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Budget Support, Sector Wide Approaches and Capacity Development in Public Financial Management

Author: OECD DAC
Date: 2006
Size: 74 pages (25 KB)

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Summary

How can donors deliver budget support in ways that maximise its benefits while reinforcing partners' capacity to achieve effective public financial management (PFM) systems? How can Sector Wide Approaches (SWAps) improve the effectiveness of development policies and government ownership of public sector policy? How can the effectiveness of aid delivery, aimed at capacity development in Public Finance Management (PFM), be enhanced? This paper, by the Organisation for Economic Co-operation and Development (OECD), highlights good practice and offers benchmarks in these areas.

Partner country ownership is essential in any aid programme. Recipient countries have responsibility for their own development - the donor role is to support national efforts, not to be a substitute for them. Delivering aid through partner PFM systems is important for strengthening PFM. Donors need to act within an explicit, government-owned framework that is strategic and programmatic. Fragmented and piecemeal initiatives by donors are unlikely to be effective. Furthermore, donors need to be sensitive to country contexts, taking account of country-specific institutions and priorities, recognising that donor behaviour may affect in-country accountability.

• Effective institutional development, in particular, should build on what already exists, rather than transplanting entirely new systems.
• Budget support can reduce transaction costs, facilitate donor co-ordination and enhance the predictability of aid flows. It is good for macroeconomic stabilisation as well as poverty reduction and growth.
• Budget support also fosters institutional development. However, it can force costly fiscal adjustments, create intrusive conditionality and make heavy reporting requirements.
• SWAps work best when the government is a major service provider and responsibilities are managed by a single ministry. The context for SWAps has become more favourable but more complex.
• SWAps are difficult to reconcile with decentralisation. There are sometimes problems of inter-sectoral co-ordination and of securing the involvement of the private sector and civil society.
• Good governance in PFM is critical to countries’ ability to reduce poverty. It encompasses democratically legitimate policy formulation as well as an effective, efficient, transparent, and rules-based system.
• Few donors have focused on how capacity development in PFM takes place. It has an inherently political dimension. Reforms of budgetary systems require high-level political support if they are to be realised.

It is important that aid is delivered in ways that maximise its potential benefits. Recommendations in this respect include:

• SWAps should be oriented towards durable strengthening of sector capacity and institutions as well as improving sector service delivery.
• Donors should avoid imposing a particular PFM blueprint and focus on facilitating an environment in which PFM capacities build progressively.
• The complexity of capacity development in PFM, as well as its political dimension, means there is a need for better donor harmonisation.

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Source: OECD DAC, undated, ‘Budget Support, Sector Wide Approaches and Capacity Development in Public Financial Management’, in Harmonising Donor Practices for Effective Aid Delivery, Volume 2, OECD DAC, Paris
Author: Organisation for Economic Cooperation and Development Development Assistance Committee (OECD-DAC), http://www.oecd.org/dac/