Chapter 3 The Scaling-Up Scenarios: Sectoral and Micro Analysis
- Matthew Gaertner, Laure Redifer, Pedro Conceição, Rafael Portillo, Luis-Felipe Zanna, Jan Gottschalk, Andrew Berg, Ayodele Odusola, Brett House, and José Saúl Lizondo
- Published Date:
- March 2012
Human development indicators across the 10 pilot countries show an urgent need to enhance development efforts. All 10 countries were grouped within the low human development status by the 2010 UNDP Human Development report and ranked among the 40 least-developed countries in the world (UNDP, 2010a). Three of them (the Central African Republic, Liberia, and Niger) were among the bottom 10 countries. Although many have shown signs of improvement in recent years, human development outcomes still remain very weak.
The Basis for the Micro Analysis
The underlying premise is that aid can finance good projects that improve health and education outcomes, build useful infrastructure, and in general have a high rate of return. This presumption is based on a large amount of analysis and empirical evidence, which is not reviewed here.14 Specifically, African infrastructure lags that of the rest of the developing world and is holding back economic growth by as much as 2 percentage points each year (African Union, AfDB, and World Bank, 2010). Scaling up aid to address this infrastructure deficit will stimulate long-term growth and accelerate progress toward achievement of the MDGs.
However, it is also clear that aid spending may not always have these beneficial effects. Failure can come about because of poor project planning and implementation, insufficient capacity, or inadequate supporting environments. Examples include incomplete coverage of maintenance costs for new infrastructure, import restrictions that keep productive enterprises from reaching their potential, pairing of medicine with inadequate delivery systems, and complex donor-mandated procedures that slow implementation. That these elements are important is illustrated by current low rates of execution of budgeted capital expenditure, ranging from 61 percent in Benin to 38 percent in the Central African Republic.15 Individually valuable projects might also fail to deliver the intended private sector growth responses or affect competitiveness meaningfully. (The next chapter addresses these issues.)
For these reasons, scaled-up aid will be most effective if it is predictable and well integrated with national budget and implementation processes and if recipient countries emphasize continued improvement in public financial management. Past reforms in the pilot countries have set the foundation for enhancing the developmental impact of scaled-up external resources. Strong macroeconomic and budgetary reforms have taken place in these 10 countries, especially in the 1980s and 1990s. Although more work remains, public financial management systems have been strengthened in a number of African countries as part of their reform processes, improving the links between strategies, plans, and outcomes.16
This chapter reports on recent efforts to develop business plans for the use of additional aid in the 10 pilot countries. These plans are designed to show that well-constructed, underfunded development plans are ready for financing. The plans provide sectoral details on the uses to which an additional $25 billion of annual aid to Africa could be put, drawing on existing work over recent years. They are thus designed to allay at least some of the concerns that these countries are not ready for additional aid and thus to provide a practical basis for scaling up aid.
Substantial work has been done in many countries in recent years to identify the sectors to which resources could be allocated to greatest effect and the amounts to be externally financed. Most African countries have relied on two tools for determining how aid, and additional aid, can be best directed and incorporated into the policy formulation and budget planning processes: Poverty Reduction Strategy Papers (PRSPs) and Medium-Term Expenditure Frameworks (MTEFs).
Most countries in SSA, including all 10 pilot countries, have produced PRSPs. The PRSPs identify priority public sector spending designed to promote growth and reduce poverty and provide the basis for determining additional external financing needs. They have been prepared by the countries themselves, in broad consultation with local stakeholders, including civil society, as well as external development partners such as the World Bank, the IMF, and the UNDP. PRSPs have provided a foundation for the provision of multilateral and bilateral financial assistance, as well as for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative.
PRSPs are generally intended to be the primary instrument for defining and monitoring national development agendas. In most countries, detailed priority action plans were prepared, development programs were costed, resource gaps identified, and resource mobilization strategies developed, paying special attention to what would be needed to achieve the MDGs. The PRSPs, through their associated annual implementation reports, have also been important for enhancing governments’ systems for monitoring MDG achievement. The National Strategy for Growth and Reduction of Poverty (known as the MKUKUTA initiative) in Tanzania, for instance, allows for regular analysis of progress toward the country’s development agenda (including the PRSP) goals and provides an overview of the performance, challenges, lessons learned, and the next steps in the agenda.
Many African countries have also adopted MTEFs. MTEFs are multiyear frameworks for determining public spending priorities (Box 3.1). These frameworks have become an important instrument through which resource requirements can be projected and resource gaps identified. They frame revenue forecasting and expenditure decision making and provide a central pillar for evidence-based budgeting and development management in Africa.
Box 3.1.The ABCs of MTEFs
The MTEF is a planning tool for estimating the resource envelope available for public expenditure and for constructing indicative plans for allocating the resources among competing priorities. PRSPs and MTEFs are related. The PRSP lays out the development strategy over the medium to long term, while the MTEF is the vehicle for operationalizing this strategy and determining priorities within a given resource envelope. MTEFs are tools for translating PRSPs into public expenditure programs within a coherent multiyear macroeconomic and fiscal framework.
In operational terms, the MTEF consists of a three-stage approach: (i) projection of a likely resource envelope; (ii) a bottom-up estimation of the current and medium-term costs of intended policies and projects; and (iii) the matching of these costs with available resources. The approach helps to link planning, budgeting, and policy, thereby allowing an MTEF to be a strategic framework for budget preparation and the expenditure process. Essential to the approach are the costing exercise by line ministries and the preparation of a detailed program budget, which contributes to translating government goals into concrete budgetary proposals. The MTEF, therefore, provides the critical link between strategic planning and annual budgeting, thus ensuring that budget execution is more firmly in line with desired development outcomes.
Drawing, where possible, on existing PRSPs and MTEFs, the 10 countries participating in the pilot studies provided detailed expenditure plans for the use of additional aid in line with the Gleneagles commitments. In collaboration with international partners, especially the UNDP, the IMF, the AfDB, and the World Bank, these governments produced detailed estimates of the current and projected expenditure patterns for specific MDG-related programs, including how they would allocate scaled-up official development assistance (ODA) flows, and their domestic and external financing resources. As a result, the potential scaling up is matched on the recipient side by a careful costing and planning mechanism.17
A challenge for this exercise was the sometimes imperfect alignment of existing MTEFs with PRSPs. In the past, the link between such planning exercises and budgeting processes (both MTEFs and annual budgets) has been weak. The pilot studies undertaken as part of this project provided a good opportunity to encourage a stronger alignment between MTEFs and PRSPs. This closer alignment should help ensure that the use of the scaled-up financing is based on the principles and priorities outlined in the PRSPs.18 In addition, costing information produced as part of the PRSP can be integrated better into the MTEFs. The alignment of these instruments should also help harmonize donors’ interventions and provide evidence-based plans and programs to absorb scaled-up ODA more effectively for better development outcomes.
The plans for the use of scaled-up aid also need to take into account simultaneous efforts to enhance domestic resources. Only in this way can the plans to use aid be embedded in a comprehensive MTEF that takes into account the overall picture of expenditure priorities and recurrent costs and the implications for the annual budget.
Most low-income countries (LICs) have made substantial progress in revenue mobilization, and they are continuing their efforts (IMF, 2010b). LICs in Africa have increased tax-to-GDP ratios, on average for nonfragile states, from about 9 percent in 1992 to about 15 percent in 2009 (see Figure 3.1). Efforts to increase revenues in line with potential continue, but raising revenues is more challenging in LICs, which have large informal sectors and relatively weak public sectors. Thus, although higher domestic revenues are an important long-term goal, they cannot be expected to substitute for aid in the near term.
Figure 3.1.Progress with Domestic Revenue Mobilization in SSA LICs
Source: IMF, Sub-Saharan Africa Regional Economic Outlook database, 2010.
Note: Lines represent simple averages. Other LICs are Benin, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, Senegal, Tanzania, Ugačnda, and Zambia. Fragile LICs are Burundi, Central African Republic, Comoros, Democratic Republic of Congo, Cote d’Ivore, Eritrea, Gambia, Guinea, Guinea-Bissau, Liberia, Sao Tome and Príncipe, Sierra Leone, Togo, and Zimbabwe.
A final factor that needs to be taken into account in designing plans for scaling up spending is the possible availability of nonconcessional borrowing. Most LICs have limited scope for domestic borrowing to finance scaling up without risking crowding out private sector activity, given the small stock of domestic saving and financial markets that are less well developed. Borrowing externally is a possibility. Such borrowing can enable more ambitious scaling-up plans, particularly in countries in which debt-management capacity is strong and prospects are good that projects will eventually “pay for themselves.” Lower debt burdens resulting from debt-relief initiatives provide some space for pursuing these options. However, care must be taken to ensure that this does not overly burden the country down the road, as has been typical in the past. Certainly, large-scale borrowing raises the stakes; although it can speed scaling up, if the pay-off is too low, the repayment obligation will be burdensome. Some of the pilot cases discussed the possibility of nonconcessional financing options.19
Summary of Results from the Sectoral Analysis
In the exercises, aid increases to a uniform $85 per capita in 2004 terms—in line with the Gleneagles commitments.20 This amount provides a degree of scaling up that varies substantially across the 10 pilot countries, because countries as of 2007 received widely varying amounts of aid (Figure 3.2), according to any measure. The allocation of increased aid to achieve a uniform $85 per capita per country was deemed to be more equitable in the distribution of aid to countries than other notional approaches that were considered. For example, equal increases in U.S. dollar terms would not account for already-existing variations in the current distribution of ODA. Allocating as a percentage of GDP would ignore large variations in GDP per capita among recipient countries.
Figure 3.2.Per Capita ODA Flows Differ Greatly by Country in 2007
Source: UNDP (http://hdrstats.undp.org/en/indicators/54.html).
PRSPs in the pilot countries have generally been substantially underfinanced. Although the rate at which PRSPs are financed varies across countries (Figure 3.3) and the precision of their underlying costing estimates differs substantially, the shortfall between projected needs and budgetary realities are high across the board. However, meeting the Gleneagles commitments would greatly reduce or even eliminate the PRSP funding gap in most countries. For example, in Ghana, the Gleneagles commitment would triple the share of ODA-financed expenditure, and thus could finance the entire PRSP.
Figure 3.3.Many PRSPs in Africa Are Underfinanced
Source: Authors’ analysis based on pilot studies.
The pilot studies show how scaled-up ODA could provide resources to unfinanced projects and programs already contained in national development strategies. Lack of funds remains, on the whole, the crucial constraint to implementing more of the outlined projects and programs.21 The sector strategies are based on needs assessments that lay out the different sources of financing, including the financing gap needed to be filled by the scaling up of aid. Proposed outlays for each sector are based on government prioritization. With regard to sectoral allocation, the studies underscore the need to boost funding for much-needed infrastructure. In Benin, Rwanda, and the Central African Republic, more than a fourth of the incremental ODA would be directed to finance infrastructure. Human-development-related spending, however, is the second leading sector in the studies, averaging about 10 percent of the incremental ODA.
The execution of development strategies needs to take into account country-specific labor rigidities and implementation capacity. Scaling-up plans, too, need to consider potential bottlenecks in skilled labor and implementation capacity. In many cases, aid itself can help to relieve these bottlenecks. For example, if engineers are in short supply for infrastructure projects, alleviating the shortage could be the focus of aid intervention. A shortage of medical doctors in rural areas is another serious constraint in many countries. However, careful sequencing of projects is necessary, for instance, to ensure that education and training initiatives can deliver the skilled labor needed for other investments.22
A country example illustrates how scaled-up aid could help achieve development strategy objectives. The Poverty and Social Impact Analysis Capacity Development report for Benin suggested that addressing limited funds and funding mechanisms would be critical for achieving the overriding objectives of the country’s national development strategy (Adjovi and Mensah, 2007). For instance, between 2004 and 2006, the average annual aid flow as a percentage of GDP was less than 9 percent for Benin. Thus, the scaling up of aid, if implemented in 2010, would have helped the government to increase its capital expenditures from $412 million in 2007 to $613 million in 2010 and its expenditures on goods and services from $178 million in 2007 to $321 million by 2010 (Figure 3.4). As a result, education expenditure per capita would have more than doubled from $3 in 2008 to $7 in 2010, health expenditure per capita would have increased from $19 in 2008 to $25 in 2010, and infrastructure spending would have increased from $19 in 2008 to $25 in 2010. The impact of the scaled-up aid is greater if other economy-wide constraints are effectively managed, including the use of skilled manpower to manage critical sectors and efforts to increase the absorptive capacity of the public sector.
Figure 3.4.The Mechanics of the Micro Analysis: Benin
Source: UNDP staff calculations.