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A special $20 billion aid fund for Africa? Perhaps, but not just yet…

Written by Simon Maxwell

Speaking at ODI on Friday, Professor Wiseman Nkuhlucalled for most of the new aid for Africa to be placed in a special new $20bn fund – equivalent to 5% of Africa’s GDP – channelled through the African Development Bank, but administered directly by African Ministers of Finance. He amplified his remarks in a later interview for the BBC World Service’s Newshour programme. The purpose of this new fund would be to implement the programmes and activities foreseen in the NEPAD Action Plans. Professor Nkuhlu is Chairman of the NEPADSteering Committee and Head of the NEPAD Secretariat, as well as being an adviser to South African President Thabo Mbeki. He was flying a kite, either of his own accord or as part of a strategy. But is this a kite that should fly?

Professor Nkuhlu cited two reasons for his proposal. The first was that the costs of receiving aid were too high, because of the so-called‘transactions costs’ imposed by donors. These take the form of conditions applied to aid, but also the burden associated with the number of visiting missions to plan, monitor and evaluate, and with overlapping and reporting and accounting procedures. The second reason was that existing aid agencies had proved to be insufficiently efficient and accountable. There is probably justification in both reasons, though neither set of problems has been left unaddressed.

The transactions costs of aid are indeed high. The number of donors and donor agencies has increased to the point where there are as many as 80 major players, with perhaps 40 active in any one country – not including the dozens of large international NGOs who may also be present. In any one sector, say education or health, there may be as many as 15 agencies trying to help. All will send missions, and every mission will want to see the Minister, and will tie up the time of senior civil servants.

In attempting to tackle this problem, donors have developed an agenda known as ‘harmonisation’ and alignment.’ This has been led by the Development Assistance Committee of the OECD, and essentially encourages donors to fall in step behind government plans, with unified support to government sector strategies, and uniform reporting and accounting procedures that follow government standards. In some cases, donors have decided to support the government budget as a whole rather than individual sectors, and to channel aid directly to budget support. The UK, for example, now provides 30% of all its country aid as budget support. In other cases, such as the US and France, enthusiasm for the harmonisation and alignment agenda is much less predominant.

Sector and budget support do help reduce transactions costs, but they do not eliminate conditionality. Indeed, they may make a country more vulnerable to suspension of aid, especially when there is no formal procedure or appeal process. See my earlier blog post on the UK’s decision to suspend budget support to Ethiopia.

Another way to reduce transactions costs is to channel more aid through multilateral agencies, and thus reduce the number of players. At present, 75% of aid is bilateral and only 25% multilateral. A slogan for 2005 could be ‘don’t just harmonise, multilateralise’. However, Professor Nkuhlu says that the multilateral agencies are not up to the job, or are insufficiently accountable. In the case of Africa, he refers particularly to the World Bank and the African Development Bank (AfDB.)

The main problem with the World Bank is likely to be governance, since votes on the Board are distributed more or less proportionately to national income. The rich countries clearly ‘own’ the World Bank, with the US alone having 20% of the votes. The 46 countries of sub-Saharan Africa have only two votes between them. This voting structure undermines the claim of the Bank to legitimacy, for example when introducing conditions on fiscal discipline or exchange rate policy, or when discussing controversial issues like privatisation. The main problem with the African Development Bank is more likely to be competence, since the institution has suffered over the years from poor management. African countries have a majority of 60% on the Board, with rich countries having 40% of the votes. The Bank is now in some sort of crisis, since it has failed to elect a new President. The vote has been put back to late July.

Whether the problems are serious or intractable enough to justify creating a new mechanism is a moot point. Professor Nkhulu presumably believes (a) that the harmonisation and alignment agenda is insufficient, (b) that the scope for multilateralisation is limited, and (c) that existing institutions cannot be reformed, even with the prospect of large new flows of resources. More important, he must also believe that a new mechanism based on decisions by Finance Ministers would be any better than existing mechanisms. This is brave. For a new Finance Minister mechanism to be effective, it would have to allocate money based on criteria of need and effectiveness, with hard decisions taken where money was not being spent well. It would also have to monitor and report at a level of detail that was sufficient to satisfy audit authorities and parliaments in donor as well as recipient countries. Some kind of secretariat function would be needed for all of this, presumably better and more accountable than the African Development Bank.

If Africa could do this, it would certainly be an exciting step forward: Africa taking responsibility for its own development. It might also be a way of creating powerful new incentives for better performance by African countries, in respect of governance and economic management. It would give the NEPAD peer review process real teeth.

Could it happen? Perhaps, but the difficulties should not be under-estimated. Europe provides an interesting parallel. Here, there is taxation and expenditure on a European scale, supported by a complex apparatus of governance and accountability, including Europe-wide elections for a European parliament. Even so, and as current debates show, for example about the Common Agricultural Policy, Ministers find it hard to reach agreement and often compromise in messy and sub-optimal ways. When it comes to coordinated economic management, for example the Growth and Stability Pactwhich underpins the euro, big countries tend to get away with breaking the rules and prove hard to restrain. The ‘No’ vote on the constitution in the Netherlands reflected the frustration of a small country at this fact.

Africa has made progress in thinking and organising on a regional level, especially since the creation of NEPAD. The African Peer Review Mechanism represents a start on holding countries to account at a regional level, but is voluntary and has so far only reported on two countries, Rwanda and Ghana. It remains to be seen whether the recommendations of the peer review reports will be implemented. The difficult countries, like Zimbabwe, Sudan, or DRC, are not even on the list for peer review. And NEPAD has enough on its hands getting the new governance standards embedded in individual African countries. Creating a new multi-billion dollar financing facility, along with all the institutional implications it brings, might therefore not be the first priority for Africa right now. Furthermore, it is not easy to imagine OECD aid ministers handing decisions over to African Finance Ministers without a great deal of monitoring and accountability, simply to satisfy their own tax payers.

Where does this leave Professor Nkuhlu’s proposal?

First, he should be thanked for putting on the agenda important issues about transactions costs and the unequal nature of the development partnership.

Second, he should also be commended for making the point that African countries should take progressively greater control of their own development trajectories.

Third, however, he should be asked to concentrate first on harmonisation, alignment and multilateralisation, as vehicles for more effective and efficient aid.

Fourth, and perhaps most important, he should be challenged to help strengthen the African Development Bank, in order to demonstrate that a majority-owned African institution can deliver the quality of aid he wants. African funding institutions, especially the African Bank, have good potential to implement regional infrastructure projects such as those NEPAD has planned. Perhaps the AfDB should get even more support for this objective, both within and from outside Africa. In particular, perhaps established donors like the International Development Association could use the AfDB as their preferred channel for co-financing in Africa, and delegate a lot more of their operations to it?