Enhancing Local Government Engagement in Development Assistance Projects

1. Effective Engagement of Accountable Local Governments in Development Assistance Projects • Prepared in consultation with the Government Accountability Office • By: • Tara Baumgarten • Michaela Meckel • JélanPassley • Maria Toniolo

2. Outline • Background Information • International Trends and Overview of Use of Local Systems • Policy Goals • Alternative Donor Approaches • Evaluation of Alternatives • Recommendations

3. Background • International commitments to increase aid effectiveness: • Paris Declaration (2005) • Accra Agenda (2008) • Busan Partnership (2011) • Aid delivered via recipient country public financial management (PFM) and local procurement systems • Direct budget support • U.S. has not yet met targets for use of local systems

4. Percentage of Aid Using Country PFM and Procurement Systems, 2010 Source: OECD 2010

5. Use of Local Systems • Increase institutional capacity and sustainable development • Risk Assessment • Tools may be donor-specific, harmonized or borrowed from other institutions • Risk Mitigation • Variety of approaches to respond to risks such as corruption, poor accounting practices, and instability

6. Policy Goals • Increase the percentage of effectively managed aid delivered via local systems • Increase local institutional capacity • Efficiently deliver aid • Effectively identify and assess potential risks throughout the project • Effectively manage risks throughout the project • Compatibility with the U.S. context

7. United States • 11% of aid through recipient country PFM systems and 12% through local procurement systems in 2010 • Average partner PFM score of 2.17 (1 low – 6 high) • Lack of harmonization in aid strategy • USAID Forward • Use of capacity assessments to strengthen institutions and responsibly administer aid via local systems • Public Expenditure and Financial Accountability (PEFA) Framework

8. United Kingdom-DFID • 66% of aid through recipient country PFM systems and 68% through local procurement systems in 2010 • Average partner PFM score of 3.52 • Of aid delivered via local PFM systems in 2010, 64% was in the form of direct budget support, which increases the efficacy of aid

9. DFID Risk Assessment Overview • DFID uses three main tools to conduct assessments: • PEFA Framework • Evaluates six dimensions • Fiduciary Risk Assessments • Evaluate quality of PFM systems • Country Governance Analyses • Assess quality of governance and instability

10. DFID Risk Management Overview • Risk Management Program • Anti-Corruption Policy Team • Fraud Risk-Management Group • Managing the Risk of Financial Loss program • Empowerment and Accountability Resource network • Pilot Strategic Intelligence Threat Assessments

11. Sweden • 64% of aid through recipient country PFM systems and 70% through local procurement systems in 2010 • Average partner PFM score of 3.65 • Of aid delivered via local PFM systems in 2010, 73% was in the form of direct budget support • Two main agencies: Ministry of Foreign Affairs and Swedish International Development Cooperation Agency (SIDA)

12. Sweden Risk Assessment Overview • Transparency International Corruption Perception Index • World Bank’s Country Policy and Institutional Assessment index • Sweden’s assessments of previous involvement with a partner country, development strategy and human rights compliance • Economic Intelligence Unit’s Democracy Index • UNDP Human Development Index

13. Sweden Risk Management Overview • SIDA Unit for Monitoring and Evaluation • Performs regular audits • SIDA Anticorruption code of conduct • Suspends further aid disbursement until receiving repayment of mismanaged funds • Swedish National Audit Office andSwedish Agency for Development Evaluation • Monitor SIDA operations

14. Asian Development Bank • 90% of aid through recipient country PFM systems and 29% through local procurement systems in 2010 • Average partner PFM score of 3.36 • Of aid delivered via local PFM systems in 2010 35% was in the form of direct budget support • Asian Development Fund provides grants and low-interest loans to developing economies

15. ADB Risk Assessment Overview • Country Partnership Strategy reflects the development and poverty reduction goals of partner governments • Performance based allocation is based on each country’s performance and policies in place to effectively implement ADB projects • ADB tailors Country Partnership Strategy when planning projects in countries with weak governance

16. ADB Risk Management Overview • The Office of Anticorruption and Integrity monitors projects and receives complaints of possible corruption or misuse of funds • Investigates allegations of corruption • Power to sanction businesses and individuals • Independent Evaluation Department determines whether or not ADB policies and ADB programs are successful

17. World Bank • 71% of aid through local PFM systems and55% through local procurement systems in 2010 • Average partner PFM score of 2.27 • Of aid delivered via local PFM systems in 2010, 58% was direct budget support • Largest local systems donor in 2010 in absolute terms ($11 billion)

18. World Bank Risk Assessment Overview • Country Financial Management Strategy based on: • Country Financial Accountability Assessment (CFAA) • Public Expenditure Review (PER) • Country Procurement Assessment Report (CPAR) • Institutional & Governance Review (IGR) • PEFA Framework (optional) • Use of assessments by other donors

19. World Bank Risk Management Overview • Accounting risk management • Monitoring by financial management staff • Corruption risk management • Borrowers are required to report fraud and corruption • Borrowers can be audited at any time • Early termination if fraud or corruption occurs

20. Goal 1: Percentage of Aid Via Local Systems • Other donors lead the way in use of local systems • Larger donors, such as the U.S. and World Bank, tend to work with lower quality local PFM and procurement systems on average

21. Goal 2: Increase Local Institutional Capacity • Risk assessments may improve local systems • Capacity building may be necessary component • Local involvement in institutional reform important

22. Goal 3: Efficiently Deliver Aid • Donors harmonize efforts in a variety of ways, including assessmentsand large project co-financing • Multiple large bureaucracies that handle different types of aid may present efficiency challenges

23. Goal 4: Effectively Assess Potential Risks • Assessing corruption and financial risk directly is more effective than as part of larger country assessments • Evidenced by control of corruption scores

24. Goal 5: Effectively Manage Risks • Active control mechanisms, quick responses, and long-term plans to mitigate risk appear most successful

25. Goal 6: Compatibility with U.S. Context • The World Bank aid scope is most similar to the U.S. • DFID also shares similar foreign policy objectives • Sweden is a smaller donor and may have scaling issues • ADB has a limited regional focus but shares major recipients - Pakistan and Afghanistan

26. Recommendations • Ensure consistent and coordinated risk assessments across countries • Expand use of the PEFA Framework evaluation tool • Increase cooperation with other donors • Increased use of PEFA could help • Consider incremental approach to use of local systems • Start with smaller projects or components of a partner country’s PFM system that operate well

27. Questions?