GRIPS Development Forum

Good Donorship
andthe Choice of Aid Modalities─ Matching Aid with Country Needs and Ownership ─

December 2004

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Good Donorship and the Choice of Aid Modalities—Matching Aid with Country Needs and Ownership—

December 2004

Izumi Ohno and Yumiko Niiya
GRIPS Development Forumi-ohno@grips.ac.jp
y-niiya@grips.ac.jp

Acronyms and Abbreviations
AFD
APR
BoP
CAS
CHC
CIDA
CPRGS
DFID
DPM
ESP
ESSP
GBS
HIST
HPSP
IDA
IEC
IMG
IST
JBIC
JETRO
JICA
KFW
LICUS
LMDG
MCH/FP
MDBS
MTEF
ODA
ODI
OECD
PAF
PEDP
PLU
POW
PRSC
PRSP
SAL
SBS
SECAL
SIP
SWAp
SWiM
TA
TAS
UNDP
UNFPA
UNICEF

French Development Agency
Annual Program Review
Balance of Payments
Country Assistance Strategy
Community Health Centers
Canadian International Development Agency
Comprehensive Poverty Reduction and Growth Strategy
Department for International Development
Development Priority Matrix
Education Strategic Plan
Education Sector Support Program
General Budget Support
Health In-Service Training System
Health and Population Sector Program
International Development Association
Information, Education and Communication
Independent Monitoring Group
In-Service Training
Japan Bank for International Cooperation
Japan External Trade Organization
Japan International Cooperation Agency
German Development Bank
Low-Income Countries under StressLike-Minded Donor Group
Maternal and Child Health/Family Planning Center
Multi-Donor Budget Support
Medium-Term Expenditure Framework
Official Development AssistanceOverseas Development Institute
Organization for Economic Cooperation and Development
Performance Assessment Framework
Primary Education Development Plan
Program Liaison Unit
Program of Work
Poverty Reduction Support Credit
Poverty Reduction Strategy Paper
Structural Adjustment Lending
Sector Budget Support
Sector Adjustment Lending
Sector Investment Program
Sector-Wide Approach
Sector-Wide Management
Technical Assistance
Tanzanian Assistance Strategy
United Nations Development Programme
United Nations Population Fund
United Nations Children's Fund

Good Donorship and the Choice of Aid Modalities—Matching Aid with Country Needs and Ownership—
Table of Contents
Acronyms and Abbreviations
1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2

Aid Modality Debates Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2-1
2-2
2-3
2-4

3

Lessons from the Past Experiences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shifts toward New Aid Modalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Emerging Consensus on "Good Donorship" Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Issues for Further Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Key Factors Affecting the Choice of Aid Modalities:
A Proposed Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3-1
3-2
3-3

4

Development Priority Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Identifying Priority Development Needs in Recipient Countries . . . . . . . . . . . . . . . . . . . 16
Assessing Real Ownership and Aid Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Matching Aid with Country Needs and Ownership:
Selected Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4-1
4-2
4-3

5

Different Role of GBS in Supporting Priority Needs: Tanzania vs. Vietnam . . . . . . . . . . 34
Pragmatic and Flexible SWAps to Improve Aid Relationship at the Sector Level:
Cambodia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Project Aid in the Two Different Country Context: Ghana vs. Vietnam("with" and "without" the SWAp policy framework). . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Practicing Good Donorship Towards Effective Aid . . . . . . . . . . . . . . . . . . . 44
5-1
5-2
5-3

6

Integration of Aid Flows into Recipient's Budget Process: Tanzania . . . . . . . . . . . . . . . . 44
Simplification and Harmonization of Aid Procedures: Ghana and Vietnam . . . . . . . . . . . 45
Consideration to Local Capacity, Needs, and Aid Relationship: Bangladesh . . . . . . . . . . 46

Implications for Global and Japan's Aid Policies . . . . . . . . . . . . . . . . . . . . . 49
6-1
6-2

Key Findings Relevant to Global Aid Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Implications for Japan's Aid Policy and the Choice of Aid Modalities . . . . . . . . . . . . . . 50

Annex 1
Annex 2Annex 3Annex 4

Donor Policies on the Use of Different Aid Modalities . . . . . . . . . . . . . . . . . 55
Re-examining Transactions Costs: Conceptual Issues . . . . . . . . . . . . . . . . . 58
Simplified Logical Framework Analysis of General Budget Support . . . . . 59
Accountability First, or Capacity First? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Boxes
2-1
2-2
2-3

Definition of Aid Modalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Concerns about Aid Coordination in Tanzania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Conceptual Shift from SAL to PRSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3-1
3-2

What's Different about Agricultural SWAps? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Vibrant NGO Activities in Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

4-1

How can Growth Promotion and PSD Fit into DPM? : A Case of Vietnam . . . . . . . . . . . 37

6-1

Japan's Stance towards Program Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Tables2-1

Evolution of Development Thinking and Aid Modalities . . . . . . . . . . . . . . . . . . . . . . . . . 5

3-1
3-2
3-3
3-4
3-5
3-6
3-7

Development Priority Matrix (DPM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Aid as a percent of Macroeconomic Aggregates (2001) . . . . . . . . . . . . . . . . . . . . . . . . . 19
Central Government Tax Revenue, (2001/02) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Access to Essential Social Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
NGO Functions and DPM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Funding Modalities in African SWAps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Changing Problems in Aid Relationship:
As Government Capacity Rises and Aid Dependence Falls. . . . . . . . . . . . . . . . . . . . . . . 30

Figures2-1

Origin of Aid Modality Debates: Two Streams of Thinking . . . . . . . . . . . . . . . . . . . . . . . 4

3-1
3-2
3-3
3-4
3-5

Development Priority Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Private Sector and Growth Agenda in DPM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Two Types of Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Selected Sources of Foreign Exchange Inflows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Country Ownership and Capacity: Two Prototypes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Acknowledgements
This document has been written by Izumi Ohno and Yumiko Niiya (GRIPS Development Forum). Editorial support
has been provided by Asuka Suzuki. The authors have benefited greatly from inputs of a large number of aid professionals and experts involved in development partnership (particularly in Vietnam, Cambodia, Bangladesh, Tanzania,
Ghana), government officials in respective countries, and advice of UK researchers (including ODI). This includes
the December 8, 2004 workshop in Hanoi, where the authors presented the main concept of this document and discussed its applicability in the Vietnamese context. The authors are also grateful to the staff of the Planning and Coordination Dept. of the Japan International Cooperation Agency (JICA) for their organizing a series of informal discussion meetings throughout the year 2004, as well as the Foundation for Advanced Studies on International Development (FASID) for its organizing a seminar with Japanese policymakers and aid professionals. Nevertheless, final
responsibility of the views expressed in the document and any errors rests with the authors.

1 Introduction

A successful aid programme requires matching one or more elements of adesirable development strategy with an appropriate aid strategy, supported
by well designed modalities and effective implementation.[Robinson andTarp 2000: 13]
The 1990s saw the emergence of new aid approaches— especially general budget support (GBS), sector budget support (SBS) and pooling fund arrangements under the Sector-Wide Approach (SWAp)—
along with the introduction of the Poverty Reduction Strategy Paper (PRSP) and the related institutional frameworks (such as the Performance Assessment Framework (PAF) and the Medium-Term Expenditure Framework (MTEF)). Their emergence is a reaction to overcome the weaknesses of the existing
aid modalities, typically 'stand-alone' projects and structural adjustment operations, especially in the
sub-Saharan African context. However, the experiences with new approaches are still recent, and there
is a continuing debate on the relative merits of different aid modalities and the relevance of new aid
approaches to the other regions, especially in Asia.1
The Rome Declaration of Harmonization (February, 2003) endorsed principles of a country-based
approach, considering such factors as country ownership, government leadership and the need to recognize diverse aid modalities.2 While such principles are widely accepted, practical criteria regarding
how to apply general principles in the country- and sector-specific context is yet to be established.
More recently, the World Bank [2004a] clarified its views on the use of aid modalities in the African
context, in the IDA Strategic Framework for Assistance for Africa. UK DFID [2004] published a policy paper on budget support (named "Poverty Reduction Budget Support"), while Canadian CIDA
[CIDA 2002, Lavergne et al. 2003] declared its policy to adopt the program-based approach [SeeAnnex 1 for Donor Policies on the Use of Different Aid Modalities]. Thus, we consider it important todeepen these discussions and establish a common ground for applying different aid modalities, taking
account of contextual factors.
Against such a background, this paper aims to address the following:●●●

To provide a conceptual framework for deciding the choice of aid modalities, based on the country and sector-specific context;
To clarify features of respective aid modalities and show examples of how and under what conditions specific modalities and/or their mix can help address development needs while fostering
ownership of recipient countries; andTo suggest how donors can effectively assist in achieving sustainable growth and poverty reduc-1

A number of studies are underway or have been recently completed, to assess the contribution of new approaches to aid
effectiveness. These include: two GBS evaluability studies [OPM 2002, Europe Aid and ODI 2004] which provide anevaluation framework for joint OECD-DAC evaluation of GBS, a case study of Tanzania on GBS evaluation [Frantz
2004], and joint evaluation of external support to basic education [Netherlands MOFA 2003]. DFID has also conducted astudy on the use of different aid instruments in the Asian context.
2
Rome Declaration on Harmonization, at the High-Level Forum on Harmonization held on February 24-25, 2003.

1

tion by properly practicing aid ("good donorship") and draw implications for Japan's aid policy.
Although the topic of aid modality has gained popularity in the recent aid literature, it mostly focuses
on clarifying conditions for introducing a specific aid modality— rather than looking into complementarities among different aid modalities.3 We argue that it is not realistic to assume that a single aid
modality can resolve all development needs in a recipient country. Moreover, the relative usefulness ofa particular modality to the other may differ by country. There are marked country differences in therelative weight of aid in development-related activities, which could have important implications forthe extent of an immediate need for financial transfer, the volume of aid transaction, and the nature ofrecipient-donor relationship. Thus it is necessary to go beyond theological debates on which aid
modality is "superior" or "progressive" over the others. Greater efforts are needed to understand thefeatures of respective aid modalities and examine how they (or their appropriate mix) can enhancedevelopment effectiveness, with due attention to the country- and sector-specific circumstances.
In this paper, we stress the importance of matching aid with country needs and ownership, especiallytaking account of: (i) development priorities in a recipient country; and (ii) recipient-donor relationships in the aid process. We suggest a common framework for deciding the choice of aid modalities,
based on these two factors.
We also stress that there is a set of issues, or "good donorship" principles, that should be honored bydonors— regardless of their choice of aid modalities— in order to realize effective aid. These could
include: respecting country ownership, alignment to government policies, improving predictability of
aid flows, promoting simplification and harmonization of aid procedures, using the government system, identifying local needs and supporting implementation with realistic recipient capacity, and so on.
While donors are strongly encouraged to practice such principles, there should be various approaches
to reaching this end. Pragmatism and flexibility are key in exercising "good donorship."Lastly, this paper does not discuss aid approaches to conflict-affected or Low-Income Countries underStress (LICUS)-type countries. These countries are in protracted crises and require humanitarian aid,
even in the absence of a legitimate functioning state and institutions of government. Since the PRSP
framework is premised on the existence of a reasonably functioning state, with whom the donor community can be engaged in partnership, how to adapt the current aid modality discussions to conflictaffected and LICUS-type countries will require separate examination.4

3

For example, Foster [2000] provides the criteria for appraising the introduction of SWAp and alternative forms of aid
delivery. Foster and Leavy [2001] presents a decision tree for choosing aid instruments with a primary focus on GBS.
4
On this point, see Harmer and Macrae [2004] and Macrae et al. [2004] which suggest the changing role of aid policy inprotracted crises.

22 Aid Modality Debates Revisited

Foreign aid involves the transfer of money, goods, and knowledge from developed to developing countries. Aid modality (equivalent to aid instruments, or aid forms) is a tool to transfer some or all of thesefactors. Aid modality is not a development strategy per se. But, it determines how funds and knowledge are transmitted to recipient countries, how goods are procured, and how recipients and donors
interact in such processes. Consequently, it importantly affects the nature of aid relationship and theeffectiveness of addressing development problems in recipient countries [See Box 2-1 for explanation,
Definition of Aid Modalities].
In this chapter, we examine the evolution of aid modalities and its underlining factors, based on a review
of existing literature. We then highlight key issues to be considered in the choice of aid modalities.
Box 2-1 Definition of Aid Modalities• Project aid: A form of aid to finance specific activities with a limited objective, budget and timeframe to achieve specific results. Here, objectives require inputs to be linked to outputs. The projectapproach is based on the identification of a specific area of intervention for donor involvement, andthe targeted use of funds for specific activities for which the objectives, outputs and inputs required
to achieve them have been defined.
• Budget support: A form of financial aid to channel donor funds directly to the partner government’s budget, using the government’s own allocation and accounting systems, with any conditionality focused on policy measures related to growth, poverty reduction, fiscal adjustment, andstrengthening institutions, especially budgetary processes. Budget support is divided into: (i) general budget support (GBS)— a general contribution to the overall budget; and (ii) sector budget support (SBS)— earmarked to a discrete sector (with any conditionality relating to these sectors).
• Pooling funds: A form of aid to pool donor funds to the government’s accounts. The government
manages and accounts for funds, preferably using standard budget procedures indistinguishable
from those used for government revenues. Funds are earmarked to the activities in a specific sector.
• Sector-Wide Approach (SWAp): SWAp is not modality per se; it is about the approach to increase
donor alignment with government policy and expenditure framework. SWAp can encompass a wide
range of instruments, from a set of coordinated projects to the provision of SBS and sector poolingfund arrangements. SWAp usually includes three components: (i) an approved sectoral policy document and overall strategic framework, which define government priorities; (ii) a medium-term
expenditure framework for the sector; and (iii) a coordinated process amongst the donors in the
sector, led by government.
It is important to note that there is diversity even within the same modality [see Table below]. While
project aid (including technical assistance projects) is often criticized for bypassing government systems and imposing transaction costs to the recipient government, a variety of options exist for its procedural arrangements. For example, there are cases where a donor directly controls all funds; but othercases exist where a donor disburses funds into a bank account maintained by the recipient government
and entrusts the government to organize procurement. Some projects operate through Project Management Units (established within or outside the recipient institutions), while others do not (and directly
work with counterpart personnel in the recipient institutions).

3

Table Characteristics of Main Aid Forms
Aid Form
BoP support

Conditionality
Macro

None

Earmarking

Accountability
None

General Budget Support

Macro & budget

None or nominal

Govt. systems

Aid financed debt relief

Macro & budget

None or poverty virtual fundGovt. systems

Sector Budget Support

Sectoral

To sector

Govt. systems

Sector earmarked

SectoralWithin sector

Govt. systems

Projects using govt.
systems(Sector &) project

Project

Govt. systems

Projects using
parallel systems

Limited by low
ownership?

Total

Donor

Source: Foster and Leavy [2001], Table 1.

Such diversity suggests that the evaluation of transaction costs by aid modality is far more complex
than a simple comparison between projects vs. program aid. This is so especially because, as Killick[2004] notes, transaction costs can be further classified into various categories —e.g., administrative,
tying, fiscal costs — which are distributed differently by forms of delivery between recipients anddonors [See Annex 2].
Source: Elaborated by the authors, based on EuropeAid and ODI [2004], DFID and Japan Team in Vietnam [2004],
Lavergne et al. [2003], Foster et al. [2001], and World Bank [2004d].

2-1 Lessons from the Past Experiences
The current rethinking of aid modalities originates from the lessons learned from the past aid practices
and the changing emphasis on the role of aid in development. In particular, as Figure 2-1 shows, two
streams of thinking are important: (i) the need to address priority development issues in a comprehensive and coherent manner; and (ii) the need to improve the recipient-donor relationship in the aid
process.

Figure 2-1 Origin of Aid Modality Debates: Two Streams of Thinking
Priority
Development
IssuesRecipient-Donor
Relationshipin the Aid Process

Aid Modality
Debates4

Priority Development Needs and the Role of Aid
Over the last fifty years, various aid modalities have evolved — both project and program aid — inresponse to emerging development priorities. Originally, lack of capital was considered as the key
resource gap facing developing countries; however, it has become clear that development is a complex
undertaking and that there is a need to pay attention to its multi-dimensionality including human,social, policy and institutional aspects. Accordingly, the expected role of aid in development haschanged. This has led to the evolution of diverse aid modalities [See Table 2-1].
A series of recent studies [World Bank 1998] also find that aid effectiveness critically depends on theinstitutions and policies of recipient countries.5 Furthermore, the fungibility argument highlights theimportance of policy priorities, budget allocation and management. These findings have contributed toresolving the 'micro-macro paradox': even if aid is effective at the project level, no macro impact canbe found. [Robinson and Tarp 2000] For projects to be effective, good policy and good institutions are
required to back them up.
Table 2-1 Evolution of Development Thinking and Aid Modalities
Development Priorities
1950s- :• Capital shortages (domestic
and foreign exchanges)• Knowledge and technology gaps
1970s:• Basic Human Needs (BHN)
1980s:• Macroeconomic stability• Structural reforms
1990s:• External debt problems

Mid-1990s- :• Building of the core government
systems• Recurrent financing• Policy and institutional coherence• Addressing fungibility issues

Aid Modality
Projects (mainly infrastructure) and program aid(typically, balance-of-payments (BoP) support
through commodity loans), aimed at financial transfer
Technical assistance (TA) projects
Expansion of project aid to support social services andrural development
Structural Adjustment Lending (SAL) and Sector
Adjustment Lending (SECAL), in the form of program
aid, adding policy conditionality to BoP support
Later, program aid became linked to debt relief
initiatives (e.g., Enhanced HIPC Initiative)
New types of program aid, including budget support(general and sector budget support), pooling funds
under SWAp arrangement, as well as pooled TA

Notes:(1) Projects were a dominant form of aid delivery until the early 1980s; but with the introduction of structural adjustment operations, the share of program aid increased drastically. For example, in the World Bank, the share of project aid declined from 82% to 48% during 1980-1996, while that of program aid rose from 2% to 23% during thesame period. [Mosely and Eeckhout 2000: 132]
(2) On financial terms, these modalities can take the form of both loans and grants.

5

The subsequent studies by Burnside and Dollar [2000] and Collier and Dollar [2002] stress that, while in countries withsound economic policies, aid promotes growth, in countries with bad policy environments, aid is dissipated in unproductive government consumption. It should be noted, however, that academically there exist debates over their analyticalresults [See Easterly, Levine, and Roodman 2003, and Easterly 2003].

5

Aid Relationship
Another important trigger for this modality shift is the recognition of the need to improve aid relationship. This derives from disappointing experiences with the existing aid modalities, as summarized
below.

(1) Critical assessment of 'stand-alone' projects
There was widespread frustration with 'stand-alone' projects, due to: (i) coordination failure, with anumber of aid projects becoming development enclaves; (ii) under-budgeting of recurrent expenditures, with donor-driven projects leading to inefficient public spending; (iii) high transaction costs ofaid delivery, with the proliferation of aid projects (often with different reporting requirements andsometimes with competing objectives) imposing heavy administrative burdens on recipient countries;and (iv) parallel off-budget systems undermining the effectiveness of government systems andaccountability.
Particularly in highly aid-dependent countries in sub-Saharan Africa, it was felt that donor projects
were increasingly isolated from local realities and that they would make no or rather limited sustainable development impact. The situation had led to further undermining local ownership and capacity,
thus impeding development progress. [Andersen 2000, Mosely and Eeckhout 2000]
This was also the case for technical assistance (TA) projects. In the 1990s, a series of critical reports
on TA were published, including the Berg Report [Berg 1993]. Their main criticisms are: (i) supplydriven nature of TA; (ii) excessive emphasis on tangible, measurable output as opposed to institutional
development; (iii) bypassing existing government system; and (iv) distortions in the market for TA(generally viewed as a free good). As a result, recipients have little incentives to decline the resources
offered, but have very little to say in the ultimate form and goals of the project. Under these circumstances, TA projects can easily end up addressing low priority needs. TA proliferates and simultaneously undermines local capacity and ownership. [Arndt 2000, IDCJ and IC Net 2003]
Box 2-2 illustrates a well-known case of Tanzania, cited from Helleiner et al. [1995], popularly known
as a Helleiner Report. The report examined the relationship between donors and the Tanzanian government and provided specific recommendations on how to improve the relationship.
Box 2-2 Concerns about Aid Coordination in Tanzania
The problems with regard to aid effectiveness and coordination in Tanzania remain, at their roots, theresults of failure to match individual donor and government agencies’ interests with agreed and coordinated priorities. Operationally, the situation is characterized by uncoordinated proliferation of projects across a large number of donors and a wide variety of disbursement accounting arrangements. In
our interviews with donors and the government of Tanzania alike, reference was often made to themore than 2,000 projects and the 40 donors that have been involved in aid to Tanzania. We also heardthat weak coordination capacity and lack of authority on the part of the GOT were making overall
coordination among donors extremely difficult. Donor-driven proliferation of projects….. to a large
extent, a reflection of this weakness as well as the product of strong donor vested interests in theirown identifiable ‘monuments’.
Source: Helleiner et al. [1995:15]

6

(2) Critical assessment of adjustment operations
There is shared consensus that structural adjustment did not bring about the expected results, particularly in low-income countries and sub-Saharan Africa. This point was recognized by the World Bank
itself in its self-evaluation reports. [World Bank 1990, World Bank 1992]
The mixed performance of adjustment operations in the 1980s led to the redesign of conditionality.
Aid released on the promise of policy change backed by the threat of aid secession has come to be
regarded as ineffective, being criticized for undermining ownership. There is growing recognition that
donors should switch from attempting to “buy” a pre-specified menu of policy changes (ex-ante conditionality), to the allocation of aid on the basis of periodic overall assessments of government achievements (ex-post conditionality).6 [Collier et al. 1997, Leandro et al. 1999]

2-2 Shifts toward New Aid Modalities
The above experiences have promoted shifts in the existing aid modalities toward programmatic aid inthree ways.
The first shift is from 'stand-alone' projects to project 'clustering,' often in the form of pooling funds
under the SWAp arrangement. This shift took place in the mid-1990s, initially called the Sector Investment Program (SIP). [Harrold 1995] Sector budget support (SBS) were also introduced, and the terminology of SWAp (or Sector Program, Sector Development Program) has come to be widely used.
Under SWAp, major donors provide support within an agreed sector framework, coordinated by thegovernment. Donor support can then be linked to a unified public expenditure framework for government and donor resources, with common management and reporting arrangements. SWAps canencompass a wide range of instruments, from a set of coordinated projects (such as SIP), pooling fundarrangements, to the provision of sector budget support. [DFID 2004]
It is expected that this shift would enhance synergies and externalities across projects within broad sectors, improve donor coordination and facilitate more effective policy dialogue and ownership by therecipient, and lower transaction costs associated with multiple donors and multiple projects.
The second shift is from structural adjustment operations (and BoP support) to general budget support(GBS). This shift is a reaction to overcome the weaknesses of SAL and SECAL. The past ineffectiveness of "inducement" as the objective of conditionality has led to the gradual redesign of the conditionality contract. The emerging consensus is that new type of conditionality contract should be expost, policy-linked, empirically based and country-specific. [Collier et al. 1997, Leandro et al. 1999] In
this sense, the PRSP initiative, led by the World Bank and the IMF in 1999, is the manifestation of
their intention to improve the nature of aid relationship. The PRSP aims that the recipient government

6
The issues on conditionality arose controversy and were debated from various aspects. Killick [1997] focuses on the difficulties of properly enforcing conditionality, while Collier and others [1997] analyze how the imposition of increasingly
detailed conditions may create serious incentive problems.

7takes the lead in formulating a medium-term, comprehensive strategy for poverty reduction, based on
which donors will make multi-year financial commitment. A typical example is the introduction by theWorld Bank of Poverty Reduction Support Credit (PRSC) [See Box 2-3].
Third, more recently, some donors (particularly, UK DFID) are moving from SWAp to GBS, based on
the view that GBS is a "preferred" or more "progressive" aid modality. It is argued that GBS is themost flexible and effective in strengthening accountability relationships. SWAp is less flexible because
they are typically funded by donor pooling funds or trust funds that are kept separate from the government's allocation and accounting systems. [EuropeAid and ODI 2004]
GBS is an instrument to implement budget priorities envisioned in PRSP by: (i) using the budget tobring public sector programs into line with government goals and service delivery targets; (ii) aligning
PRSP processes with government systems and cycles; and (iii) promoting alignment and harmonization by donors. Main arguments for GBS are that it would encourage greater local ownership of thedevelopment process by reinforcing accountability relationships within governments and drawing on
and developing the capacity of governments to define and manage programs. This, in turn, is thought
to translate into more significant and sustainable reductions in poverty. [EuropeAid and ODI 2004]

Box 2-3 Conceptual Shift from SAL to PRSC
The World Bank has recently updated (“modernized”) an operational policy (OD 8.60, Adjustment
Lending), to explicitly reflect the PRSP principles into its policy-based lending. The updated policy
uses single terminology of “Development Policy Lending” to call all types of policy-based lending,
except for PRSC whose approach and familiarity have already been established.
Table How PRSCs are Different from Traditional Adjustment Lending
PRSCs

Traditional Adjustment Lending

Initiative

CAS based on core objectives of country-owned PRSP

Development partners in dialogue withgovernment

Focus

Public sector management, governance,
capacity building, service delivery,
regulatory frameworks

Policy frameworks, sector reform

Stakeholder
participation

Broad consultation with government andcivil society

Bank dialogue with government

Modalities

Single annual tranche within rolling
framework

Multi-tranche

Performancetriggers

Ex-post development outcomes

Ex-ante conditionalities on promised
policy changes

Timing

To national budget cycle

Per program arrangements

Response toperformance

Adjustment in amounts committed infollowing PRSC

Stop-start of entire program

Source: World Bank [2004d], p.84, Table 4.2.

8

This analogy holds for TA projects, as well. The past criticisms have led to the argument for innovative
funding channels for TA, i.e., budget support and pooling funds, as a way to effectively address theissue on local ownership. [UNDP 2002] Also, there has been increased awareness of the need to: (i)make the TA project structure work better, with greater attention to institutional development; and (ii)resort to comprehensive planning of TA. [Arndt 2000]

2-3 Emerging Consensus on "Good Donorship" Principles
In the 1990s, the lessons learned from the past have led donors to re-think their aid practices— interms of both responding to newly recognized challenges (e.g., building the core government systems,
financing recurrent expenditures, improving policy and institutional coherence, and addressing fungibility issues) and improving aid relationship (e.g., enhancing ownership and reducing transaction costsof aid procedures). There has been emerging consensus on the elements of "good donorship" to bepracticed by respective donors, as follows:
●

●

●

●

●

●
●

●

Respect for country leadership and ownership, with due consideration to recipient capacity andaid relationship;
Alignment to government policies and programs, and donor coordination within a common policy framework;
Increased predictability of aid flows, including multi-year planning of aid, transparency andinformation sharing of aid budget, and alignment to government budget cycle;
Simplification and, where possible, harmonization of aid procedures, including procurement anddisbursement procedures, safeguard policies, formats of reporting, monitoring and evaluation
etc., and other measures to reduce transaction costs of aid delivery;
Increased reliance of government systems and procedures where desirable, avoiding the use ofparallel systems;
Identification of local needs based on the realistic assessment of recipient capacity;
Implementation on the ground, and the incorporation of the lessons learned into the policy andinstitutional design by creating feedback mechanisms; andCapacity development for the long term, at both the institutional and human levels.

The above list may not be exhaustive, given a great deal of ongoing research in this area.7 But, we
believe that it merits serious consideration, as it is built on the reflection of donor practices in the past.
In sum, the emergence of new aid modalities can be understood as an attempt to pursue "good donorship" principles, by shifting a modality from one to the other. Such modality shift is also viewed aspart of integral efforts to support the PRSP framework.

7

For example, OECD/DAC [2003] and discussions at H/L Forum on Harmonization (Rome in February 2003 and Paris
planned for March 2005). Also, ODI/CAPE has an ongoing research project "Aid Effectiveness and Good Donorship"(ODI Research Stream No. 1: Aid Policy and Donor Practice). See Karin Christiansen, PPT presentation "Aid Effectiveness and Donor Behavior" at the May 13 2004 CAPE seminar.

92-4 Issues for Further Consideration
The recent move from projects to program aid is supported by the argument that new aid modalities
have a stronger influence on the policy environment, superior ownership properties, and greater aggregate coherence. It is also claimed that they incur smaller transaction costs than an equivalent amountgiven in the form of traditional projects. [Killick 2004] A key question here is whether we should pursue "good donorship" by always shifting to a particular aid modality. While we do not deny the potential usefulness of modality shift in certain circumstances, we consider it important to explore a possibility of improving the existing ones, as well.
The alleged superiority of new aid modalities is based on a chain of causal linkages between their
inputs and the final impact of sustainable poverty reduction [See Annex 3 for the framework for acausality chain between GBS and poverty reduction]. While such a causality chain may hold theoretically, the benefits are not automatic at least in the short run. Furthermore, there remain theoreticallyunresolved, technically difficult and institutionally complex issues on designing and implementing
PRSPs, on which GBS and SWAp are based.

Assessment of the Early Experiences with New Aid Modalities
While it is too early to give a definitive judgment on their effectiveness, there are views to suggest thata complete shift to a single modality, typically GBS, would be neither realistic nor desirable. First, inlight of fiduciary requirements, the number of countries where GBS is applicable is limited. The recent
study shows that only nine countries have been using GBS with the participation of two or more
donors, of which seven are African countries (Uganda, Tanzania, Mozambique, Ghana, Rwanda, Burkina Faso, and Ethiopia). [EuropeAid and ODI 2004]
Second, the early experiences with GBS and SWAp have mixed results in reducing transaction costs
and increasing predictability of aid flows. Killick [2004] and Frantz [2004] stress that there is little
evidence to show that providing greater shares of aid as budget support significantly reduces transaction costs.8 There are considerable start-up costs of establishing joint monitoring frameworks, and theprocess is very time consuming. [World Bank and IMF 2004] The recent joint donor evaluation of program aid in basic education also finds that in the short run, the introduction of budget support andSWAp appears to have resulted in a massive transfer of administrative work from donors to the Ministry of Education and Sports in Uganda. [Netherlands MOF 2003] Furthermore, there are cases where
aid has become less predictable under GBS and SWAp. [Foster et al. 2000, Frantz 2004] Especiallybecause GBS is high-profile and highly flexible aid from the donor's perspective, the predictability of
its aid flows continues to be a challenge.9

8
Killick [2004] argues that the language of transaction costs has been used too loosely and would merit a substantial
empirical study. The trend in aid share, away from projects in favor of program aid, may not be as strongly based on evidence as is commonly assumed.
9
In a research paper, Bluir and Hamann [2001] demonstrate the large uncertainties of aid flow in general, and much larger prediction errors in program aid than project aid (with a stronger tendency to over-estimation).

10Unresolved Issues on the PRSP Framework
In addition, we would like to raise fundamental issues that hinge on the assumptions on the causality
chain and the functioning of the PRSP framework.

(1) Capacity constraints
The effectiveness of GBS and, to some extent, SWAp is grounded on the functioning of elaborate systems guided by the PRSP framework. This is by no means easily achievable. In fact, the latest WorldBank progress report of PRSP recognizes that the PRS approach is still a work in progress and that few
countries have fully aligned their PRS cycles with domestic decision-making processes, especially thenational budget cycle. The report stresses the need to overcome capacity constraints. [World Bank and
IMF 2004]
More specifically, the functioning of the entire system requires that capacities be developed across awide range of organizations and at different levels— from the central economic ministry, line ministries to the local level of service provision. These include capacities for: (i) financial management
and accountability (budgeting and accounting, procurement and contracting, etc.); (ii) planning anddesigning development programs; (iii) implementing programs and deliver services; (iv) developing
viable data bases on development results and process indicators; and (v) monitoring and evaluating
performance. [Lavergne et al. 2003]
Thus, capacity constraints of the government and related entities could pose serious challenges. A variety of complementary interventions are needed so that GBS could contribute to the achievement of its
ultimate objective of sustainable poverty reduction. While the central economic ministry is responsible
for managing the process based on MTEF and PAF and establishing accountability relationship withthe line ministries, full range of activities are required to translate policies and public expenditures into
final outcome. There is also a need to build the capacity of enforcement and implementation entities,
including that of the private sector itself.

(2) Analytical underpinnings of "pro-poor growth"
Sustainable poverty reduction requires broad-based growth including private sector development, or socalled "pro-poor growth." However, there is no consensus on how to operationalize the concept of"pro-poor growth" including the methodology for identifying country-specific measures and budget
items to this end.10 This parallels with one of the most common criticisms of PRSPs (i.e., emphasis on
direct-poverty targeting measures and the social sectors, with less attention to private sector development and productive investments).
The analysis of "pro-poor growth" and the sources of growth is vitally important because, in the longrun, recipient countries should lower aid dependency and graduate from aid ("aid exit"). Since GBS is

10

A series of research by Ishikawa [2002] attempts to address this question.

11

primarily concerned with the use of public resources, those measures indirectly related to publicresources tend to receive lower priority. This points to the need to strengthen local capacity for policy
analysis, including the strategic direction and content of PRSPs. Donors should also consider how aid
can effectively support this process.

(3) Country diversity, regarding development priorities and ownership
In discussing aid effectiveness, it is important to recognize country diversity. There is a spectrum ofrecipient countries, facing different development priorities. The current discussions on aid modalities
are primarily driven by the development experiences with highly aid-dependent and low-income countries (in fact, originated in sub-Saharan Africa).
Even if we focus on low-income countries, recipients differ in their levels of aid dependency, capacity,
ownership, and so on. For example, highly-aid dependent countries face an immediate need for financial transfer (even to fill a gap of recurrent expenditures)—often, at the cost of huge volume of aidtransaction. Here, aid relationship critically affects the way the governments coordinate development
planning, resource mobilization and utilization. Lacking recurrent expenditures, these governments
face priority needs to establish a basic system for social service delivery. On the other hand, in low-aid
dependent countries, aid is only a supplementary source of development. Having established a basicsocial service delivery system, these governments are interested in attending the higher level of development agenda, e.g., improving the quality of social services and promoting dynamic growth, where
public expenditures or fiscal transfer through aid may not have a central role. Diverse actors areengaged in development-related activities, including domestic and foreign private enterprises, and aid
relationship is just one aspect of the government's coordination mechanisms. Therefore, it is importantto recognize such contextual differences. There is a need to broaden the perspectives of the ongoing
discussions and establish an analytical framework which can sufficiently accommodate country diversity.
All the above suggest that we should be pragmatic and perceptive to local reality in the choice of aid
modalities. There is a need to develop an understanding of how various aid modalities complement one
another, taking account of their features in relation to a specific country's circumstances. This is thecontext in which donors should seek and practice "good donorship" principles toward more effective
aid.

12

3 Key Factors Affecting the Choice of Aid Modalities:
A Proposed Framework

In this chapter, we propose a conceptual framework for deciding the choice of aid modalities, taking
account of the two factors previously mentioned: (i) the nature of priority development problems inrecipient countries; and (ii) the nature of recipient-donor relationships in the aid process and ownership. To this end, we present the Development Priority Matrix (regarding (i)) and two prototypes ofownership and capacity (regarding (ii)) as analytical tools. We also examine how country- and sectorspecific factors should be considered in applying this framework, since contextual differences could
have important implications for modality choice.

3-1 Development Priority Matrix (DPM)
What are key development priorities in recipient countries, and what is the nature of development
problems? To examine these questions, we have constructed a Development Priority Matrix (DPM).
DPM focuses on the public sector domain, namely, the areas covered by public expenditure and policies.
Figure 3-1 Development Priority Matrix<Upstream>
Policy &Institutions• Establishment of (sector-specific)
policy and institutional framework• Critical assessment of
SAL conditionality• Fungibility issue• Macroeconomic stability• Inter-sectoral budget allocation(e.g., consistency with PRSP priority)• Establishment of core government functions& systems (e.g., budget mgt., civil service systems)

Sector & Local
Administration

2

1

3

4

Macroeconomic
Policy• Improvement of public service
delivery (quantity & quality)• Strengthening of implementation capacity(e.g., public financial management, monitoring& evaluation)• Strengthening of implementation
capacity (managerial & technicalaspects)

Critical assessment ofparallel systems& transaction costs<Downstream>
Implementation

13

Table 3-1 Development Priority Matrix (DPM)
Quadrants

Priority Problems

Responsible Agents+(1) Upstream
macro-level

Policy and institutional framework at
the macro level

Central economic ministries andthe central bank+(2) Upstream
sector & local
levels

Policy and institutional framework at
the sector and local levels

Line ministries and agencies, andlocal governments(3) Downstream +sector & local
levels

Implementation and service delivery
to the intended beneficiaries at thesector and local levels

Line ministries and agencies, andlocal governments(4) Downstream +macro-level

Implementation of macro policy andinstitutional framework at the macrolevel

Central economic ministries andthe central bank

The vertical axis shows a range of tasks—from policy and institutional reforms (upstream or highlevel) to operational and implementation issues (downstream, or actions on the ground). The horizontal
axis shows a range of agents responsible for carrying out these tasks—from central economic ministries and agencies, line ministries, to local authorities. More specifically, DPM classifies development priorities into four quadrants, as shown in Table 3-1.

Linking DPM and Aid Modalities
Effective public sector requires the functioning and coordination of all the four areas in DPM. In thisregard, it is important to understand how modality choice is related to priority problems in recipient
countries.
The quadrant (3) is where project aid is primarily used. In well-planned, organized, and sustainably
financed government systems, input supply projects can make a valuable contribution of lasting benefit. However, if recipient authorities make inadequate provision for the maintenance and replacementof donor-supplied inputs, techniques and methods transferred through projects (including TA) will not
be properly integrated into local practice. [Roberts 2003]
The quadrants (2) and (3) are the areas where project aid, typically large-scale projects with policy andinstitutional reform contents, is used. But, under the situation with aid fragmentation, individual projects may not sufficiently address coherent policy and institutional reform. This is why SWAp has
emerged to rectify coordination problems. Also, SECAL used to be applied to address sector policy
and institutional reforms; but the urge to redesign conditionality has replaced this modality with SWAp
and/or SBS.
The quadrants (1) and (2) are the areas where SAL and SECAL were respectively used, previously.
However, the failure of conditionality under adjustment operations has prompted the emergence of
GBS and SBS.

14

In general, higher-level and systemic problems call for higher-level aid relationship and dialogues on
fundamentals, such as policy reforms (around PRSP) and inter- and intra-resource allocation. It is
understood that budget support and SWAp attempt to cover multiple areas in DPM and seek for synergies among policy and institutional reforms, budget allocation and execution, and implementation.
Therefore, these modalities can be effective if priority problems in recipient countries are complex andcorrespond to several quadrants in DPM. Moreover, since budget support and SWAp permit large
resource transfers, they are likely to be suitable if services to be financed call for mainly recurrent
expenditures.
On the other hand, if the identified problems are specific, for example, the search for technical solutions, project aid focusing on the quadrant (3) may be appropriate. Also, if policy innovation is sought,
project aid can contribute to the quadrant (2). Therefore, it is important to identify and locate priority
development problems of recipient countries in DPM, and then decide a suitable modality, based on
the understanding of properties of respective modalities.
Technical assistance (TA) can be used in all the quadrants—(1), (2), (3), (4). TA is often provided in
the form of project aid, or the dispatch of experts contracted by donors. Since TA aims to support
recipients' capacity development at the individual, organizational, institutional and societal levels(through knowledge and skill transfer, pilot innovation and so on), it can promote not only implementation on the ground, but also policy and institutional reform. But, as mentioned in the previous chapter, efforts are needed to enhance its effectiveness by better aligning TA projects to the existing administrative structure and policy framework. This is why recently pooled TA has been attracting attention.

Treatment of the Private Sector and Growth Agenda in DPM
It is important to note that the original DPM discusses priority problems that can be addressed bydirect public actions via public expenditures and policies. These are public sector agenda, including
macroeconomic management, the establishment of core government functions and institutions, and theprovision of social service delivery. In fact, many low-income countries are striving for meeting such
immediate priorities. But, pro-poor growth equally requires growth promotion and private sector
development (PSD), namely, the development of agriculture, industry and business, for which bothpublic actions and the behavior of private agents (e.g., firms and farmers) matter. Thus, DPM can beextended beyond the original area by explicitly indicating the private sector [See Figure 3-2]. Thereexist interactions between the public and private sectors. On the one hand, public policy and actions
influence the business environment, for example, through macroeconomic environment, trade policies,
legal and regulatory framework, physical and financial infrastructure. On the other hand, the private
sector— through tax contributions— helps generating additional budget for poverty-targeted programs
and public investment. The size of the private sector domain differs by country by country.

15

Figure 3-2 Private Sector and Growth Agenda in DPM
Original DPM

Broader DPM

Private Sector
Policy & Institutions

Sector& LocalAdmin

Public sector

Macroeconomic
PolicySector& Local
Admin

Implementation

Policy & Institutions

Interaction

Public sector

Macroeconomic
PolicyImplementation

3-2 Identifying Priority Development Needs in Recipient Countries
Country-specific Context
Relative effectiveness of aid modalities should be assessed in light of the location of priority problems
in DPM. This suggests the need to understand the degree of government capacity and the functioningof the government's core systems, and then match aid with country-specific problems.
Figure 3-3 hypothetically illustrates two extreme types of governments. Case 1 is the government with
sufficiently strong capacity, in terms of macroeconomic management, resource mobilization, public
expenditure management, public administration, service delivery, and so on. Here, internally generated
resources can largely finance the government's core systems, and the government is capable of providing essential public services to the population in need. Under such circumstances, individual projects
can be integrated into the country's institutional and policy framework and their sustainability is likely
to be ensured. There is a great chance of "scaling up" their impacts.
Case 2 is the government with severely restricted functions, heavily dependent on aid flows to makethe core systems work. Under such circumstances, merely supplying inputs into individual projects isunlikely to "scale up" their effects, and projects face serious problems with sustainability. As Hyden
noted, this is the typical situation of sub-Saharan African countries, where the patrimonial features arestill prevalent and public administration is 'underbureacuratized.' [Hyden 1983:79] ODI [2001] also
gives the following summary of the features of eight countries included in the PRSP Institutionalization Study (Benin, Ghana, Kenya, Malawi, Mali, Mozambique, Rwanda and Tanzania).

16

●

●
●

●

●

Semi-democratized states and fragmented policy processes, characterized by low coordination
between different centers of decision-making, and between the formulation and implementationof policies;
Patronage-based domestic politics, with fragmented party systems and weak civil societies;11High levels of financial and institutional aid dependency, producing low accountability todomestic actors;
Public expenditure and revenue management systems, which have, until recently, been weakly
driven by public policy objectives; andAdministrative systems characterized by low morale and weak performance incentives.

Figure 3-3 Two Types of Governments
Capacity of the public sector[Case 1: Government with complete functions]1.

Policy & Institutions

Sector& LocalAdmin

PublicsectordomainStrong resource generation / mobilization
capacity
2. Strong administrative capacity• Broad public sector domain.
• With sufficient resources (financial,
institutional, & human), individual projects
Macrocan be integrated into the country's
economic
institutional & policy framework andscaled up.
PolicySustainability assured.

Implementation[Case 2: Government with severely restricted functions]1.

Policy & Institutions

Sector& LocalAdmin?

Weak resource generation / mobilization
capacity
2. Weak administrative capacity• Government core systems (e.g., budget
mgt., salaries of civil servants) yet tofunction. Heavy dependence on aid flows.
Macro• Narrow public sector domain.
economic• With severely limited resources (financial,
Policyinstitutional, and human), scaling-up ofindividual projects is unlikely.
Serious problems with their sustainability.

Implementation

11

While recognizing its important effect on the functioning of government system, we do not intend to provide in-depth
analysis of patrimonialism in the paper. We believe that this topic merits separate attention.

17

To better understand country differences in the government's capacity, we show the data on selected
countries (Ethiopia, Tanzania, Ghana, Bangladesh, Cambodia and Vietnam) in terms of: (i) aid as apercent of macroeconomic aggregates (including selected sources of foreign exchange inflows); (ii)central government's tax revenue as a percent of GDP; and (iii) indicators for public service delivery(primarily on the access to social services). Although rough, these data are useful in assessing thedegree of the government's functioning in the spectrum of two extreme cases and locating priority
problems in DPM.12 Moreover, whether and to what extent a country has alternative sources of development financing (such as domestic resources, FDI, export earnings), other than aid, can affect its bargaining position vis-a-vis donors in aid relationship.

(1) Aid as a percent of macroeconomic aggregatesAmong the six countries, Vietnam and Bangladesh are less aid dependent. The ratio of aid to macroeconomic aggregates is not particularly high. In Vietnam, aid accounted for around 4.6 percent of GDP
and less than one tenth of imports in 2001. Aid's share in the government expenditures is relatively
small, at 18 percent and at about less than one-sixth of total investment. As Table 3-2 shows, aid is justone of several sources of foreign exchanges. Bangladesh exhibits similar tendency, at aid accounting
for around 3.3 percent of GDP and about 23 percent of government expenditures in 2001.
The situation is quite different from those of Tanzania, Ethiopia, and Cambodia. In these countries, aid
accounts for about 60 percent (or more) of government expenditures and 12-18 percent of GDP, and is
the main source of investment (70-90 percent). Such a high share of aid in government expenditures
suggests that the governments in these countries must rely on aid flow to finance crucial parts of corepublic functions (including recurrent financing). In Cambodia, the sources of foreign exchange earnings are somewhat diversified. But, in Tanzania and Ethiopia, aid accounts for nearly half of the foreign exchange earnings, and aid receipts are higher than export earnings and FDI. This suggests thevery limited size of economic activities by non-government, for profit sectors [See Figure 3-4].
Ghana is less aid dependent than the three countries mentioned above and has more diverse sources offoreign exchange earnings. But, the nature of its problems resembles that of the three countries above(rather than that of Vietnam and Bangladesh). This is also because Ghana's export earnings mainly
come from primary commodities (e.g., cocoa, gold, timber), which are vulnerable to price fluctuationsin international markets. In contrast, Vietnam has a stronger industrial base and its exports include
labor-intensive manufacturing products.

12

The World Bank uses CPIA as an indicator for assessing capacity of IDA countries. CPIA uses 20 (16 from the 2005
exercise) indicators which have both short- and long-term impacts on development effectiveness; but it does not takeaccount of aid dependency. Here we use simpler indicators, focusing on the functioning of Government core systems andthe degree of aid dependency, which roughly suggests the government’s ability to mobilize alternative resources (indicators (i) and (ii)). The indicators for public service delivery (iii) at particular time may not necessarily show the sustainability of service coverage. But, given the difficulty in obtaining comparable data, we consider that these can serve as proxy toassess the functioning of core systems when combined with other indicators (i) and (ii).

18

Table 3-2 Aid as a percent of Macroeconomic Aggregates (2001)
Unit: %GDP

Imports

Forex.
Revenue

Investment

Govít Exp.

Vietnam

4.6

9.4

7.0

14.8

17.9

Bangladesh

3.3

18.2

14.1

13.1

22.8

Cambodia

12.4

24.4

19.0

69.1

64.4

Ghana

14.9

26.6

18.5

55.8

45.4

Tanzania

14.3

89.2

41.8

83.8

75.0

Ethiopia

18.0

69.3

48.6

92.2

57.1

Source: IMF Statistical Appendix [2003], OECD/DAC [2004].
Note: The aid data (gross disbursement) are based on donor report to OECD/DAC, which may not coincide withthose reported by the government.

Figure 3-4 Selected Sources of Foreign Exchange Inflows (Average of 1999-2001)
Unit: $mn

14,000.0

Exports

12,000.0

FDI Inflows

10,000.0

Private Transfer

8,000.0

ODA Inflows

6,000.0
4,000.0
2,000.0
0.0
VietnamBangladesh Cambodia

Ghana

Tanzania

Ethiopia

Source: IMF Statistical Appendix [2003], OECD/DAC [2004].

(2) Tax revenue
Table 3-3 shows the data on central government's tax revenue as a percent of GDP in four of the six
countries (Vietnam, Bangladesh, Ghana, and Tanzania), on the average of 2001-2002. Among the four
countries, Ghana and Vietnam have higher ratios of tax collection. Bangladesh has extremely low tax
collection ratio at 7.4 percent of GDP (especially, income tax). This ratio is much lower than those of
sub-Saharan Africa. Judging from that the levels of standard VAT and corporate tax rates are not quite
different from those of the other countries, the low tax collection ratio may imply the government's
limited capacity for enforcement and capturing locally generated resources.

19

Table 3-3 Central Government Tax Revenue, (Average of 2001-02)
Unit: %

Vietnam
16.6

Bangladesh
7.4

Ghana
17.2

Tanzania
12.1

Income tax
VAT or sales tax

6.0
4.2

1.4
3.9

5.6
5.1

2.7
4.1

Excise taxes

1.4

0.1

0.7

2.1

Trade taxes

3.8

2.0

4.1

1.0

Other taxes
Memo

1.2

0.1

1.7

0.0

Standard VAT rates

10.0

15.0

12.5

20.0

Corporate tax rates

30.0

35.0

32.5

30.0

Tax

Source: IMF staff reports.

Table 3-4 Access to Essential Social Services
GNI per capita(2002)

Child Immunization
Rate (% of children
under age one, 2001)

Primary School
Completion Rate
(2001)

Access to Improved
Water (% of pop.,
2000)

Vietnam

$430

98%

101%

77%

Bangladesh

$360

83%

70%

97%

Cambodia

$280

60%

43%

30%

Ghana

$270

80%

64%

73%

Tanzania

$280

85%

60%

68%

Ethiopia

$100

56%

24%

24%

Source: WDR 2004 [World Bank 2003](3) Indicators for public service delivery
Table 3-4 compares the data on selected social services, mostly delivered by the public sector (primaryschool completion rate, child immunization rate, and the access to improved water source). Although
not perfect, these data could roughly provide a basis for judging the government capacity for public
service outreach (access). Vietnam surpasses the other countries in the functioning of social service
delivery, although there is room for quality improvement. This is followed by Bangladesh, Ghana, andTanzania. The indicators on Cambodia and Ethiopia are very low, suggesting that systems for delivering basic public service are yet to be established.
The above three kinds of information give a rough idea of government capacity in generating internal
resources to finance its core functions and delivering essential public services. Such information canhelp clarify the country-specific circumstances, particularly addressing such questions as: (i) what is
the magnitude of problems associated with the four areas in DPM; (ii) what are priority issues andwhere they are located in DPM; and (iii) whether and to what extent GBS, or alternative modalities
can be useful in addressing the identified, priority problems. It also suggests whether the nature of
immediate priorities should be understood within the original DPM or the broader DPM [Figure 3-2].

20

Sector-specific Context
The role of public expenditures differs by sector and by type of services to be financed. If the sectors
and desired services are recurrent-intensive and the country is heavily aid dependent, large resource
transfers would be required on a constant basis. This implies the importance of ensuring links among
quadrants (1), (2) and (3) in DPM. Furthermore, the nature of desired services matters, too. If therequired action is the system-wide application of homogeneous and standardized technology, increasing public expenditures or reducing the unit costs of measures may be appropriate. On the other hand,
if the required action is highly context-specific, innovative and targeted interventions are needed tomeet heterogeneous demands of beneficiaries. In such case, simple expansion of public expenditures
may not be enough. Carefully designed interventions in quadrant (3) of DPM need to be accompanied.
Therefore, it is important to identify suitable aid modalities, considering the role of public expenditures in the sector or services to be financed. We pay attention to the following two criteria:●●

Intensity of public-goods components and the role of recurrent expenditures; andThe nature of required public sector actions, particularly the degree of the system-wide applicability of standardized, homogeneous approaches.

(1) Intensity of the public-goods component and the role of recurrent expenditures
The role of government and public expenditures differ greatly by sector (or sub-sector). Where the sector (or sub-sector) provides services with the high public-goods component, public expenditures—
recurrent expenditures in particular—play a key role. Roughly speaking, the sector-context can begrouped into the two depending on the intensity of the public-goods component:●●

Case 1: Government as provider of service delivery and public goods. This is typically the caseof the delivery of basic social services (such as primary education and primary health care),where the government is a key provider of services, with expenditure dominated by recurrent
costs in local currencies (especially salaries).
Case 2: Government as regulator and/or coordinator of various stakeholders including the private
sector. Here, the private sector covers both "for-profit" (e.g., growth promotion, private sector
development) and "non-profit" (e.g., NGO support to social service delivery) actors. In this case,the role of public expenditures is less important. The main role of the government is not financing itself, but creating an enabling environment for these actors, i.e., sustaining macroeconomic
stability and establishing sound policy framework and institutional mechanisms for supporting
the activity of non-government actors.

The implicit assumption behind budget support is that public expenditure programs are by-and-large
efficient and effective in bringing about development outcomes. While this is primarily concerned with
Case 1, the applicability of such assumption should be examined by sector (or sub-sector) and by typeof services to be financed.

21

The education sector is a most representative example of Case 1. This is the sector where the government plays a key role in directly providing essential public services (or by outsourcing to private
providers). Most expenditures on education are non-tradable, with 75 percent or more consisting ofwages and salaries. Public provision far exceeds non-governmental provision in the supply of schooling, particularly at the primary level, and public expenditure greatly exceeds private expenditure. Thus,
it is generally assumed that public expenditure is the prime policy instrument for achieving educational outcomes. [Robert 2003]
The government also plays a key role in the provision of health services. However, compared to education, the effects of government interventions on health may be more indirect since they affect healthoutcomes through a multiplicity of channels—economic, social, cultural, geographical and environmental. The most direct interventions include preventive action (e.g., immunization campaigns) andcurative care services provided in the public sector. Also, governments are responsible for health status
and epidemiological monitoring, information, guidance and education on health matters, coordinating
and regulating private providers of health care and insurance, and health-improving environmental
expenditure and regulation. [Robert 2003]
Infrastructure, particularly large-scale infrastructure like trunk roads, is capital-intensive public works.
Although often treated as public goods, infrastructure works tend to be planned and implemented in
the form of projects, regardless of sources of financing (government, donors, private). Because of theircomplexity, construction works require coordination with various ministries and agencies—such as
procuring goods, securing financing, examining design and technology, and responding to environmental and social concerns—all of which go beyond regular channels of communication within thegovernment. With such multifaceted ramifications, their planning and management may well exceed
local capabilities. This is a case where the project approach—a targeted use of funds, goods, technology and knowledge for well-defined, specific objectives—may be appropriate. Moreover, the size offinancial requirements makes it imperative for the government to conduct careful cost-benefit analysis
and detailed design on a project basis, prioritize investment decisions under a Master Plan, and secure
project financing in a multi-year public investment program.
At the same time, its large investment size suggests the importance of assigning sufficient recurrent
budgets for operations and maintenance, and there is a need for careful infrastructure planning, considering the balance between capital and recurrent budgets (for operations and maintenance costs). These
are systemic issues and concerned with inter-and intra-sectoral budget allocation. In such cases, higher-level, policy dialogue is required to address the problem, which may go beyond the reach of a single
project.
Regarding Case 2, "for-profit," private sector development (PSD) aid has firms as immediate beneficiaries. The interventions to support PSD can be at macro, sector, or firm levels—which are not necessarily confined to public expenditures or a single sector. Often, market framework institutions and policies,and consensus building (private-public partnerships) are as important as public expenditure itself. Thus,
aid can go through various channels. Examples include interventions to promote: (i) macroeconomic
stability; (ii) creation of the enabling investment climate, including rules and regulations, information,
physical and financial infrastructure, privatization and commercialization, infrastructure development,

22

education and training; (iv) direct support for the private sector through lines of credit, matching grantschemes to encourage firms to invest in knowledge transfer and new processes and explore new markets; and (v) partial risk-guarantee to encourage private participation in infrastructure and enable banks
to relax country limits on trade finance, and so on. [World Bank 2004a, Kragh et al. 2000]
Given the decentralized and competitive nature of the private sector, a coordination mechanism for
PSD aid is quite different from that of the other sectors. When giving aid through the public sector, asector strategy or a master plan of one sector can be laid out in a ministry and each donor can take onsome of the tasks outlined in the plan. But, such form of a coordination mechanism is unlikely to workin PSD aid. "For profit," productive sectors do not predominantly involve public spending, and clear
policy prescriptions for growth do not exist. Often such sectors are the responsibility of more than one
line ministry. In some cases, the government faces the situation to reduce the influence of government
bodies in the sector. [Warrener 2004]
Agriculture is the sector where private agents, i.e., farmers, are immediate beneficiaries. Foster et al.
[2001] gives a useful account of the different role of the government and the ministry concerned insupport of agricultural development [See Box 3-1].

Box 3-1 What’s Different about Agricultural SWAps?
There are crucial differences that may make the SWAp approach less suitable in agriculture than in thesocial sectors. Fundamental characteristics of agriculture as a sector include:• The most important government roles in supporting agriculture do not concern public expenditure at all. The most immediate government influences are policies on exchange rates, interest
rates, prices, trade, taxation, land reform, the structure and regulation of markets for agricultural
inputs and outputs, and the enforcement of peaceful conflict and the rule of law.
• The most important public expenditures for supporting agriculture may not be in the agricultural sector. Investments in, for example, roads may be more important in terms of both budget and impact.
• Conversely, much of what the ministry of agriculture is doing may be better done by the private
sector, and an effective agricultural strategy may actually involve cutting the budget, staffing andresponsibilities of the ministry which is expected to take the lead role in implementing it.
• Unlike health, education or roads, there is no single technology that can be applied across thesector with only minor adaptation….. The agriculture sector is far more diverse in what it produces and the circumstances in which activities are performed, and neither the problems nor thesolution can be defined for the whole sector.
• Government is a minor player in the agriculture sector, which may employ 80 percent of the
population, and the relationships with farmers and commercial firms supplying services are evenmore fundamental than those with private providers in other sectors.
Source: Adapted from Foster, Brown and Naschold [2001].

23

Channeling aid through "non-profit" actors is, by definition, another example where public expenditures (including recurrent) have a limited role in service provision. Here, the role of the government is
to establish a regulatory framework for facilitating the participation of qualified NGOs, outsourcing
funds, and directly financing specific NGO activities. Furthermore, as Table 3-5 shows, NGOs canassume various functions such as policy research, advocacy, operational, and networking, which could
be relevant not only to quadrant (3) but also (1) and (2) of DPM.
Table 3-5 NGO Functions and DPM
Type of Functions

DPM
Quadrants

Examples of Activities

Policy and research;
Advocacy(1), (2), (3)• Policy analysis and recommendations• Monitoring and evaluation

Operational(3)• Service provision (e.g., education, health, relief, microcredits, training), with own resources• Service provision, with government resources

Linkage and networking (3)• Facilitation between communities and local
administration (e.g., coordinating visits of local
officials in light of community needs)• Social mobilization

Box 3-2 Vibrant NGO Activities in Bangladesh
Bangladesh is well known for its vibrant NGO activities. NGOs cover large populations with a wide
range of activities. This is so particularly in the operational functions. Examples include: micro-credit
programs covering about 11 million individuals (BRAC, Grameen Bank, Proshika etc.), education
services (provided to over 1.2 million students by BRAC non-formal primary education program), andcertain health and population control services are provided exclusively through NGOs (population
control in the 1970s, HIV/AIDS prevention currently). Linkage and networking is another promising
function. For example, under a JICA-supported development partnership program, Shaplaneer has
been supporting networking between community residents and local government. Building on its
extensive work in the Ishwarganji Upazila (one of the 12 Upazilas in Mymensingh District), Shaplaneer organizes a number of meetings and training at its own Community Development Centers, establishing contacts between Upazila officers (fishery, livestock, family planning, agriculture etc.) andbeneficiaries. Such approach is worth noting because it aims to complement —rather than replace —the functions of public administration.
Source: Elaborated by the authors, based on World Bank [2003a] and Shaplaneer [2001, 2002, 2003].

24

(2) The nature of required public sector actions, particularly the degree of the system-wide
applicability of standardized, homogeneous approaches.
The above (1), in particular Case 1, focuses on public sector actions to be realized through public
expenditures (e.g., higher levels of expenditures, reduction in unit costs of standardized services).
However, the quantitative expansion of services through public expenditures is only one side of theequation. Even in the education and health sectors, in which the public-goods component is high relative to the other sectors, there are cases where targeted-interventions are necessary to improve thequality and outcome of services. Although many possibilities exist, we would like to consider two
illustrative situations:●●

Case 1: Homogeneous and standardized services, which can be replicated (with local adaptation)and expanded by increasing public expenditures. In this case, policy and institutional design isimportant to support the quantitative expansion of service packages.
Case 2: Heterogeneous and context-specific services, which are difficult to replicate and notsuitable for massive expansion. This must be accompanied by carefully designed, targeted interventions, with due attention to implementation issues (including out-reach and feedback mechanisms).

Generally, interventions through public expenditures are appropriate in the situations where: (i) there
exists consensus on the technology and program design to be adopted; and (ii) standardized, homogenous technology—often a nationally determined approach (although with some local adaptations)—
can be applied. Typical examples are the construction of primary schools, the provision of school
lunches, and immunization. While their implementation is by no means easy or simple, their main
problems are administrative and logistical. [World Bank 2003b]
On the other hand, activities such as classroom teaching and curative care are demand-driven, andservice providers must respond to behavior and attitudes of different individuals and exercise discretion in choosing teaching and treatment methods. Here, the main problems are to respond to heterogeneous needs, and interventions must be tailored to specific, local needs. Thus, standardized, scripted
approaches would not give enough latitude. [WB 2003b] In this regard, the recent evaluation of program aid in basic education stresses the role of project aid in providing assistance to local needs, basedon the case analyses of four countries (Burkina Faso, Bolivia, Uganda and Zambia). It suggests thatthe movement to support basic education through SWAps and other forms of program support beaccompanied by an understanding of the positive role of project aid, especially in supporting innovations and in providing targeted support to marginalized groups. [Netherlands MOFA 2003]
Pritchett and Woolcock [2002] classify public sector activities in light of the levels of "discretion" and"transaction intensiveness" involved.13 Noting that both discretionary and transaction-intensive services
are extremely difficult to replicate, they conclude that a programmed approach to service delivery is

13
Discretion refers to the extent to which an activity requires extensive professional or context-specific knowledge (i.e.,
judgment). Transaction intensiveness refers to the number of transactions required to undertake an activity. [Pritchett andWoolcock 2002]

25

appropriate in areas involving standardized services, but less appropriate where heterogeneous services
are involved.

Practice of Aid Modalities across Sectors
The above analysis is consistent with the actual practice of aid modalities across sectors. The experiences show that most of the SWAp operations and sector conditionality emphasized in GBS are foundin education and health, particularly at the primary level.
Table 3-6 indicates the proportion of total support for SWAps being provided in the form of pooled orcommon basket funding, budget support, projects, and funding channeled through NGOs or otherforms of off-budget support (e.g., technical assistance or other off-shore payments that are not included in the budget). There are notable differences across sectors. Fully 70 percent of funding the education sector took the form of pooled funding or budget support in 2002; this fell to 48 percent for thehealth sector; and dropped to only 2 percent in the transport sector, where large infrastructure projects
tend to dominate. The Table also confirms the trend of increasing budget support and pooled funding(the former in particular) in Africa, while the project support and funding through NGOs etc. continue
to be important form of funding. [Lavergne et al. 2003]
Table 3-6 Funding Modalities in African SWAps
Funding Modality

2000
(%)

2001
(%)

2002
(%)

2002
Education

2002
Health2002
Transport

Pooled funding

8

11

11

7

20

0

Budget support

20

24

35

63

28

2

Project support

56

49

40

27

28

91

NGOs and other off-budget
support

16

16

13

3

24

7

Total (%)

100

100

100

100

100

100

Total (US$mn)

678.2

791.2

1070.6

331.9

484.2

162.1

Source: SPA Secretariat [2003], cited from Lavergne et al. [2003]

3-3 Assessing Real Ownership and Aid Relationship
Another important factor affecting the choice of aid modality is the degree and nature of "ownership"
exercised by recipients in an aid relationship. It is well recognized that local ownership of the development process is a pre-requisite for the achievement of sustainable results. The following statement
illustrates how local ownership is important in the aid process.

26

"Local ownership is thus at its greatest where aided activities reflect local
goals and priorities, preferable based on a genuinely consultative national
consensus, where the identification of projects and programmes to be assisted rests primarily with the recipient government and where there is minimum
resort by donors to policy conditionality (as distinct from the standard stipulations concerning accounting, procurement, etc.)." [Helleiner et al. 1995:9]
Here, we would like to focus on the following three perspectives to analyze ownership:●●●

Capacity—encompassing the design of development strategy, the implementation of development program, and aid management;
Aid relationship, particularly aid dependency; andRecipient perception of ownership.

Ownership and Capacity
Ownership and capacity are connected concepts. It is not possible for recipient country institutions toexercise ownership of development programs if they do not have the required capacity to design andimplement development programs, or to provide the leadership required for donor coordination. At thesame time, capacity development itself depends upon the existence of local ownership. [Lavergne et al.
2003]
Figure 3-5 shows two extreme types of government in terms of the degree of ownership ("two prototypes of ownership and capacity"), as follows:●

Case 1 (left) shows the government with strong ownership. Here, the recipient government iscapable of formulating development strategy, identifying specific needs to be financed by aid,
matching its own internal budget with aid programs and projects, delivering services, and monitoring and evaluating their performance. As such, it is likely that even if implemented as individual projects, they can achieve and sustain developmental impacts.14●

Case 2 (right) is the government with weak ownership. Due to capacity constraints, there areproblems with the absence of policies (or insufficient policy content even they exist), and externally-funded individual projects are unlikely to be integrated into the government's policies andprograms, resulting in aid fragmentation. Aid fragmentation in turn would divert human andfinancial resources from recipient governments and impose high transaction costs of aid andheavy administrative burden on the government. All these would severely limit the sustainabilityof individual projects. These problems are especially serious for heavily aid-dependent countries.

14

Nevertheless, this does not mean that no efforts are required to reduce transaction costs. Even in Case 1, it is important
to make efforts to promote procedural simplification or harmonization of aid delivery.

27

Therefore, it is important to assess the capacity of recipient countries and implications for the choiceof aid modalities—such as whether conditions exist for individual projects to work and to what extent
budget support or other type of programmatic aid may contribute to minimizing aid fragmentation,
increasing policy coherence, reducing transaction costs, and eventually enhancing ownership.

Figure 3-5 Country Ownership and Capacity: Two Prototypes

Case 1: Strong

Case 2: Weak - vicious cycle

Development
scenario● Absence of policies● Policies with

Low quality
IneffectivenessMisalignment bydonorsDevelopment
strategy• Stand-alone
projects• Aid fragmentation

Identificationof aid needs
Implementation
Formulationof aid● Governments resources(financial, institutional & human)
Donor competition overgovt. resources
Aid bypassing
government system

InternalAidmoney budget

Development
effectiveness &Sustainability• Heavy burden on
local government
capacity• Weak sustainabilityof individual
projects● Macro environment

Fungibility
Macroeconomic
instability• Development goals
unfulfilled

Achievement ofstrategic goals

Ownership and Aid RelationshipIn the recipient-donor relationship, ownership is demonstrated through the aid process. In this sense,
the degree of aid dependency is an important determinant for the levels of ownership. If a recipient28

country is highly-aid dependent, it has weak negotiation power vis-a-vis donors and faces difficulty in
exercising full ownership. Moreover, high aid dependency implies a large volume of aid transactions,which in turn places heavy administrative burdens on the recipient government (i.e., transaction costs).
As such, the degree of aid dependency affects recipient's capacity for policy dialogue with donors andaid management.

Recipient Perception of Ownership
Recipient perception of external actors is another determinant for ownership. This is more subjective,embedded in local society, and may be even shaped by historical factors. Some recipient countries areprepared to establish an open relationship with donors, including a high degree of donor involvementin policy dialogue on strategic direction, budget priorities, and performance evaluation; but other countries may wish to have their own boundaries of internal and external relationships and may be reluctant
to allow donors to influence over high-profile polices and budget priorities.
Because budget support and SWAp involve a fair to high degree of donor involvement in recipient's
country programming and budgeting, they imply a certain loss of sovereignty for the host country atthat level. As a result, the recipient country is unlikely to find this an acceptable approach unless it ishighly aid dependent.[Lavergne et al. 2003] In this sense, donors should recognize the "duality" ofbudget support and to some extent SWAp. On the one hand, GBS intends to enhance local ownershipby changing the design of conditionality from ex-ante to ex-post, as well as by improving policy
coherency and accountability incentives. But, on the other hand, by providing GBS, donors gain accessto policy dialogue, enabling them to exercise leverage and greater influence over central government
policies and budget priorities. [Frantz 2004]
While there is no denying the importance of policy dialogue, donors should duly recognize the political sensitivity of general budget support. There is a need to identify pragmatic entry points for aid
intervention, based on careful assessment of perception-related ownership of recipient countries.
Table 3-7 shows three types of the inter-dependent relations among ownership, capacity and aid relationships, as well as their dynamic processes of changing problems as capacity increases and aid
dependency declines.
In this sense, it is interesting to compare Tanzania, Vietnam and Cambodia, because the three countries
exhibit different types of ownership (including perceived ownership), capacity and aid relationship. As
shown in the previous section 3-2, Tanzania and Cambodia are more heavily aid dependent than Vietnam, with lower capacity for providing core public services. Tanzania is an example of a country
engaged in Scenario 2, while Vietnam is most likely to be in Scenario 3. Cambodia offers another different country context, being on the way to graduate from Scenario 1 to Scenario 2. Over the last
decade, Cambodia has made steady transition from post-conflict to development stages. In the following, we describe how the three countries differ.

29

Table 3-7 Changing Problems in Aid Relationship:
As Government Capacity Rises and Aid Dependence Falls
Aid Relationship
Scenario 1:
High aid dependence, but aid
poorly integrated into
government

Scenario 2:
High aid dependence, withaid better integrated into
government

Scenario 3:
Lower aid dependence, aid
integration into government
less of a problem

Characteristics of Aid
Relationship

Main Problems and Challenges in
Aid Relationship-

Low government capacity
Aid poorly integrated into
public services- Low ownership by government
as donors bypass government- Low trust between governmentand donors- Risk of ‘low ownership trap’(low trust leading to low
ownership, which leads to low
capacity leads to low trust)-

Government capacity low
but rising
Aid better integrated into
public services (SWAps,
budget support)- Government increasingly
undertakes management of aid(leading to ownershipstrengthening)- Assurance arrangements to
reduce risk to both governmentand donors--

Government capacity- Aid integration less of a problem
higherfor government since core public
Lower dependence ofservices are funded principallyfrom own revenues (strong
public services on aid
Aid becomes decentralized
ownership)
once more, going to
specific organizations andpurposes (projects)

Source: OECD/DAC [2003: 113-115](1) Tanzania15
Tanzania is often cited as a model of donor-government partnership. The aid relationship is open andcovers a broad range of issues including budget allocation. A variety of mechanisms have been developed to encourage the alignment of donor assistance to the PRSP priorities and the harmonization ofoperational procedures among donors. These include: annual public expenditure review process, opening of the budget process to actors outside the Ministry of Finance (MOF), and Performance Assessment Framework (PAF) as the basis for policy dialogue and performance monitoring. Principles governing the relationship between donors and the government are spelled out in the Tanzanian Assistance

15

This part largely draws on Frantz [2004].

30

Strategy (TAS), and both parties' adherence to their respective commitments is evaluated in advance ofConsultative Group meetings by an Independent Monitoring Group (IMG).16
This type of institutionalized "mutual review" process, conducted by an independent body, is unique to
Tanzania. Most recently, donors have begun discussing the possibility of developing a joint country
assistance strategy. All of these are intended to enhance local ownership of the development process
and reduce the transaction costs of aid for the government.
This was possible in Tanzania because both the government and donors had shared understanding of
the problems prevailed in the past aid relationships (including aid fragmentation, transaction costs, andweakening of ownership). In the context of Tanzania, the 'solutions' to the problems are to: (i) deliver
aid in accordance with the priorities outlined in PRSP; (ii) harmonize donor procedures with the government systems; and (iii) channel aid increasingly through program aid, particularly general budget
support. The Tanzanian government, including the President, indicates strong preference for GBS as
the most flexible aid modality and an effective way to enhance the country ownership. Nevertheless,we should be aware of the reality that aid finances substantial parts of the government's core functions
and that the government has limited negotiating power vis-à-vis collective voice of donors under the
GBS arrangement.
MOF is a focal point of such an institutionalized "mutual review" process. The MOF is responsible forbudget planning and management, and aid coordination. Although the National Planning and Development Commission (NPDC) under the office of Vice President, is officially charged with development
planning including the formulation and monitoring of PRSP, the established link among PRSP, MTEF
and PAF— in which the budget process plays a crucial role and attracts donor attention—gives the
MOF de facto centralized power for conducting dialogue with donors on policy and budget priorities.

(2) Vietnam
Vietnam is also regarded by donors as a partnership model, led by strong country ownership [Donge etal. 1999, Jerve et al. 2003, Pincus and Thang 2004]. But, the nature of ownership exercised by the
Vietnamese government is different from that of the Tanzanian government. The Vietnamese government has kept a restrained relationship with donors and made clear its wish to retain selectivity anddiversity in obtaining donor advice. Although partnership groups are active in Vietnam, their role has
been primarily to facilitate information sharing and coordination of assistance among donors. In Vietnam, partnership groups do not discuss intensively the policy framework and conditionality (overalland sectoral), budgetary allocation, and performance monitoring.
While the government receives budget support (World Bank-supported PRSCs, which are cofinancedby bilateral donors via trust funds set up in the World Bank), its size is limited compared to the16
The development of the TAS and IMG can be traced to a report prepared under the leadership of Gerry Helleiner in
1995, popularly known as the Helleiner Report, which examined the relationship between donors and the Government andrecommended ways in which the relationship might be improved.

31

receipts from the other aid instruments. Generally, the government is cautious about the full-scale
introduction of budget support because it is normally accompanied by policy conditionality.
In contrast to Tanzania, harmonization and modality issues are more loosely linked in Vietnam. The
government strongly argues for the diversity of aid modalities and treats the issue on new aid modalities part of the broad harmonization agenda. Of course, Vietnam is not free from problems with thetransaction costs of aid delivery. But, with the government's core functions being in place (although
not perfect) and with low aid dependency, the nature of Vietnam's development priority is different
from that of many countries in sub-Saharan Africa. So, project aid continues to be dominant in Vietnam. Major donors—Japan, the World Bank, and the ADB—provide project aid in various sectors.
At least three factors have contributed to shaping Vietnam's unique relationship with donors. First,
Vietnam's growth and poverty reduction record over the past decade, combined with the country's
manageable external debt and healthy export growth, afforded the government an unusual degree of
bargaining power vis-à-vis donors.[Pincus and Thang 2004] Second, historically, national sovereignty
has been a cornerstone in Vietnam's external relationships. A strict separation between external advice
and domestic decision-making process exemplifies Vietnam's nationalistic bent to donor-government
relations. The government is sensitive to any form of aid conditionality and shows a strong resistancewhen donors push on policy reform. Third, Vietnam has unified institutional setting for aid management. The Ministry of Planning and Investment (MPI) is a powerful ministry, which holds centralized
functions for development planning, FDI absorption and aid coordination. The Ministry of Finance(MOF) is another important organ charged with the allocation of recurrent budgets and the negotiations with legal agreements with donors; but its role is largely confined to the treasury.

(3) Cambodia
Cambodia is a good example of the post-conflict countries which are making the transition to a progressive, state-led country in the process of development. The total destruction of institutions andhuman resources by Khmer Rouge left a devastating impact over the country. In the emergency relief
and reconstruction period (1994-1999), Cambodia experienced an influx of foreign aid. This was the
beginning of the country's heavy aid dependence. The new government established under the 1993
Constitution operated in a fragile political environment where former conflicting parties formed a
coalition government while the civil war against Khmer Rouge continued along the Thai border. As aresult, the government was not fully prepared to take leadership of aid partnership at a time whendonors were sending hundreds of missions to Cambodia to develop their projects. [Govt.-Donor PWG
2004] Due to such historical legacy, Cambodia manifests socio-economic features similar to those of
sub-Saharan Africa, including high aid dependency and capacity constraints [See the above section 32].
While much literature notes that aid relationships in Cambodia have been donor-driven, there is no
denying that during the relief and reconstruction period, donors did pay insufficient attention to Cambodian ownership and promoted their preferred aid projects or programs, taking advantage of its fragile political situation and limited institutional and human capacity.

32

Over the recent years, the country has made an important and positive step forward in terms of its aid
relationships. The Cambodian government is making a genuine effort to restore ownership and lead aid
partnership processes. At the same time, the government recognizes that there are gaps in its management capacities. Thus, at the CG meeting in May 2000, the government launched the new development
partnership paradigm.17 There are significant progresses in establishing partnership mechanisms anddesigning innovative SWAp arrangements in education and health [See the next Chapter 4-3]. In thelatest CG meeting (in December 2004), the government and donors discussed responsibilities andaction plans of the existing 17 thematic working groups, as part of partnership efforts. The issues ofharmonization of aid practices are an important area of concern to the government. Cambodia is one of
the 13 pilot countries for harmonization and alignment, and the government has become increasingly
vocal in international fora. Cambodia is yet to receive GBS.
Compared to the previous two countries, Cambodia's institutional setting for development planning,budget management and aid coordination is more fragmented, and this appears to have further strained
the already weak capacity of the government.18 There are three organs: (i) the Ministry of Planning(charged for development planning); (ii) the Ministry of Economy and Finance (charged for budget
management and coordination with loan donors); and (iii) the Cambodian Rehabilitation and Development Board (CRDB) within the Council for the Development of Cambodia (CDC) (charged for overall
aid partnership and coordination with grant donors). The functional responsibilities for national development planning, implementation of development projects, and receipt of foreign assistance are dispersed among the three. Also, different organs deal with loans and grants. Recently, CDC/CRDB has
been making increased efforts to strengthen overall coordination, for example, by leading the organization of CG meetings and harmonization initiatives.

17

In the 2000 May CG meeting, the Cambodian government presented an overall vision of the new partnership paradigm,
declaring a paradigm shift from “Donorship” to “National Ownership.” The government also showed its commitment tomoving from Control to Leadership, from mere Coordination to Collaboration, and from Dependency to Sustainability,
building on the existing aid coordination and management mechanisms. [Govt.-Donor PWG 2004]18
As a symbolic example, WB [2004b] notes the parallel preparation of two strategic documents— SEDP II (Second
Socio-Economic Development Plan) and NPRS (National Poverty Reduction Strategy, Cambodian version of PRSP)—and
the resultant duplication and confusion, due to rivalries exercised by the ADB and the World Bank.

33

4 Matching Aid with Country Needs and Ownership: Selected Examples

This chapter shows selected cases to illustrate how to match aid with country needs and ownership, inlight of the framework presented in Chapter 3. We present five examples in four countries in order toexplain how to combine or select aid modalities, tailored to diverse development needs and types ofownership of recipients. These examples can be analyzed from three aspects: (i) different role of GBS
in supporting priority needs, with different aid mix (Tanzania vs. Vietnam); (ii) pragmatic and flexible
arrangements for SWAp (Cambodia); and (iii) project aid in two distinct country context (Ghana vs.
Vietnam).

4-1 Different Role of GBS in Supporting Priority Needs: Tanzania vs. Vietnam
Tanzania: Building Government Systems and Supporting the Implementation of Priority
Sector Reform through GBS and SWAp

Policy & Institutions

Sector& Local
Admin

PEDP

PRBS
PRSC

Implementation

Macroeconomic
PolicyPublic fin.
mgt. reform

Tanzania: General budget support (PRSC/
PRBS) and primary education SWAp (PEDP)• GBS and SWAp intend to address: (i) macroeconomic policy and institutional framework; and (ii) the implementation of priority
sector reform (e.g., budget allocation, quantitative expansion of social service delivery).
• High aid dependence.
• Shared understanding between recipientand donors of the problems of transaction
costs and aid fragmentation.
• PRSP-MTEF-PAF linkage established.
• Open and extensive partnership, active
introduction of new aid modalities.

Over the recent years, GBS has become a key tool for promoting policy dialogue and financing thegovernment’s priority development programs in Tanzania. The country has been implementing SWAps
in priority sectors in PRSP, including primary education. In FY2002, the share of program aid stood at
58 percent, up from 32 percent in FY99, and this trend is likely to continue. [Frantz 2004] Currently,
11 donors participate in GBS through: (i) Poverty Reduction Budget Support (PRBS), supported byeleven bilateral donors including Japan; and (ii) the World Bank-supported Poverty Reduction Support
Credit (PRSC). These account for about 16 percent of government revenue (FY2003/04 budget).19 Furthermore, a TA program for public financial management is to be implemented to support the implementation of PRBS/PRSC, with 13 donors expressing their interest in participating through pooling
fund.

19

Fiscal year covers July 1-June 30 in Tanzania.

34

As mentioned in the previous chapter, Tanzania’s drive to program aid derives from critical reflectionof the past problems with ‘stand-alone’ projects. There is broad consensus between the governmentand donors on the importance of building government systems and channeling aid to priority sector
reform by using program aid.
The current PRSP, formulated in October 2000, identifies seven priority sectors (education, health,water, agriculture, roads, judiciary, and HIV/AIDS) and envisages increased budget allocation in these
sectors. Education, especially primary education, enjoys strong donor support.
Primary education is a good example where a strong link between PRBS/PRSC and SWAp has been
established in terms of supporting PRSP and budget priorities and financing sector programs. The
Ministry of Education and Culture (MOEC) formulated the Primary Education Development Plan
(PEDP), which was endorsed by donors in July 2001. PEDP aims at improving education quality,
expanding school access, and increasing school retention at the primary level— through measures toincrease and improve resource availability, allocation and utilization, and to improve educational
inputs, and to strengthen institutional arrangements for effective primary education delivery.20 Donor
support to PEDP started in January 2002 (school year) through SBS and multi-donor pooling fund.
More than 95 percent of the PEDP budget is recurrent expenditure, which is funded by general revenue, GBS, HIPC fund (savings from debt relief), and donor support via SBS and pooling fund. Morerecently, there is a sign that some pool-funding donors (e.g., UK DFID) are channeling their funding
increasingly through GBS.
While it is too early to assess the effectiveness of PEDP, the joint sector review (covering the period ofJanuary 2002- June 2003) shows the following progress:21●●

School enrollment of the first year increased 43 percent in 2002, compared to the previous year.
Textbook distribution has been expanded through the use of a capitation grant.
There are clearer functional responsibilities among MOEC, the Ministry of Regional Administration and Local Government, the offices of local governments, and schools, which should facilitate the implementation of PEDP.

Vietnam: Promoting Private Sector Development through GBS and Large-scale
Infrastructure Projects
Poverty Reduction Support Credit (PRSC III), approved by the World Bank Executive Board in July
2004, is the third in a series of PRSCs. It seeks to implement reforms envisaged in the Comprehensive
Poverty Reduction and Growth Strategy (CPRGS) completed in May 2002 and updated in the Annual
Progress Report of December 2003. PRSC III intends to deepen the reforms supported by the first two
PRSCs, particularly in the areas of trade, finance, state-owned enterprise (SOE) reforms, investment

20
Tanzania Primary Education Development Program (PEDP), PID by the African Regional Office, World Bank, August
2001.
21
The PEDP experiences are so recent that it is premature to make impact assessment. Furthermore, there are other factorsthat can affect PEDP performance, including the introduction of free compulsory education in 2002.

35

climate, infrastructure development, and so on. In other words, it supports the Vietnamese government’s externally oriented growth strategy.

PSD &structuralreformPolicy & Institutions

PRSC
Sector& LocalAdmin

Macroeconomic
PolicyImplementation

Large-scale
infrastructure
projects

Vietnam: General budget support (PRSC)
and infrastructure projects• GBS is designed to: (i) promote policy andstructural reforms for private sector development; and (ii) complement the investments in infrastructure projects.
• Low aid dependence.
• Weak linkage among PRSP, budget allocation, and performance monitoring (absenceof MTEF).
• Broad, but restrained partnership. Limited
introduction of new aid modalities.

Vietnam’s PRSCs differ from Tanzania’s PRBS/PRSC (and its equivalents in sub-Saharan Africa) in
two ways. First, it has stronger focus on private sector development than that of Tanzania. The latterhas concentration on budget management and public sector governance issues. In Vietnam, private sector development and transition are mutually reinforcing, and these are priority policy and structuralreforms. While Vietnam’s PRSC III also includes the conditionalities on budget management and governance issues, their role is much smaller than those of Sub-Saharan Africa.22 Thanks to the country’s
relatively low aid dependency, the transfer of budgetary resources to the treasury itself is not the prime
objective of PRSCs. More specifically, Japan pledged to support PRSC III through cofinancing of theWorld Bank loans, together with other bilateral donors. Some of the conditionalities on investment climate are based on policy inputs derived from high-level business dialogue involving Japanese
investors. There has been close policy dialogue among the Vietnamese government, the World Bank,and the Japanese government.
Second, Vietnam’s PRSC III addresses measures to enhance the effectiveness of infrastructure development, which receives significant donor support mainly in the form of project aid.23 For example, theVietnamese government expanded the original CPRGS in November 2003, in order to make the role oflarge-scale infrastructure more explicit in promoting growth and poverty reduction. The CPRGS
expansion involved intensive discussions between donors and the government on complementarymeasures to make infrastructure investment effective, such as the enabling business environment,
investment planning to balance recurrent and operations and maintenance budget, environmental andsocial concerns, and so on.24 The conditionalities included in PRSC III are consistent with these discussions at the time of the CPRGS expansion.

22
Ozeki [2004] makes an interesting comparison of PRSCs between Vietnam and Ghana, stating that Vietnam’s PRSC III
places greater emphasis on private sector development than public financial management.
23
According to UNDP ODA survey, about 50 percent of the total ODA was devoted to major infrastructure in 2002 (e.g.,transport, energy, water and sanitation, urban development).
24
See GRIPS Development Forum [2003] on the CPRGS expansion and the role of large-scale infrastructure in poverty
reduction.

36

Box 4-1 How can Growth Promotion and PSD Fit into DPM?: A Case of Vietnam
As part of consultation process in finalizing this report, GRIPS-affiliated Vietnam Development
Forum (VDF) organized a workshop in Hanoi in early December 2004. A most debated issue at theworkshop was how growth agenda and PSD strategy can fit into DPM. Many participants noted that
DPM is a useful tool to consider the role of aid in the development activities that fall on the public
sector domain. This is so especially where the expansion of basic social services is national priority.
At the same time, they suggested that DPM be adjusted to capture a range of Vietnam’s priorities,
which cannot be addressed simply through coordination and resource transfer within the public sector
domain. Vietnam’s development needs are quite diverse and include many growth agenda, such as FDI
promotion, industrial development, SOE reforms and PSD. It already has a functioning network ofbasic social services; and even social needs are more complex, such as rising income gaps, environmental problems and political pluralism (“growth pains”). Currently, the Vietnamese government isfaced with a challenge of improving coordination capacity among the different levels of the government and between the government and various stakeholders that go beyond the public sector domain.
Source: Minutes of VDF workshop in Hanoi, December 8, 2004 (see http://www.vdf.org.vn/WS/workshop.html)

4-2 Pragmatic and Flexible SWAps to Improve Aid Relationship at the Sector Level:
Cambodia
Improving aid relationship toward greater country ownership is one of the primary concerns to thegovernment of Cambodia. Faced with serious capacity constraints, the Cambodian government recognizes potential merits of program aid in reducing transaction costs and increasing policy coherence.
In this regard, it is notable that the Cambodian government has adopted a pragmatic and flexible strategy in pursuing program aid in education and health — which is called “Sector-Wide Approach(SWAp)” and “Sector-Wide Management (SWiM)” respectively. This is because the government hasrecognized: (i) the internal constraints faced by donors themselves; and (ii) that excessive restriction offlexibility in the program design may lead to the exclusion of potentially interested donors and thelower level of resource mobilization. Thus, while pushing ahead with the implementation of program
aid in education and health, the government has left the choice of the participation modality to donors,
within the overall agreed framework.25 Cambodia’s experiences with SWAp (education) and SWiM
(health) show that: (i) even in the same type of modality, various approaches exist to promote policy
and procedural harmonization among donors; and (ii) pragmatism and flexibility are important to fully
exploit merits of program aid.

25

Cambodia Position Paper, DAC Task Force on Donor Practices (October 7, 2002).

37

Education SWAp
In 1999, the Ministry of Education, Youth and Sport (MOEYS) introduced the concept of SWAp fornational education reforms. This was a reaction to rectify unsatisfactory progress of massive donor
assistance (totaling US$224 million in 1994-99)— largely attributable to the lack of an integrated policy framework and the proliferation of discreet and ill-coordinated donor-funded projects.26 The
MOEYS developed a SWAp process in which a wide range of stakeholders could participate, including an Education Strategic Plan (ESP) and a rolling Education Sector Support Program (ESSP). A
number of aid modalities, including budget support and project-support, have been accepted to ensure
the participation of a broad range of donors. The MOEYS, donors and NGOs jointly reviewed the performance of the education sector in 2002 and 2003.
The recent study notes the following improvements in managerial aspects of aid coordination after the
introduction of SWAp.
Criteria

Indicative Evidence

Local ownership• High level of commitment by top senior officials• Willingness to direct donors to country needs• Enhanced confidence and leadership

Capacity
development• Positive changes in attitude toward ESSP joint review• Officials lead the drafting of documents in English

Overlap of donor
assistance• Reduced overlaps through improved information about donor assistance (acomprehensive list of donor assistance and Aid Management Information
System)Transaction costs
to the government• Reduced transaction costs to the government (resulting from better
coordination among donors through Education Sector Working Group andNGOs through NGO Education Partnership, respectively)

Sustainability of
aid coordination• Enhanced institutional capacity at MOEYS (through ESP/ESSP development
and joint review process)Source: PPT presentation by Toshiyasu Kato, IC Net Ltd., “Education SWAp in Cambodia” at the LENPA
Forum on PBA in Asia, June 2004.

Health SWiM
In March 1999, the Ministry of Health (MOH) developed a document entitled Step by Step to a SWAp:
Action Plan for 1999 and 2000, which foresees the gradual introduction of the SWAp process. However, the results of the stakeholder analysis indicated that each donor had different views and positions
on their support to SWAp (with some donors reluctant to support a pooling fund generally associatedwith ‘SWAp’). Various options were discussed, and by mid-2000 the MOH decided to adopt Sector-

26

Education for All (EFA): The Year 2000 Assessment: Country Report, cited from [Govt.-Donor PWG 2004].

38

Wide Management (SWiM) to allow for the participation of all the key donors. The MOH also proposed developing a Sector-Wide Master Plan (Health Sector Strategic Plan 2003-2007, or HSP) and a
MTEF under SWiM. The principle of SWiM is in line with that of SWAp, but the key difference
between them is that SWiM does not require budget support or pooling fund. The first joint sector
review was held in April 2003.
The recent study finds some improvements in managerial aspects of aid coordination after the introduction of SWiM. More importantly, it is fair to say that the development of SWiM capacity in the
MOH is the reason for — and an outcome of — strengthening partnerships in the health sector. Its
design process has opened dialogue among the MOH, various MOH-affiliated technical institutions,and donors. [Govt.-Donor PWG 2004]
Criteria
Local ownership

Indicative Evidence• High level of commitment by top senior officials• Better understanding of HSP and readiness to implement HSP as theirown strategic plan
• Enhanced ownership of HSP at provincial and operational district
officesCapacity
development• Joint activities perceived by many as a capacity building process for
MOH officials (but, it is too early to draw conclusions on the impact of
capacity building)Overlap of donor
assistance• Reduced overlaps through improved information on donor assistancearound HSP, at Health Sector Partners Meeting (although this has
primarily served as a forum among donors)

Transaction costs
to the government• Limited evidence in the reduction of MOH administrative burdens,
although there is a potential for reduction if the current aid
coordination mechanisms (e.g., joint planning and reviews) continue.

Sustainability of
aid coordination• HSP serving as the basis to enhance the sector-wide management capacityof MOH, a first step towards the development of a sustainable government
system for coordinating aid in the health sector.

Source: Elaborated by the authors based on Govt.-Donor PWG [2004].

39

4-3 Project Aid in the Two Different Country Context: Ghana vs. Vietnam (“with” and“without” the SWAp Policy Framework)
Ghana: Scaling up a Pilot Project to Improve the System-wide Efficiency within a SWAp
Policy Framework27

Policy & Institutions
MDBS
Sector& Local
Admin

HealthSWAp

Implementation

Macroeconomic
PolicyGhana: Health SWAp and pilot Project• Moderately aid dependent.
• Early “successful” example of health SWAp.
• Scaling up a pilot within the SWAp policy
framework.
• Role of project aid as pilot-innovation, serving for “transaction-intensive” activities.

HIST project : Classification & registration of training datasystem design, implementation & monitoring (incl. feedbacks
for improvements).

Ghana's Sector-Wide Approach for health development is considered one of the most successful, early
SWAp arrangements. The vision and strategies for the health sector development were defined in 1996
in a Medium-Term Health Strategy. These orientations were translated into the 1997-2001 Program ofWork (POW-I) of the Ministry of Health (MOH). In 2001, in line with the Ghana Poverty Reduction
Strategy, MOH developed a 2002-2005 POW (POW-II). The five-year POW uses performance data toassess progress, defines sector policy, and allocates resources based on the financial management system. The JICA-supported TA, Health In-Service Training System (HIST) Project, is a good example ofproject aid, which performed experimental functions and was subsequently expanded within the fiveyear POW framework.
The HIST Project aimed at the development of healthcare human resources in Ghana through developing, introducing, and operating an "in-service training (IST) system."28 Prior to the HIST Project, anumber of donors and NGOs had been supporting IST activities without coordination. This uncoordinated situation led to such problems as: (i) lack of IST-related information; (ii) poorly planned ISTs;(iii) not (or less) standardized IST contents; (iv) unequal distribution of IST opportunities among
health workers; and (v) inappropriate, donor-driven IST contents with limited attention to the needs of
local health workers. By taking a systemic approach to data collection, registration and monitoring, theHIST Project addressed the above problems and contributed to improving the efficiency of IST for
health workers.

27

This section largely owes to Akiba et al. [2004].
In-service training is defined as “training for health workers currently in service that enables them to gain updated professional knowledge, skills and moral necessary for providing local populations with a better quality of health services.”[Akiba et al. 2004]28

40

During 1997-2002, the Project focused on the development of IST system in three pilot regions. Then,the Project was evaluated, and in the follow-up period of 2003, the system was expanded to cover all
the 10 regions in Ghana. At the end of the Project, the coverage of IST logbook holders among healthworkers employed by the MOH reached 59.9 percent. The distribution of IST opportunities in the threepilot regions became more equal (with the ratio of IST repeaters in a year dropping from 63 percent in2002 to 29 percent in 2003). The planning and review of IST contents have been progressing according to the IST official classification. These facts suggest efficiency improvement of IST in Ghana,through systemic approach taken by the Project.
More specifically, four components were developed under the system: (i) IST official classification
systems; (ii) IST information system; (iii) IST logbook; and (iv) IST monitoring system. All the system components were developed through: (i) scrutinizing the needs at district, regional and national
levels; (ii) designing a system to meet these needs; (iii) frequent feedback for further improving thesystem; and (iv) building a consensus of all IST-concerned parties in Ghana on each component. These
processes were essential to developing a new system that did not exist in other countries, even in
Japan. Furthermore, they are transaction-intensive activities, requiring constant testing, monitoring andfeedback of the results. Thus, the HIST Project can be considered an example where the merits of project aid has been fully utilized.

Vietnam: Supporting Field Implementation by Using Project Aid to Address the Contextspecific, Heterogeneous Demand of Beneficiaries

Policy & Institutions

Sector& LocalAdmin

Macroeconomic
PolicyImplementation

Vietnam: Reproductive Health (RH) Project• Low aid dependency• Existence of govt. policy framework andbudgetization (with salary-self financed).
• Extensive network of primary health care(province-district-communes).
• Role of project aid as strengthening thefield implementation, particularly to improve
service quality, serving for “context-specific” and “transaction-intensive” activities.

RH project : Skill transfer and follow-up & monitoring
activities to assist CHC staff in the adaptation of acquired
skills to local reality.

The JICA-supported TA, Vietnam Reproductive Health (RH) Project in Nghe An Province, offers agood example of how project aid can effectively support the field implementation (i.e., the fourth
quadrant of the DPM). At the same time, it clarifies country-specific, complementary factors that havemade the project approach function: (i) the existence of primary health care networks; and (ii) the existence of the government's RH policy framework.
The Project started in 1997, with the objective of improving the reproductive health situation in Nghe
An province. It takes an integrated approach encompassing the facility improvement of Community
Health Centers (CHCs), training of CHC staff, and the strengthening of IEC (information, education

41

and communication) through local organizations. The Project covered 244 communes in 8 districts inthe phase I and has been expanded to include all 469 communes in 19 districts in the phase II (ongoing).
The Project is designed to transfer two types of skills from a group of Japanese experts to the Vietnamese professionals: (i) medical skills, and (ii) capacity for disseminating and utilizing the acquired
medical skills by adapting to local reality. The success of the latter depends on whether there exists an
institutional framework for disseminating medical skills, and whether CHC staff can perform well byapplying the newly obtained skills.
The Project has adopted a cascade-type knowledge dissemination framework, with the Maternal andChild Health/Family Planning Center (MCH/FP) in the capital of Nghe An Province acting as thecounterpart and the base to support CHCs, either directly or through District Hospital (DH). Establishing an institutional framework itself is not an easy task; but capacity development of CHC staff (e.g.,
midwives) is also essential to enable them to discharge the expected functions. Therefore, special
efforts have been made by the national counterpart at the MCH/FP Center and Japanese experts totrain midwives assigned to CHCs and conduct post-training "monitoring" activities so that the midwives can practice the acquired skills in the local context.
The vital importance of the post-training "monitoring" of midwives is stressed by a Japanese expert asfollows: "Traditionally, in the Vietnamese context, monitoring tends to mean ‘giving instructions.’ But,
this is not a kind of monitoring we intend. Monitoring is a skill to support the self-learning process.
The midwives who have received training always face the difficulty of how to apply the acquired skillsin the complex reality. The important thing is to reflect this experience in their next practice. As posttraining ‘monitoring’ activities, we visit CHCs frequently to go through this process together with midwives and help them start the self-learning process. Normally, midwives at CHCs must work in theenvironment isolated from professional stimuli. Our visits intend to motivate them to break up this isolation." The number of communes visited by this expert amounted to 137 in the phase I and 70 in thephase II (as of June 2003). DH staff accompanied her visits as part of on-the-job training of "monitoring" skills. Recently, representatives of community organizations and the MCH/FP staff started toaccompany their visits, too.
Donors can support the establishment of a knowledge dissemination framework through interventions
at the second quadrant of DPM. However, such a framework will work only when individual staffs areequipped with the capacity for properly performing respective functions. To this end, intensive transactions among foreign experts, national counterpart (MCH/FP personnel), DH and CHC staff are necessary. Also, these interventions can be made, with due attention to the local context and specificdemand of beneficiaries. This is why the project approach has proven effective in this case.
Nevertheless, we should recognize that at least two complementary factors have contributed to the successful implementation of this Project. First, as an important pre-condition, the Project could rely on
the existing primary health networks in Vietnam. CHCs were located at almost all communes from the
beginning of the Project, and since 1995 staff salaries have been covered by the national budget. So,
there were little problems with staff attendance with training, and the Project could purely seek to42

stimulate their professional motivation rather than a financial one. However, under the situations wheresuch basic service networks do not exist, it is unlikely that project interventions would work.
Second, there exists a policy framework for reflecting the project experiences at the higher, upstream
level (e.g., the second quadrant of DPM). In 2001 the Ministry of Health formulated the Master Planof Reproductive Health and now intends to prepare its action plan. As a pilot experience, this Project
can provide valuable information on reality, including what works and what does not. It is important towidely share such experiences and examine their policy implications in Vietnam.

43

5 Practicing Good Donorship Towards Effective Aid

The case analyses in the previous chapter confirm that there exist various ways of addressing country
priorities and aid relationships— even within the same modality and regardless of modality choice.
Thus, "good donorship" requires different approaches to different countries. Based on this understanding, this chapter shows selected examples of the recent donor effort to practice "good donorship"
through GBS, SWAp, and project aid. Although these are only part of many examples, we consider
that they can provide useful information on how to: (i) integrate aid flows into recipient budget process(Tanzania); (ii) promote simplification and harmonization of aid procedures for both GBS and projectaid (Ghana and Vietnam); and (iii) design SWAp based on realistic assessment of local capacity(Bangladesh).

5-1 Integration of Aid Flows into Recipient's Budget Process: Tanzania
Tanzania Assistance Strategy (TAS)
Improving the predictability, transparency and accountability of aid flows and strengthening the government capacity for integrating projected and actual (disbursed) flows in the budget process are
essential elements of "good donorship" principles. While GBS is often regarded as the modality torealize these benefits, it is possible to design a framework and procedures to accommodate project aid
and other modalities in the national budget process. The Action Plan of Tanzania Assistance Strategy(TAS), published in January 2003, offers a framework for promoting the budgetization of aid channeled through various modalities— including project aid directly implemented by government agencies. This framework covers both the formulation and execution stages of the budget and promotes thealignment of aid flows with the national budget process.
The TAS exercise can be considered a good practice in the highly-aid dependent context, where external resources occupy significant proportion of the government budget and are hardly captured. Nevertheless, it is important to note that the framework and procedures applied here are a part of the joint
efforts in Tanzania toward improving aid relationship that had begun in mid-1990s, as described in
Chapter 3.

(1) Budget formulation
By the end of October every year, donors are required to report to MOF the amount of: (i) their aid
commitments for the next year; and (ii) their projected disbursements in the subsequent two years.
Based on donor reports, MOF allocates the funds into development and recurrent budgets and integrates them into MTEF and annual budget plan. This exercise contributes to improving the predictability of aid flows and strengthening the integrity between domestic and external resources.

44

(2) Budget execution
Donors are strongly encouraged to use the government's Exchequer system (i.e., Treasury) when they
disburse aid money.29 In case donors provide financial and material resources directly to projects
charged by line ministries or local governments (so called "D-fund [Direct Fund]), the Dummy Exchequer Issue Notification should be prepared. Although the Tanzanian government prefers the direct useof the Exchequer system, this dummy voucher arrangement makes it possible to capture D-funds (inother words, in-kinds type of project aid) in the budget system. It is expected that the integration of aid
into the Exchequer system would improve the transparency of aid flows and strengthen the domestic
accountability of aid money.
Donors must report their compliance with these procedures to the TAS Secretariat established in MOF,
which is charged with monitoring the entire implementation process of the TAS Action Plan. The TAS
Secretariat regards the procedural compliance as one of the measurements of good donorship.

5-2 Simplification and Harmonization of Aid Procedures: Ghana and Vietnam
Ghana MDBS and PRSC: Harmonization of Multilateral and Bilateral GBS Frameworks
By definition, GBS is a form of aid to use the government systems with the intention to strengthen thegovernment's policy framework. But, there exists room for further synchronizing the frameworks for
two types of GBS— (i) bilaterally-supported, Multi-Donor Budget Support (MDBS) and (ii) the World
Bank-supported PRSC. The recent agreement on a common policy framework for MDBS 2005 andfuture PRSC III in Ghana offers an example in this regard.30 This includes the preparation of a joint
policy matrix as the basis of dialogue for programmed reforms between Ghana's major partners, theutilization of common review meetings, and joint planning for the use of aid flows as well as joint
monitoring and assessment. (An exception is the number and timing of tranches, which are yet to beharmonized. While MDBS expects two disbursements in a year, PRSC will disburse in one tranche.)
The core of this synchronized MDBS/PRSC framework includes the review and appraisal sessions.
There will be a minimum of two such sessions per year, and the timing of these sessions will be linked
to the Ghanaian budgetary and policy cycle. It is envisaged that by 2006 all bilateral and multilateral
donors are able to follow these cycles as far as programmatic aid is concerned. [World Bank 2004c]
Under this synchronized framework, same performance indicators will be used. These should lead tosignificant gains in human resource use and the critical element of time saving. Moreover, the quarterly mini-Consultative Group meetings, chaired by the Minister of Finance and Economic Planning,serve as a platform to inform all donors of the progress made in economic and monetary terms and ofpolicy dialogue.31
29

Based on a note prepared by Accountant General, for the Tanzania DAC in November 2001.
Currently, there are nine partners involved in MDBS. These are the African Development Bank, Canada, Denmark,Germany, European Union, the Netherlands, Switzerland, United Kingdom and the World Bank. France also plans to participate in MDBS.
31
At the same time, there is increased recognition that further work would be needed to better align the MDBS/PRSC
with the sector review process.
30

45

Vietnam's Procedural Harmonization of Project Aid under the Government-led Common
Framework: 5 Banks Group, LMDG, EU, and UN
In Vietnam, Decree 17-CP, promulgated in May 2001, lays the foundation for all the harmonization
efforts. The decree established a common framework for ODA-related procedures and regulations.
More recently, the government elaborated an Action Plan on Simplification and Harmonization of
ODA Procedures (December 2003). What is notable about this Action Plan is the pragmatic approachtaken by the Vietnamese government. The government is encouraging the donor community, by donorgroup, to simplify and harmonize respective procedures.
More specifically, four different donor groups (with similar aid schemes) are working to simplify andharmonize respective procedures, guided by a common and coordinated framework established by the
Vietnamese government. Their work is focused on timing and documentation formats used in the different stages of the project cycle. The groups include: (i) 5 Development Banks (the World Bank,
ADB, JBIC, KfW, and AFD); (ii) Like-minded Donor Group (LMDG consisting of Canada, Denmark,Finland, Germany, Netherlands, Norway, Sweden, Switzerland and UK); (iii) UN systems (UNDP,
UNICEF, and UNFPA); and (iv) EU (Member States and the European Commission). In addition,bilateral effort is underway between the Japanese government and MPI, focusing on Japan's grant aid
and technical assistance, to address the selected issues identified by the JICA-commissioned study ontransaction costs of aid delivery.
In particular, since loan aid accounts for 80 percent of aid commitment in Vietnam (two-thirds on a
disbursement basis),32 procedural harmonization among 5 Bank Group should significantly improvethe efficiency of aid delivery. In May 2002, the World Bank, the ADB, and JBIC (Japan) agreed on a
joint statement to harmonize the areas of procurement, financial management, environmental andresettlement issues. This was joined by KfW (Germany) and AFD (France) in 2003. The coverage ofharmonization efforts by the 5 Bank Group centers around the five agreed priorities: (i) project preparation practices and procedures; (ii) procurement process; (iii) financial management; (iv) environmental and social safeguard policies and practices; and (v) portfolio management. In May 2003, the 5
Bank Group, in collaboration with the MPI, held a Joint Portfolio Performance Review.

5-3 Consideration to Local Capacity, Needs, and Aid Relationship: Bangladesh
Designing SWAps based on the Realistic Assessment of Local Capacity and Harmonizing
Donor Aid Procedures: Bangladesh Health and Primary Education SWAps
Bangladesh offers valuable lessons of how the design matters for SWAps to achieve the expected
impacts. In 1997, the country launched the Health and Population Sector Program (HPSP) for the period of 1998-2003. Despite its good intention to increase the range, coverage, quality and effectivenessof MCH care services, HPSP encountered difficulties at the implementation stage. This is partly

32

Cumulative figure during 1993-end of 3rd quarter of 2003. (MPI data presented at the 2003 CG Meeting).

46

because HPSP was the first SWAp in Bangladesh involving a pooling fund and also one of the early
SWAp arrangements elsewhere. Until recently donor support for basic education took the form of project aid, including the Primary Education Development Plan (PEDP I); but in order to improve education quality and policy coherence, the government has decided to adopt SWAp in PEDP II for the period of 2003/04-2007/08 and introduce a pooling fund.33 The lessons learned from HPSP have been
incorporated into PEDP II operations.
The January 2003 Annual Program Review (APR) Technical Report concluded that there had been little progress on the HPSP reform agenda even four and half years into the program. [HPSO 2003] Theexisting literature also notes problems associated with the SWAp design, in particular: (i) ambitious
and politically sensitive reform, such as the unification of two separate directorates of the Ministry of
Health and Family Welfare (MOHFW) and that of services of health and family planning personnel
working at Upazila (sub-district) and below levels, which led to resistance to the program; and (ii)rapid transition from project-based to sector-wide management, and the resultant concentration ofadministrative burden on a few units in MOHFW. In particular, there were problems with the synchronization between procurement and logistical systems in health services.34
SWAps sometimes seek not only better aid coordination, but also policy and institutional reforms. In
HPSP, the unification of two different services was not accompanied by a realistic implementation
plan. The introduction of a pooling fund, together with radical changes in logistic functions, led to theconcentration of heavy procurement burdens on Central Medical Stores Depot (and its equivalents of
the lower levels) of MOHFW. Previously, these functions had been also assumed by different units anddonors (in the case of "in-kinds" type project aid). These experiences underscore the importance ofdesigning SWAps based on the realistic assessment of local capacity and readiness for reforms andsupporting capacity development, if necessary. Otherwise, the simple transition from project-based to
sector-wide management may not necessarily lead to positive changes.

(1) Realistic assessment of local capacity
Based on the above lessons, PEDP II has deliberately avoided radical institutional changes. Line-divisions have been made responsible for the execution of a pooling fund and national budget, and the Primary Education Directorate (i.e., the executing agency) will integrate the program's activities to thegreatest extent possible within its regular administrative structure. To cope with extra managerial burdens, additional staffs are hired in each line division (often recruiting those with project management
experience), and a new unit (Program Coordination Unit, not a Program Implementation Unit) charged
with procurement and financial management has been established. Furthermore, at program inception,
institutional assessment is to be conducted to identify specific needs and approaches to capacity development of the Directorate, and TA will be provided to support the establishment of an appropriate

33
PEDP II became effective in April 2004. The Directorate of Primary Education in the Ministry of Primary and Mass
Education is the executing agency.
34
The APR 1999-2000 (by MOHFW, 2000) identified procurement as the most critical program support issue. The Independent technical report on HPSP also observed that the capacity building in logistics and procurement was below expectation [See also Iftekhar and Rahman].

47

chart of accounts, accounting and internal control guidelines and procedures, and strengthening of theaccounting and internal control functions with the line ministry.35(2) Donor coordination mechanism within the Program Support to facilitate the transition
phase from project to program mode
A unique aspect of PEDP II is the establishment of a Program Liaison Unit (PLU) aimed at donor
coordination and aid harmonization. PLU is expected to support a consortium of the 11 donors participating in PEDP II, by managing intra-donor communication and linking the consortium (as a group) to
the Program Coordination Unit within the Directorate in the process of policy dialogue and monitoring.36 The head of PLU is the Bangladesh nationality with extensive professional career at the government and international organizations. Thus, PLU would serve as a mechanism for alleviating start-up
transaction costs associated with SWAp, by building consensus among donors, and facilitating donor
understanding of the local context, and channeling "harmonized" donor requests to the Bangladesh
side.37

35

Based on interviews conducted by authors in June 2004. Also, see “Program Based Approaches to Formal Primary
Education in Bangladesh,” presentation materials at LENPA Forum on PBA in Asia, Tokyo, June 2004.
36
The lead donor is the ADB and other members include: AusAID, CIDA, DFID, EU, JICA, Netherlands, Norway, SIDA,
UNICEF and the World Bank. There are eight pooling donors.
37
The PLU head considers its role “honest broker” and stresses that in moving to a programmatic approach, donors
should: (i) not confront but accompany the challenges faced by the government; (ii) utilize to the greatest extent local officials, as there are enough capable persons; and (iii) not enter into micro management, once agreed on the overall directionof reform. (Based on our interview in June 2004.)48

6 Implications for Global and Japan's Aid Policies

The final chapter will summarize key findings of the previous analyses. It will also draw implications
for Japan's aid policy, particularly how Japan could better practice its aid modalities.

6-1 Key Findings Relevant to Global Aid Policy
Throughout this paper, we have argued the need to broaden the current modality debates, in order toaccommodate a wider-spectrum of countries. Our proposed framework — the Development Priority
Matrix (DPM) and the two prototypes of ownership and capacity—is a modest attempt in this endeavor.
A key conclusion of this paper is that: (i) contextual differences matter for the choice of aid modalities,
which in turn could affect aid effectiveness; and (ii) it is important to match aid with country needs andownership. It is not productive to debate which aid modality is superior over the others. The more
important issue is to understand the features of respective aid modalities and apply (or combine) rightones, with due consideration to the country- and sector-specific circumstances. In doing so, donors
should make maximum efforts to match aid with recipients' development priorities and ownership,
sharing the overall policy and institutional framework. Donors may also wish to decide their interventions in light of comparative advantages, so that respective interventions can be mutually complementary.
Our case analyses reveal that there exist various ways of addressing country priorities and aid relationships. For example, the comparison between Tanzania and Vietnam shows how GBS can play different
roles, according to distinct country needs. The case of Cambodia shows that alternative approaches canbe explored within SWAps and that the benefits accrue when flexibility is provided in the program
design. The comparison between Ghana and Vietnam (the health sector) illustrates how project aid canwork in the different context—with the former as integral part of SWAp and the latter without SWAp,
but within the government's existing policy, budget, and institutional frameworks. These two cases also
confirm the complementarities between project and program aid. For example, the case of Ghana suggests that project aid can perform strategic and pilot functions, if properly integrated into the programmatic framework. The case of Vietnam's RH Project shows the role of project aid in supporting thefield implementation by addressing context-specific, heterogeneous needs of beneficiaries.
Good donorship requires different approaches to different countries. There are a number of ways toenhance aid effectiveness — not only by shifting aid modality from one to the other, but also by
improving the design and application of respective modalities themselves. Recognizing that there are a
set of "good donorship" principles based on the lessons from past aid, donors should make serious
efforts to improve their aid practice and the existing modalities along such principles.
For example, Tanzania's TAS suggests that it is possible to design a framework and procedures toaccommodate project aid (including off-budget projects) and other modalities in the national budget

49

process. Vietnam offers an interesting example of harmonization of project aid, where different donorgroups (with similar aid schemes) are working to simplify and harmonize respective procedures, guided by the government-led common framework. The case of Ghana shows that even if adopting GBS,
donors must make efforts to harmonize policy and procedural aspects between bilateral and multilateral frameworks (PRSC and MDBS). And Bangladesh's SWAp experiences give hard lessons that simple
modality shift is not enough, or can even be detrimental if proceeded too quickly without careful
preparation. It is important to design SWAp, based on a realistic assessment of local capacity.
Lastly, we would like to stress that further work is needed to refine our proposed framework for the
choice of aid modalities, particularly by addressing the following questions:●●

How can the private sector issues—particularly the growth agenda and PSD—be better incorporated in the modality debates and our framework?; andWhat is the role of aid modalities in supporting the strengthening of local capacity for policy
formulation (such as development scenario and strategies), without jeopardizing recipient ownership?, What is the nature of policy dialogue so that capacity development and fostering ownership can go hand in hand?

These questions merit due attention, especially when many PRSPs have entered into the second generation in the post-HIPC era; and not few countries including sub-Saharan Africa, have expressed theirintention to make their PRSPs more growth-oriented. Also, they are the questions raised by less-aid
dependent, Asian countries, since the beginning of PRSP. In the long run, recipient countries should
lower aid dependency and graduate from aid ("aid exit") in order to achieve real ownership. This is
only possible through sustainable growth, and it is important that the current modality debates takeaccount of such fundamental issues.

6-2 Implications for Japan's Aid Policy and the Choice of Aid Modalities
In Japan, project aid is a dominant mode of aid delivery. Japan's aid consists of three types of schematic cooperation: (i) grant aid; (ii) loan aid; and (iii) technical assistance.38 Financial aid covers (i) and(ii), and these can serve as non-project aid, too. Non-project aid accounts for 17-20 percent of its bilateral ODA, which can be used for GBS, sector budget support, and pooling fund under the programmatic framework. [MOFA 2004] Furthermore, in early 2004, the Ministry of Foreign Affairs (MOFA)
adopted a measure to make the proceeds of non-project, grant aid more easily available for budget support. (Japan's contribution to Tanzania's PRBS is its first application.)
In Japan, aid policy planning and implementation are fragmented. While the MOFA is responsible foroverall aid policy planning and exclusively charged with grant aid, the Ministry of Finance (MOF)
plays an important role in policies for loan aid and multilateral development banks and IMF. The Min-

38
Regarding procurement, direct contract method is employed for grant aid and technical assistance (procured by theJapanese agencies without disbursements to recipients), while indirect contract method is used for loan aid (procured byrecipients according to the agreed procurement guidelines, and also disbursed into the accounts held by recipients.)

50

istry of Economy, Trade and Industry (METI) is also involved in policies for loan aid and technicalassistance. Furthermore, aid implementation is dispersed to different agencies by scheme (with MOFA
responsible for grant aid, JBIC for loan aid, and JICA for technical assistance etc.). Because of suchinstitutional fragmentation, achieving the right aid mix consistent with the country- and sector-specificcontext requires extensive inter-institutional coordination.
Nevertheless, recent years have seen notable developments for ODA reform. These include: (i) theestablishment of the Board on Comprehensive ODA Strategy (which aims at strengthening strategic
functions of the MOFA and serves as advisory board for the Minister); (ii) the formulation of the new
ODA charter; (iii) the establishment of a field-based, planning and coordination mechanism, called"ODA Task Force" (comprised of the Embassy of Japan, JICA, JBIC, and JETRO offices where relevant); and (iv) the formulation of country assistance strategies in selected countries, led by the fieldbased "ODA Task Force," and so on. In particular, (iii) and (iv) are vital mechanisms for achieving theright aid mix across schemes and integrating aid into the recipient's policy and institutional framework.
Thus, it is important to consider how to link the emerging issues on aid modalities to the ongoing ODA
reforms.
As the first step, Japan should clarify its policy on the use of different aid modalities, recognizing its
comparative advantages and the lessons learned from the past. The June 2004 statement by a senior
official of the MOFA (at the occasion of the LENPA Forum on PBA in Asia) is a good start. The
MOFA statement clarified Japan's interpretation of the program-based approach and its basic stance ofpromoting the program-based approach, while allowing for a variety of modalities in a coordinatedframework [See Box 6-1]. But, further details and strategic direction must be given to the field-based,"ODA Task Force," which assumes prime responsibility for the formulation of country assistance strategy, operational planning, and partnership activities in recipient countries. In this regard, we suggestthat the Japanese government seriously consider issuing a policy paper on the use of aid modalities.

Box 6-1 Japan’s Stance towards Program Approaches…Japan defines Program Based Approaches as an aggregate of activities and policies leading to thecomprehensive and coordinated planning and implementation of activities under the ownership of thepartner governments. Japan believes that in the program approach, a variety of modalities, each having
different advantages and disadvantages, should be made available to meet the various development
needs in different sectors and countries. It is important to distinguish between stand-alone projects andthose that are integrated in the national or sectoral development programs. Program assistance accompanied with the necessary capacity building would increase the absorptive capacity of partner countries. The most important point is whether the various types of assistance provided by different donors
are appropriately coordinated in the program implementation and whether the coordination and the admodalities are well-suited to the recipient government’s capacity and needs.
Source: Quoted from “Japan’s Experience with ODA and the Position towards PBA,” Note prepared for the LENPA
Forum on PBA in Asia, Tokyo, June 2004.

51

As a donor with extensive experiences with project aid, Japan should reinforce its efforts to: (i) maximize the impacts of project aid within the overall policy and institutional framework, by linking project experiences to upstream, strategic vision and supporting the implementation on the ground; and (ii)
improve the efficiency and effectiveness of existing project aid, as outlined in "good donorship" principles, by overcoming its weaknesses. As we discussed in this paper, projects can perform certain, vitalfunctions if properly integrated into the programmatic framework. It is important to ensure complementarities and synergetic effects between program and project aid.
Where necessary, Japan may also wish to consider its participation in budget support and poolingfunds, in order to: (i) support the process of policy formulation and dialogue; (ii) provide intellectual
inputs to the policy content; and (iii) contribute to the transfer of financial resources. The possibility ofJapan's participation in budget support should be judged whether and to what extent such participation
could enhance the contribution of project aid and deepen the content of policy dialogue.
Lastly, Japan should assess what worked and did not work in its past assistance to East Asia and clarify the underlining factors. Japan's current aid approach is primarily derived from the experiences with
its aid to East Asia and its own development. But, we should recognize that significant contextual differences exist between East Asian and sub-Saharan African countries (and even within East Asia). Thisimplies that simple application of Japan's traditional aid approach to Sub-Saharan Africa may notwork. At the same time, there is room for further improvements in its aid approach even in the East
Asian context, learning from the ongoing aid modality debates. It is important to conduct a candid
assessment of Japan's aid approach to East Asia and examine: (i) which aspects can be promoted, orapplied for different countries with some modification; and (ii) which aspects should be fundamentallycorrected. Such an undertaking should be helpful for Japan to concretize and properly exercise its
comparative advantages.

52Annexes

Annex 1

Donor Policies on the Use of Different Aid Modalities

Annex 2Re-examining Transactions Costs: Conceptual Issues

Annex 3

Simplified Logical Framework Analysis of General Budget Support

Annex 4

Accountability First, or Capacity First?

Annex 1 Donor Policies on the Use of Different Aid Modalities

1 World Bank African Region: Emerging Partnership Model
In February 2004, the World Bank's Africa Region published a Strategic Framework for Assistance toAfrica [World Bank 2004a]. This report proposes the Emerging Partnership Model as a way to improveaid effectiveness and clarifies the IDA's policy to link country performance to aid instruments. Morespecifically, it seeks to match the absorptive and management capacity of recipient countries to IDA's
engagement levels (via aid modalities) as follows:●●

Lower-end countries (mostly LICUS): Engagements will be limited, focusing on selected "entry
points." Aid instruments will be through modest TA and capacity-building projects (to build afoundation for improved management and greater IDA engagement in the future). As countries
progress, this engagement can be supplemented by projects in social sectors and basic infrastructure, health, and education, with the idea of building capacity to move further along the continuum.
High-middle performers: A gradual shift from 'stand-alone' projects to SWAps is anticipated,
where appropriate. In the social sectors, engagement will shift from 'stand-alone' projects tomore SWAps-helping to coordinate the work of an increasing number of partners. Traditional
projects would continue in some areas, e.g., large-scale infrastructure and rural projects, financial sector reform, and private sector development. Rather than a host of TA projects, a unified
facility could reduce transaction costs, supporting an agreed program of capacity-building assistance closely tied to the program's objectives.
High performers: These countries become candidates for programmatic support, such as PRSC.
Each PRSC will have a core economic management component, but the sectoral emphasis may
both grow and shift over time. As appropriate, sectors can be brought into PRSC (as the policy
dialogue on and the support to certain sectors might revert to "maintenance" levels). TA would
be provided through a unified facility. The number of separate projects per country would fall,rather than increase. Projects will continue in community-driven development operations, major
investments in infrastructure.
Lower-end countries

High-middle performers

Policy & Institutions

Policy & Institutions
Pool TATA
Sector& LocalAdmin

Macroeconomic
PolicyImplementation: TA

Sector& Local
Admin

SWAP

●

Macroeconomic
PolicyImplementation: Traditional/stand-alone project

55

High performers
Policy & Institutions

PRSC
Sector& Local
Admin

Pool TA
Macroeconomic
PolicyImplementation: Programmatic approach

The World Bank maintains the array of aid instruments-stand-alone projects, SWAps, TA projects andpooling facility, and general budget support (PRSC). But, in the context of its assistance to Africa, it
expects that there will be a move along the continuum from a project to SWAps and then to a PRSC,
according to a growing degree of confidence in national budget processes, combined with a progressive increase in recipient capacity. PRSC is envisaged as a form of instrument, for countries with superior or higher capacity and performance.
Source: World Bank [2004a].

2 DFIDIn May 2004, DFID published a policy paper on Poverty Reduction Budget Support (PRBS), which
covers both GBS and SBS. While recognizing that PRBS is one of a range of aid instruments, DFID
stresses that PRBS is the instrument most likely to support a relationship between donor and developing countries which will help to build the accountability and capability of the state. This idea is clearlyspelled out in UK Government's 2000 White Paper as such: "The UK Government will work with other
donors to channel more of our support through developing country budgetary systems, where governments have a strong commitment to poverty reduction, and help strengthen their planning, financial
and procurement systems to make this possible." [DFID 2000: 98]
The underlying hypothesis is that more predictable funding, together with more sustained and coordinated policy dialogue in support of a PRSP (or similar national development strategy) and a MTEF—
together with some targeted technical assistance—might start to make the planning process moremeaningful and objective. Budget allocations could in turn be more reliable, transparent and pro-poor.
At the same time, the policy paper recognizes that PRBS is more relevant in the countries with highaid dependence than those with low aid dependence.
(African Region)

Sector& Local
Admin

Policy & Institutions
PRBS
=GBS

SWAP

(Involvement
through TA andsector negotiation)

Implementation

Source: DFID [2004]

56(Financial sources
are integrated into one)

Macroeconomic
Policy3. CIDA
In September 2002, CIDA published the document, Canada Making a Difference in the World: A Policy Statement on Strengthening Aid Effectiveness. This document states CIDA's policy shift to increased
use of "program-based approaches" (PBAs), in contrast to its traditional reliance on projects as a wayof engaging in development cooperation. This was followed by the issuance of an operational guide to
PBAs, CIDA Primer on Program-Based Approaches [Lavergne et al. 2003], which discusses the concept of PBAs, the modalities involved, and the issues to be addressed in the course of CIDA programming.
Conceptually, PBAs are the extension of SWAp and cover both SWAps and "SWAp-like" initiatives.
The approach emphasizes comprehensive and coordinated planning in a given sector, or thematic areaof intervention, or under a national Poverty Reduction Strategy (PRS). The program may be a PRS, asector program (i.e, SWAp), a thematic program, or the program of a specific organization such as
NGOs. In this sense, the PBA concept is similar to SWAp or budget support; but it is broader and does
not assume "progressivity" of one aid modality to the other. Under PBAs, donors can work on several
levels simultaneously — e.g., at the macro-level through GBS around PRS, the sector level through
SWAp, and the sub-national level through district-wide assistance program.
CIDA Premier assumes that PBAs would be appropriate under conditions of high aid dependence, afair degree of macroeconomic budget stability, and a sound policy framework at the program level.

Sector& LocalAdmin

PBA(=SWAP)

Policy & Institutions

PBA(=GBS)PBA
Micro

Implementation

Source: CIDA [Lavergne et al. 2003]

57

Macroeconomic
PolicyAnnex 2 Re-examining Transactions Costs: Conceptual Issues

The evaluation of transaction costs by aid modality is far more complex than a simple comparison
between project and program aid. Noting that the language of transactions costs is used too loosely,
Killick [2004] attempts to classify types of transaction costs—i.e., administrative, tying, fiscal costs—
and construct hypotheses how these costs are distributed differently by forms of delivery between
recipients and donors.
Hypotheses about Comparative Transaction Costs of Program and Project Aid
Transaction
costs

Recipient
Program
Project

Donor
Program

Project

Moderate

Moderate

Moderate

Very large

Low

Potentially

LowModerate

Administrative costs
Pre-investment appraisal
Implementation

large
Monitoring & reporting

Large

Very large

Large

Moderate

Ex-post evaluation

Low

Moderate

Large

Moderate

Loss of coherence &ownership

Nil (?)

Large

Price premium

Nil

Large (‘25%’)

Potentially
large

Low

Counterpart fund & recurrent
cost problems

Nil

Large

Volatility/unpredictability,
destabilization

Very large

Moderate/large

Moderate

Moderate

Nil

Large

Tying costs

Political etc. costs of policy
conditionality
Fiscal costs

Erosion of budget byextra-budgetary aid
Source: Killick [2004], Table 1, p.25.

The above table shows that the administrative aspects of transactions costs (a narrow definition) are
more associated with project aid and mainly assumed by donors. On the other hand, if tying and fiscal
aspects are considered, program aid appears to incur insignificant burdens on the recipient as well. Killick also notes that the table is limited because it treats all types of costs as of equal significance,
where the seriousness of loss of freedom for political management or of fiscal destabilization is evidently on a different scale from, say, project evaluation costs.
In conclusion, Killick states that the alleged superiority of program aid in reducing transactions costs
is not evidence-based and should not be taken for granted. He recommends that a serious evaluative
study be conducted to clarify the whole transactions costs question.

58

Annex 3 Simplified Logical Framework Analysis of General Budget Support
General Budget Support

Level One :Inputs by GBS
Donors

GBS
Funds

PolicyDialogue

Conditionality

TA & Capacity
Building

Alignment toGovernment policies& systems

Harmonisation
between Donors
External Factors:
assumptions

Level Two:
Immediate
Effects

Changed relationship between external assistance and thenational budget/national policy process:• % of externally-funded activities and resources subject tonational budget process increased• Policy dialogue focused on key public policy andexpenditure issues• TA/capacity building focused on mainstream government
activities• External assistance more aligned• Donor activities more harmonised

Level Three:Outputs

Positive changes in the financing and institutional framework for
public spending and public policy:• More favourable budget financing structure (predictable,
fungible resources)• Partner government empowered• Increased efficiency in public spending (stronger budget
process, Lower transaction costs,capture of project funds)• Intra-government incentives and capacities strengthened• Democratic accountability enhanced

Level Four:
Outcomes

Government capacity to reduce poverty enhanced:• Stable macro environment for private investment and growth• Government services effectively delivered and pro-poor• Regulation of private initiative works to ensure business
confidence, equity, efficiency and sustainability• Effective regulation and justice in place• Appropriate public action to address market failures

Level Five:
Impacts

Poverty reduced

Source: EuropeAid and ODI [2004]59

Annex 4 Accountability First, or Capacity First?

Which should come first—the accountability framework within a government, or the capacities of various actors? There are two contrasting views on how to sequence measures to improve government
effectiveness in delivering public services and attaining pro-poor growth.
The clearest advantage of GBS over other aid modalities is that it does not hinder, or instead strengthens the accountability relationships that should exist between budget allocation authorities and authorities to which public resources are allocated. Rather than being accountable to donors that may havepreviously funded them directly, line ministries are forced to be accountable to the Ministry of Finance(MOF) when assistance is provided as GBS [See Figure below]. By limiting access to extra-budgetaryfinance, GBS reinforces budget discipline within a recipient government. GBS also requires that line
ministries develop greater technical capacity to more effectively make their cases to the MOF forbudget allocations. These arguments are based on the view that the accountability relationships withina government system matters most.
Another view places greater importance to capacity development of various actors within and outside agovernment system. Effective service delivery depends, to a great extent, on the capacities of actors at
different levels, such as MOF, line ministries, local authorities, and NGOs. It is argued that GBS offers
little assistance to these entities for strengthening their capacities and that complementary interventions are necessary, e.g., in the forms of TA and projects. Furthermore, the effectiveness of GBS is
grounded on the functioning of PRSP framework, which, for many recipient countries, remains technically difficult and institutionally complex. Many countries continue to face capacity constraints intranslating PRSP priorities into budgetary policies in annual budgets and in MTEF and establishingmonitoring and evaluation systems.
Probably, a more balanced view would be that both are necessary. A web of accountability relationships and capacities should be strengthened—not simply those within institutions in a recipient government, but also between citizens and government and between citizens and service providers.
Accountability Framework Assumed under GBS
Transformation

Min. of Finance• policy

Capacity?

Accountability

Sector Ministry

Projects
Source: Elaborated by the authors, based on Frantz [2004] and DFID [2004]

60

Donors• equity• access• effectiveness, etc.

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