1 Aid Architecture: An Overview of the Main Trends in Official Development Assistance (ODA) Flows Cape Town March 17, 2007

2 Where are we today, post Monterrey/ Gleneagles? Historical and projected volume of ODA % of GNI ODA (2004 USD billion) ODA as a % of GNI (left scale) DAC Members' net ODA 1990 – 2005; DAC Secretariat simulation (right scale) Total ODA Total ODA to Africa (right scale)

3 Roadmap I.Trends in Official Development Assistance (ODA) Flows l Overall volume and composition of ODA l Bilateral vs. multilateral ODA l Composition of multilateral ODA II.The Distribution of ODA to Recipients III.Proliferation of Aid Channels IV.Fragmentation of ODA

4 l After significant decline in the 1990s, funding for ODA has been growing steadily over the last decade l Net ODA disbursements: $105 billion in 2005 (in 1997: $57 billion, at 2004 prices) l Growth of 11% p.a. during past five years ( ) l Much of the recent increase in ODA has been due to debt relief, which now accounts for 24% of ODA l ODA for core development projects and programs has been growing at less than half the rate (4.6% p.a. during ) l It took until 2004 for ODA available for projects and programs to return to the level of 1993 in real terms l Rising ODA volumes have been accompanied by increasingly concessional ODA terms l 90% of bilateral aid is in the form of grants l Multilateral lenders are also highly concessional and use grants Substantial recent growth in ODA, but not for core development programs

5 ODA from DAC donors to developing countries (net disbursements, $ million at 2004 prices, )

6 l About 70% of ODA flows have been provided through bilateral organizations, and 30% through multilateral organizations l Bilateral ODA: stable at 70% since mid-1970s l In 2005: Bilateral ODA reached 78% l Large donor-by-donor variance in bilateral vs. multilateral share l Among multilateral organizations, the European Commission has become the main ODA channel, followed by the United Nations and the International Development Association (IDA) l IDA’s share of multilateral ODA peaked in the 1980s, at 42% l IDA’s share in the period: 20% l Primarily due to credit reflows, gross disbursements by multilateral ODA channels exceed the contributions received from donors Multilateral ODA accounts for 30%, with the EC, the UN and IDA as the largest channels

7 Multilateral ODA (core contributions), by channel (net disbursements, $ million at 2004 prices, , period averages)

8 Roadmap I.Trends in Official Development Assistance (ODA) Flows II.The Distribution of ODA l By income group l By geographical area l By economic sector III.Proliferation of Aid Channels IV.Fragmentation of ODA

9 l Low-income countries received 67% of total ODA over the period, up from 60 percent since the 1970s Increase in the share of total ODA going to low-income countries Upper-middle income countries (per capita GNI: $3,256 - $10,065) Lower-middle income countries (per capita GNI: $826 - $3,255) Other low-income countries (per capita GNI: $825 and below) Least Developed Countries (LDCs, per UN definition) Low-income countries

10 Increase in the share of total ODA going to Sub-Saharan Africa

11 l The share of social sectors in total allocable ODA to low- income countries has grown from 29% in the early 1990s to 52% in l Currently, more than half of ODA allocated to specific sectors goes to education, health, water and sanitation, and other social sector activities l In Sub-Saharan Africa today, the social sectors receive even 60% of total allocable ODA l In parallel, the ODA share for infrastructure and for production in low-income countries has declined, especially in Sub- Saharan Africa l Over the past 15 years, the share of infrastructure ODA in Sub-Saharan Africa fell from 29% to 19%, the share of production ODA from 24% to 12% l Within the social sectors, aid has been allocated away from water and sanitation A sharp increase in ODA for the social sectors, and a marked decline for infrastructure and production

12 Distribution of sector allocable ODA to low-income countries (commitments, period averages, %, )

13 Roadmap I.Trends in Official Development Assistance (ODA) Flows II.The Distribution of ODA III.Proliferation of Aid Channels l The donors’ viewpoint l The recipients’ viewpoint IV.Fragmentation of ODA

14 l The number of bilateral donors has grown from 5-6 in the mid- 1940s to at least 56 today l Emerging (non-DAC) donors play an increasing role, especially in Sub-Saharan Africa, creating particular challenges for donor coordination and alignment l There are currently over 230 international organizations, funds, and programs - in addition to NGOs and private philanthropy l The number of international organizations, funds and programs is now higher than the number of developing countries they were created to assist l Proliferation of new funds or programs has lead to specialization in a particular sector or theme (global programs, vertical funds) l Donor proliferation is particularly pronounced in the health sector, where more than 100 major organizations are involved - a much higher degree of proliferation than in any other sector Substantial proliferation of bilateral and multilateral agencies, increasing the complexity of ODA

15 l The average number of donors per country nearly tripled over last half century, from 12 in the 1960s to 33 in l Since 1990, the number of countries with over 40 active donors & international organizations grew from zero to thirty-one l Multiple aid channels impose an additional strain on already weak implementation capacities in low-income countries l Different donors use their own unique processes for initiating, implementing and monitoring projects l More and more aid gets earmarked for specific uses or for special-purpose organizations, including global programs or “vertical” funds l About half of the bilateral contributions channeled through multilateral channels in 2005 went through some degree of earmarking by sector or theme Aid channel proliferation - and earmarking of aid - is increasing at the recipient level

16 Global Programs and Vertical Funds: Aid for infectious disease control ($ million, at 2004 prices, in 2005) , SSASouth and Central Asia East AsiaMiddle EastNorth AfricaLACLow IncomeMiddle incomeAll including GFATM excluding GFATM 25% of total ODA allocated for health 36% of total ODA allocated for health l Vertical funds may increase in the importance of the specific interventions they support in the overall ODA for a country l Earmarking may contribute to underfunding of other investments which are equally important for growth and poverty reduction. => Effectiveness and sustainability of global programs will ultimately rest on presence of complementary sector-level and country-level policies.

17 Health sector financing and public spending: The case of Rwanda l Increased funding both from donors and the State budget l Health sector interventions (incl. HIV/AIDS-related interventions) received 21.5% of sector allocable ODA to Rwanda in l Health sector accounted in 2005 for 10% of government spending in Rwanda – up from 2.5% in 1998 l First challenge: Achieving policy coherence and basic fiscal monitoring. Only 14% of donor funds are spent through the Rwandan Ministry of Health; 75% spend by donors/ NGOs directly. l Second challenge: Misalignment of funding in relation the country’s burden of disease and with government priorities. $46 million earmarked for HIV/AIDS, $18 million for malaria, and only $1million for the integrated management of childhood illnesses (IMCI). l Rwanda has a 3% HIV/AIDS prevalence rate, while infant mortality remains high at 118 per 1,000 and maternal mortality at 1,400 per 100,000 l Third challenge: Lack of long term funding commitments from donors, which leads to substantial variations in funding levels from year to year, inhibiting long-term health planning and strategy implementation.

18 Roadmap I.Trends in Official Development Assistance (ODA) Flows II.The Distribution of ODA III.Proliferation of Aid Channels IV.Fragmentation of ODA l Aid fragmentation and associated costs l The Paris Declaration Agenda

19 l In 2004 l 60,000 donor-funded ODA activities l $1.5 million average size per activity l Average size would be even lower without debt relief (which is 16 times larger per activity than the average) l Social sectors account for 48% of all recorded activities l Fragmentation is reinforced as 1/3 rd of the aid units (20,000 activities) is for free-standing technical assistance (TA) l One TA activity started per working day per developing country l Fragmentation seems to be higher the lower is the institutional capacity of recipient countries l Where implementation capacity is low, donors tend to finance a large number of small activities, in a reduced number of sectors An increase in the number of donor activities, and a reduction in their average size

20 Number and average size of donor activities included in the CRS Database ($ million, at 2004 prices)

21 l A tax on donors l Many uncoordinated, often overlapping activities l Largely fixed cost for project preparation means higher relative implementation cost, as total transaction size drops High complexity of the aid architecture increases transaction costs for donors and recipients, ultimately reducing aid effectiveness Examples of Aid Transaction Costs in Tanzania A large share of aid to Tanzania is through more than 700 projects managed by 56 parallel implementation units. Half of all technical assistance provided to the country is not coordinated with the Tanzanian government. Tanzania received 541 donor missions during 2005, of which only 17 percent involved more than one donor. Source: DAC, Progress report on the 2006 survey on monitoring the Paris Declaration. l A burden on recipients l Direct transaction costs: Time spent by government officials with donors, away from domestic priorities l Indirect costs: Large number of small donor-financed projects may lead to ‘brain drain’ from line ministries, where managerial skills are in short supply

22 l Signed by 35 donor countries, 26 multilateral donors, 56 recipient countries, and 14 civil society observers l 5 key principles: l Ownership. “Partner countries exercise effective leadership over their development policies & strategies and co-ordinate development actions.” l Alignment. “Donors base their overall support on partner countries’ national development strategies, institutions and procedures.” l Harmonization. “Donors’ actions are more harmonized, transparent and collectively effective.” l Managing for Results l Mutual Accountability l 12 monitorable global targets for 2012, including..: l 50% of technical co-operation flows should be implemented through coordinated programs consistent with national development strategies l 66% of aid flows should be provided in the context of program-based approaches The Paris Declaration of Aid Effectiveness of March 2, 2005

23 l ODA has grown steadily over the last decade, and is expected to continue to rise as donors have committed to scale-up aid to achieve the MDGs l With debt relief winding down, core development programs are likely to increase l For effective use of such scaled-up ODA at the country level, implementation challenges need to be addressed: l Achieving complementarity across national, regional and global development priorities and programs l The principles and targets of the Paris Declaration provide an important platform to achieve this l Strengthening recipient countries’ ability to make effective use of scaled-up ODA, especially fast-disbursing aid (e.g. budget support) l This can be achieved through enhancement of country systems (i.e. public expenditure systems, financial management procedures) Concluding Remarks

24 Aid Architecture: An Overview of the Main Trends in Official Development Assistance (ODA) Flows Cape Town March 17, 2007

25 Funding of ODA and ODA Recipients by Developing Countries, (gross disbursements and reflows, $ billion, cumulative, at 2004 prices)

26 ODA from DAC donors to IDA-eligible countries (net disbursements, $ million at 2004 prices, ) l IDA-eligible countries have received in recent years less ODA for core development programs than they did on average during the early 1990s