Dr. Golam Sarwar Senior Research Specialist Foreign Aid Policy Dhaka July 20, 2011

Dr. Golam SarwarSenior Research Specialist

Foreign Aid Policy

DhakaJuly 20, 2011

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Presentation Contents

Foreign Aid as Development Instrument

Historical Perspective of Foreign Aid Inflow in to Bangladesh

Bangladesh Experience on Foreign Aid Utilization

Rationale for a comprehensive Foreign Aid Policy for Bangladesh

Objectives, Priorities and Foreign Aid Policy Focus

Instruments of Foreign Aid Policy Implementation

Institutional Arrangement of Foreign Aid Policy Management

Concluding Comments on Foreign Aid Policy Implementation

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Foreign Aid as Development Instrument ‘Foreign aid’ as ‘Development Assistance’ emerged as a crucial

‘instrument of economic development’ with the successful implementation of ‘Marshall Plan’ after the Second World War.

Two Gaps Theory: fiscal (savings–investment) and BoP/current account (export–import) gaps

Multilateral and regional institutions like World Bank, IMF and ADB and bilateral aid agencies were created

OECD, the organization of 22 rich developed countries formed DAC to provide ODA to poor countries.

Donors pledged to provide 0.7 % of their GNP as ODA in 1970,

New Millennium pledge set the MDGs

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Foreign Aid as Development Instrument (contd.)

In many cases foreign aid has become ineffective due to: Foreign aid is wasted in poor quality projects and on

overpriced goods and services from donor countries; Foreign aid serves the geo-political strategic and economic

interest of the donor countries; Foreign aid benefits powerful domestic interest and breeds

corruption; Aid projects/programs are selected based on the trade interest

of donors instead of the needs of recipients; Foreign aid undermines domestic resource generation and

makes recipient countries perpetually aid dependent; Too little foreign aid reaches countries that desperately need it.

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Foreign Aid as Development Instrument (contd.)

Aid effectiveness debate led to: ‘Rome Declaration’ in 2003 ‘Paris Declaration of Aid Effectiveness’ in 2005 ‘Accra Agenda of Action’ in 2008

Aid Effectiveness debate set the context of preparing a comprehensive ‘Foreign Aid Policy for Bangladesh’

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Periodic Flow of Foreign Aid 1972-2010 (in billion US$)

FY Food Aid Commodity Aid

Project Aid

Total Aid Average Yearly

Aid1971-1980

2.090 2.768 1.749 6.607 660

1981-1990

2.346 4.435 7.340 14.121 1.412

1991-2000

1.537 3.169 10.911 15.617 1.562

2001-2010

613 536 15.104 16.253 1.625

Total 6.586 10.908 35.104 52.598 1.315

% share 12 21 67 100

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Periodic Flow of Foreign Aid 1972-2010 (in billion US$)

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Types of Foreign Aid 1972 -2010 (in %)

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Ten largest Donors in Bangladesh FY 1972-2010 (in million US$)

SL Donors Grant Loan Total Share (%)

1 World Bank 269 11664 11933 22.69

2 Asian Development Bank

70 8114 8184 15.56

3 Japan 3308 3753 7061 13.42

4 USA 2,787 763 3,550 6.75

5 UN System (except UNICEF)

2744 20 2764 5.25

6 Canada 2087 16 2103 4.00

7 UK 1973 89 2062 3.92

8 Germany 1436 268 1704 3.24

9 European Union 1534 48 1582 3.01

10 Netherlands 1,078 71 1,149 2.18

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Ten Largest Donors in Bangladesh10

Foreign Aid Utilization

Project Aid pipeline at the end of FY 2010 : US$ 9.43 billion Some identified flaws in the aid utilization in Bangladesh:

Limited absorption capacity of project aid due to governance inefficiency, corruption, and limited institutional capacity;

A large portion of foreign aid may have been wasted by using in inappropriate projects;

Failure of policy and institutional reforms towards good governance due to lack of policy / strategy and ownership;

Lack of proper public investment planning and implementation in terms of identification and preparation of public investment projects / programs, and implementation monitoring;

Lack of donor alignment with the national planning and programming;

Lack of aid harmonization among the donor community.

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Rationale for a Comprehensive Foreign Aid Policy

Mobilization of required aid commensurate with national priorities;

Synchronization assistance strategy of DPs with the national development plans / strategy;

Accelerate the process of aid negotiation through alignment of DP priorities with the country needs;

Maximize the benefits of foreign aid in terms of poverty reduction and socio-economic development by improving aid effectiveness;

Ensure allocation foreign aids to nationally identified priority areas where aid is needed most; and

Maximize the value of foreign aid by utilizing aid properly in the identified areas.

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Objectives of Foreign Aid Policy

Broad Objective: to facilitate foreign aid inflow into Bangladesh through a comprehensive policy frame-work and maximize aid effectiveness for poverty reduction through accelerated economic growth.

Specific Objectives: To develop a policy framework to augment aid flow into Bangladesh in the

backdrop of stagnating / declining aid flow since 1990s by identifying and rectifying the constraints of aid flow;

To promote the efficiency of aid utilisation for faster poverty reduction through accelerated economic growth and graduate Bangladesh to a middle income country by 2021;

To develop an effective partnership with the Development Partners in line with the mutual accountability and aid effectiveness committed and reaffirmed through ‘Paris Declaration 2005’ and ‘Accra Agenda for Action 2008’ respectively.

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Macroeconomic Goals of Foreign Aid Mobilization

1. Poverty Reduction2. Job Creation3. Raising Per Capita Income4. Raising GDP Growth Rate

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Priority Areas for Foreign Aid Mobilization

1. Human Resource Development Education Health Population Planning

2. Safe Water Supply3. Sanitation4. Food Security5. Energy Security6. Water Resource Management7. Physical Infrastructure8. Social Protection9. ICT Development10. Environment Sustainability11. Climate Adaptation

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Major Foreign Aid Policy Focus1. Grant Aid

Grant aid has declined to 43% of total aid; GoB will try to reverse the declining trend of grant aid.

Funds needed for TA in policy making, being very small, will be borne from Government’s own fund, or from a centralized TA fund to be set up with grant aid from DPs and administered by ERD

2. Concessional Loan Aid Bangladesh will accept concessional loan aid only after

careful financial and economic benefit-cost analysis, foreign exchange and external debt implications of the programs / projects.

only in national priority sectors / programs / projects identified in the national plans / strategy like Five Year Plans or PRSP;

focused on developing infrastructure that would promote export / foreign exchange earnings;

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Major Foreign Aid Policy Focus(contd.)

Concessional Loan Aid: To reduce future external debt burden, GoB will:

• not accept or minimise expenditure on consultants / foreign experts out of loan aid;

• not accept loan aid with tied procurement of goods and services from any specific country / source;

• not to provide sovereign guarantee against any loan taken by any public sector entities;

• not accept loan aid for higher studies, study visits, trainings, seminars, workshop etc. in foreign countries;

• not accept loan aid or minimise expenditure on procuring vehicles for programs / projects.

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3. Project / Program Aid Program / project aid are sometimes loaded with

policy/reform conditionality which are politically and administratively not easy to carry out.

Bangladesh will improve its project aid absorption capacity with necessary institutional and procedural reforms.

Bangladesh will pursue the DPs to adapt their policy conditionality with the ground realities of Bangladesh in line with the ‘Paris Declaration on Aid Effectiveness 2005’.

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4. Food AidSince 1990s food aid declined drastically with the increasing

agricultural productivity in Bangladesh. GoB will continue to mobilize food aid for public food

distribution under safety net programs like FFW (Food for Work) and VGD (Vulnerable Group Feeding) for the hard core poor and for keeping its food grains stock at optimum level to avoid any risk of food shortage due to unusual natural calamities.

5. Commodity Aidstarted to decline and ultimately dried up by FY 2003. GoB will continue to mobilize commodity aid as it provides

government fungible resources to tackle commodity scarcity from time to time and to generate local currency for aided projects.

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6. Technical Assistance: while considering technical assistance following criteria will be followed:

Technical assistance will be sought based on appropriateness with national policies;

Technical aid will be sought for implementation of large and complicated programs / projects. TA will be discouraged in small projects to avoid too much fragmentation of TA; ERD will set up a Central TA Fund (CenTAF) for funding small assignments

All Technical Assistance projects must have an institutional mechanism to have enough counterparts for internalization of foreign knowledge and technology.

50% of the budget of a TA assignment or more would be targeted for national experts / consultants, where suitable expertise is available from the country.

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7. Sector-Wide ApproachBangladesh will prefer sector-wide foreign aid for

comprehensive programmatic support under joint aid financing arrangement by multiple development partners instead of fragmented project approach.

Because of superiority of sector-wide approach over project approach, Bangladesh would like to expand sector-wide approach in all sectors in stages for improving aid effectiveness.

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8. General Budgetary SupportBangladesh would seek general budgetary support whenever

required to avoid fiscal stress. If conditionality is appropriately designed general budgetary support is better in term of aid utilization flexibility.

9. Foreign Development VolunteersGoB will prepare a regulatory framework containing the

sectors / sub-sectors / area where Bangladesh needs foreign development volunteers and their required qualification and experience.

Under the regulatory framework GoB would set institutional mechanism to assign local counterparts with foreign volunteers so that knowledge and technology transfer to the local communities are ensured and sustained.

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10. Foreign Aid through NGOs/CSOs GoB would prepear a regulatory framework to maximize development

effectiveness of the aids channeled through NGOs / CSOs. The regulatory framework would contain:

1. To make NGOs/CSOs transparent and accountable to the people they serve, they will deposit all their financial resources in a current account opened in any commercial bank operating in Bangladesh.

2. NGOs/CSOs will submit yearly financial and physical progress reports of their activities carried out by foreign aid to the NAB (NGO Affairs Bureau)

3. NGOs /CSOs will carry out the Annual Public Audit of the implemented projects/programs and publish such reports in the national news paper

4. International NGOs/CSOs have to maximize the use of local people to strengthen local communities in terms of internalization of knowledge and management techniques.

5. International and local NGOs/CSOs will be encouraged to work in remote rural areas.

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11. Public Private Partnership (PPP) and FDIForeign aid could facilitate FDI in PPP projects

significantly. A PPP project may need funds for the following purposes: Technical Assistance Investment in linked public sector projects Institutional Capacity building

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12. Foreign Debt Cancellation: GoB will pursue the DPs to write-off principal and interest of their loans following the Japan – Bangladesh Agreement 2003 through which Japan agreed to write-off its loan signed before June 1989.

13. Transfer of Technology through Aided Projects: ERD will prepare a guideline for ToT for foreign aided projects after consultation with stakeholders

14. Local Contents in Aided Projects: GoB will review and monitor all aided projects to ensure that sufficient local contents are used in the aided project such as local inputs in the form of local products and services from local contractors and SMEs.

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Foreign Aid Policy Instruments

1. Strengthening Macro and Sectoral Planning Process

2. Public Expenditure Management Linkage among MTBF, national mid-term development plan (Sixth

Five Year Plan 2011-15) and ADP will be further strengthened. ADP will follow clearly defined priorities and ranking of projects in

terms of their potential in achieving macro and sectoral goals and targets.

Forward project planning exercise will be undertaken for on-going projects to complete them in stipulated time to avoid time and cost overruns.

Rigorous project screening and appraisal will be made mandatory to include any new project in the ADP to avoid over-stretching of the development budget.

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Foreign Aid Policy Instruments (contd.)

3. Effective Program / Project Planning Procedural Reforms for Public Investment Efficiency

Functions of the Sector Divisions of the Planning Commission will be reorganized focusing more on sectoral / sub-sectoral planning / strategy

Sector/sub-sector-wide program approach will be introduced in stages based on sectoral / sub-sectoral plans / strategy

Resource allocation among ADP sectors would be based on ICOR to maximize GDP growth rate

All development programs / projects including foreign aided programs / projects will be rigorously appraised and their opportunity cost will be analyzed

Rigorous screening will be done by the inter-ministerial Programming Committee of the Planning Commission for inclusion of new projects in the ADP.

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Institutional Reform for Public Investment Efficiency All Government Departments/Directorates will have a Planning Wing /

Unit headed by a director with adequate manpower and logistics to improve project design capacity;

All Ministries / Divisions will have a Planning Wing headed by a Joint Chief with adequate manpower and logistics to improve project appraisal capacity;

Planning Commission will be reorganized in the context of changed economic management and will be strengthened for formulating sector / sub-sector plans / strategy and MIS will be developed in all its Divisions;

IMED will be strengthened in term of MIS and professional skills to improve program / project implementation monitoring and evaluation capacity;

BBS will be strengthened in terms of professional skills and autonomy to improve macro, sectoral and program appraisal data base.

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4. Program / Project Financial Management Fund disbursement will be linked with comprehensive expenditure

reporting by spending units including physical progress indicators; Reimbursable claims to foreign aided programmes / projects will be

made on a timely basis; Programme / project financial statement will be prepared and

audited and will be made available within six months of the completion of fiscal year.

Making local matching fund available for aided projects, Decentralising decision making authority to the field level

programme / project managers and holding them accountable for the implementation performance,

Making PPR standardised to international procurement rules so that all development partners comply and harmonise their procurement rules accordingly.

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5. Program / Project Implementation Support IMED currently outsource single point monitoring to outside

consultants. To make it effective, outsourcing of monitoring would be redesigned to make it continuous and sustainable throughout the project execution period through implementation support consultancy.

Implementation and monitoring of large and complex foreign aided programs / projects will be outsourced to independent Programme / project implementation monitoring firms;

Program / project implementation committees incorporating all stakeholders at operational level will be formed;

Post implementation Program / project impact studies will be done by independent firms and public hearing will be organised as feed backs for new programs / projects.

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6. Aid Utilization Performance Rating: ERD will assess the AUPR of each agency and rank them. Prior to seeking foreign aid for Agencies falling in the bottom 10%, ERD may set the condition that the AUPR of the Agency being low, they need external implementation support. Guidelines for assessing AUPR will be prepared and issued by ERD

7. Joint Programming and Financing: Development partners will be encouraged to undertake joint programming of development assistance to channel foreign aid in priority sectors identified in national plans according to their comparative advantages and excellence and to agree on joint funding for large and complex programs / projects.

8. Foreign Aid Alignment with the National Development Plan / Strategy9. Foreign Aid Harmonization among the Development Partners10. Foreign Aid Flow Monitoring for Implementation of MDGs and other

Development Goals11. Monitoring Foreign Aid Flow for ‘Climate Fund’

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Institutional Arrangement for Aid Policy Implementation

1. Joint Cooperation Strategy (JCS)2. Local Consultation Group (LCG)3. Bangladesh Development Forum (BDF)4. Aid Effectiveness Unit (AEU)5. External Economic Policy (EEP) Branch6. Strengthening FABA for Web Based AIMS 7. Capacity Building of IMED and ERD on Public

Procurement8. Strengthen ‘Economic Wings’ in the

Bangladesh High Commissions / Embassies

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Implementation of Foreign Aid Policy

The ‘Foreign Aid Policy of Bangladesh 2011’ has been prepared in an evolving national and global aid scenario as a living document. It will be reviewed from time to time to adapt with the changing foreign aid environment.

Implementation responsibility of ‘Foreign Aid Policy of Bangladesh 2011’ would lie with the ERD in association with the Planning Commission, IMED, Finance division, line Ministries / Divisions and DPs (Development Partners).

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Dr. Golam Sarwar Senior Research Specialist Foreign Aid Policy Dhaka July 20, 2011

Documents

Transcript of Dr. Golam Sarwar Senior Research Specialist Foreign Aid Policy Dhaka July 20, 2011