Wieck Wildeboer: Towards performance based financing in development assistance

Development Policy05 Mar 2010Wieck Wildeboer

These observations are partly written in reaction to the article by Niels Boesen in The Broker, February 2010. Mr. Boesen refers to the discussion triggered by the publication of the report in January this year of the Scientific Council for Government Policy (WRR) in the Netherlands. I appreciate his efforts to bring some order in the complexities of development, poverty reduction and of the aid system itself. Complexities which are, for a large part, ‘man-made disasters’, especially in the aid system.

I take as a starting point that developing countries should develop themselves; an opinion which by now is shared by many intellectuals from the South. Aid should not intervene in locally initiated processes, but support them. One of the main reasons for the present ‘crises’ in the worldwide aid system is donors’ overemphasis on including their multiple development objectives in comprehensive strategies as a condition for financing. We still presume that the more comprehensive the strategy, the better the results of the development effort. This, we may say, is a misconception. We should also recall that many of those objectives are a reflection of developments in the North and represent the interests of certain groups. What, for example, would become of environmental consultants if the environment was taken out of the development parameters?

Would it be possible to develop an alternative aid system, one that would put the responsibility for development where it belongs, that would simplify the workings of the aid system and, at same time, limit the interventionist (and arrogant) character of aid?

Below, I have developed some thoughts on the issue, which may be a starting point for further discussion. I will limit myself to government-to-government assistance, as provided by donor countries to governments in the South.

The governments of developing countries have an important role to play, in development in general and in the eradication of poverty in particular. In many countries, they are the most important actor in the development process, as civil society and private enterprise still have a limited presence. Furthermore, we may expect governments to be rooted in their societies or at least understand the parameters of the social and economic processes that determine the direction of development. ‘Good governance’ by these important development agents was therefore correctly introduced as an important criterion for selecting countries as recipients of bilateral government-to-government aid.

How then, one may ask, is it possible that despite the massive aid that has been provided over the years through government channels, the results are so poor in terms of economic growth and poverty eradication? Of course, many external factors that cannot be influenced by the governments of developing countries play an important role. All development ‘experts’ agree that those adverse conditions should be tackled simultaneously, while maintaining bilateral and multilateral aid flows.

Part of the disappointing results should, however, be blamed on the poor performance of the recipients of bilateral government-to-government aid or, to put it in other words, on the fact that the ‘good governance’ criterion is not seriously applied by the managers of bilateral aid programmes. The main problem is, in my opinion, that the ‘governance’ factor is judged on the intentions of governments, not on their actual performance. Development plans on the macro and sectoral level, as well as poverty reduction strategies, are dutifully formulated. They include the multiple objectives of donor agencies and include plans for the improvement of ‘governance’ performance. Most of these efforts, it seems, are solely undertaken to secure the flow of funds.

I understand this picture will be contradicted by managers of bilateral aid programmes. They do undertake serious annual reviews and evaluations which include the ‘governance’ factor. However, they are mostly undertaken by the same people who earlier recommended the selection of a particular country as a recipient of long-term bilateral aid. One cannot expect them to change their minds overnight, especially if there is a chance to create diplomatic and political confrontations. Furthermore, the ‘governance’ factor is still not well defined in operational terms and is open to interpretation. Also, internal factors in the donor country play an important role. One cannot change long-term commitments; one has to disburse the allocated funds etc.

In view of the ongoing discussion on development aid after the publication of the WRR report, as well as the upcoming elections in the Netherlands, a drastic overhaul of the bilateral aid mechanisms may be feasible. The main change would be a shift from ‘plan-based financing’ to ‘performance-based financing’.

A simple example: the Netherlands expresses an interest in financing the plans of the government of country X to build an additional 300 primary schools over three years. Under the present system, the money for the first year, or 100 schools, would be provided in advance. Conditions are thoroughly formulated: the schools should be built in an environmentally friendly way, the enrolment of girls must be guaranteed, as well as the presence of qualified teachers. Detailed contracts are made concerning the flow of funds and their accountability. After one year, one often has to conclude that planned targets have not been met and only 80 schools have been built, while environmentally friendly materials were not always available. The funds for the other 20 schools have been used for other purposes or have simply disappeared. An explanation for this misallocation of funds can always be found and will be difficult to contradict without creating a diplomatic incident.

Under a system of ‘performance-based financing’ (PBF), the donor country would pay for only 80 schools at the beginning of the second budget year; that is, for the schools which have been built. The intention is, of course, that those funds would be used for building of schools in the second year of the programme. If the government decides that tanks are a higher priority than schools for the second programme year, then so be it.

A PBF system, when rigidly applied by all donors, would force recipient governments to plan investments in accordance with their own priorities and the availability of their own resources. It also would allow them to execute projects and programmes according to local cultural and social circumstances; areas where they definitely have more expertise than an imported Northerner. It may also force them to widen their tax base, which in many developing countries is too small anyway. Still, under PBF, plans and strategies will have to be made and to be judged by the donor community in order to select countries and activities eligible for PBF. The difference, however, is that only successes will be financed, be it retrospectively.

A PBF system will require greater flexibility in the financial planning of donor countries, even to the extent that insufficient successful activities are available for retrospective financing, and development cooperation funds cannot be spent completely. However, it is my impression that guaranteeing the financing of successful activities only would greatly enhance popular support for development aid.

A further advantage of PBF is that it would free development staff from embassies from the obligation the chase the flow of aid money and confront recipients governments with misappropriation and embezzlement. They should be available to advise the governments of recipient countries and certify the success of activities proposed for retrospective financing.

Retrospective financing as such is not a new idea. It has been applied under the heading of programme assistance in the Netherlands and was introduced in the US under the administration of President G. W. Bush. However, PBF was, to my knowledge, never introduced as a leading principle.

This post also appeared on the Dutch version of this blog ‘Minder pretentie, meer ambitie’