Comments

Hi Malcolm, Thanks for your post. It was interesting and I learned something new reading it. You make a good case for budget support. I thought I'd offer a slightly different perspective though. To my mind, everything else being equal, budget support is the best modality for bilateral and multilateral aid. For a start it's more efficient and, as you note, it brings with it the potential to strengthen government systems. Unfortunately, the trouble is that, in development, everything else isn't equal. And, of particular relevance to budget support, governments, political economies and institutions (especially the interaction between formal and informal institutions) change significantly from country to country (and within countries too). While I think there's good reason to believe that budget support is a very good idea in reasonably well governed countries, I'm not at all sure this is the case in countries where governance is particularly poor. In well governed countries budget support will likely lead to more efficiency and stronger state systems, but in poorly governed countries, where the relationship between the state and society is extremely complex and not at all like it is in our own home countries, I'm not sure this is likely. Take for example the case of Papua New Guinea. I'm no expert, but it seems to me that the state society relationship there is distinctly different from that assumed in arguments for budget support. Specifically, the state does little in the way of providing public goods and services but rather much of it's revenue is extracted and distributed through clientelist relations between politicians and citizens. These relations are strong and have proven largely resistant to external efforts to change them (they're also economically rational, given the lack of a cohesive national polity). Given this, I don't think the conditions we could impose as a quid pro quo for budget support will override them anytime soon. Which means that budget support would actually augment (grow the pie) one of the most destructive aspects of PNG politics. Which is an issue not only because the money involved will be diverted from its original purpose but also because it may actually lead to worse governance. For this reason I couldn't support an intellectual prescription that strove for budget support in all cases. I think that, first and foremost, context matters. Start with that and then let the aid modalities follow. Thanks again for an interesting, thought-provoking comment. Terence

If you are interested in the UK aid reviews, you may also like Paul Collier's excellent blog assessing the new UK aid agenda - http://ht.ly/497BW

I agree with Bob’s view that the important progress on climate finance made in Cancún was enabled in part by significant previous steps made in Copenhagen and throughout last year (including the work of the AGF). I’d just like to comment on a couple of the big questions raised in the post about the financial architecture. First, on how money gets into the Green Climate Fund: designing the Fund will be a major challenge for the lead-up to COP17, and the Transitional Committee has such a heavy workload that it may have little chance to make much headway on longer-term sources of funding this year. At the international level it is possible that the task of identifying sources will be left in part to a new Standing Committee on finance (also agreed to in Cancún), but unfortunately there is no timetable yet for how and when it will be set up, and its mandate remains vague. At the domestic level, however, Australia and other countries that are likely to contribute to the Fund can already start building on the work of the AGF to develop new funding sources, some of which may not rely on international agreement (e.g. earmarking revenue from a carbon pricing scheme or redirecting fossil fuel subsidies). Second, on how money will flow from the Fund, I agree that it will be important to use effective established bodies wherever possible. Another channel to consider is the Kyoto Protocol Adaptation Fund. The Adaptation Fund is widely supported by developing countries and is increasingly attracting developed country contributions (including from Australia), and it will be important to ensure this innovative mechanism is able to play a significant role in distributing adaptation funding as the broader architecture emerges.

I agree that the article is supposed to be about reporting, but is also heavy on insinuation about the performance of PNGSDP and Ok Tedi, and selective in it's use of evidence. If your article had stuck to just the GRI reporting issue that might be OK, but you go further that this. If you want to cast aspersions on PNGSDP and Ok Tedi, you should be prepared to back it up with rigorous analysis, specifically evaluations of PNGSDP and/or doing a cost-benefit analysis of Ok Tedi. If that evidence doesn't exists, you should limit your analysis to identifying the gaps. Others may wish to add comments on sources of evidence/data on Ok Tedi, OTML and PNGSDP performance.

I'll reply under Matt's three headings. 1. "Evaluating PNGSDP – John’s analysis is partial and misleading". Steady on, my blog does NOT evaluate PNGSDP but, in the first instance, OTML's claim to 'adopt the reporting of key GRI (Global Reporting Initiative) indicators' in 2006. This claim, as I said, does not stack up. I then more briefly look for evidence of similar reporting by PNGSDP. I said it did not report its project evaluations, NOT that it wasn't doing a good job. I said it doesn't publish the evidence for us to say. 2. "Cost-benefits of Ok Tedi – Again John’s analysis is partial and misleading". (a) Well, no, I don't do a cost benefit analysis of Ok Tedi - I refer to my previous answer. (b) Matt says: "Quite why John ignores [the PNG Treasury, large payments made to governments and macroeconomic stability] is unclear." This is simple; none of these things are mentioned in PNGSDP's mission statement (http://www.pngsdp.com/index.php/mission-and-values). This has broad values about improving the quality of life and four 'actions' by which these will be achieved: . investing its income wisely . undertaking projects that provide significant benefits . meeting the best financial, physical, cultural, social and environmental standards in all activities . working together with the people of Papua New Guinea I commended it for the 1st. I said PNGSDP didn't publish evidence for the 2nd. On the 3rd, see below. I didn't say anything about the 4th. 3. "Counterfactuals". Matt mentions alternative scenarios. As I explained at (1) above, my blog was NOT about evaluating the mine of PNGSDP, but about the adoption, or otherwise, of sustainability reporting. A discussion of the alternative scenarios would be another blog (and I dare say well too long for this format). Matt says a Google search for 'environmental report site:oktedi.com' turns up "the extensive 130 page 2009 annual report on environmental issues (including impact and remediation)". To be specific, the web site has annual environment reports for 2003-07 and 2009. (The link to 2008 is a 404 error.) The trouble is none of them contain the keywords 'GRI', 'Global Reporting Initiative', or 'sustainability reporting'. On the question of impacts, two important ones are excluded: "OTML ... has undertaken to perform an independent external environmental audit of the site every year ... The scope of the audit specifically exclude[s] both social impacts of OTML’s operation, and any review of the site’s riverine impacts (2004 environment report, p. 124)" I repeat that the blog is about sustainability reporting. There are various international frameworks for this, but the GRI, with its industry consultation-generated GRI Mining and Metals Sector Supplement, is considered to be the accepted starting point, as OTML said ('widely adopted by mining and other industries throughout the world'), as mandated for ICMM members, and as recommended by the MCA. It isn't rocket science to fill in a GRI report, but you absolutely can't do it with this kind of lead in the saddle.

A few comments on some of the issues in John's blog. (Full disclosure, I was involved in the negotiations on BHP's exit and establishment of PNGSDP.) 1. Evaluating PNGSDP - John's analysis is partial and misleading. 1) PNGSDP should be evaluated on all three of its functions (shareholder in OTML, fund manager and development agency). 2) Focusing on just admin costs and a rubber project is extremely partial and there is more information in Annual Reports that John could have cited. Moreover, comparing admin costs across aid agencies is fraught with difficulties - happy to discuss further. 3) A process evaluation of PNGSDP would be the best way to consider issues of the company's performance, but probably wouldn't answer bigger questions on the overall costs and benefits of Ok Tedi. 2. Cost-benefits of Ok Tedi - Again John's analysis is partial and misleading. Early in his article he talks about benefit streams to communities and government in addition to PNGSDP. But further down, he narrows this to just a discussion of PNGSDP and environmental damage - saying the benefits of the former should outweigh the latter. We know from PNG Treasury that large payments are being made to governments (from taxes and their shareholdings) and this has played a big role in macroeconomic stability over the last decade. Quite why John ignores these is unclear. What John should have said is that we need to know the overall net benefits, and this would include the various revenue streams, efforts in environmental remediation; and the efforts of PNGSDP, now in concert with Ok Tedi, to maintain a base for the North Fly and Western Province economies after mine closure, and so avoid a humanitarian disaster on mine closure. 3. Counterfactuals - A final point in all this is to be clear on the counterfactuals. Alternative scenarios to considered might be: i) what would have happened if the mine had closed in the early 2000s - arguably a sharp economic collapse in the province, and ii) what would have happened if the shares in OTML had gone to government instead of PNGSDP. For all the criticisms of PNGSDP, I have not heard anyone credible argue that the government would have spent the money better - moreover the experience of PNG government trust funds over the last few years give some indication of what might have happened. Two quick final points: i) although a Google search for 'GRI site:oktedi.com' turns up nil results, a search for 'environmental report site:oktedi.com' produced quite a few results, including an extensive 130 page 2009 annual report on environmental issues (including impact and remediation), and ii) the Chairman of PNGSDP is a Distinguished Professor at ANU, not a Visiting Fellow.

Ian, Many thanks for your comment regarding 'capturing resources' - worthy of consideration by organisations considering the use of budget support as an implementation mechanism. As an additional comment, I add several points re. AusAID and Budget Support and list several references for those seeking further information on this subject. Budget Support and AusAID The AusAID Office of Development Effectiveness Annual Review of Development Effectiveness 2009 notes that working in partner systems when delivering support has been internationally endorsed, including by Australia, in the Paris Declaration on Aid Effectiveness. The declaration highlights the importance of development partners harmonising their support, aligning aid with the partner countries’ priorities and working in their systems. AusAID’s use of budget support as an implementation mechanism The AusAID ARDE 2009 also notes Australia has performed ‘below par’ in terms of adherence to the Paris Declaration Principles according to a recent OECD survey. For example, only 40% of its aid was disbursed using partner countries’ public financial management systems. This falls short of the DAC average of 47%. Only 23% of Australia’s aid is subject to partner countries’ procurement systems, which is lower than the DAC average of 44% and much lower than the 2010 target of 80%. It is assumed that AusAID will continue to increase its use of budget support as a primary implementation mechanism as indicated by its recent approval of a $500 million Australian aid package, the Basic Education Program, for schooling in Indonesia using a budget support implementation mechanism. AusAID’s budget support rules, conditions and assessment tools While the European Commission (EC) approach under the Cotonou Partnership Agreement has well defined eligibility criteria including: a well-defined national or sectoral policy and strategy; a stability-oriented macroeconomic policy; and a credible and relevant programme to improve public finance management and procurement, what are AusAID’s rules and conditions for the use of budget support? While the EC, together with a large group of donors, has developed the ‘public finance management performance measurement framework’, enabling the study of all dimensions of public finance management and procurement, what assessment methodologies does AusAID use for developing country public finance management and public procurement systems? A recent review of donor Web Sites notes that few PEFA, CPA and/or MAPS assessments have been undertaken in East Asian, Papua New Guinea and Pacific Island countries in the past three years, the period during which AusAID’s use of budget support as an implementation mechanism has increased. What is AusAID’s program to assess developing country public finance management and public procurement systems for East Asian, Papua New Guinea and Pacific Island countries to inform their suitability for budget support? AusAID messages AusAID ultimately must take on the macroeconomic, fiduciary and political risk of sectoral programs and the reputational risk of not meeting Australia’s international commitments. If macroeconomic, fiduciary and political risks are to be given greater weight in risk assessments, AusAID will need to give clear messages that they require a balanced assessment of macroeconomic, fiduciary and political risks using appropriate tools. Further information For any reader interested in this subject, the following references are suggested; •Department for International Development, ‘Joint Evaluation of General Budget Support 1994–2004: Thematic Briefing Papers 1 to 6’, 2007. •European Commission, ‘Budget support - A question of mutual trust’, Booklet, 2008. •IDD and Associates, ‘Evaluation of General Budget Support: Synthesis Report’, 2006. •International Monetary Fund, ‘Budget Support vs. Project Aid’, Working Paper WP/03/88, 2003. •World Bank, ‘Budget Support: Concept and Issues’, Paper prepared for World Bank practitioners’ forum on budget support, May 5-6 2005. E. John Blunt

Great introduction to the topic. I just wanted to point out one specific type of political risk that is important. That of "capture" of resources. By this I don't necessarily mean corruption, but rather that while the goal of aid donors might be to reach the most disadvantaged and needy populations, that is not always a government priority - in particular using funds for politically attractive projects that benefit the middle classes and the ruling party's power base is always a temptation for governments seeking re-election and budget support can be used to help support this type of project. This might come under the guise of a "nationally led development agenda" but it is really a "government or ruling party led development agenda". To ensure this doesn't happen, in addition to the steps above it's important to carry out a poverty analysis that looks at disparities, and also to analyze the impact of the government budget on these.

Thank you for the very interesting and useful analysis. The world bank praised New Zealand's RSE scheme as one of the most successful development projects to date. But my question is what are the social impacts back home when many of the young village men leave for most of the year. What impact does this have on family systems, security and vulnerabilities e.g. to humanitarian disasters or conflict? Also access do women have to these schemes and the savings earned as a result of them - what impact does this have on gender equality? My other concern is about the vulnerability of RSE workers in the host country - particularly the US. $3000 plus the costs of flights would take many months to work off at minimum wage. During this time participants are indebted to the company. Vulnerable immigrant workers such as these are prime sources exploitation by large international companies. Take for example the garment manufactures on Saipan Island (part of the United States), where it is well documented that Chinese workers (whose flights to the island are paid by the company) become practically enslaved to the multinational, because it becomes difficult to pay off the debt of their accommodation and airfares, and are unable to save for the flights home again. Their debt silences them against speaking out about the human rights violations that go on within the work places. While I think this is an extreme case, it concerns me that Pacific workers would be so far from their home, and indebted by $3000 or more until they can work it off. From what I have heard workers under the schemes have no choice over where they stay, and are given access to only a small portion of their income while in the host. Is this correct? What checks and balances are in place to insure treatment and living conditions meet appropriate standards for all of the workers under these schemes?

Two very simple ways in which donors can manage the issue of corruption in Indonesian educational development is to avoid spending money in ways where the risk is very high, such as school construction and ill-conceived training schemes of the kind proposed in the new Australian Education Partnership, and spend it in ways that achieve results but that still work through government systems. Such ways have been demonstrated by the AusAID Indonesia-Australia Partnership in Basic Education that finished in 2007, USAID’s Managing Basic Education Project, 2003 – 2007 and UNICEF’s Mainstreaming Good Practices in Basic Education (2006 – 2010). Another and more challenging and longer-term task is to assist Indonesia in addressing the alarming processes of “educating” children in corrupt practices that are embedded in the National Examination system. A study I conducted for USAID in 2009 found congruence between research in the USA on the impact of ‘high stakes’ testing there and the present conditions in Indonesia where the National Examination is considered to be high stakes. The research finds that as the stakes associated with a test go up, so does the uncertainty about the meaning of a score from that test and so do the distortions, corruption, and negative backwash effects on the quality of education and on students. Briefly, corruption occurs at all levels in the implementation of these examinations, making the results unreliable and invalid, and worse, encouraging and rewarding children to cheat and learn about corruption from an early age. Now that is an area that Australia has the technical excellence to support and which Indonesian officials have expressed a need for assistance. Instead, money is to be spent, and likely wasted, elsewhere. Could it possibly be because corrupt government officials see the opportunity for corruption and personal benefits and so support these alternative development goals (construction and training) or is this a too cynical and uncharitable suggestion?

Thanks Matt, I definitely agree with you first suggestion (getting specific evidence on the risks in a particular country). And I agree for the most part with the strategies you suggest for risk management. Although, I'm suspicious of 'cash on delivery': mostly because I think it assumes that governments in recipient countries have more wiggle room vis a vis the social structures that they're set amongst than is actually the case (i.e. incentivising them won't change much because they are stuck in a form of political equilibrium that is very difficult to escape). For similar reasons, I don't think budget support will help at all in very corrupt countries. I agree with your point on alternative delivery mechanisms though. And that debate between Kaufmann and Khan on Development Drums is great. A must listen.

Hi Jane & Jonathan. I want to make an important correction to the above comment that quotes me as discussing the geographical direction of Australian aid. That was not me, but in fact Stephen Grenville, a consultant on financial sector issues in East Asia and Visiting Fellow at the Lowy Institute for International Policy who made those comments in the new Lowy aid blog: http://aidreview.lowyinterpreter.org/post/AusAID-Review-Narrow-the-geographic-focus.aspx Since Stephen's post, further discussion on the geographical direction of Australia's aid program can be found here http://aidreview.lowyinterpreter.org/ if you are interested