Hands on or hands off for budget support?

EDITOR’S NOTE: Should donors take a more “hands-on” approach for budget support, as the Independent Commission for Aid Impact recommends in its latest report on the management of U.K. budget support operations? Overseas Development Impact research fellow Heidi Tavakoli discusses in this blog post.

Enthusiasm for budget support has waned. Last year four major bilateral budget support donors (the UK, Germany, the Netherlands and Sweden) signalled plans to slash their allocations for general budget support – a trend fuelled by dissatisfaction with its assessed impact. However, Friday’s Independent Commission for Aid Impact (ICAI) report on the ‘management of UK budget support operations’ paints a more optimistic picture.

The evaluation states that the ‘programme is meeting most of the criteria for effectiveness and value for money (VfM), but some improvements should be made’. In essence it suggests that the UK should continue to do the same thing, but do it better. This is a good rating for an aid modality that seems to be rapidly falling out of favour with other bilateral donors.

As an assessment of the performance of budget support, the evaluation offers a balanced, uncontroversial perspective. The ICAI report reiterates the importance of budget support in funding the expansion of service delivery when there are strong government commitment and leadership, and it highlights the positive role policy dialogue can play.  It stresses the need to improve the management of fiduciary risk, mirroring perceptions that this is the most controversial aspect of budget support, and it calls on the Department for International Development (DFID) to promote national accountability in recipient countries by improving the transparency of budget support operations – all points highlighted in our recent meeting series on budget support.

The report could have done more to apply the latest thinking on evaluation methodologies for budget support, such as statistical impact assessment, political economy analysis, and analysis of the spill-over effects of modalities. It also fails to examine the theory of change of budget support, which is fundamental to our improved understanding of what has worked and why.

For me, the most notable part of the report concerns this idea of theory of change; how impact is achieved through development assistance. DFID’s bullish focus on results is welcome, but there are different ways to achieve results. The ICAI evaluation points in one direction: a ‘more hands-on approach’ for budget support. The evaluation states:

‘UK budget support operations have led to increased expenditure on poverty reduction and basic services, generating progress towards the Millennium Development Goals. In some cases, however, lasting impact will depend on progress in overcoming political and institutional bottlenecks to more effective development expenditure and service delivery. This may not be achievable through budget support alone, indicating a need for more hands-on approaches to accompany budget support.’

It cites evidence that there may be diminishing returns to budget support unless the ‘political and institutional bottlenecks’ to service delivery are addressed. Without this additional effort, high volumes of budget support may not offer good value for money. As a recommendation, the evaluation suggests that general budget support should be accompanied by sector budget support with a stronger emphasis on technical assistance to tackle directly the impediments to better service delivery.

The kind of government and market failures that lead to poor service provision and are synonymous with political and institutional bottlenecks are well-documented. They refer to situations where incentive systems encourage poor performance and are driven by weak accountability mechanisms, motivation problems and poor information. One of the most commonly cited challenges in education is the problem of teacher absenteeism and creating systems to address this.

Findings from a five-year research project on the effective delivery of public goods in sub-Saharan Africa suggest that a coherent vision, effective top-down performance disciplines and local involvement in problem solving are all crucial. Ensuring that aid works to support such efforts, rather than to exacerbate or ignore these challenges, was also a clear recommendation from an ODI study on sector-budget support.

Why might the ‘hands-on approach’ recommended by ICAI be contentious? Well, it comes at a time when DFID is scaling up its support for results-based aid (RBA), including cash on delivery (CoD), an aid instrument that epitomises the opposite, ‘hands-off’ approach.

DFID’s leadership has made a commitment to launch three RBA pilots by the end of 2011and it is clear this is a strong ministerial priority. DFID is steaming ahead with these and, having just attended a recent workshop with representatives of the other big EU donors, it’s clear to me that many are watching DFID’s progress with keen interest.

Some similarities exist between budget support and RBA as defined by DFID – both provide financial aid direct to recipient country treasuries and are tied to performance indicators. But they differ in fundamental ways. For example, RBA (particularly CoD) is supposed to be a blank cheque for recipient countries in return for agreed results, while budget support involves policy dialogue and external technical assistance to support the achievement of those results.

In addition to the policy dialogue and technical assistance already provided with budget support, the ICAI evaluation recommends that DFID should become more involved with its partner country counterparts to resolve the bottlenecks to more effective public services. This change would move the budget support package further away from RBA models.

This discussion begs a key question: which actors are best placed to address political and institutional bottlenecks, and is there a role here for donors? On the one hand, proponents of RBA and CoD argue that recipient countries are best placed to achieve results and should be given the policy space to lead and manage that process. Implicit here is the assumption that governments have the commitment and capability to address the bottlenecks, even though those same governments may be the cause of them.  On the other hand, the ICAI evaluation proposes a more intrusive role for donors, providing stronger capacity-building support alongside incentives for results. It assumes that donors can leverage change in areas that are tied in complex ways to the social, cultural, economic and political nature of the country.

As it stands, both approaches are yet to be seriously tested, so the jury is still out on which will be more effective. It’s clear they assume very different roles for donor agencies and recipient countries. Before either approach is implemented at scale, donors such as DFID must make a more explicit judgement on the intervention logic for their aid programmes and thus the appropriate role of donor action. That decision should determine the choice of aid modality.

Going forward, depending on which approach proves the more popular with donors and the purity of its implementation, we could see the emergence of new and very different types of donor-recipient relationships.

Republished with permission from the Overseas Development Institute. View original article.

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