“Aid on Budget” Study Findings & Good Practice Recommendations

1. “Aid on Budget” StudyFindings & Good Practice Recommendations SPA Working Groups Tunis, 20 February 2008 Stephen Lister

2. Overview of Presentation • Paris Declaration on use of country systems • Key concepts and definitions • Literature review findings • Incentives (for donors and governments) • What is the baseline? • Potential gains and what helps them • Outline recommendations • Next steps and follow up "Aid on Budget" Study Findings and Good Practices

3. Paris Declaration: Use of Country Systems ALIGNMENT • Donors use strengthened country systems (21) Donors commit to: • Use country systems and procedures to the maximum extent possible. Where use of country systems is not feasible, establish additional safeguards and measures in ways that strengthen rather than undermine country systems and procedures. • Avoid, to the maximum extent possible, creating dedicated structures for day-to-day management and implementation of aid-financed projects and programmes. • Strengthen public financial management capacity (25) Partners commit to: • Publish timely, transparent and reliable reporting on budget execution. (26) Donors commit to: • Provide reliable indicative commitments of aid over a multi-year framework and disburse aid in a timely and predictable fashion according to agreed schedules. • Rely to the maximum extent possible on transparent partner government budget and accounting mechanisms. Other relevant commitments under Ownership, Harmonisation, Results, Mutual Accountability. "Aid on Budget" Study Findings and Good Practices

4. Concept and Definitions (1) “on budget” is about budget systems, not just budget documents. Hence: "Aid on Budget" Study Findings and Good Practices

5. Concept and Definitions (2) Be careful to note: • Identifying sources of public funds, vs. identifying uses of public funds. (And different levels of detail.) • Multiplicity of budget documents: • Ex ante and ex post budgets, etc • Multiple budgets (and budget-holders) in decentralised systems. • Different aid-disbursement channels: • Channel 1: funds disbursed via Ministry of Finance • Channel 2: funds disbursed to government, but via sector ministry or special project unit. • Channel 3: funds managed by donor, and government receives services or assets in kind. "Aid on Budget" Study Findings and Good Practices

6. Relevance of different aid modalities • Budget support is on budget by definition, but other aid modalities can and should also use country budget systems. • Sometimes confusion about Sector Budget Support. (Different degrees of earmarking.) • Sometimes wrongly assumed that projects are automatically off budget. • Aid not channeled via government may still be on plan and on report. "Aid on Budget" Study Findings and Good Practices

7. Reasons for Capturing Aid • Reasons: • comprehensiveness • transparency • accountability • strengthening government systems • Whether capturing aid at any of these points will have the desired effects depends on: • quality of the information: completeness, credibility (predictability), disaggregation and detail, etc. • timeliness and accessibility: who has the information, and at what stage in the relevant process • the quality of the information and processes relating to non-aid resources. "Aid on Budget" Study Findings and Good Practices

8. Key Points from Literature Review • Strong overlap between agendas for better public finance management and for better aid effectiveness (cf. PEFA). • Paris Declaration is key pressure to bring more aid on budget. However: • Different donors interpret objectives differently. Contrast between “reflecting aid in budget documents” and “integrating aid in budget processes”. • Different interpretations of targets diminish the credibility of Paris Declaration monitoring survey. "Aid on Budget" Study Findings and Good Practices

9. Donor perspectives and incentives • Likelihood of putting aid on budget depends on: • Form of aid (grant, loan, TA, other aid in-kind) • Modality (budget support, project aid) • Aid partner (central/local government, NGO) • But also depends on donor characteristics: • “reflectors” vs. “integrators” • Importance of “visibility” • Attitude to quality of public finance management • Flexibility • Other factors: • HQ vs. in-country perspective • General vs. sector perspective • Career incentives of staff "Aid on Budget" Study Findings and Good Practices

10. Government perspectives and incentives • Often conflicting interests and incentives on the government side, e.g.: • Finance vs. sector ministries • Centre vs. local government • Vested interests of project management units. • Concerns may be about: • discretion over resources • reliability of disbursement through treasury • An example: perverse incentives (for government and donors) when aid is included in sector budget ceilings. "Aid on Budget" Study Findings and Good Practices

11. What is the baseline? How much aid is on/off budget? • Available data: • Diagnostics becoming more rigorous (e.g. PEFA vs. HIPC Assessment and Action Plans); Paris Declaration monitoring is the only quantified cross-country survey (2005 data). • But problems in consistency mean that comparisons across countries and over time are not reliable (Literature Review includes Paris Declaration summary across countries and donors). • PEFA Indicators D2-D3 also show weak scores. • Conclusions: • Large volumes of aid are (still) off-budget. • Budget support is (by definition) on budget; thus off-budget proportion of other modalities is often very high. • Large (but sometimes puzzling) differences in donor scores. • Lack of clear correlation between aid-on-budget and scores for quality of public finance management. • For aid effectiveness, very important to look behind the percentages and consider the quality of aid capture at different stages in the budget process. (This was the focus of our case studies.) "Aid on Budget" Study Findings and Good Practices

12. Where are the potential gains? • Budget support is automatically on budget in all dimensions. It makes sense for partner countries to create favourable conditions for (general and sector) budget support. • However, budget support has limits, and project aid has been growing. The bigger challenge, therefore, is to bring project aid on budget. • Need to consider quality of capture: timeliness, accuracy, and (above all) use of information about availability and disbursement of aid. • Also need to prioritise: • Issues are more important in more aid-dependent countries. • More attention to sectors where substantial aid flows support public services. • Which dimension is most important for a particular instrument? • Link to overall country strategy for reform of public finance management. • Recognise that technical solutions won’t work unless incentives are right. "Aid on Budget" Study Findings and Good Practices

13. What helps to bring aid on budget? • Main factors that deter donors (and other stakeholders) from putting aid on budget: • Weak planning process (poor costing of national strategies and government unwilling to prioritise). • Budget that lacks credibility – gap between budgeted amounts and actual spending. • Slow and unreliable accounting for public expenditure. • Unsatisfactory procurement process (although aid can be “on treasury” but not “on procurement”). • Key factors for progress in bringing aid on budget: • Strong government leadership (especially from Finance Ministry). • Credible public finance management reform programme. • Effective dialogue between government and donors (at general and sector levels). • Donor commitment to strengthening government systems. "Aid on Budget" Study Findings and Good Practices

14. Recommendations for governments (1) • Explicit aid effectiveness strategies should: • Link aid management strategy to strengthened public finance management reform (effectiveness of all resources). • Go beyond indication of preference for budget support modality, to specify good donor practices and standard government procedures for other modalities. • Include dialogue about the use and the additionality of aid funds (to reduce donor demand for earmarking and micro-management of donor funds). "Aid on Budget" Study Findings and Good Practices

15. Recommendations for governments (2) • Key PFM reforms include: • Discipline in budget execution. • Strengthen transparent medium term expenditure planning (to bring aid “on plan”). • Clear planning and budgeting calendar. • Better budget classification, including: • accurate identification of recurrent and capital expenditures (but moving away from separate “recurrent” and “development” budgets); • “source” codes to allow tracking of donor funds if required. • Single Treasury Accounts (and strict control of government bank accounts). • More timely reports and accounts. • Transparent and efficient mechanisms for funding sub-national governments. • More transparent budget documents: • to show aid sources of budget finance, and aggregate uses of aid; • to facilitate more meaningful parliamentary review. "Aid on Budget" Study Findings and Good Practices

16. Recommendations for donors • Review agency-specific procedures and the extent to which they use regular government systems. • Improve understanding of government public finance management systems and factor this into early stages of project/programme design. • Support strengthened approach to public finance management. • Provide aid flow information linked to government FY, government planning and budget calendar, and government budget classification. • Improve medium-term aid predictability. "Aid on Budget" Study Findings and Good Practices

17. Recommendations for joint action • Recognise importance of joint government-donor action (at general and sector level). • Explicitly consider different dimensions of “on budget” and monitor agency performance. • Incorporate “aid on budget” objectives in country-led public finance management strategies. • Strengthen Paris Declaration monitoring • set standardised and less flexible definitions at international level; • monitor proportion of project aid that is on budget; • continue country-level focus on use of government systems. • Rationalise and cooperate on aid-related databases (but a database is not a free-standing solution). "Aid on Budget" Study Findings and Good Practices

18. Next Steps and Follow-up • Draft Good Practice Note • Input key findings and recommendations for Accra High Level Forum • CABRI plans to make Aid on Budget a major part of its 2008 work programme. "Aid on Budget" Study Findings and Good Practices