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The Department for International Development’s (DFID’s) use of budget support is helping developing country governments to build their capacity and expand basic services. But, according to a report out today by the National Audit Office, evidence on whether budget support has yielded better value for money than other forms of aid is not conclusive. While budget support has some advantages compared to other forms of aid, it also carries significant risks which need to be better managed.

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DFID has significantly increased its use of budget support, which is aid it gives directly to developing country government budgets. It provided £461 million in budget support to 13 countries in 2006-07, up from £268 million five years ago. This amounts to nearly 20 per cent of its total bilateral expenditure and DFID expects it to increase further in future years.

DFID has been one of the leading bodies promoting budget support and improving best practice in its management. By working closely with other donors on budget support it aims to reduce burdens on partner governments. Today’s report looked at what budget support is achieving, how DFID manages the risks of using it and how DFID takes individual funding decisions.

Developing country officials have welcomed DFID’s efforts to promote the use of direct budget support with other donors. Budget support has allowed developing country governments to increase expenditure in priority areas and to expand access to essential public services such as health and education.

But the significant expansion of basic services has often been accompanied by a deterioration in service quality. Rwanda, for example, has increased the number of children enrolling in schools from 1.4 million to over 2 million between 2000 and 2006, but pupil numbers have increased before the government has been able to recruit and train more teachers. It has not yet been possible to establish the effect of budget support on the number of people living on less than a dollar per day.

Budget support has helped to strengthen systems in partner country, such as those for planning and delivering services, and managing finance. The report shows, for example, successful reforms of financial management practices – although progress has been slower or more limited than originally expected and most indicators show no significant progress yet in public finance outcomes. In the best of the three countries where the results of state audits were readily available, 43 per cent of government accounts were qualified.

Monitoring what budget support is achieving is challenging. The NAO report found that weaknesses in setting objectives mean that DFID does not always set out what it expects to achieve or by when. Some 15 per cent of indicators do not have specific time-bound targets, and baselines against which to measure progress were missing in 22 per cent of cases.

Formal monitoring frameworks do not always track progress in remedying weaknesses in financial systems. And monitoring of human rights – one of the key criteria for giving budget support – is not yet systematic. DFID has encouraged joint arrangements between donors and has invested more resources in improving statistics than other donors. But weaknesses in available statistics continue to limit the ability to monitor results.

Although budget support may deliver several benefits, it also carries significant risks. For example, developing country governments may not be capable of using UK funds efficiently and effectively or may misuse them for political reasons or through corruption. DFID has played a leading role in developing and using risk assessment tools, which pay specific attention to corruption, but could be clearer in setting out the extent of risk to UK funds. For example, only two risk assessments carried out by DFID country teams estimated the extent of losses due to corruption.

DFID expects to increase budget support in future. To manage the associated risks, DFID needs to build on existing practices to tighten the design and monitoring of budget support, clarify the risks to UK funds, and improve its appraisal of budget support options.

“Budget support can help developing country governments deliver basic services to some of the world’s most vulnerable people. But to ensure that money provided by the UK is spent by governments in the most efficient and effective way and that it reaches the people who need it, DFID needs to improve further some of the basics. These include setting more precise objectives, monitoring progress more systematically, and clarifying the risks to UK funds.”

Tim Burr, head of the National Audit Office


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