Aid and Trust in Country Systems

Aid and Trust in Country Systems

Stephen Knack The World Bank

May 30 2011

“Challenges for Aid Effectiveness” conference SITE – Stockholm School of Economics

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Summary

The Paris Declaration commits donors to increased use of country systems in managing aid. We investigate factors associated with greater use of recipients’ public financial management systems, general budget support and program-based aid.

We find a donor’s trust in a recipient’s aid management systems is determined by three sets of variables:

• Trustworthiness of those systems, as measured e.g. by PFM quality or corruption ratings

• Trust in aid’s effectiveness on the part of its domestic

constituents, as measured by opinion surveys on support for aid in donor countries

• Confidence it will reap sufficient benefits from investing in recipient country systems, as measured by the donor’s share of the aid “market” in the recipient country.

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Paris Declaration indicators

Ownership: national development strategies Alignment

• reliable PFM systems

• aid on budget

• coordinated TC

• use of PFM & procurement systems

• PIUs

• predictable aid

• untied aid Harmonization

• program-based approaches (including budget support)

• coordinated missions and country analytic work Managing for results: results-oriented frameworks

Mutual accountability: mutual assessments of progress

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Political constraints on donors

• “Aid agencies want to be able to identify their own

contributions, often through distinct projects, to facilitate feedback to taxpayers and sustain political support for aid flows. A new hospital is easier to showcase than the outcome of policy reform or budget support.”

--World Development Report 2004, p. 216

• “Donor agencies benefit from the visibility associated with separately managed and “branded” projects…

where more programmatic multi-donor ventures are introduced, visibility is lost and the attribution of

development results to the particular donor’s support becomes problematic.”

--Williamson and Agha, 2008, p 34 ⁴

But donors are not all the same…

• Multilaterals were established in part to

overcome these sorts of political constraints facing bilaterals

• DAC members more subject to “peer pressure”

on aid practices than other bilaterals

• Some bilaterals are less subject than others to parliamentary micro-management

• Public opinion in some bilaterals is more

skeptical of aid’s effectiveness, so “visibility” and

“attribution” (i.e. creating a perception of aid’s

effectiveness) are more critical

…and a given donor may solve the “attribution”

problem more easily in some countries

• Where there is only one donor, the development benefits of using country systems are fully

internalized (no spillover benefits to other donors)

• In general, a donor’s incentives are better aligned with long-term development objectives where it provides a larger share of total aid to a country

• A donor may have more of a “reputational stake”

in the development of countries with colonial or geographic ties

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Testable hypotheses

Use of country PFM systems should be positively related to

• Donors’ reputational or other stake in country’s development (share of aid market, colonial tie, geographic proximity)

• Strength of support for aid by donor’s constituents (in bilaterals: taxpayers, voters, parliamentarians)

• Quality of country PFM systems (CPIA, PEFA)

• Transparency in government/low corruption levels (CPIA)

• Quality of national development strategies (PRSPs)

• HIPC completion ₇

Data: Paris Declaration monitoring survey

• We use 2008 data only

• 2006 was a pilot, 2011 has not yet been released

• Debt relief & humanitarian aid are excluded

• Most donors are represented in the survey, but only 54 recipients, accounting for about $45 billion in aid

Aid recipients are more likely to be in the survey if they are

• Poorer

• HIPC

• Larger

• Aid dependent

• in sub-Saharan Africa (but not other things equal)

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Largest 17 donors in survey

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Donor (PD 5a %) aid share recipients

World Bank (54) 19.9% 51

United States (3) 12.9% 48

EC (40) 10.3% 54

Japan (62) 8.6% 49

United Nations (18) 6.6% 55

Asian Develop. Bank (81) 6.0% 10

United Kingdom (77) 4.5% 32

African Develop. Bank (39) 3.3% 25

Germany (40) 3.2% 47

Canada (75) 2.7% 36

Netherlands (63) 2.6% 30

France (40) 2.4% 36

Spain (51) 2.0% 25

Global Fund (42) 1.9% 47

Denmark (54) 1.9% 21

Sweden (57) 1.8% 29

Australia (13) 1.7% 9

Dependent variables

1) Use of country PFM systems = average of:

• use of national budget execution procedures

• use of national financial reporting procedures

• use of national auditing procedures

• use of national procurement procedures each as a share of aid to government sector

2) Direct budget support (including sector budget support) as share of all aid

3) Program-based aid (including direct budget support) as share of all aid

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Independent variables:

recipient characteristics

• Quality of national development strategies (PD 1)

• Quality of PFM systems (CPIA 13, PEFA)

• Transparency/corruption in govt. (CPIA 16)

• HIPC completion dummy

• Quality of macro/fiscal policy (CPIA 1 & 2)

• Aid/GNI

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Independent variables:

donor characteristics

• Multilateral v. bilateral

• MDBs v. other multilateral

• Vertical funds

• DAC bilateral v. non-DAC bilateral

• “Nordic plus” v. other DAC bilateral

• Public support for aid in national surveys

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Independent variables:

donor-recipient relationships

• donor i’s share of all aid provided to recipient j

• colonial ties dummy: not significant

• geographic distance: each 1000 km increment separating donor and recipient capital cities

reduces use of PFM systems by 1 percentage point

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Donors use country systems more in

recipients where their share of aid is higher

Each 1 percentage-point increase in a donor’s aid share increases:

• share of aid using PFM systems by 0.65 percentage points

• share of aid using budget support by 0.33 pct. points

• share of aid that is program-based by 0.74 pct. points

Reference:

Mean of donor aid share = 6.4%

Mean use of PFM systems = 34%

Mean budget support = 12%

Mean program-based aid = 31% ¹⁴

Donor “type” matters

• MDBs and “Nordic Plus” bilaterals provide more budget support and program-based aid, and use PFM systems more

• Vertical funds provide more program-based aid and use PFM systems more

• Non-DAC bilaterals use program-based aid less

• The US, UN and Japan are negative outliers on use of PFM systems

• The US and Japan are negative outliers on budget support

• The US is a negative outlier on program-based aid

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Public opinion matters in bilaterals

• Gallup International and the World Values Survey have included questions on support for providing foreign aid

• The US and Japan show the weakest support for aid in both surveys

• Among bilaterals, use of PFM systems and use of budget support are higher where public support for aid is stronger

• Result is not sensitive to inclusion of the US; e.g. support for aid in Eurobarometer is associated with more budget support

• Because the US and Japan account for a large part of aid,

perceptions of aid’s effectiveness in their countries may need to change before we see dramatic increases in use of country

systems overall ¹⁶

Survey questions on support for aid

• Gallup: Do you think that the wealthier nations should give more financial help to the poorer nations or are they giving enough now? (Should give more/are giving

enough now)

• WVS: Some people favor, and others are against, having this country provide economic aid to poorer countries. Are you personally: very much for/for to some extent/somewhat against/very much against

• Eurobarometer: Do you think that the share of its budget that the [respondent’s country] Government

dedicates to development aid is: too big/too small/about right

• ¹⁷

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survey WVS 1995-8 Gallup

International 2002

Eurobarometer 2004

Australia 17.7% 63% .

Austria . . 21%

Belgium . . 36%

Canada . 64% .

Switzerland . 71% .

Czech Rep. . . 18%

Germany 18.2% 68% 25%

Denmark . 53% 35%

Spain 33.1% (2 of 9) 91% (1 of 20) 58% (1 of 21)

Estonia . . 17%

Finland 15.2% 61% 31%

France . . 35%

UK . 69% 38%

Greece . . 30%

Hungary . . 11%

Ireland . 87% 30%

Italy . 83% 30%

Japan 9.8% (8 of 9) 45% .

Korea . 87% .

Lithuania . . 24%

Luxembourg . 71% 19%

Latvia . . 27%

Netherlands . 50% 33%

Norway 21.9% 63% .

New Zealand 11.9% . .

Poland . 83% 35%

Portugal . 89% 22%

Sweden 35.5% (1 of 9) 69% (9 of 20) 29% (12 of 21)

Turkey . 87% .

USA 6.7% (9 of 9) 45% .

Quality of PFM systems matters

• Each 1-point increase in Q13 increases use of PFM systems by about 10 percentage points

• This effect is somewhat larger when the sample is limited to IDA recipients

• This effect is equally strong when the WB observations are dropped, despite the fact the WB produces the Q13 ratings

• PEFA ratings (index of all 28 questions) are also linked to

greater use of country PFM systems, but not as strongly as for Q13

• Quality of PFM systems predicts use of budget support and program-based approaches less strongly than for use of PFM systems

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20

0 10 20 30 40 50 60 70

2 2,5 3 3,5 4 4,5

Use of PFM systems in AFR mean, by Q13 values

use of PFM systems

Other recipient characteristics

• Each 1-point increase in Q16 (CPIA question on transparency and corruption) increases use of PFM systems and budget

support (respectively) by about 7 and 6 percentage points

• Other corruption indexes (e.g. TI) are not as strongly linked to use of country systems as Q16

• Quality of national development strategies is significantly

related to use of country systems only if CPIA variables (Q13, Q16) are not controlled for

• Use of country systems is higher in HIPC completion countries

• Budget support as a share of aid is higher in more aid-

dependent countries, and (other things equal) where the quality of macro and fiscal policy are higher

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Extra slides for reference

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Mean Dependent Variables

Use of PFM systems 34.0%

Direct budget support 11.9%

Program-based approaches 31.0%

Independent Variables

Donor aid share 6.42%

Former colonial relationship 4.93%

HIPC completion countries 38.9%

PFM quality (CPIA 13) 3.41

Transparency (CPIA 16) 2.92

Macro/fiscal policy (CPIA 1 & 2) 3.89 Quality of operational development strategy 3.08

Aid/GNI (%) 10.8%

“Nordic plus” countries 0.18

Non-DAC bilateral donors 0.04

Multilateral development banks 0.13

Non-MDB multilateral donors 0.24

Public support for aid (%)

Gallup International, 2002 63.8%

World Values Surveys, 1995-98 18.0%

Eurobarometer, 2004 33.0%

Use of national budget execution procedures

Three of these four criteria must be met to qualify:

• Funds are included in the annual budget approved by the legislature

• Funds are subject to established country procedures for authorization, approval and payment of funds

• Funds are deposited and disbursed through the established treasury system

• Opening of separate bank accounts for donor funds is not required

₂₄

Use of national financial reporting procedures

Both criteria must be met to qualify:

• No separate accounting system is required to satisfy donor’s reporting needs

• No separate chart of accounts is required to record the use of donor funds

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Use of national auditing procedures

To qualify, funds are subject to audits by the country’s Supreme Audit Institution using its auditing cycle and

standards, and additional auditing arrangements are not requested in normal circumstances.

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Use of national procurement procedures

Donors do not make additional or special

requirements on governments for the procurement of works, good and services.

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Direct budget support

To qualify, funds must be transferred to the national treasury and be managed using

national budgetary procedures, and not

earmarked for specific uses. They may be nominally earmarked for a broadly-defined sector such as education (sector budget support).

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Program–based approaches (PBA)

Funds qualify as PBA only if all four below criteria are met:

• recipient government (or organization) exercises leadership over the donor-supported program

• a single comprehensive program and budget framework is used

• there is a forma process for harmonizing donor procedures on at least two of the following systems: reporting, budgeting,

financial management, and procurement

• the program uses at least two of the following systems:

program design, program implementation, financial management, and monitoring/evaluation.

Recipient characteristics matter more than donor characteristics…

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Explanatory power of donor and recipient dummies Use of PFM

systems

Direct budget support

Program based approaches

Donor dummies .21 .21 .14

Recipient dummies .28 .21 .23

Donor & recipient .44 .40 .36

N 782 798 787

…so donor-level indicators should be adjusted for the countries in which donors are operating, before including them in donor

performance indexes (a la CGD or Easterly)

Are incentives aligned in Bank operations?

• At corporate level the Bank is a strong advocate of using country systems

• In its GAC Strategy and external relations it also stresses

reduction of fiduciary and other risks, and at one point had “zero tolerance for corruption”

• It is also a leader in PFM reform efforts, potentially getting around this tradeoff

• Do the emphases on “results measurement” and portfolio

performance weaken our incentives to use country systems?

• Do personnel policies unduly shorten staff’s time horizons, thereby weakening incentives to use country systems?

• Senior management’s time horizons are typically even shorter

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