How EU aid could be more effective
The most recent EU study on aid effectiveness estimates that a total of € 5 billion in savings and gains could be made, if Europe (meaning EU institutions and Member States together) would implement commitments made in Paris and Accra.
The study, entitled: "The Aid Effectiveness Agenda: the benefits of going ahead [2 MB] ", focuses on two main areas, namely aid agency effectiveness (cost effectiveness of agencies) and aid policy effectiveness (the cost of parallel development policy making). Whereas other areas of the Paris agenda are equally important (like ownership, mutual accountability, and a focus on results), the purpose of the study is to be explicit about the costs, and putting a price-tag on not implementing the Paris agenda.
The study starts with a review of the aid effectiveness literature to date, most of which point to benefits of more coordination. There is also a good overview of the effects of the Paris agenda so far, for which Mali has been used as a case-study.
Main conclusions of the study (figures are based on 2009, are for Commission + Member States, and are per year):
- The direct savings the EU as a whole could make on lower administrative costs when harmonising (including a Division of Labour) with Member States, and by reducing the number of partner countries, is € 461 million. If also changing the aid modality towards more Budget Support (general or sectoral) another € 283 million can be added, bringing the total of direct savings on transaction costs to € 744 million.
- On calculating the gains to be made from the untying of aid two parameters have been used: the amount of EU aid that is tied, and the cost increase that is associated with tying. The findings indicate that € 784 million could be gained.
- On gains to be made by improving predictability, the cost of aid volatility is being calculated, using methodologies and insights from finance theory; the estimate comes to € 1681 million of gains to be made by eliminating aid volatility.
- Lastly, the indirect effects on partner countries' institutions and economic growth are estimated and, although the researchers admit that this is the most difficult cost estimate, they come up with an estimated € 1808 million as a total loss, as indirect effect.
This means that the total efficiency gains, funds that could be used for poverty reduction projects and programmes, could be a staggering € 5 billion per year!
Important, "non-financial" conclusions of the report deal with the need for a stronger role for the Commission. They mention a strong need for Member States to jointly decide about their country programmes and allocation of their aid, with the Commission as the "natural" coordinator of the process. Other conclusions deal with the importance of good governance in partner countries, and its relation with the use of conditionalities.
A 2009 EU study on aid effectiveness, entitled: "Aid Effectiveness Agenda: Benefits of a European Approach ", estimated that efficiency gains would be between €3 and €6 billion per year if the EU (Commission and Member States) would implement the Paris agenda. Since there were some comments that challenged the methodology of the study, a follow-up study was commissioned in 2010, focusing more on a strong quantitative methodology.
Since the first High Level Forum on Aid Effectiveness (Rome, 2003) donors have been trying to increase the effectiveness of their aid. The second (Paris, 2005) and the third (Accra, 2008) have been instrumental in shaping the aid effectiveness agenda, leading respectively to the Paris Declaration and the Accra Agenda for Action. The fourth High Level Forum in Busan (2011) has taken stock of how the donor community has done so far.
Apart from international commitments, the European Union and the Member States have also been working on a European level to increase the effectiveness of European aid, and have decided on various actions in the field of aid effectiveness (like the European Consensus (2005), the EU Code of Conduct on Complementarity and Division of Labour (2007), and other initiatives like the Operational Framework on Aid Effectiveness (2009).
However, worldwide, the number of donors continues to increase, as well as the number of projects, while their size decreases, leading to more and more proliferation and fragmentation.
Savings are relatively easy to calculate; direct costs for donors are major cost items as country representation (agencies, development sections of embassies, development cooperation staff costs, country programme development and management costs, monitoring and evaluation costs, expert missions for studies and assessments). Many of these costs are made because of duplication of country strategy processes (with each donor developing and implementing its own), the duplication of representations, and the duplication of missions and studies. Many of these costs could be shared in the future.
Managing many small, individual projects is more expensive than managing larger Sector or General Budget Support programmes; changing from projects to programmes will lead to additional savings, as the study shows.
Tied aid remains a contested area, because by keeping restrictions on the use of funds donor institutions and their private sector continue to benefit, knowing that untying could lead to financial gains for partner countries, freeing funds that can be used for poverty reduction.
Aid volatility represents the lack of predictability: donors do not actually pay out what they have committed themselves to, for a variety of reasons. Partner countries have great difficulties in filling the financing gaps caused by this, and substantial gains could be made by eliminating volatility, again freeing funds for what they are meant for: combating poverty.
The issues mentioned above would also have an effect on a partner country's economic growth, with the most significant one being the use of General Budget Support. The main indirect effect is an increase of the country's GDP; the effects of donors increasing their GBS share with for instance 11% would be to an increase of the aggregate GDP level of some €1800 million.
The final part of the study attempts to estimate possible savings by dealing with the issue of "aid orphans", through a drastic inter-country reallocation of aid, concentrating on a limited number of countries only, where one Euro would have the greatest effect on poverty reduction. However, because of the "political cost" of such an exercise, the authors' conclusion is that for now it would be more realistic to move step by step, and to strengthen ongoing processes like joint programming, and stronger policy coordination.