To get better development outcomes, donors must align with countries’ public financial management systems

A view of Dhaka, Bangladesh. Photo: © Dominic Chavez/World Bank

Development projects can achieve better outcomes with fewer resources when donors work together at the country level. That is the conclusion of the Fiduciary Alignment Initiative, a joint Asian Development Bank (ADB)-World Bank seminar held in Bangladesh recently that focused on the use of country fiduciary systems in aid programs.

The seminar echoed the results of a World Bank study, which found that setting up parallel public financial management systems for projects cost four donors (Gavi, Global Fund, UNICEF and World Bank) $1.2 billion in the health sector alone from 2011 to 2016. That money could instead have been invested in programs to achieve better health outcomes.

Fiduciary systems are the institutions and processes in a country that allow transparent and accountable use of public and donor funds. They include the country’s budget, procurement and financial reporting frameworks, as well as supreme audit institutions, all of which are collectively referred to as a country’s Public Financial Management (PFM) systems.

Relying on these national systems for development projects means channeling donor funds through the government budget, utilizing national procurement, accounting and reporting rules, and relying on supreme audit institutions for project audits. By using country systems, development partners have an opportunity to identify gaps, engage in a dialogue with government counterparts and strengthen capacity to make those systems more robust and reliable in the long term. These positive effects will improve development outcomes and promote transparency and accountability.

All donors share the goal of ensuring that borrowing governments use project funds for the purposes intended -- and spend the money economically and efficiently. By coordinating on fiduciary requirements and assessments, donors can reach a common understanding on the strengths and weaknesses of a country’s PFM systems and determine the extent to which they can be relied upon and used for project operations. This helps reduce project transaction costs and optimizes the use of limited resources. It will also benefit member governments through improved coordination of development aid, reduction in the number of parallel PFM systems for managing donor-financed projects, and better use of donor funds to achieve development outcomes.

Still, achieving these goals can be challenging. In the early 2000s, the World Bank and ADB, along with other development partners, began efforts to work together on aligning their fiduciary principles, policies and requirements. Twenty years later, real progress on the ground is slow.

The Fiduciary Alignment Initiative seminar brought together multilateral and bilateral donors to explain why this way of doing development work hasn’t taken off. The conclusion:  Country-level alignment and engagement face challenges in terms of organization, country and project.

• At the organizational level, different donor priorities, capacity, culture and institutional focus lead to differing scope and depth of support to PFM systems and institutions. 
• At the country level, varying country strategies and timing of lending programs impede coordination and information sharing, because even when donors work in the same sector in the same country, they may be operating at different times and speed.
• At the project level, collaboration requires already stretched project teams to assess country systems and the work of other donors before being able to rely on them.

The COVID-19 crisis showed that greater donor collaboration is possible and beneficial. In many countries, major development partners worked together to support the vaccine programs of developing member countries. In these countries, (Bangladesh, Sri Lanka, Nepal and Indonesia), the pandemic response was swift and there was alignment of fiduciary requirements. Such mutual coordination must become the norm.

This collaboration and joint assessments of fiduciary systems can be promoted in two ways.

First, all donors must accept a common framework to assess and understand a country’s PFM system. Seminar participants agreed that the Public Expenditure and Financial Accountability (PEFA) framework is the best understood and most robust diagnostic tool for assessing country PFM systems. Over the past 20 years, more than 600 PEFA assessments in 154 countries have been conducted, but rarely jointly by donors.

Second, governments must guide the process. This can lead to strong ownership of PFM reforms, with the government directing donor support to progressively improve country PFM systems over the medium to long term. A good example is Indonesia, where a decade-long effort to encourage donors to use the country systems has resulted in sustainable improvements to PFM.

The World Bank and ADB have embarked on a pilot initiative to collaborate on the 2022 PEFA assessment for Bangladesh, where 37% of development funding is from foreign aid, channeled through more than 400 projects. This PEFA assessment and update of the PFM reform action plan for Bangladesh are key policy actions under the terms of a loan approved by ADB in September 2021. The government will lead the PEFA assessment, with ADB and World Bank collaborating to deliver it.

The most important requirement for success is that donors collaborate and align their fiduciary work. When assessing fiduciary systems, at the country, sector or project level, efforts should be made to review recent fiduciary assessment reports of other donors in the sector/country and to consider using the country systems, to the extent possible. This will reduce transaction costs in the short to medium term and will leave a lasting footprint in the country’s PFM system in the long term.