come in at about 10%. Others are still in the game – the World Bank, for example, is introducing a new budget support-type instrument, Programme for Results. Many donors, however, including the US and Germany, have very low figures.

There are other, less pure forms of budget support, like Sector Budget Support, which might boost these numbers. Figures are more difficult to obtain, but the monitoring survey prepared for Busan finds that the share of direct budget support in aid has stagnated since 2005, with only a modest increase in other programme-based approaches (Figure 1). Results for this indicator of donor performance is worse than just about any other of the set agreed in Paris in 2005. (Statistical alert: the figures from the Monitoring Survey are higher than those cited by Marcus Manuel. I consulted CAPE colleagues at ODIOverseas Development Institute (London) and paste in their contributions at the end, to indicate how complicated this is (and how well-informed they are!)).

Formal and informal policy statements confirm the lack of enthusiasm in some quarters.  For example, the new German development policy, published on 3 August, contains only a guarded reference to budget support, calling for case-by-case reviews and insisting that the right conditions need to be in place for budget support to be considered. Even amongst the strongest proponents, the conditions for budget support are being tightened and the nomenclature changed. For example, the UK’s DFIDDepartment for International Development has issued new guidance, adding domestic accountability as a criterion for the granting of  budget support (in addition to existing criteria, relating to the MDGs, respect for human rights and public financial management), and also suggesting (para 2.2.6) that budget support be re-named, to reflect the new emphasis on results, as follows:

Figure 1

Percentage of aid provided through programme budget approaches

Source: http://www.ukan.org.uk (PDF)

‘Individual budget support programmes could be re-named to reflect the results we want to achieve (rather than the nature of the instrument). Thus:

• General Budget Support could be re named: “Growth and Poverty Reduction Grant”
• Sector Budget Support could be re-named: “name of sector Service Delivery Grant” (e.g. “Education Service Delivery Grant”).
• General Budget Support in post-conflict States, where the objective is state-building could be renamed: “State Building Grant”
• Earmarked budget support to finance cash transfers and other social protection schemes, could be labelled: “Social Protection Grant”.’

At a public event which I chaired in Brussels on 13 July, organised jointly by ODIOverseas Development Institute (London) and Oxfam, Commissioner Andris Piebalgs was unambiguous about the risks involved in budget support, his words carrying particular weight because the ECEuropean Community has attached such importance to this form of aid. The meeting report summarises his comments as follows:

‘Commissioner Piebalgs began by explaining frankly why he considers the European public to be less enthusiastic about Budget Support than the development community and as a consequence, why it might be under threat. First, according to the Commissioner, democracy and human rights matter in development operations and with the background of the Arab Spring, the ECEuropean Community is under increasing pressure to justify support to regimes that have chequered histories regarding their commitment for such underlying principles. Second, corruption is a key concern and unless the recipient country has clear-cut measures or a commitment to fight corruption donors should not provide Budget Support, as donors will be vulnerable to taxpayers‟ criticisms. Third, he raised concerns about the dependency of recipient countries on Budget Support and how this links with domestic resource mobilization. Fourth, related to the results agenda, he indicated that there is pressure for the effects of aid to be visible and traceable. This is more difficult to achieve with Budget Support as it forms part of the government’s overall resource envelope.’

Despite these reservations, Commissioner Piebalgs indicated that his eventual ambition is to increase budget support, not reduce it – from the present target of 25% to perhaps 50%. Presumably, the target will be embodied in the new Communication on development policy, expected in the autumn, following the Green Paper consultation. But will Member States allow him to go that far?

Busan can help to shape future policy on budget support. It is notable, however, that whereas the topic is mentioned in the developing country position paper for Busan, finalised in June, it does not appear explicitly in the latest Summary by the Busan Chairs on emerging areas of consensus.

That’s a pity. Budget support should not be allowed to fall off the agenda. Developing country finance ministers would miss it (as Dr Samura Kamara from Sierra Leone indicated at the Brussels meeting). So would development practitioners, as Commissioner Piebalgs suggested, and as is amply evident from the series of meetings that ODIOverseas Development Institute (London) has organised on the topic this year. That is not surprising. Budget support, especially General Budget Support, but also Sector Budget Support, delivers at scale, empowers developing country Governments, reduces transactions costs, and increases accountability.

What, then is the way forward?

First, it is important that budget support appear explicitly in the Busan agenda and also in the Busan outcome document. There is a good case for this, based on the targets originally set in Paris, and reaffirmed in Accra. The Accra Agenda for Action stated that donors should

‘Avoid activities that undermine national institution building, such as bypassing national budget processes . . . and recollect and reaffirm their Paris Declaration commitment to provide 66% of aid as programme-based approaches. In addition, donors will aim to channel 50% or more of government-to-government assistance through country fiduciary systems, including by increasing the percentage of assistance provided through programme based approaches.’

Second, however, recipients in particular will need to recognise the pressures on developed country ministers and their concerns about potential diversion of funds. They will need to be well-briefed on the current debate about development results, which is sympathetic to the political process and institution-building, but insistent that results be demonstrated to sometimes sceptical tax-payers and publics.  I have documented the latest thinking in a previous piece, about Results 2.0. It is certain that results will feature prominently at Busan – as, indeed, will accountability.

Third, then, donors and recipients will need to work together to preserve the best of budget support – and, as the Brussels meeting report suggests, ‘reform the rest’. It seems to me that there is more to do here. For example, developed countries talk quite a bit about the conditions that should govern whether or not budget support can be provided. It would be interesting to know whether they are consistent among themselves. Also, it would be useful to know whether recipient countries agree with the various conditions and how they should be monitored. There is also more work to be done in demonstrating the impact of budget support in a results environment. For example, Ed Mountfield from the World Bank presented interesting figures at the Brussels meeting, showing that countries eligible for and receiving budget support-like lending from the World Bank had grown faster and made faster progress towards the MDGsMillennium Development Goals than those that did not qualify. Can these results be generalised?

Fourth, there are interesting questions about who decides on eligibility and on possible suspension (as has happened recently to Malawi, criticised by the UK Government for poor economic management and governance). There is a link to the debate in Busan about mutual accountability and aid predictability. The EUEuropean Union could offer a model here, with the accountability and arbitration procedures of the Cotonou Agreement, and the parliamentary oversight of the EU-ACP Joint Parliamentary Assembly. The ACPAfrica, Caribbean and Pacific itself could make a strategic contribution on behalf of all developing countries, by picking up this as one of its challenges for 2011: see my challenge to the ACP.

To summarise, the Busan outcome document should:

• Reaffirm the value of budget support to developing countries, in its various manifestations (including general and sector budget support);
• Make an explicit link to the contribution that budget support can make to the results and transparency agendas;
• Celebrate innovation in budget support, including the World Bank’s new instrument, but also many country-based experiments;
• Acknowledge that budget support is not suitable in every case, and lay out the conditions that pre-dispose to the use of different budget support modalities;
• Recall the Paris and Accra target that 66% of aid should be delivered through programme-based approaches – and note slow progress against the target;
• Specify in more detail the process by which countries will be declared eligible for different kinds of budget support, and the monitoring that will be put in place to underpin continued eligibility; and
• Insist on mutual accountability provisions, that will allow for arbitration and political accountability on budget support.

Here’s the thing about endangered species. Do nothing and the threat of extinction becomes a self-fulfilling prophecy. Ask the dodo. Alternatively, act decisively and a species can be saved. Ask the bald eagle or the American bison.

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to register your vote on whether EUEuropean Union Development Commissioner, Andris Piebalgs, was right in settin a target of 50% of ECEuropean Community aid as budget support, click here.

Statistical Appendix – correspondence with CAPE

1. SM to CAPE

Colleagues

Re-reading my blog post this morning, I was struck by the discrepancy between the figures Marcus cited in Brussels (2% of bilateral oda, 3% of total) and the much higher figure for budget support (22%) and programme-type aid (another 26%) in the Busan monitoring survey. Can anyone explain the difference? One possibility is that the monitoring survey covers only 32 countries, and these might be ones with higher budget support. Or there is a serious definitional difference between two different sources. Or, most likely, there’s just something I haven’t understood.

2. From Marcus Manuel

The scale of the difference is surprising. One problem is that DACDevelopment Assistance Committee (of the OECD) figures are only for GBSGross Budgetary Support and don’t include sector budget support. But that shouldn’t affect the figures by more than a factor of two. The other one is that multilateral aid is more than I stated as we didn’t have WBWorld Bank data at the time – when you add them in you get more like 5% than 3%.  The final factor may be different time periods – I was citing ten year average. But then there wasn’t much trend upwards over time.

3. From Matt Geddes

I just ran the data for 2005-9 to check your figures for GBS, I got 4% so Marcus’s figures of 2-3% seems the right ballpark considering I think he used a different time-period.

I also ran the numbers for just the 32 countries who have done the PDMS 2006 and 2008 that the 22% figure reflects. This boosts the GBSGross Budgetary Support share to 9% (seems explainable given the self-selection of donor darlings etc. in the 32).

But, we are still 13% short between the OECD-DAC CRS data and the PDMS data…..

The 9% (and 2-3%) figures are those reported by donors HQs directly to the OECD-DAC in Paris whereas the 22% is reported by donor country offices – clearly different incentives / knowledge at play producing a very different figure?

As for who is more accurate……..I wouldn’t ask either, I would ask the governments.

In practice, many country offices rely on figures from HQ but the translation process is unknown but probably most importantly, some reporting incentives are felt differently at country level – plus country level might have a better / different knowledge of flow specifics in the context of meeting the definition. See pages 32-34 of the 2011 survey guidance. Note the definition of PBAs has changed I think (certainly the interpretation has) since 2005.

Yet another example of the need for IATI and better reporting at the project level. Or at least an element of random spot checks for PDMS reporting!

4. From Heidi Takavoli

See Info below taken from a report I wrote on the PDMS in 2009.

Aid aligned to national priorities

Indicator 3 is calculated by dividing total aid recorded in the government budget (USD), by total aid disbursed by donors for the government sector (USD), to derive the percentage of disbursed aid that is reported in government budgets by donor, by recipient country. However, there are considerable methodological concerns with this indicator, which should be considered when interpreting the results. Firstly, government reported data is compared with donor reported data. However, inadequate information by budget authorities in recipient countries as well as weak information about possible disbursements by donors often results in different recordings by government and donors (OECD, 2008a). Secondly, this indicator compares ex-ante budget estimates to ex-post disbursements, yet the predictability of aid is predominantly not 100% (as shown by Indicator 7) and disbursements often vary from planned amounts due to in-year decision processes. Both factors contribute to large discrepancies in both directions.

Predictability of aid

Indicator 7 is calculated by dividing total aid disbursements recorded by governments (USD), by total aid scheduled by donors for the government sector (USD), to derive the percentage of scheduled aid that is disbursed according to government accounting systems. Similarly to indicator 3, there are methodological issues that should be taken into account when examining the results. Firstly, government reported data is compared with donor reported data and as such fails to discriminate between the effects of disbursement performance and poor information capture. Secondly, discrepancies in calculating aid predictability can go in both directions e.g. disbursements can fall below scheduled amounts as well as exceed them. Therefore in adjusting for ‘under/over-reporting’, one might be inappropriately changing figures that reflect the reality.

Programme based approaches

Indicator 9 is calculated by using total aid disbursed by donors (USD) in support of PBA (by either direct budget support or other assistance), and total aid disbursed by donors. For the 2006 survey uncertainty about the precise nature of PBA and flexibility allowed by the explanatory note, meant that recipient country programmes were interpreted differently by different donors. Therefore, as with the results for Indicator 4 and 6, comparability across countries and donors is weakened. Consequently the results from Indicator 9 may not create an accurate picture of the scale of PBA because only a low proportion of PBA aid may in fact reflect “an exceptionally honest and rigorous application of the definition of PBA given in the Guidance Note”, rather than an “exceptionally limited effort to harmonies procedures” (in Booth 2007). For the 2008 survey however, stricter guidelines were produced, directly affecting observed progress between years.  The 2005 figures are believed to be overestimated, and 2007 figures underestimated (OECD 2008a).

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