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Africa: Real Aid?

AfricaFocus Bulletin
Jul 17, 2006 (060717)
(Reposted from sources cited below)

Editor's Note

World leaders gathered at the G8 Summit in St. Petersburg, Russia, gave only token attention to Africa issues that had been a major focus at last year's meeting in Gleneagles, Scotland. Although they pledged to keep Africa on the agenda for Germany next year, evaluations of the summit noted little progress beyond the pledges on debt relief implemented over the past year.

A flurry of evaluations were issued, from the pro-forma vaguely quantitative "compliance report" by the G8 Information Centre at the University of Toronto (http://www.g8.utoronto.ca) to successively more critical analyses from the celebrity-sponsored DATA (http://www.data.org) and development organizations such as Oxfam (http://www.oxfam.org) and ActionAid
(http://www.actionaid.org). There was general agreement that the G8 had made little or no progress on trade and some limited steps forward in increasing aid. But even the limited advances on aid were less than they seemed.

This AfricaFocus Bulletin contains excerpts from the recent ActionAid report estimating the portion of aid that is "phanton aid," because of double-counting, inefficiencies, and other factors making its ineffective. Another AfricaFocus Bulletin sent out today contains excerpts from the same report focusing on technical assistance in particular.

For the full ActionAid report, visit http://www.actionaid.org

For previous AfricaFocus Bulletins on related economic and development issues, visit http://www.africafocus.org/econexp.php

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

Real AID 2

Introduction

In 2005, rich countries made long overdue promises to increase aid. European Union countries signed up to clear timetables to reach the 35-year-old target of allocating 0.7% of national income on aid, encouraging other donor countries to add their own pledges of new funds. At their summit in Gleneagles, the G8 announced that aid would increase by $50 billion over the next five years. These commitments, while failing to provide the scale of funding needed to eradicate poverty, were welcomed as a step forward.

Aid can make a real difference to the lives of the world's poorest people. It can build schools, clinics and rural roads, purchase essential medicines and train and employ the millions of teachers, extension workers and nurses needed to meet the basic rights of poor people. But to do this aid must be real: that is, genuinely available to fight poverty. In this report we show that almost half of all aid remains 'phantom': it is either poorly targeted, double counted as debt relief, tied to donor goods and services, or badly co-ordinated and highly conditional. While there has been some progress since our first Real Aid report was released in 2005, this falls far short of what is needed to eradicate poverty.

One of the largest areas of phantom aid is technical assistance: donor spending on consultants, research and training. Technical assistance absorbed $19 billion of aid in 2004, a quarter of global aid flows. But as we show in this report, much of the current spending is ineffective, over-priced, donor-driven and based on a failed development model. ...

When it is provided properly, technical assistance can do a great deal to help poor countries make their own way out of poverty. But too often technical assistance is deeply flawed. Ensuring that it contributes fully to poverty reduction will require a radical overhaul of the way that technical assistance, along with other forms of aid, is provided. Donors must stop trying to control poor countries and instead let them determine their own paths to development at their own speed. They must stop pressurising poor countries into adopting identikit reforms designed in Washington. And they must stop assuming that their own western 'experts' have better ideas about poverty reduction than those experiencing poverty first hand. ...

Chapter 1: Real Aid

"Aid has received a bad press in recent years, But for utterly the wrong reasons. Aid is too little to solve the problems at hand, (and is) excessively directed towards the salaries of consultants from donor countries rather than investments in recipient countries."

Jeffrey Sachs, 2005.

More aid is a crucial part of the fight against poverty. Yet headline aid levels remain pitifully low, standing at only 0.26% of the combined income of all donor countries in 2004. Even if all the promises made in 2005 are met, donors will only give an average of 0.36% of national income by 2010 half of the 0.7% target level. As we will show, even these low headline aid figures exaggerate the true donor contribution to the fight against poverty, with real aid levels standing at only 0.14% of donor income in 2004, one fifth of the way to the 0.7% target.

Such low real aid levels stand in stark contrast to the extent of 'reverse flows' the flow of resources from poor countries to the rich world. Debt repayments, capital flight, unfair trade, profit remittances and rich countries' contribution to climate change contributed to an estimated net resource flow of $710 billion from developing countries in 2003, ten times the value of official aid. ...

1.1 Real Aid in 2004

ActionAid International's first Real Aid report was launched in May 2005. This report used indicative data to estimate how much of each donor's aid was real. Using 2003 figures, we calculated that more than 50% of official aid flows were 'phantom': that they were not genuinely available to fight poverty.

This report uses newly available 2004 data to update our earlier analysis. Our figures are necessarily approximate: donors are very poor at reporting on how they spend aid money, making it difficult to hold them to account. However, we have used the most comprehensive current source - data from the OECD - to calculate indicative estimates of real aid.

We estimate that a massive $37 billion (47%) of the $79 billion in headline aid in 2004 was 'phantom', while real aid stood at only $42 billion. There was some improvement from 2003, with nearly all the increase in aid - otherwise known as Overseas Development Assistance or ODA - between 2003 and 2004 counting as real aid. ... Even with this increase, our analysis suggests donors still contributed an average of only 0.14% of gross national income in real aid in 2004, or only one fifth of the UN target level. ...

The $37 billion of phantom aid in 2004 included:

  • $6.9 billion which was not targeted for poverty reduction
  • $5.7 billion which was double counted as debt relief
  • $11.8 billion spent on over-priced and ineffective technical assistance
  • $2.5 billion lost through aid tying
  • $8.1 billion lost through the costs to recipients of poor donor co-ordination
  • $2.1 billion spent on immigration related spending in the donor country
  • at least $70 million spent on excessive administration costs.

These figures are necessarily approximate. If anything, they probably flatter donors. ...

1.2 Components of Phantom Aid

1.2.1 Poorly targeted aid ($6.9 billion)

Aid remains poorly targeted: much is spent in middle income countries, out of all proportion to the number of poor people living there. Donors give aid to middle income countries because they are geopolitically or commercially significant, near neighbours, or because of other historical and cultural ties. ...

... We assume that, if donors were really allocating aid in accordance with poverty needs, 70% would go to the poorest countries, leaving only 30% allocated to middle income countries. Aid above that level is counted as phantom aid. ...

1.2.2 Debt cancellation is still double counted as aid ($5.7 billion)

Debt cancellation is vital in the fight against poverty. Recent debt cancellation deals for Nigeria and other poor countries, while inadequate,9 are a step forward.

But debt cancellation must be additional to new aid transfers. Contrary to their commitments at the 2002 Monterrey Consensus on Financing for Development, donors continue to count debt cancellation as part of their headline ODA. This can vastly exaggerate the sums of money available to reduce poverty. For example, one fifth of the headline ODA from EU member states in 2005 was accounted for by cancellation of Nigerian and Iraqi debts. Yet Iraq was not even servicing these debts, meaning that no more money will be available to the Iraqi government as a result of debt cancellation. A recent OECD paper on the Heavily Indebted Poor Countries debt relief initiative (HIPC) suggested that as little as 10% of debt relief actually generated new resources for poverty reduction. ,,,

Counting debt cancellation as part of aid is particularly unjust given that the debts that are cancelled were often incurred for odious or illegitimate purposes that had little to do with fighting poverty. Counting debt relief as aid violates the principle of justice that southern governments and global debt campaigners have long fought for: that creditors should share the cost of past mistakes. ...

By using debt cancellation to help them meet the 0.7% target, creditors are effectively passing that cost on to poor countries, who would otherwise have received higher volumes of aid.

1.2.3 Over-priced and ineffective technical assistance ($11.8 billion)

One quarter of global aid is spent on technical assistance: donor spending on outside expertise such as consultants, research and training, used to supplement the existing skills and administrative capacity of developing country governments. Yet, as we show in Chapter 2, technical assistance has often failed to build capacity, and has in some cases even served to erode existing capabilities.

Because most technical assistance is still donor-driven, it is both heavily over-supplied and over-priced. Globally, spending is still concentrated on expatriate consultants, often at very high rates of pay. Such 'phantom' technical assistance often fails to make a lasting contribution towards the ability of poor countries to determine their own development paths, and instead tends to leave little behind once donor payments cease.

Donors are particularly poor at providing information about spending on technical assistance, as Chapter 2 explains. .... However, the Development Assistance Committee (DAC) is starting to rectify this, potentially allowing scope for a more differentiated analysis in future. In the meantime, in order to assess 'phantom' technical assistance, we continue to use an across-the-board 75% discount8 of bilateral technical assistance. This is based on:

  • An estimate of the cost mark up from tying of technical assistance. ... technical assistance contracts are overwhelmingly awarded to firms from the donor country, suggesting that actual and de facto tying is common. We therefore discount 25% on the basis of the cost mark up from tying.
  • An estimate of the cost mark up of expatriate consultants. Non-salary costs associated with expatriate consultants, including school fees and flights, can amount to more than half of technical assistance costs, ....
  • An estimate of effectiveness. Of the remaining 50% of technical assistance, on the basis of the analysis presented in Chapter 2, we assume half has been ineffective in building capacity. This generates a total discount of 75%. ...

1.2.4 Aid tying reduces the value of aid ($2.5 billion)

Donors still commonly tie aid to goods and services from their own countries. According to OECD estimates, tying increases the costs of aid by between 15% and 40%.22 also distorts local priorities and denies local contractors the opportunity of using aid money to boost employment and develop their own skills and capacity. ...

Using a conservative estimate of the cost mark up from tying, we assume that 20%23 of all tied aid is phantom. This means that $2.5 billion, or roughly 3% of ODA, is phantom tied aid, up slightly from $2.3 billion in 2003.

In 2001, donors agreed to untie all their aid to the least developed countries, excluding food aid and technical assistance. But five years on, progress from some donors has been woeful, and there does not appear to have been any reduction in the total share of tied aid between 2003 and 2004. The US, Italy, Canada, Greece, Spain and Austria remain the worst culprits in terms of aid tying. In contrast, Ireland, the UK and Norway have fully untied their aid.

1.2.5 Loss through poor donor co-ordination ($8.1 billion)

Despite promises made by donors in Paris in March 2005 to improve 'harmonisation and alignment', aid continues to be poorly co-ordinated, imposing heavy burdens on already over-stretched administrations. According to the DAC, for example, a typical African country hosts more than 20 donor missions a week or four each working day. Donors continue to demand different reporting requirements from poor countries, often with minimal co-ordination.

Donors are particularly poor at providing data on the extent to which they co-ordinate their aid, making it very difficult to hold individual donors to account. The OECD has started to collect data, but this is not yet available on a donor-by-donor basis. ...

As we show later in this chapter, a more useful and independent framework would involve governments, CSOs and other stakeholders monitoring donors on the basis of their performance in country. In the absence of such a framework, we continue to rely on donor rankings put together by UK-based non-profit consultancy Debt Relief International (DRI), based on recipient governments' own estimates of donor performance. Based on DRI's calculations we estimate that donors ranked as 'above average' by recipients lose 10% of the value of aid through poor co-ordination, while donors ranked 'below average' lose 20%. This generates an estimate of $8.1 billion of phantom aid lost through poor donor co-ordination.

1.2.6 Aid is spent on immigration related costs in donor countries ($2.1 billion)

Under OECD rules donors can count spending on refugees in their first year of arrival in the donor country as part of ODA. Countries vary in the extent to which they do this: the UK, Finland, Italy, Japan and Luxembourg commendably do not include any such spending in their ODA, while the US and France include almost half a billion dollars each. ... ActionAid believes they should be counted as part of domestic expenditure rather than ODA.

1.2.7 Aid is spent on excess administration costs ($70 million)

Spending on administrative expenses by donors, including housing and transport, is also allowed to score as ODA. Some administrative spending is important to ensure effective aid programmes. However, donors such as DFID allow a maximum spend on administration by NGOs of 8% of the total budget, and we therefore allow a similar threshold. Spending over and above that level is deemed to be excessive, yielding a total discount of around $70 million. ...

1.3 Real and Phantom Aid: the Donor Rankings

In total, our analysis suggests that nearly 50% of all aid is still 'phantom' - it is not genuinely available to meet the human development needs of the poor. Donors vary substantially in their efforts to provide real aid. Some have high headline aid levels and a high share of real aid; others give low volumes of largely phantom aid. ... Luxembourg, Denmark, Norway, Sweden and the Netherlands all have high official ODA/GNI ratios and a high share of real aid, while Luxembourg, Denmark and Norway have all increased their real aid since 2003. Luxembourg now meets the 'real' 0.7% target, while Denmark and Norway are not far behind. ...

Ireland retains its 2003 position as the donor with the highest share of real aid. The UK and Finland also both have relatively high shares of real aid. But all three countries are brought down the overall real aid league slightly by their less impressive levels of aid volume. ...

At the bottom of the donor league are those with both low volumes of official aid and high shares of phantom aid, giving pitifully low real aid levels. The world's richest country, the US, scores worst of all, with real aid at only 0.06% of gross national income, the equivalent of only $25 per person per year. Greece, Italy, Japan, Austria, Australia and Spain also score badly.

...

1.5 Recommendations on Increasing Real Aid and Reforming the Aid System

As our last report outlined, the failure of the aid system to deliver real aid is no accident. Aid quality is poor because donor countries are not held accountable. These countries on the one hand make excessive demands on poor country governments in the form of intrusive policy conditions, but on the other are not held accountable for delivering on their own promises. Donors have promised to untie aid, to improve co-ordination, support capacity building and to better allocate their aid. Yet in most rich countries, progress in meeting these promises has been woeful.

As the first Real Aid report also showed, if aid is truly to become real then there is a need for fundamental reform of the international aid system to make donors, governments and civil society organisations truly accountable to each other and to poor people. Such a system must involve:

  • clear financing policies from southern governments
  • a shift from donor-imposed conditions to mutual commitments
  • national and international forums for ensuring donors and developing country governments are held to account.

1.5.1 Clear financing policies from southern governments

Some southern countries have been able to improve aid quality by developing clear financing strategies and putting pressure on donors to provide aid in their preferred forms. The Tanzania Assistance Strategy, launched in 2002, identified specific commitments from both donors and governments to improve the effectiveness of aid, and has served to improve donor behaviour. This is now being used as the basis for a new Joint Assistance Strategy that aims to further strengthen donor co-ordination. Similar efforts are underway in Afghanistan, Vietnam and Mozambique. In India, the government has even asked donors who provide low levels of aid to leave the country.

Other developing countries should now follow their lead and set out their own financing policies. ...

1.5.2 Mutual commitments in place of one-sided conditionality

Donors continue to impose a raft of intrusive policy conditions on poor countries, and to back 'reformers' they have identified in recipient governments who are prepared to promote donor-friendly policies. Yet these practices often undermine democratic accountability, skew policy priorities and promote policies that have often been ineffective in the fight against poverty. If there is to be sustainable poverty reduction, poor countries must, as the G8 stated, be, "free to decide, plan and sequence their economic policies to fit with their own development strategies." ...

The British and Norwegian governments, to their credit, have both announced that they will no longer attach economic policy conditions to their aid. Other countries must now follow suit. The World Bank and IMF, both heavy users of conditionality, need to dramatically reduce the amount and intrusiveness of their conditionalities. The Bank's good practice principles on conditionality, agreed in September 2005, are a small step in the right direction, but fall far short of the change that is needed. ...

This does not mean that developing countries should be able to misuse donor (and their own) resources. Both rich and poor countries have mutual obligations to ensure accountability and transparency in the use of resources ...

1.5.3 National and international processes for holding donors and governments to account

If donors and southern countries are to be held accountable for effectively using resources to fight poverty and for meeting international obligations, there needs to be new national and international forums where both sides can be held to account by parliaments, the media, NGOs and other civil society groups.

At present, there are no international forums for promoting such accountability. Existing forums such as the World Bank, IMF and OECD DAC are dominated by rich countries, with developing nations and CSOs allowed a very minimal role. ... A new forum is needed where donors and southern governments can meet as equals to review progress on improving the quality of aid and meeting international obligations. There is a need for an independent arbitrator, such as the UN, to adjudicate in case of disputes between donors and southern governments.

At country level, negotiations between donors and southern countries generally take place behind closed doors, with limited opportunities for engagement by parliaments, civil society, the media and the general public. Even public forums such as Consultative Group meetings are largely donor dominated. Parliamentarians, CSOs and other stakeholders have few opportunities to scrutinise the agreements that their governments are signing, the use of donor resources, or even the new loans being contracted in their name. This must change. New, broadened Consultative Group meetings should be run by developing country governments, with parliamentarians, CSOs, other stakeholders and donors all able to effectively participate.


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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