SPA-CABRI Project on “Putting Aid on Budget” Presentation to DAC Joint Venture on Public Finance Management Paris, July 2007 Peter Dearden, Strategic Partnership with Africa Although I’m a DFID staff member, I’m making this presentation today on behalf of the Strategic Partnership with Africa – specifically the CoChairs of the SPA Sector Support Working Group – and CABRI - the Collaborative Africa Budget Reform Initiative. The project study I will describe to you is being conducted for these 2 partners. DFID is one of the funders, alongside JICA.

Presentation Outline Why is “Putting Aid on Budget” Important SPA-CABRI Project on “Putting Aid on Budget” Possible Role of JV-PFM Presentation in 2 main parts First, a few slides on why putting aid on budget is important Then the central part of presentation describes the SPA-CABRI Putting Aid on Budget project, which was launched in May this year. The final slide asks some questions about possible role of the Joint Venture. The presentation focuses on the situation in Sub-Saharan Africa, but the issues it addresses are relevant in other regions too.

Why is Aid on Budget Important? Aid Dependency, Selected Countries (net aid/central government expenditure, 2004, %) Sierra Leone 128 Rwanda 98 Mozambique 84 Ethiopia, Tanzania, Zambia, Uganda 70-80 Ghana, Malawi 60-70 Burkina Faso, Senegal 50-60 First Introduction slide shows the size of aid flows relative to central government expenditure in some African countries. NB. This table shows figures for ALL aid, as reported by donors to DAC, including debt relief, and some flows often outside national budgets eg. TA, humanitarian aid – but they do indicate how big aid flows are compared with budgets in many African countries. Source : Africa Development Indicators 2006

Findings of the Paris Declaration Survey Indicator 3 : Aid flows aligned on national priorities : Total ODA recorded in the approved budget, as % of Total ODA disbursed to government sector (as reported by donors, ex post) 100% would be ideal Results : average of 42% and a huge range (from 2% to 200%) Conclusions A large proportion of aid flows to the government are not comprehensively and accurately reflected in budget estimates This undermines credibility of the budget for governing effective allocation of resources in line with policy priorities Paris Declaration Indicator 3 concerns alignment. As the report on the 2006 Paris Declaration Survey says, “the formulation of the budget is a central feature of the formal policy process in all countries. So the degree to which donor financial contributions to the government sector are fully and accurately reflected in the Budget provides a relevant indicator of the degree to which there is a serious effort to connect aid with country policies and policy processes.” So Indicator 3 measures total ODA recorded in the approved budget as % of total ODA disbursed to the government sector, as reported by donors, ex post. If everything worked perfectly the ratio should be 100% in every country. But the survey found the ratio varied very widely between countries – with big problems of non-disbursement of scheduled funds, and also the opposite – unscheduled disbursements. The conclusions the Report draws from survey findings are that A large proportion of aid flows to the government are not comprehensively and accurately reflected in budget estimates This undermines credibility of the budget for governing effective allocation of resources in line with policy priorities

Recommendations of the Paris Declaration Survey Countries need to establish a comprehensive and credible budget linked to policy priorities Donors need to provide information on intended disbursements to the budget authorities and provide aid on budget in good time, and aligned with programme and sector priorities in the budget Donors and partners need to work together to ensure that budget estimates are more realistic. These are the recommendations from the 2006 Paris Declaration Monitoring Survey report -- governments need a comprehensive and credible budget -- donors need to provide information to government about their planned disbursements on time, and then disburse on time, aligning aid with budget priorities -- donors and partner governments need to work together to ensure that budget estimates of aid flows are more realistic. The Paris Declaration Monitoring Survey is not the only international process addressing these issues. The PEFA Performance Measurement Framework also includes relevant indicators. The IFAC International Public Sector Accounting Standards Board has recently circulated proposals for International Public Sector Accounting Standards for recipients of external assistance – to be discussed after lunch. And the IMF Fiscal Transparency Manual sets out standards in this area too.

Why Put Aid “On Budget” ? Strengthens National Ownership of development process Allows comprehensive resource allocation decisions (inter-sectoral, intra-sectoral) in light of overall resource flows Builds Transparency and Accountability Donors to government Government to Parliament, civil society Line Ministries to Ministry of Finance Ministry of Finance to Line Ministries Facilitates fiscal-monetary management So why is it important to put aid on budget? A number of reasons can be given. First Key point is that it strengthens national ownership and allows better resource allocation, especially over the medium and longer term. Not that aid on budget is a panacea. It needs to be complemented by action to Strengthen sector strategies Align aid better with sector strategies Improve aid predictability Enhance quality of public expenditure etc But there is not doubt that putting aid on budget can empower Ministries of Finance and Planning to make better use of available resources. Secondly, putting aid on budget builds Transparency and Accountability between donors and govt : donors provide clear timely information about how much they have disbursed in the past FY, and how much they intend to disburse for the coming FY. Between govt and domestic stakeholders – how aid flows are being used to support national policies Between line ministries and central ministries Between Ministry of Finance (MoF) and line ministries – MoF is under more pressure to execute the budget as approved. And also increases the accountability of project implementation managers to the budget in the sense that they have to respect reporting and auditing cycles. Facilitates fiscal and monetary management by giving MoF a clearer view of expected aid inflows.

Why a SPA-CABRI Project on Putting Aid on Budget? Important issue in many countries in Sub-Saharan Africa : high aid dependency, PFM capacity constraints SPA brings together donor HQ staff and African governments to identify and promote aid effectiveness good practice CABRI brings together African Senior Budget Officials to promote budget management good practice This year, SPA and CABRI have launched a project on “Putting Aid on Budget”. The reasons for this are First, the relationship between aid and the budget process is a particularly important issue in many countries in sub-Saharan Africa, especially where the flows of aid are high in relation to the size of the national budget, and where the capacity of the PFM system is constrained, for instance by shortages of skills. Second, Strategic Partnership with Africa is an appropriate forum to discuss the subject because it brings together representatives of donor agencies and of African governments to discuss aid effectiveness issues of common interest, and of course putting aid on budget is very much an at the interface of the relationship between donors and partner governments. As the Paris Declaration work has highlighted, putting aid on budget requires donors and governments to work together. Third, Collaborative Africa Budget Reform Initiative is a network of Senior Budget staff from African governments who want to learn from each other in strengthening budget systems and processes. When SPA suggested to CABRI around 6 months ago a joint SPA-CABRI project on putting aid on budget, CABRI welcomed the opportunity to work together. A Concept Note was subsequently agreed between SPA and CABRI, which led to preparation of Terms of Reference for a consultancy study.

Study Process Synthesis Report Good Practice Note 10 Country Inception Case Studies Inception Report [June 07] Literature Review The consultancy study was launched in May 2007 and an Inception Report issued in June (Room Document 2). The study will produce a Synthesis Report and Good Practice Note, draft in November 2007 and final version in January 2008. These final outputs will draw from conceptual work in the Inception Report, from 10 African country case studies, and from a Literature Review. The Literature Review will review existing good practice guidance, the relevant policies of major multilateral and bilateral donors and experience from a few other countries (including in Asia and Latin American regions). The draft Synthesis Report and Good Practice Note will be reviewed by CABRI members at their annual meeting in Nov 2007. External reviewers include the CoChairs of the SPA Sector Support Working Group, the CoChairs of this Joint Venture, Head of the PEFA Secretariat, and staff in IMF Fiscal Affairs Department and Africa Department. The contractor is Mokoro Ltd, and the Team Leader is Stephen Lister, who led the DAC Joint Evaluation on General Budget Support. JICA have agreed to fund the Literature Review, and other parts of the study are funded by DFID. Synthesis Report Good Practice Note [Draft in Nov 07, final in Jan 08]

Good Practice Note : Components Why? Explain why capture aid in the budget process How? Set out good practice General principles Specific examples Who? Address both sides of the problem : Government systems and processes Donor behaviours Recommend how to monitor progress in bringing aid on budget The final shape of the Good Practice Note is not yet decided, but it is expected to include : Material explaining why capturing aid in the budget process is important. Suggestions for how to do it : not only good practice general principles, but also some specific examples drawn from the country case studies. Recommendations not only for African government systems and processes but also for donor agencies. Recommendations on monitoring progress in bringing aid on budget. The output of this study may be used in the Accra High Level Forum in September 2008, although the process for this is not yet clear.

“On Budget” Study Definitions (1) Aid Is included in On Plan Planning documents behind budget submissions On Budget Budget documents On Parliament (or “through budget”) Revenue and appropriations approved by Parliament On Treasury (or “on payment”) Main revenue funds, and is managed through government systems The study Inception Report has recognised that the expression “aid on budget” can be used to mean a wide range of different things. The Report works with the DAC definition of ODA, which includes technical cooperation, and sets out 7 different dimensions of “aid on budget or capturing aid”, which reflect different ways in which aid can be captured in the PFM process. First, aid on plan, is talking about programme and project aid spending integrated into spending agencies’ strategic planning documentation, which underpins the budget submissions. Second, aid on budget in the narrow sense, means that aid, including programme and project funding, and its intended use, is reported in budget documentation. Third, aid “on parliament”, or “through budget” means aid is included in revenue and appropriations approved by Parliament Fourth, aid on treasury means that aid is disbursed into the government’s main revenue funds and managed through government systems.

“On Budget” Study Definitions (2) Aid Is included in On Accounting In government accounting system, in line with government classifications On Audit Auditing by government audit system On Report Ex post reports by government Fifth, aid on accounting means that aid is recorded and accounted for in governments accounting system, in line with governments classification system Sixth, on audit means aid is audited by governments auditing system Seventh, on report means aid is included in ex post reports by government. Naturally there is scope for debate round these definitions, but this is the conceptual framework which the consultants have decided to work with.

Key Challenges in Conducting the Study Each country situation is different Budget laws, procedures, systems vary Good Practice Note needs to recognise Government capacity to absorb and use data may be limited Governments typically have ongoing complex PFM reforms Donor policies (and capacity to comply with partner government requirements) also varies There are several challenges the study team have to address. Here are are a few of them. Standardised definitions of on budget will be essential for the study. First even though consultants will use the same definitions of “on budget” for all 10 country studies, applying these definitions will not be straightforward because National Budget documentation, procedures, systems vary a lot between countries Second, the GPN will also need to recognise Govt capacity to absorb and use data may be limited Many countries are in the middle of implementing complex PFM reforms, for instance of budget cycle, budget procedures, budget classification, management information systems But also on the donor side, agencies vary in their capacity to provide the aid flow information required. This suggests a step-by-step phased approach to improving the capture of aid in the budget will be appropriate in many cases

Case Study Country Selection Capture different country contexts (strength of PFM systems, aid context, aid management experience) 10 Group A countries : Burkina Faso, Ethiopia, Ghana, Kenya, Mali, Mozambique, Rwanda, South Africa, Tanzania, Uganda Of which, 5 possible Group B countries for deeper study : Ghana, Mali, Mozambique, Rwanda, Uganda Turning now to the country case studies which will provide much of the information on which synthesis report and good practice note will be based. A design objective for the study was to capture different country contexts. The 10 countries to be covered are Burkina Faso, Ethiopia, Ghana, Kenya, Mali, Mozambique, Rwanda, South Africa, Tanzania, Uganda. Of these 10, 5 countries will be selected for a second stage deeper examination. Provisionally these will be Ghana, Mali, Mozambique, Rwanda, Uganda, but the final decision on this list will depend partly on findings from the first stage (what the study calls Group A) review across the 10 countries.

10 Group A Country Reports Country Context PFM system, planning and budgeting structures, processes, frameworks Aid context : importance of aid flows, different modalities etc Aid management : structures, processes Aid capture (7 dimensions of “on budget”): What aid is captured, and how well? How useful is the information? Why, why not? The 10 Group A Country Reports will be factual statements with 2 main elements. Under country context, the reports will discuss the PFM system, including planning and budgeting processes, the aid context, including the importance of aid flows of different types, and the aid management arrangements. Under aid capture, the report will consider all 7 dimensions of “on budget” listed in the earlier table (on plan, on budget, on parliament, on treasury, on accounting, on audit, on report) and will assess what aid flows are captured, what the quality of the data is, how useful the information is, and explanations.

Country Case Study Process Existing documents Country Researcher CABRI Senior Budget Officer Donor Representative This slide outlines the process for producing Country Case Study reports. The work will be led by a country researcher contracted by the consultant but working closely with the named CABRI Senior Budget Officer (for instance, the Director of Budget in the Ministry of Finance) and with a representative of the donor community (eg. DFID country economist). For the 10 Group A countries heavy reliance will be placed on using existing documentation, including PEFA reports, IMF reports, country budget process legislation, regulations, documents etc. Country Report

5 Group B Country Reports Deeper analysis of experience More interaction with government and donors at country level Attempt to understand interplay between formal and informal systems (also political economy) What works, what doesn’t, and why? In Group B countries, the country researcher will spend more time analysing experience with putting aid on budget, in consultation with government and donor staff in country. It is hoped that understanding what has worked (or has not worked) and why (or why not) will be particularly valuable for drafting the good practice note.

Role of JV-PFM Members? Comments at this stage, to feed back to consultants as they start country work? Pointers to existing material which the Literature Review should cover? Facilitate input of donor views (from HQ and at country level)? Engagement with draft Synthesis Report and Good Practice Note? This last slide suggests inputs which the JV-PFM members might make to this process. First, at this stage, are there any comments the JV would want me to feed back to the study consultants as they start the country studies? Second, is there key material which the Literature Review should examine – either country experience, or guidelines etc. Third, it would be very helpful if the JV members could respond positively if/when the study consultants approach them for information about the policies of their donor agencies on putting aid on budget. Lastly, what JV engagement might be appropriate when the draft Synthesis Report and Good Practice Note are produced?