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Aid instruments

This topic guide covers a number of generic issues broadly related to the theme 'aid instruments'. It aims to provide key sources of information on the governance aspects of design and decision-making choices, impact, assessment and evaluation of aid instruments. This resource is supported by three other GRC Exchange topic guides which cover the specific instruments of budget support, Poverty Reduction Strategy Papers (PRSPs) and Sector Wide Approaches (SWAps).

Page contents

Definition of topic and content

Where is a good place to start?

Aid instruments and service delivery

Aid and reform
Aid appropriateness and effectiveness
What's new? Fiduciary risk
What's new? Donor harmonisation
What other resources are available on the GRC Exchange?
Additional information resources

Definition of topic and content

"The aid business is a busy one, characteristically pursuing several agendas simultaneously. There is a natural urge to simplify by focusing on one theme at a time, but the various agendas are not neat compartments. They share common underlying ideas, and there are many overlaps and interactions (some obvious, but some counter-intuitive) between the different issues and activities to which they give rise. Currently active agendas include poverty reduction, new aid modalities, service delivery, decentralisation, capacity building and donor harmonization" (Lister, 2002: 1).

DFID Overall Objectives and Requirements

2.01 DFID wants changes in the way in which aid is provided, in order to reduce distortionary effects, build local capacity and maximise impact. These changes involve working towards:

  • assistance related to the recipient country's PRSP
  • a common donor position that, where possible, aid should be included in government budgets
  • reliance by all donors on common procedures for disbursement, accounting and audit, based, as far as possible, on the recipient government's own systems
  • assistance in the form of budget support (at the overall level, or for a specific sector), with pooled donor funds where possible, rather than separate donor projects
  • longer term commitments to the provision of aid.

2.02 The effect of these changes would be to align the provision of aid more closely with recipient governments' own priorities, to enable these governments to plan better, to reduce the costs to them of administering aid and, by focusing more attention and placing more demands on their own systems, to increase the pressure for improvement of these systems.

Meeting DFID's Fiduciary Risk Requirement when Providing Direct Budget Support.

Where is a good place to start?

In recent years, poverty reduction has become the central objective of development co-operation. The World Bank and International Monetary Fund have called for Poverty Reduction Strategies to be prepared by all countries receiving support. This has resulted in several changes in the relationship between donors and developing countries. These changes make it imperative to understand how the government operates, notably the budget processes in individual countries and particularly how donors interact with them. The key document below asserts that indeed the means to successful aid relationships (forms of aid that are compatible with government systems) is a thorough understanding of the budget process in developing countries:

Foster, M. and Fozzard, A. 2000, 'Aid and Public Expenditure: A Guide'
This paper focuses attention on the difficult inter-relationship between aid and the reform of domestic institutions. It suggests that donors are (1) beginning to co-ordinate their aid (2) offering budgetary support at increasingly macro levels (3) focusing their attention of the effectiveness of governments due to new development targets.
Full document available online

The document below provides further information to support processes of decision-making in aid choice, which reflect appropriateness to specific country circumstances, for example, conditionality, ear-marking and disbursement and accountability:

Foster, M. and Leavy, J. 2001, 'The choice of financial aid instruments'
This paper provides an excellent and easily accessible discussion and illustrations (such as the decision tree) of what forms of aid are appropriate in specific country context. The appendix includes matrix tables and a flow chart of different aid instruments and when they might be used.
Full document available online
(document summary available shortly)

Aid instruments and service delivery

What is the relevance of different aid modalities to the enhancement of service delivery? The details of design as well as the broad category of aid instrument employed both hold implications for service delivery. Below, a key document is identified to assist in considering these implications for service delivery:

Lister, S. 2002. 'The relationship between governments and donors: aid instruments and service delivery', paper presented at DFID November 2002 Retreat
This paper was presented at the DFID retreat on the Politics of Service Delivery, November 2002. The author examines trends and issues in choosing or designing particular instruments, as well as the direct links between these trends in aid and the possibilities for improving service delivery. It notes that in general the two agendas should be strongly complementary, but acknowledges some of the complications that arise in practice.
Full document available online

Aid and reform

Large amounts of Aid are aimed at stimulating reform in recipient countries. Results have however been varied, from significant and minimal positive change to negative changes. The documents below provide discussion of some of the reform processes relevant to the aid sector:

Dollar, D., Devarajan, S., and Holmgren, T., 2001, Aid and Reform in Africa, World Bank, Washington D.C.
This book examines the link between aid and reform in 10 African countries. The main findings are that policy reform is triggered by a crisis and not by aid. Indeed aid may impede reform by sustaining bad government practices and that short-term condition-based aid can be harmful by reducing ownership, participation and sustainability of the reform process. But, once the reform process is underway, aid can be used to galvanize support.
Full document available online

Oxford Policy Management 1999, 'Medium term expenditure frameworks - panacea or dangerous distraction?', OPM Review, Oxford.
Donors and lenders, including DFID and the World Bank, support Medium Term Expenditure Frameworks (MTEF) as the logical mechanism around which to structure the design of government-wide instruments of budget support, but identifying the essential components of a successful MTEF is not easy. This research by Oxford Policy Management, questions whether such a sophisticated mechanism is really the best place to start in reforming public expenditure management systems.
Full document available online

Aid appropriateness and effectiveness

The appropriateness of aid instruments is highly dependent on the wider context of relations between a government and its donors. Lister (2002) asserts that there is an increasing recognition of the need for an overall framework within aid recipient countries for more effective management of all stages of the aid cycle. Below, a number of documents highlight the issues that require consideration in developing such a framework, which will ultimately enhance the appropriateness and therefore the effectiveness of aid:

World Bank Group LICUS Initiative 2002, Assistance to Low-Income Countries Under Stress
This paper examines the reasons for lack of success in World Bank (as well as other donors') assistance programs and suggests ways of improving effectiveness of external assistance to countries with very weak policies and institutions has become a priority for the World Bank Group.
Full document available online
(document summary available shortly)

World Bank 1998 'Assessing Aid: What Works, What Doesn't and Why'
This report summarises the findings of a research programme on aid effectiveness. A key theme is that aid is a combination of money and ideas. Money has a big impact but only if countries have good economic institutions and policies. The ideas side of aid is critical for helping countries reform and effectively provide public services.
Full document available online
(document summary available shortly)

Benyon, J. 2001, 'Policy Implications for Aid Allocations of Recent Research on Aid Effectiveness and Selectivity'
This paper examines the World Bank's 'Assessing Aid' and the poverty efficient aid allocation models developed by Paul Collier and David Dollar (as above). The central argument of this paper is that policies AND poverty matter and that re-allocating aid on the basis of poverty indicators produces bigger benefits than re-allocating on the basis of policy scores alone.
Full document available online
(document summary available shortly)

DAC Expert Group on Aid Evaluation website
This website allows you to download free publications on evaluation and aid effectiveness from http://www1.oecd.org/dac/htm/pubsfoc.htm#Evaluation.

What's new on this topic? Fiduciary risk

The documents below provide you with DFID's current thinking on the issue of fiduciary risk and also provide a view from the OECD-DAC Sub Group on Donor Practices in Financial Management:

Department for International Development 2002, Strengthening Public Financial Management and Accountability and Managing Fiduciary Risk, DFID, London
This DFID paper sets out a strategy for assistance in strengthening public financial management, accountability and managing fiduciary risk. Recent developments, worldwide, have highlighted the weak state of public financial management in the poorest countries. The process of developing and implementing poverty reduction strategies has focused attention on the budget as the central tool whereby governments translate policies and strategies into investment in pro-poor growth and service delivery.
Full document available online

Department for International Development 2002 'Managing Fiduciary Risk When Providing Direct Budget Support'
This draft policy paper by DFID/PFM provides guidelines to assess and monitor fiduciary risk in the case of budget support. DFID has little control over funds that are directly channelled through central governments or sector ministries. Instead, DFID will need to provide reasonable assurance that direct budget support represents an effective use of aid.
Full document available online

OECD-DAC Sub-Group on Donor Practices in Financial Management
This page contains links to the Sub-Group's Documents and its newsletters.

GRC Public Financial Management and Accountability Key Capability pages
In addition to the documents above, please refer to the key Fiduciary Risk documents held within these pages.

What's new on this topic? Donor harmonisation

"All development agencies have operational policies and procedural requirements that guide their engagement with partner countries. A major problem is that even where agencies have similar objectives, their specific requirements can be different. As a result, donors and partner countries alike, face administrative complexities that lessen development effectiveness" (OECD).

Another emerging challenge associated with the general theme of 'aid instruments' is therefore to find ways of streamlining policies and procedures to guide aid delivery worldwide. The links below provide access to current debates and research on this topic:

OECD DAC website

World Bank website dedicated to looking at Donor Harmonization

International Development Department, University of Birmingham
IDD has recently completed OECD commissioned research on donor practices. This work looked at which practices place highest burden on recipient governments and also identified those that could cost-effectively reduce the burden on recipient countries. For country reports, good practice notes and other reports see http://www.idd.bham.ac.uk/research/activities/OECD/oecd_1.htm
Full summary of IDD: available through the Organisation Database

What other resources are available on the GRC Exchange?

In addition to this generic guide to 'aid instruments' the GRC Exchange is also developing three further topic guides directly relevant to this topic, which will be available shortly. These cover specific aid instruments:

Budget support
Poverty Reduction Strategy Papers (PRSPs)
Sector Wide Approaches (SWAps)

Key texts
This resource does not attempt to provide an exhaustive list of documents relevant to 'aid instruments'. For a thorough search of the whole GRC Exchange site please refer to the Information Database.

Training and events
A searchable database of courses and conferences in each of the governance theme areas is available on the GRC Exchange site.

Additional information resources

OECD DAC Expert Group on Aid Evaluation website
Free publications on evaluation and aid effectiveness are available from http://www1.oecd.org/dac/htm/pubsfoc.htm#Evaluation

Overseas Development Institute's Centre for Aid and Public Expenditure (CAPE)
This website is a useful source of information on good-practice approaches in public expenditure planning and management. It researches and advises on institutional development in budgetary policy-making, performance measurement in public expenditures, and the co-ordination of donor support for public expenditure programmes.

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