Augustine Ngafuan has an unenviable task. As Liberia's Minister of Finance, he is responsible for trying to manage the tidal wave of development assistance flowing into his country. The vast majority of Liberia's foreign aid is "off-budget," which means that money goes directly to NGOs and contractors to implement development projects. So while the Government of Liberia's official budget of $374 million for Fiscal Year 2009-2010 includes $23 million of foreign assistance, these figures don’t even come close to showing Liberia’s total resource envelope. More than doubling the government's total budget, Liberia receives an estimated $449 million in annual off-budget foreign assistance. And this estimate of off-budget aid excludes unknown amounts of funding from UNMIL, China, private foundations, and several bilateral and UN agencies.
Minister Ngafuan and his colleagues therefore face an extraordinary challenge: they must plan and budget with financial information that covers only 44% or less of their total resource envelope (see Figure 1). Donors who provide off-budget aid can in theory take steps to make their funding more transparent, but in practice this rarely happens. Donor incentives are generally aligned in a way that privileges reporting to Washington D.C. and Brussels, not Monrovia. The U.S. Government, which is by far Liberia's largest donor (providing nearly $230 million a year), provides a useful example. Currently, 100% of U.S. assistance to Liberia is "off budget," and Natty Davis, a senior official in the Office of the Presidency, notes that “the development partner that is most difficult to get [aid] information from is the U.S. government.”
Off-budget aid donors are quick to respond that, as stewards of taxpayer resources, they face a unique set of constraints in countries with weak budgetary, procurement, and financial management institutions; putting aid on budget can substantially increase the risk of waste, fraud, and abuse. But countries like Liberia pose a catch 22: how does a cash-poor government go about strengthening its institutions when donors are preoccupied with designing, implementing, and evaluating their own projects?
One commonly-heard argument is that recipient governments need to first take steps to "put their own house in order" to boost donor confidence. And, by all appearances, the Liberian authorities are doing just that; they have adopted a series of public financial management reforms under the Heavily Indebted Poor Country (HIPC) Initiative, achieved full compliance with the Extractive Industries Transparency Initiative (EITI), and strengthened their anti-corruption and supreme audit institutions. Minister Ngafuan has also established an Aid Management Unit in the Ministry of Finance, utilized an Aid Management Platform(AMP) for tracking external resource flows, and rolled out an aggressive new Aid Policy that:
• requires aid-receiving government institutions to report to the Ministries of Finance and Planning within seven days of reaching the agreement with donors;
• forces CSOs to disclose their financial records and agreements made with donors; and
• establishes a common reporting mechanism for recording all development projects undertaken in Liberia
Therefore, the tricky issue for donors is knowing when it is appropriate (and safe) to begin channeling resources through partner government systems. The Danes, the French, the Norwegians, and most UN agencies exclusively provide support to Liberia via off-budget aid. The European Union also remains skittish. However, the World Bank, the African Development Bank, Germany, and DFID have begun to channel modest amounts of assistance through the government (see Figure 2).
In addition to the obvious planning and budget challenges associated with off-budget aid, there are political reasons why aid modality decisions could have a profound influence on development outcomes.Research shows that young democracies, like Liberia, are highly vulnerable to political instability, violence, and unconstitutional transfers of power. Newly-elected governments in post-conflict settings generally have a tenuous grasp on power and must convince voters of their credibility and legitimacy if they have any hope of escaping a major democratic reversal (e.g. a coup). One way for a young democracy to shore up its credibility and legitimacy is to build effective and sustainable public service delivery systems. However, when voters get all of their development "goodies" (e.g. food, water, health, education) from donor-funded projects via off-budget aid, recipient governments risk the appearance of impotence and losing public support. This is precisely why the U.S. Ambassador to Afghanistan, Karl Eikenberry, hasprivately advocated for increased budget support to the Karzai administration and an "Afghanization" of U.S. foreign assistance.
Team Obama has acknowledged the importance of refocusing U.S. foreign assistance programs on long-term capacity building, but only time will tell if the administration can translate its good intentions into tangible changes in the way foreign assistance is delivered. USAID recently announced that it will select 5 pilot countries to test the feasibility of channeling more funds through host country systems in transitional settings. And, as chance would have it, Liberia will be its very first test case. USAID will initially provide small amounts of funding through Liberia's public financial management system, and after assessing whether the country has managed the money well, consider a more substantial increase in on-budget aid. This is an important policy development that deserves careful scrutiny.
Here at AidData, we have begun collecting more comprehensive "channel of delivery" data --in collaboration with Simone Dietrich at Pennsylvania State University and Sarah Bermeo at Duke University -- to enable researchers to evaluate competing claims about the usefulness of on-budget and off-budget aid in different country settings. Our hope is that the emerging set of IATI standards will also facilitate more systematic "channel of delivery" reporting by donor agencies.