STRATEGIES FOR ADDRESSING ABSORPTION CAPACITY CHALLENGES IN DONOR-FINANCEDPROJECTS WITHIN COMESA MEMBER STATES
- INTRODUCTION
Development Aid (DA) may be defined an unrequited transfer of resources from a donor to a recipient country with a view to promote social and economic development of a recipient country. DA is mainly provided with the twin objectives of financing domestic expenditures and increasing the availability of foreign exchange.
In many Sub-Saharan African countries, DA provides crucial resources to support crucial expansion of public investment programmes in energy, infrastructure, education and health among other sectors. The growth in these sectors in turn contributes to economic growth and poverty alleviation. Moreover, DA provide foreign exchange resources that allow countries to increase imports of capital goods, which stimulate economic output and are often associated with productivity gains.
- TYPES OF DEVELOPMENT AID
In many developing countries including those in the Sub-Saharan African region, Development Aid consists of a considerable share of the total government budget. This emanates from the fact that in most of those countries, internally generated resources are not adequate to fully cater for huge capital investment needs. As a result, the financing of capital investment projects from domestic resources in form of tax revenues, user fees, and domestic borrowing is often supplemented with external resources in the form of bi-lateral loans and grants; and multi-lateral loans and grants. In essence, DA involves transfer of capital, goods, or services from donor country to recipient country. Traditionally, such assistance includes grants and concessional loans with a grant element higher than 25 percent.
There are four types of Development Aid which are extended to support developmentprojects in recipient countries, namely;
(i)Public (ODA) or private (NGOs)
(ii)Bilateral or multilateral
(iii)Balance of Payments (BoP) support which may take the form of monetary transfers or technical assistance and training
(iv)Tied or untied which may be linked to or not linked to the purchase of goods and services from the donor country, or in kind specific economic or political conditions
- IMPLICATIONS OF LOW ABSORPTION OF DONOR-FUNDED PROJECTS
Development assistance is provided through the generosity of tax payers in Development Partner (DP) countries. To promote accountability, efficiency and effectiveness of donor-funded projects, recipient countries must in principle undertake to implement the agreed projects on time not only to satisfy the “donor requirements” but also to account to their citizens who are supposed to benefit from projects being undertaken through donor support.A number of studies done on absorption of donor funds have found that the actual annual absorption of these funds in many countries has been below fifty percent. These findings underscore the importance of building capacity and undertaking public financial reforms in COMESA member countries to ensure that externally funded projects are delivered or implemented in a timely, transparent and most efficient manner.
If resources in donor-funded projects are not utilized as planned thereby resulting in low absorption, the following are the likely implications:
(i)Opportunity cost is lost, hence slower development of economy than planned.Since every resource (land, money, time, etc.) can be put to alternative uses, the consequences of low absorption in donor-funded projects has an associated opportunity cost in terms of development outcomes. Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project.
(ii)Payment of commitment fees to Development Partners though resources are not absorbed.Donors should disburse aid according to the agreed schedule and increase transparency toward recipient country governments to minimize cases where commitment fees are paid on loans and grants despite the DA not having been disbursed to projects. Recipient countries on the other hand should respect the conditionality of development aid disbursements.
(iii)Cost over-runs of projects if the resources are not utilized. Aid can play an important role in the growth and development of recipient countries. However, it can also have adverse macroeconomic implications. The volatility and unpredictability of aid flows may have a negative impact on recipient budget management and jeopardize macroeconomic stabilization efforts.Aid recipients base spending plans on optimistic aid commitments. If disbursement of aid is not forthcoming or stopped midstream, there are likelihoods of adverse macroeconomic disturbances, including cost over-runs. Recipient countries should therefore implement appropriate policies to properly manage aid flows, taking into account the potential impact of aid on a country’s competitiveness.
- CAUSES OF LOW DISBURSEMENT IN DONOR-FUNDED PROJECTS
Disbursement problems are the main causes of low absorption rates in donor-funded projects. Disbursement problems mainly involve the lack of universal understanding, political ownership, as well as capacity and institutional shortcomings.In actual fact, low absorption in donor-funded projects can be attributed to many factors including; lack of shared priorities, absence of performance-based motivation, weak institutional/political ownership, poorly designed projects, lack of centralized monitoring and tracking mechanism, weak capacity of procurement entities, lack of clear responsibilities, poor capacity of project management and cooperation between different government agencies.
(i)Disbursement problems related to lack of common priorities and institutional ownership
If government agencies lack ownership partly due to the absence of implementing sector ministries in conceptualization, feasibility studies and financial agreement negotiations of the project, then disbursement problems are likely to arise due to lack of common prioritization of theprojects by the government and donors.
A number of countries including those in the COMESA region lack clear policies on external aid management.Consequently, disagreementsoften arise on prioritization of development programsbetween the recipient government and donors. In such scenarios, projects get approved for funding by the donors without proper consultationswith relevant government agencies and taking due consideration of regulatory and policy requirements of recipient government.The end result is weak institutional and political leadership which hampersproject implementation.
(ii)Accounting and reporting problems
One of the causes of low disbursement in donor-funded projects has been slackness by the project implementers in observing cut-off dates for submitting periodical reports as requiredby the development partners. In addition, existence of inaccurate or incomplete claims hinders further disbursement of project funds. In some cases, ineligible expenditures are incurredby project implementers outside categories of expenditures agreed in the Financing Agreement.Inadequate disclosures of material facts during reporting often leads to audit qualifications, thus hindering the disbursement of funds.
(iii)Disbursement problems related to institutional shortcomings
The process of accessing funds from the donors is very lengthy and involves many players hence time consuming. Delay by project implementers in accounting for the advanced funds leads to withholding of further disbursements. Holding cash balances during end of a given financial year by implementers of projects complicates the problem as it requires re-voting of the project funds in most cases. In other cases, donors delay in remitting reports on disbursement of funds to projects for ownership and accountability. This creates an impression that nothing has been disbursed but the problem is lack reporting or publishing the information on disbursement by donor.
(iv)Disbursement problems related to competencies, capacities and work motivation
-Procurement related factors
Complex procurement procedures involving many prior review requirements hinder disbursement of donor funds.Understanding and applying the recipient countries and donor procurement rules and regulations at the same time pose challengesto staff that may be lacking capacities in procurement processes.
Poor competency in applying national and donor procurement regulations leads to lengthy procurement processes due to interventions in procurement decisions from both sides and delays in obtaining “non-objection” from the donor. In addition, issues of conflict of interest amongst key players especially where there is lack of confidence and technical capacity in the procurement process.
-Capacity challenges
Lack of adequate capacity by project implementers to appropriately design and prepare conceived projects may later pose challenges during the implementation stage. This situation can be complicated if there is high turnover of staff in the projectimplementation units thus negating the benefits of learning curve effect.
- SUGGESTED RECOMMENDATIONS
In a number of countries, there are no dedicated units to oversee project implementation. In order to address poor absorption arising from disbursement challenges, ministries responsible for financeshould ensure that effective Project Management Unitscomprising of multidisciplinary officers are establishedacross allMinistries/Departments/Agencies(MDAs) to improve absorption in donor-funded projects. Project Supervision Committees chaired by Accounting Officers in respective MDAsshould also be established.
Accounting Officers should enforce compliance with rules and regulations and financing agreements in order to minimize cases of ineligible expenditures.In circumstances where low absorption is on account of disbursement problems related to lack of common priorities and political ownership between the recipient government and the donor, the following is recommended:
(i)Recipient countries and donors should develop a mutual working relationship which is aimed at improving the alignment of donor and Government interests and priorities in projects which may include defining not only the sector projects but also the share of funds allocated to each sector. Project preparation and design should be completed before securing finances. It is advisable that project management team be part of those formulating and designing of the project.
(ii)Develop a policy on external aid management. Such a policy should provide guidance on donor code of conduct. Once developed, an External AidManagement Policy will address absorption challenges arising from poor coordination, resource mobilization, accountability, reporting among others.
(iii)As much as possible donors should agree to accept only projects and programs based on recipient Government initiative to avoid promoting their own development agenda. There should be a clear definition and communication of donors versus government priorities. Recipient Government should be given an option to reject project proposals if not in their interest.
(iv)Setting up a centralized tracking mechanism and harmonization of planning, monitoring and evaluation procedures between the donors, ministry of finance and line ministries with respect to the donor-funded projects. Key elements for the data base required for tracking advancement and disbursement to projects/programs should be developed. For instance, key performance indicators, existing financial obligations, achievement of key activities, responsibilities, costs, time line for completion of activities, annual planned disbursement and actual annual disbursement.
(v)Develop models for performance based contracts using existing best practice and a code of conduct for public servants. Officers assigned to project implementation should sign performance contractsto commit themselves to improve absorption of the budgeted project funds. This is critical in improving absorption of donor-funded projects.
(vi)Ministries of Finance in Member Countries should develop common operations manuals for use in their respective countries. Such manuals shouldoutline the financial management, disbursement and procurement procedures for all donor funded projects.
References
Aiyar, S. and U. Ruthbah (2008), ‘Where Did All the Aid Go?An Empirical Analysis of Absorption and Spending.’IMF Working Paper 08/34, Washington, D.C.
Isard, P., L. Lipschitz, A. Mourmouras, and B. Yontcheva, eds. (2006), The Macroeconomic Management of Foreign Aid: Opportunities and Pitfalls, Washington: International Monetary Fund.
Dorothy McCormick and Hubert Schmitz (2009), ‘Donor Proliferation and Co-ordination:Experiences of Kenya and Indonesia’. Journal of Asian and African Studies
IMF (2005), ‘The Macroeconomics of Managing Increased Aid Inflows: Experiences of Low-Income Countries and Policy Implications,’ SM/05/306 (August 8, 2005), unpublished, Policy Development and Review Department
Page | 1