Demystifying foreign aid

The only way to operationalise the consensus among serious public policy professionals, that aid needs to be provided primarily through the Pakistani government systems, is if the state is ready and able to be helped. In other words, if donors are expected to keep their end of the bargain, in supporting aid efficacy-efforts as articulated in the Paris Declaration, they need some help from the recipient country’s government.
Donors (invariably, other countries’ governments) that provide grant assistance to Pakistan do not have a great track record in supporting state effectiveness in Pakistan. While donors acknowledge the need to strengthen the Pakistani state, they have real and genuine concerns about providing direct support to Pakistan’s government. In part, this is informed by the fact that taxpayers in other countries may have reservations about how Pakistan’s government spends this money. After all, once in a budget, all money is fungible, which means donors can’t really choose what part of government expenditure they are funding. With a massive military budget, potentially leaky public expenditure schemes like Sasti Roti and the Benazir Income Support Program, and allegations that public funding is provided to organisations with links to militants, the fungibility of budget support threatens the coherence of other countries’ Public Financial Management (PFM) systems.
Donors basically can’t do anything in support of the Pakistani state that violates their own rules, or threatens either the jobs of their foreign aid bureaucrats, or the standing of their politicians. The choices made by donor governments are, at least at the strategic level, defined by the interests of the taxpayers whose money they are spending. If genuine concerns about fungibility are added to the less substantive, but more compelling argument about fears of corruption in Pakistan, it isn’t hard to see why donors try to minimise their exposure to the Pakistani

government’s balance sheet.
This is a country of 180 million people, with more than 40 million children between the ages of five and eighteen currently not in school. The scale of Pakistan’s problems requires government interventions. It’s the only authority that has the agency to act nationwide, and the legitimacy to tax and spend. The overarching assumption therefore is that real and substantive change in Pakistan requires investments in government. Ultimately, if foreign aid is to be absorbed properly by Pakistan and have any kind of meaningful impact, Pakistan itself has to take a number of important steps.
Spending foreign aid through government systems requires three basic things. The first is an overarching vision. Donors need to feel that they are investing in a plan that has a viable outcome at the end of a specific period of time. Those outcomes may or may not be achieved, but Pakistan has to be able to articulate what it wants to do to ensure that the next generation of Pakistani leaders deal with smaller problems, of a shallower nature, that do not represent existential threats to either the state or its citizens. So the question to ask is whether Pakistan has a plan for economic growth and human development.
The second thing needed to make a compelling argument to donors for directing aid through government systems is a set of functional accountability instruments. The most important of these is the Public Financial Management (PFM) system. The PFM is simply an array of instruments used to ensure that there is an easy and accessible way through which citizens of a given country can track public expenditure, be assured that it is used in a manner that is fit for the purpose of public funds, and in a manner that delivers value for money. The two instruments to ensure this in any country are the supreme audit institution, and the parliamentary mechanism. In Pakistan, these functions are fulfilled by the Auditor General of Pakistan and the Public Accounts Committees of parliament respectively.
Over the course of the last three decades, a sustained culture of slow and clumsy procedural structures within the Auditor General’s domain has resulted in the instrumentalisation of by-passing the audit process altogether. Most publicly financed companies that are focused on human development, such as the Pakistan Poverty Alleviation Fund (PPAF), and indeed, all of the Rural Support Programmes (RSPs), were designed specifically so that the government would have the ability to spend money on development quickly, without worrying about hordes of “audit objections”. The outsourcing of the auditing function of course means that the Auditor General of Pakistan continues to do things the way it always has, spare the minor reforms it has enacted to satisfy long-standing World Bank and Asian Development Bank loan conditionalities. In short, the PFM instruments in Pakistan are outdated, slow and deliberately by-passed, by the government itself – including the Ministry of Finance (which signs off on bodies like the PPAF). The only changes or reforms that the PFM system ever experiences are brought about through the compulsions of loans. The net risk that this exposes the Pakistani taxpayer to is hard to quantify, but it is certainly an enhanced level of risk, as compared to the risk in a country with supreme audit institutions that have universal jurisdiction over public funds, and the flexibility to dispense with their responsibilities adequately. The bottom line is that if Pakistan’s own government doesn’t trust its supreme audit institution, why would any other country?
Third and perhaps most importantly, Pakistan needs to have a set of coherent and pragmatic need articulation and aid absorption mechanisms. Without these, the great risk is a repetition of the difficulties this government has faced in getting it right on foreign aid. The evolved equation for foreign aid management through the 1990s and the until the self-immolation of Gen Musharraf’s regime was that the Economic Affairs Division played the lead role. The Pakistan Development Forum was the established annual meeting to discuss aid between donors and the Pakistani government.
In its enthusiasm for change and freshness, the PPP initiated the Friends of Democratic Pakistan – a kind of mini-UN convened to reward Pakistan for its frontline role in combating terrorism. Of course, this single move swung the pendulum dramatically away from the EAD and toward the Foreign Office (FO). But the FO of course has limited experience and capacity on matters of aid. Meanwhile, the Ministry of Finance – a kind of chief financial officer for the GOP – became more and more involved in articulating need, given the massive fiscal deficits it was facing. This overall situation has been further complicated by the Swat IDP crisis, and the floods of 2010 – adding organisations like the Special Support Group, and the National Disaster Management Authority to the picture. Finally, powered by the 18th amendment, the provinces are no longer necessitated to wait for the federal government to articulate plans and provide approvals for foreign aid conversations.
Today, the foreign aid conversation within the government of Pakistan has become a vulgar shadow of what it could be, and certainly what it should be. The FODP mechanism has failed to stimulate the magnitude and modalities it was once thought it would. The provinces don’t have the capacity to conduct negotiations with the donors, and the donors have even less confidence in provincial PFM mechanisms than they do in the federal ones. Federal government ministries, agencies and divisions compete for donor funds. All this helps power the engine of donor expenditure through non-state actors. This cycle has demonstrably failed before. How can it be arrested?

(to be continued)

The writer advises governments, donors and NGOs on public policy.