Effective Engagement of Accountable Local Governments in Development Assistance Projects Prepared in consultation with the Government Accountability Office By: ●Tara Baumgarten ●Michaela Meckel ●Jélan Passley ●Maria Toniolo

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

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

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

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

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

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

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

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

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

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)

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

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 and Swedish Agency for Development Evaluation ●Monitor SIDA operations

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 % was in the form of direct budget support ●Asian Development Fund provides grants and low- interest loans to developing economies

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

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

World Bank ●71% of aid through local PFM systems and 55% 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)

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

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

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 GoalImpact CategoryStatus Quo: U.S. Country Approach 1: DFID Country Approach 2: Sweden Multilateral Approach 1: ADB Multilateral Approach 2: World Bank Increase Percentage of Effectively Managed Aid Delivered via Local Systems Amount of funds managed and quality of recipient PFM systems LowHighModerate Amount of funds managed and quality of recipient procurement systems LowModerate LowModerate

Goal 2: Increase Local Institutional Capacity ●Risk assessments may improve local systems ●Capacity building may be necessary component ●Local involvement in institutional reform important GoalImpact CategoryStatus Quo: U.S. Country Approach 1: DFID Country Approach 2: Sweden Multilateral Approach 1: ADB Multilateral Approach 2: World Bank Increase local institutional capacity Increase PFM system quality *HighModerate Moderate - LowModerate Increase procurement system quality *ModerateModerate - Low LowModerate Institutional reform is sustainable and locally driven LowHigh ModerateModerate - High

Goal 3: Efficiently Deliver Aid ●Donors harmonize efforts in a variety of ways, including assessments and large project co-financing ●Multiple large bureaucracies that handle different types of aid may present efficiency challenges GoalImpact CategoryStatus Quo: U.S. Country Approach 1: DFID Country Approach 2: Sweden Multilateral Approach 1: ADB Multilateral Approach 2: World Bank Efficiently deliver aid Harmonization of aid stakeholder activities LowHighModerate-High Moderate Aid is delivered efficiently (in terms of time and money) ModerateHighModerate Low

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 GoalImpact CategoryStatus Quo: U.S. Country Approach 1: DFID Country Approach 2: Sweden Multilateral Approach 1: ADB Multilateral Approach 2: World Bank Effectively identify and assess potential risks Effectively identify and assess threat of corruption ModerateHighModerate Low Effectively identify and assess weaknesses in accounting practices ModerateHighModerate Low Effectively identify and assess risks of instability Moderate Moderate-HighLow

Goal 5: Effectively Manage Risks ●Active control mechanisms, quick responses, and long- term plans to mitigate risk appear most successful GoalImpact CategoryStatus Quo: U.S. Country Approach 1: DFID Country Approach 2: Sweden Multilateral Approach 1: ADB Multilateral Approach 2: World Bank Effectively manage risks throughout the project Effectively detect and respond to instances of corruption throughout the project HighModerateModerate - HighModerateLow Effectively detect and respond to weaknesses in accounting practices throughout the project LowModerate Moderate - LowModerate Effectively detect and respond to instability throughout the project Moderate Low *

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 GoalImpact CategoryStatus Quo: U.S. Country Approach 1: DFID Country Approach 2: Sweden Multilateral Approach 1: ADB Multilateral Approach 2: World Bank Compatibility with U.S. Context Similarities of aid profiles and approach N/AModerate High Economic feasibilityN/AModerateLowModerate - LowModerate

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

Questions?