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Budget support

Double strategy

by Benjamin-Immanuel Hoff
Programme-based funding by several donors is a core topic in the recent debate on aid effectiveness. One consequence is that budgetary controls need to be improved in many countries. [ By Benjamin-Immanuel Hoff ]

There are considerable shortcomings in the public budgeting system of most developing countries. This is particularly true of the poorest among them. All too often, the governments concerned are unable to implement development strategies, even though they are interested in good governance.

The Paris Declaration on Aid Effectiveness was adopted in March 2005. It aims for new standards in future cooperation between donors and developing countries, and emphasises the relevance of budget-support programmes. The Accra Agenda for Action of this year, essentially confirmed this approach.

Budget support and programme-based basket funding are about several donors pooling money to boost the budget of an entire country or of a line ministry. The recipient country is responsible for how the funds are used. Of course, all involved agree on conditions beforehand – and these conditions are typically based on Poverty Reduction Strategy Papers (PRSP).

The following aspects are cited as advantages of budget support:
1. improved alignment between internal and external contributions to national programmes,
2. greater focus on results and impacts in development cooperation, and
3. reduced transaction costs for both donors and recipients.

Nevertheless, budget support also has its critics. Complaints concern
– restricted leeway for national governments and politicians, and
– the reduction of parliamentary control over the national budget to little more than acclamation in view of various when faced with donor specifications.

Moreover, budget support is said to boost the power of the recipient country’s executive branch of government vis à vis the legislative one, while, at the same time, restricting the decisionmaking power of the executive vis à vis the donors.

Such criticism is to be taken seriously. There are indeed several risks, which may reduce or completely undo the advantages of budget support.
– Budget support may provide additional opportunities for corruption and mismanagement in recipient countries, as opposed to projects which get individual funding. After all, the donors do not track the use of funds.
– External aid for achieving development goals can untie domestic resources, which are then used for questionable purposes – in extreme cases, donors would fund social services, while freed-up funds end up in the military budget.
– An increase in budget support can jeopardise ownership by the developing country, because all important policy and budget decisions have to be agreed with the donors. The setting limits the authority of parliaments in budget matters, strengthening the executive at the expense of the legislative and other players, exacerbating the imbalance which often exists between a strong president and a weak parliament.
– Budget support focusses on the expenditure side of a country’s budget. However, the revenue side of the budget – the mobilisation of domestic resources, in other words – must not be neglected. Development policy should be about more than spending.

Programme-based development co­operation in general, and budget support in particular, therefore place high requirements on the integrity and expertise of public finance management in developing countries. Recipients of budget support must satisfy requirements or create conditions so that programme objectives are reached and donors’ fiduciary risks are reduced. The donors, moreover, are interes­ted in seeing that transferred sums are used properly, so they are able to report back to the public and their own supervisory bodies – audit offices and parliament. Obviously, however, budgetary control also makes sense where governments do not receive budget support (see box).

Relinquishing control

Budget support, disaster relief and development assistance are cross-border public expenditure. To control and monitor such flows is a daunting challenge, in both legal and practical terms. When donor governments grant budget support, they relinquish control over how taxpayer money is used. Parliaments that agree to use money for budget support in other countries foresake some of their constitutional rights and duties of supervising and regulating public finance.

Let’s not forget that parliaments are not the masters of public finance, but only serve as guardians. They must act in a fiduciary manner when dealing with the funds in the service of the general public which has raised them. Parliaments are accountable to the people.

Budget support requires financial control by the donors, as well as by the recipient countries. In many countries, private companies or auditors (the Big Four audit firms) do the monitoring part. All too often, developing countries do not have capable governance institutions to handle budget matters. For instance, many lack an operational supreme audit office.

Banking on private-sector firms is not really satisfactory because this approach only tackles whether funds are used as intended. In procedural terms, however, it undermines the objectives of ownership and capacity building. Furthermore, recipient countries’ sovereignty is restricted, and so is parliamentary responsibility.

Whenever the instrument of budget support is used, it would make sense to ensure from the outset that the necessary control agencies have been set up. The UK Department for International Development (DFID) is a pioneer in this respect. It has agreed with the UK National Audit Office that budget support will be practised only in those countries that control their finances according to international standards.

The World Bank is aiming to provide more than half of its aid to Africa in form of budget support by 2015. The amount for countries in sub-Saharan Africa is intended to quintuple by then through additional bilateral allocations. Therefore, it is particularly important to set up and support audit bodies and to establish a democratic and efficient public auditing system.

Budget support must be linked more closely to the existence of a public audit system, which is made up of an independent supreme audit office and a parliament which is able to carry out its budget functions – including supervision. The issue thus is not only to deliver budget support but also one of setting up operational public-finance controls.
In order to improve governance, institutions must take root in the legal and political structure of a country. Supreme audit offices are of particular relevance. They can make a considerable contribution to preventing corruption, supporting effective resource distribution and managing public goods. They are also able to provide advice in the reform process.

In many developing countries, the separation of powers and the administrative structures of existing audit institutions are inadequate. Employment relationships are often unregulated and, after a change of government, many of the administrative staff are changed, degraded or promoted. Poor and late remuneration, for obvious reasons, adds to the prevalence of corruption.
All too often, governments in developing countries employ people they favour, but not necessarily those who have the skills. Such practices must be considered and put right if a country is to get an effective financial-control system.

It is essential that supreme audit offices be independent. Otherwise, tax-payers will never know what their taxes are used for. Where administrative and budgeting reforms are delayed, there is opportunity for corruption.

As early as 1977, the 9th International Congress of Supreme Audit Institutions
(INCOSAI) established the foundations for independent and constitutional external auditing in the “Lima Declaration of Guidelines on Auditing Precepts”. These continue to be the standard for development projects today.

Institutions and processes for financial control are essential for improving budget matters. Generally, the need and the opportunities for changing the regulatory framework are inversely proportional. In other words, the greatest need for change is often found in the most difficult policy environment.