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European Aid for Poverty Reduction in Nepal

Working papers

This study is part of a larger programme of research focusing on the use of aid for poverty reduction (PR). It restricts itself to the European donors with the largest aid programmes in Nepal: Denmark, Finland, Germany, the Netherlands, the United Kingdom and the European Commission. The paper discusses the issues of aid and poverty reduction at three different levels: the public policies for PR in Nepal (Chapter 1); the role of foreign assistance in general (Chapter 2) and a comparative analysis of European donors' approaches (Chapter 3). It then presents the results of empirical investigations of 'best practice' interventions by the selected donors (Chapter 4) as well as Nepalese perceptions of European donors' aid for PR (Chapter 5).

Conclusions for Donor Policies

The study suggests that Nepal is an over-aided country where weakly co-ordinated donors are funding and running too many projects which do not have PR as a consistent priority. It also suggests that donors are seriously interested in improving their PR performance. To narrow the gap between best and poor practice, and between official PR commitment and in country operations, the following conclusions are drawn on ways in which the donor agencies might contribute more effectively to PR in Nepal.

Good Governance

The most important basic contribution that donors can make is helping the government to introduce, institutionalise and implement good governance standards. Donors can help to reform the civil service and other organs of the government to make them more efficient and competent, accountable and transparent, decentralised and participatory and less corrupt. Good governance cannot be installed from outside without the political support of the country's leaders. But a concerted and energetic insistence by major donors on good governance will certainly have a substantial impact on any government in Nepal. Donors could help in devising and installing an effective incentives system in addition to using their leverage to push civil service reform as a basic condition. Donors should impose strict conditionality in accountability, transparency, non-corruption and a decentralised, participatory approach in donor-funded projects. Projects should be approved, extended or cancelled based on governance-related performance criteria.

More Pro-Poor Aid

To increase the pro-poor character of aid donors need to reduce the concentration on large physical infrastructure projects and programmes, and shift the allocation of aid more towards the social and human development sectors, especially the basic social services. In physical infrastructure, maintenance of the existing stock should be emphasised as much as new construction. The focus of aid should be on building rural infrastructure, integrating of rural and remote areas with the national economy and markets, building tourism infrastructure and developing the of power sector, with due regard for ecological, social and fiscal concerns. Rural electrification - based on power generation from renewable sources such as micro-hydro sources - should be emphasised for poverty reduction.

Donors should restructure their aid to achieve the 20/20 compact of the 1996 Social Summit, in view of the fact that the education, health and drinking water sectors combined received only about 15% of the total aid disbursed during 1990-95, with less than 12% being devoted to human priority sub-sectors. This could be done most effectively as a collective action by the (European) donors. Some first steps could be: to organise national round-table discussions bringing together relevant stakeholders to encourage participatory poverty assessment; to clarify the respective roles of the government, the private sector and civil society in the provision of basic social services; to carry out analytical groundwork including (a) a review of social sector expenditure and (b) participatory assessment of the delivery of basic social services; to integrate the provision of basic social services into a longer-term comprehensive National PR Action Plan; and to develop an implementation strategy including monitoring and evaluation and impact assessment.

Country Programming

Most donors lack a thorough understanding of the political and socio-cultural aspects of poverty. The geographical dimensions of poverty and deprivation are only superficially known and play a minor role in project identification and selection. Dialogue with the intended beneficiaries barely takes place, and dialogue with representatives of the Kathmandu-based (I)NGOs cannot really substitute for it as they are often too far away from the social realities. Donors often know little about each other's failures and successes.

Country programming for effective PR therefore requires a better understanding of the socio-cultural and geographical context of poverty in Nepal; an updated assessment of the poverty policies and programmes of HMG/N; and a clearer conception of pro-poor growth and how it can be achieved. As donors increasingly share a common interest in PR, more co-operation among agencies in areas such as participatory poverty assessment and pro-poor policy formation should be undertaken. Local and regional research organisations should be commissioned to undertake the necessary research.

Donors should also pay more attention to the choice and balance of modes of intervention. This requires a better understanding of what is actually needed and what has proved to be feasible in the Nepalese social and political context. A sound balance between pro-poor growth-stimulating interventions and sectoral policy reforms, on the one hand, and directly or indirectly poverty-reducing interventions, on the other, can only be achieved if donors strengthen the co-ordinating capacity of HMG/N and pay more attention to a division of labour rather than competition among them. The formulation of country strategies therefore needs to be based on a transparent consultation process involving the relevant stakeholders including other donors.

Modes of Intervention and Best Practice Approaches

Project interventions have proved that poverty can be reduced. The impact on the overall poverty situation often remains insignificant, however, because successful approaches are not replicated in national programmes. The Nepal case study shows that too much experimentation and piloting may even be counterproductive if there is no effective screening mechanism in place. The establishment of an independent Poverty Impact Monitoring Unit jointly operated by local research organisations and interested donors could improve the situation. It could undertake impact studies of donor-assisted projects, provide consultative services with a focus on poverty to donors and promote professional discussion among the relevant local players from government, donors and civil society.

An increasing number of donors favour sector-wide approaches, but sector and policy reform efforts need to be built on locally tested technical and institutional solutions. Nepal, in particular, needs location-specific solutions for its diverse ecological and socio-cultural environment. A balanced mix of decentralised donor actions via line ministries (sector-wide approaches), local governments (social or poverty fund models), and via civil society organisations (social organising approaches) may be most appropriate. But such actions will only work if central government can effectively co-ordinate the donors.

Though the sample of best-practice case studies examined was small (12), some conclusions emerged. Donors should improve the targeting and the participation of the poor, especially in the design stages of projects. Participatory approaches are personnel-intensive and costly if carried out by project personnel. Sustainability is at stake if organisational development at the local level and financial resource mobilisation are not given high priority.

Interventions tend be more PR effective and sustainable, if gender aspects have been given appropriate attention. Gender analysis should be made standard practice in project identification and design. The project impact upon the poor can be systematically evaluated only when PR is a stated objective and/or is included in the system of indicators regularly monitored. Poverty impact assessment implies the provision of sufficient funds for social science research and post-project evaluations.

Donor Co-ordination

Current co-ordination efforts are too donor-centred. Donors should assist HMG/N in effective aid co-ordination in order to avoid duplication, wastage, conflict and loss of impact because of scattered and unco-ordinated interventions, and in order to enhance synergy, complementarity and sustainability. Instead of competing, donors should be collaborating and complementing each other, and there should be an effective mechanism for exchange of experience and learning from others so that the same mistakes are not repeated in different projects by different donors.

Hans Gsänger and Timo Voipio