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A new report from OECD DAC, the club of traditional aid donors, says that poor countries' management of public finances is improving That's the good news. Here's the bad news: donors have been slow to respond. Despite the donors repeated pledges to avoid the high costs of setting up parallel programs and projects, they are still doing so -- including in countries like Cape Verde and Moldova which are in the top group of low-income countries where financial management is concerned according to the 2008 version of the annual OECD-DAC Survey on Monitoring the Paris Declaration.

The new DAC report was prepared in anticipation of this week's Third High Level Forum on Aid Effectiveness in Accra, Ghana. Citing the World Bank's annual Country Policy and Institutional Assessment (CPIA) index the report says that 36% of countries surveyed have improved the quality of their Public Financial Management (PFM) systems by at least one point (on a 1 to 6 scale). In some of the 12 countries with the highest system ratings however, donor use of Public Financial Management systems remains low. In Mongolia, for example, just 17% of donor funds are disbursed through the country's public financial system (down from 49% in 2005), and in Cape Verde the figure is just 23% (down from 64%).
Poor financial management has been one reason donors give for creating parallel structures, such as Project Implementation Units, with separate monitoring and reporting. Another reason is almost surely donor acute political sensitivity to the risk of possible corruption in the projects that they fund. Donors, both public and private, understandably fear that one bad story that will eclipse all their good works, undermining support for future funding. But setting up expensive parallel systems not only wastes money, it can undermine the very development process donors would like to strengthen, by hollowing out government capabilities.
This dynamic can be seen in the World Bank's response to the Volcker Report's findings on its work in Cambodia. The report, issued by an independent review committee charged with assessing the World Bank's treatment of alleged corruption cases, found that the bank mishandled corruption charges on several projects in Cambodia (and other countries) costing tens of millions of dollars. The big picture however is that since 2004, Cambodia has made substantial progress in reforming its Public Financial Management systems (from a score of 2.5 to 3.0 according to the new DAC report). How have donors reacted? During this same period, the number of parallel Project Implementation Units has increased!! And increased dramatically -- from 56 in 2005 to 121 in 2007.
How can donors better handle fear of waste and corruption? One way might be for donors to promise to pay for progress that is audited, and to tell their legislatures and taxpayers that their cash is buying results only. We call this new idea Cash on Delivery Aid (COD Aid). We think COD Aid is one way that donors could protect themselves from the risk that their funds might be wasted, while at the same time letting aid recipients get on with strengthening their own capacity to deliver on key development goals. Silver lining: donors who give this a try might have more exciting than promises of improved behavior to share at the next "Accra" meeting.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.